BUSINESS STRATEGY

Course Code: 611 & 612 Dr. Subir Sen – Faculty Member, IBS
E-Mail: subir@ibsindia.org, 9830697368 1) Crafting & Executing Strategy – Thompson & Strickland. 2) Strategic Management – Pearce & Robinson. 3) Strategic Management – Fred. R. David. 4) Exploring Corporate Strategy – Johnson & Scholes. 5) Competitive Advantage – Michael E. Porter. 6) HBR – Articles & Case Studies.
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INTRODUCTION

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STRATEGY - DEFINITION

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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

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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.
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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.
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STRATEGIC MANAGEMENT FRAMEWORK

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Economic al Strategic Finance Fit Political Strategic Intent Fit Political Marketin g Manageme nt Social & Cultural

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Management

Technological

Strategic

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Political

HR

         7 . It is all about creativity and innovation.STRATEGIC MANAGEMENT .FEATURES It forms the core activity of the top management. It provides broad guidelines. It involves substantial resource outlay. It is a holistic and integrated approach. It is long-term in nature. It is irreversible. It is about adaptation and response to the same. It requires full commitment of the top management.

It is about a definite formula. It is rocket science. It a bundle of techniques or even tricks. It is fool-proof in nature. It involves nitty-gritty's.            8 . It brings instant success. It attempts to minimize risk. It is about forecasting. It involves only the top management. It about mere data and facts.STRATEGIC MANAGEMENT – MYTHS It involves short-cuts.

To be insulated against environmental threats. rather than reactive. To assimilate change faster. To be future oriented. scale and scope. To gain expertise in technologies. To innovate. To be proactive. . To tap markets across boundaries. To leverage size. again and again …….STRATEGIC MANAGEMENT IMPERATIVES            To be continuously alert. To generate large resource pool. 9 To develop core–competencies.

today's battles are fought over markets. but with a lot a rigour and robustness. In the ancient days battles were fought over land.ORIGIN     The word strategy has its origin from the Greek word strategia meaning Military Commander. In contrast. In the ancient days battles were won not by virtue of size of the army or armory. 10 . but by virtue of their courage. It is an old wine in a new bottle.STRATEGY . Even in today’s markets. and more importantly .strategies. battles fought on the market front are won by companies by virtue of their obsession & strategies. obsession. whose origin can be traced to some of the greatest battles fought in the ancient days.

challenging GM and Ford. – Yahoo and Microsoft challenging Google. 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.SOME PARALLELS     Japan’s attack on Pearl Harbour – Strategy: Attack where it hurts the most. Napoleon’s attack on Russia – Strategy: Waiting for the right time. Allied Forces Vs Germany (WW-II) – Strategy: Forging alliances. – Reliance’s entry into telecom. 11 .

a radical change in the business environment brings about discontinuity. The things happening around the firm when totally disconnected from the past leads to a paradigm shift.Industrial Revolution. – Mass Production Organization Size – Complicated Processes – Complex Structures Evolving of an emerging paradigm – survival of the fittest (Fayol & Taylor. 1910). 12 . The first major discontinuity in the history of global business environment was the .EVOLUTION OF MANAGEMENT     As Peter Drucker refers to it. A paradigm is a dominant belief about how the business and its environment operates.

Efficiency and effectiveness are no longer sufficient. 1960).e. 13 . performance across firms became differentiated. push to pull). – Homogeneous to heterogeneous products. Survival of the most adaptable becomes a new management paradigm (Ansoff. – Changes in the technology fore-front. – Global market place. – Affluence of the new customer (i. From uniform performance.EVOLUTION OF STRATEGIC MANAGEMENT    The second major discontinuity in the history of global economic environment – World War II. The question of outperforming the benchmark became the new buzzword.

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 strategy is primarily concerned with external ones rather than internal ones. 15 . – 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. – Biases and prejudices has a very little role to play in strategic choices pursued by managers. Learning always begin on a clean sheet of paper.

Once the control systems are in place. 16 . Successful organizations align authority and responsibility of various departments in way to reach overall objectives. everything else follows.APPROACHES TO STRATEGY  Design Approach – Alfred Chandler (1970) – Structure follows strategy. – Management control systems has a dominating role in influencing firm performance. The organization initially decides which industry to enter. who will be the top managers. how it will compete. – Organization structure will precede and cause changes in strategy. – The top managers then decide on the type of organization structure & systems to be in place.

– A firms performance is inversely related with the bargaining power of environmental forces to which it is exposed. 17 . competitors. – An organization is seldom in a position to influence the larger business environment. substitutes. – The environmental forces comprises of – supplier. – The organization will outperform the industry where environmental forces are weak and vice-versa.APPROACHES TO STRATEGY  Positioning Approach – Michael E. Porter (1980) – Choose a consumer segment and position your product accordingly. customer. new entrant.

APPROACHES TO STRATEGY  Core Competence – C. locating in most attractive industries and pursuing the same strategy. K. 18 . – It enables a firm to deliver unimaginable value ahead of time. but exploiting the resource differences among them. – Organizations can significantly alter the way an industry functions. Prahalad (1990) – The key to superior performance is not doing the same as other organizations. They are complex resources and undermines a firms competitive advantage. – 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 .

A substantial gap between its resources and aspirations. A strategic intent is a statement of purpose of existence. you cannot reach there. It is the cornerstone of an organizations strategic architecture reflecting its desired future state or its aspirations. A gap that consciously manages between stagnation and atrophy. It implies a significant stretch. It’s a philosophy that distinguishes it from its competitors. It provides a sense of direction and destiny. 21 .STRATEGIC INTENT      If you cannot see the future. It involves an obsession to be the best or outperform the best.

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. when radical changes in the internal and external environment (i. Dominant logic changes. 23 .DOMINANT LOGIC     A dominant logic can be defined as the way in which the top management team conceptualizes its various businesses and make critical resource allocation decisions. strategic variety) is apparent. 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. To put it more simply.e.

– It represents the company’s audacious. It enables the top management to remain focused. It ensures that the company does not wander off into unrelated zones or fall into an activity trap. It provides an unity of purpose amidst diversity of personal goals. – It stands for the unchanging core values of the company.  24 .VISION It is a dream (not a forecast) about what the company wants to become in the foreseeable future.  It is a combination of three basic elements – – An organizations fundamental reason for existence. but achievable aspirations. beyond just making money.

Empathy – It should reflect the company’s beliefs to which it is sensitive.CHARACTERISTICS       Reliance – Where growth is a way of life. Sharing – The company across all hierarchies should have faith in it. In Reliance when a new project becomes operational top managers hand over charge to the SBU heads and move on to a new project. Clarity – Vividly descriptive image of what the company wants to be known for in the future. not an utopian dream. 25 . Reachable – It should be within a reasonable target in the known future. Brevity – It should be short.VISION . and memorizable. clear.

It gives enlightment. It facilitates development of skills & capabilities. It fosters risk taking and experimentation.ADVANTAGES           To stay focused on the right track. To prevent the fall in a activity trap.VISION . 26 . It lends integrity and genuineness. It makes strategic alignment easier. It gives the impression of a forward-looking organisation. It gives a shared platform. It provides a holistic picture.

 27 . It enables the firm to define its business landscape and identify its competitive forces. 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.  It serves as a road map to reach the vision. Although the purpose may change over time. its reason for existence.

We offer solutions. …………………. – We do not offer steel. We offer strength. All the businesses of the company are strongly integrated with their main business. …………………. – We do not offer software's.MISSION – SOME IDEAS  Reliance – We are in the business of integration. …………………. We offer security. – We do not offer insurance. though some may seem unrelated in nature. We offer comfort. Some other examples – We do not offer shoes. 28 . ………………….

It provides a quantitative feel to an abstract proposition. 29 . – It lends direction – time frame in the medium term.GOALS & OBJECTIVES  Reliance – We want to become a Rs. It is an end result (quantifiable) something a firm aims and tries to reach in a time bound frame. – It prevents deviation. – It provides a benchmark for evaluation.100K crore company by the year 2005. – It keeps the mid management pre-occupied. – It adds legitimacy and motivation. – It helps identifying key success factors. – It is based on Management by Objectives (MBO).

 30 . – Use price-elasticity to break market barriers. coordinating appropriate technologies. – Acquire a market share of indomitable position. – Compress project times. It is the process of garnering necessary inputs. The details of the plan Reliance Telecom adopted were – Backward integrate process technologies. – Leverage economies of size and scale. and gaining access to desired markets to achieve the desired goals and objectives. It is specific to a particular business.PLANS Reliance – Desire to invest 25K crore in telecom business by circa 2010.

equilibrium is maintained. When changes in the environment is incremental. This state of affairs is known as strategic drift. 31 . radical change may lead to disequilibrium. past strategies tend to have a bearing on future strategies. Historical studies have shown that most organizations tend to continue with their existing strategies. However.STRATEGIC DRIFT    Due to top management commitment. In such a context. strategies lose touch with the emerging realities. This tendency to restore continuity is known as inertia (resistance to change). It often leads to an organizational crisis.

STRATEGIC DRIFT FRAMEWORK Environmental Change Degree of change Strategic Change Radical Change Incremental Change State of Flux Continuity Stage of Transformation Strategic Drift Stage of Atrophy Time 32 .

33 . Some instances of organizational politics – Formation of powerful groups or coteries. Organizational politics involves intentional acts of influence to enhance or protect the self-interest of individuals or groups over organizational goals. – Hiding vulnerability.ORGANIZATIONAL POLITICS  Strategic drift often leads to organizational politics. – Creating a favourable image. – Creating obligations of reciprocity. – Using covert tactics to pursue self interests. – Distorting information to gain mileage. – Developing a platform of support.

Usually there is wide gap between the two when organizational politics is evident. A realized strategy is what the top management actually translates into practice. Other causes – – The plans are unworkable and utopian. – Persons responsible for strategy conceptualization and implementation are34 divergent. – Influential stake-holders back out. – The environment context has changed.INTENDED & REALISED STRATEGIES  An intended strategy is an expression of interest of a desired strategic direction. .

Learning is an integral part of logical incrementalism. They simply unfold the particulars of the sub-system in stages.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. this is not to be treated as “muddling”. but the master scheme of the rational comprehensive scheme is not apparent. However. 35 . Strategy formulation and implementation are linked together in a continuous improvement cycle. but as a defensible response to the complexities of a large organization that mitigate against publicizing goals.

36 . Leveraging Crisis – A sudden crisis or an opportunity should be used as a trigger to facilitate acceptance and implementation of change.IMPLEMENTING INCREMENTALISM      General Concern – A vaguely felt awareness of an issue or opportunity. Macro Broadcasting – The broad idea is floated without details to invite pros and cons leading to finer refinements. The broader objective should serve the overall interest of the organization. Adaptation – As implementation progresses. Agent of Change – Formal ratification of a change plan through MBO.

. As it brings 37 with it a different dominant logic. Dominant logic’s are very rigid and sticky and prone to inertia.STRATEGIC TRANSFORMATION     Strategic transformation (a complete overhauling of the strategic architecture) becomes inevitable whenever a strategic drift takes place. It creates blinders. Strategic transformation becomes smooth through a change in top leadership. Dominant logic’s are the cornerstones of change when strategic transformation is apparent. Tampering with surface level factors often leads to atrophy.

It helps prevent a strategic drift from occurring at the first place.LEARNING ORGANIZATION  A learning organization is capable of continual regeneration from knowledge. Factors that fosters a learning organization – Pluralistic – An environment where different and even conflicting ideas are welcome. and skills that fosters experimentation and questioning and challenge around a shared purpose. – Informal Networks – Emerging of new ideas. – Constructive Bargaining – Agree to disagree. – Experimentation – Fosters a culture of risk taking. – Organisational Slack – Enough free space. 38 . A learning organization must continuously focus on unlearning as well. experience.

ENVIRONMENTAL CONDITIONS Dynamic Scenario Planning Learning Organization Static Forecasting Decentralization Simple Complex 39 .

ANALYZING BUSINESS ENVIRONMENT 40 .

Strategic planning is a function of discounting the future. gap analysis). Competitive advantage provides the surest way to fulfill the strategic gap. It is reactive in nature. It points to a position of superiority with relation to competition. Strategic gap basically points towards a vacuum of where the organisation wants to be and where it is. It is based on the assumption of incremental change. It requires a quantum leap (i. 41 .e.PLANNING & STRATEGIC PLANNING     Formal planning is a function of extrapolating the past. It is based on the assumption of radical change. It is pro-active in nature.

42 .ENVIRONMENTAL SCANNING     The environment is defined as the aggregate of conditions. The segments of the environment a top manager scans selectively depends upon his dominant logics. not guided by any boundaries. A manager has to continuously scan the environment to ensure alignment of the strategies with the radically changing environment. and influences that affect an organizations way of doing things. It is exploratory in nature. Environmental factors can be external as well as internal to the organization. The world is flat. Environmental scanning is very important component of strategic planning. resources and ideas move unhindered. events.

It is not intended to be used as an exhaustive list. for which a holistic picture is required. It is important not only to identify the structural drivers of change. Understanding the composite effect is critical. which may be different from the past impact. 43 . It is particularly important that PESTEL be used to look at the future impact of environmental factors.PESTEL      PESTEL attempts to provide a broad framework on how the broader environmental forces affects an organization and influences the way it practices strategy. but also to analyze the complex linkages across them.

FDI Inflows. Monsoon & Food Grains Reserves. Licensing & Quotas. Capital Market & Forex Reserves. Savings & Investment. Literacy Levels. Income & Age Distribution.   44 . Social – Population Diversity. Infra-Structural Investments. Economic Model. Inflation & Interest Rates. Currency Stability. Religious Sentiments. Central – State Co-alignment. Social Values. Fiscal Deficit.PESTEL FRAMEWORK  Political – Government Stability. Language Barriers. Subsidies & Protection. Economic Cycles. Government Attitude. Economic – GDP.

Carbon Credits. Environmentally Preferable Purchasing. Legal – Monopolies Legislation. Technological Convergence. Environmental – Global Warming & CSR. Patents. Obsolescence Rate. 45   . Product Design. ERP. Patent Laws. Non-Fossil & Alternative Fuels. Extended Producer Responsibility. Consumer Protection Laws. Research & Development. Direct & Indirect Taxes.PESTEL FRAMEWORK  Technological – Innovation. Waste Disposal & Emissions. Pollution Control Laws. Product Safety & Health Hazards. Employment Laws.

New Trade Policy (NTP) – Lowering import tariffs. Economic Reforms – Fiscal & Monetary Reforms.ECONOMIC LIBERALISATION     New Industrial Policy (NIP) – Liberalizing industrial licensing. Capital Market Reforms. PSU Disinvestments. Exit Policy. FERA Liberalization. 46 . Abolition of import licenses. Rupee convertibility.VRS. Structural Adjustments – Phasing out subsidies. Banking Sector Reforms. Dismantling price controls. Encouraging exports. Encouraging FDI. Curtailment of PSU’s. MRTP Liberalization.

DISCONTINUITY Destabilization due to entrepreneurial freedom – Cocoon of protection disappears – Diversification spree – Existing notions of size shaken – Industry structures change radically – Economic Darwinism .Survival of the fittest MNC Onslaught – Enhancing stakes – Power Equation – Joint Ventures – Technological Alliances – Take-over threat. Mergers & Acquisitions 47   .

Consumerism Challenges on the technology front – Competencies become technology based – Investment in R&D become inescapable 48 .Globalization – Cheap Imports & Dumping – Push to Pull Marketing Buyers exacting demands – Shortage to surplus – Price competition – Life-style changes – Stress on quality.DISCONTINUITY    Hyper Competition – MNC’s .

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 .

It should not only be used to understand the forces. It is even wiser to apply the same at the product – market level. 51 . profit potential) per se. It depicts the attractiveness of an industry (i.e. but also used to understand how they can be countered and overcome. the forces are subject to changes. The model should not be used as a snapshot in time. The five forces have strong cross-linkages. incremental or otherwise.FIVE FORCES MODEL ASSUMPTIONS      The model is to be used at the SBU level and not at the industry level.

Product differentiation through proprietary technology or brand power. Scope for backward integration. Unimportance of product quality. Government policy. Undifferentiated product. Presence of substitutes or unorganized sector. Learning curve advantages.PORTERS FIVE FORCES ANALYSIS Threat to Entry – Economies of size and scale. Low relative importance of the segment.   52 . Low customer switching costs. Threat of Customers – Buyer concentration and volumes. Access to distribution channels. Low margins & stagnancy. High switching costs. Industry stagnation. Resource profile & fear of retaliation. Capital requirements.

Lack of substitute inputs. Low relative importance of the segment. Scope for forward integration. Piracy and counterfeits. Intermittent overcapacity. Produced by industries earning high profits. Buyer’s propensity to substitute. Low level of differentiation.PORTERS FIVE FORCES ANALYSIS    Threat of Suppliers – Supplier monopoly. Industry stagnancy. Threat of Substitutes – Improvement in price -performance trade-off. Jockeying for position – Fragmented market. Diversity of players. 53 . Unorganised sector. High customer switching costs. Product perishability. High exit barriers. Differentiated inputs.

Cohesiveness – Degree of bonding existing across affiliated firms. dominant or related diversified or unrelated diversified businesses (Infosys. 54 . Resource Profile – It highlights the capabilities (generic) or competencies (business specific) of the firm. Inertia – Excessive commitment to past strategies prevents firms from tapping emerging opportunities.FIRM ENVIRONMENT      Size and Scale of Operations – It is a very important component of competitiveness in today's global context (Bharti – MTN. Business Scope – The intention whether the firm wants to be in a single. Reliance). Tata).

However. and with lower prices it can increase its sales volume. Experience curve has strong linkages with performance. The E-Curve thus enables organisations to build entry barriers. experience teaches better and more effective way of doing things. an E-Curve can prove to be futile during discontinuity. it can price its products more competitively. Matured firms will always be positioned advantageously on the ECurve than new entrants. which further reduces costs.EXPERIENCE CURVE      The cost of performing an activity declines on per-unit basis as a firm becomes more efficient. With lower costs. leverage it as a competitive advantage. 55 .

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 .

Competitors. Press Clippings & Interviews. Business Intelligence – Bankers. Customers. Observation. Suppliers. A SWOT audit involves – Company Records – Annual Reports. Websites.VULNERABILITY ANALYSIS . It helps an organisation to capitalize on the opportunities by maximizing its strengths and neutralizing the threats minimizing the weaknesses. .SWOT     The framework was originally conceptualized by Kenneth Andrews in 1970. Acronym for Strengths – Weaknesses – Opportunities – Threats. 59 Analysts. Case Studies – Structured Questionnaires. It is one of the earliest models in environmental scanning. Interviews.

SWOT ANALYSIS .FRAMEWORK Opportunities Nullify weaknesses which prevents you from exploiting opportunities Leverage strengths to make use of opportunities Weaknesses Minimize weaknesses which prevents you from countering threats Strengths Threats Utilise strengths to counter threats (?) 60 .

Sony. Infosys. Strong R&D base – Eg. Engineering Skills – Eg. Infosys. Dr. Biocon. Toyota. Caterpillar. SBI. Large resource pool – Eg. Volkswagen. HUL. Tata. Honda. Tata Steel. Siemens. ITC. Reliance. High quality products – Eg. Ranbaxy. Reddy’s. Aditya Birla. Strong after sales & service network – Eg. Reliance. Excellent penetration – Eg. Motivated employees & cordial industrial relations – Eg. 61 . Good credit rating – Eg. Economies of scale – Eg.SOURCES OF STRENGTH           Strong brand identity – Eg.

Excess manpower – Eg. CMC (Tata Group) 62 . Lack of product / brand clout – Eg. Nirma. K. Strategic myopia – Eg. B. Procter & Gamble. Excessive diversification – Eg. Modi Group.Raymond. Organizational Politics – Eg. Lacking experimentation culture – Eg. Hindustan Motors.SOURCES OF WEAKNESSES            Outdated technology – Eg. Inefficient top management – Eg. Ballarpur Inds. Bijoligrill. Narrow business scope – Eg. Tatas. SAIL. K. J. Single product syndrome – Eg. CESC. Inertia – Eg. Group .

Fertilizer.SOURCES OF OPPORTUNITIES            Delicensing of Industries – Eg. Exit Policy – Eg.Tata Motors. Sugar. 63 . ECB’s. Life style changes – Eg. Market driven Pricing – Eg. Abolishing MRTP – Eg. Middle-class buying power. Free pricing – Eg. Fertilizers. Insurance. Telecom. VRS. Sugar. Growing population – Eg. Capital market reforms – Eg. Collaborations & Joint Ventures – Bharti & WalMart. Abolishing CCI. Banking. Retailing. Maruti. Market driven Interest rates – Eg. Globalization – Eg. GDR’s.

Social activism – Eg. Hostile take-over – Eg. Onida. Tata Steel. Reliance. Land acquisition . 64 . Satyam. Economic recession – Eg.SOURCES OF THREATS            Political instability – Eg. Bajoria – Bombay Dyeing. (2008). Lack of Corporate Governance – Eg. Group disintegration – Eg. Dumping from China. (1985–1990). Terrorist attacks – Eg. Earth Quake. Tsunami. Import relaxation – Eg. Nationalisation – Eg. 11/9. 26/11. Foreign Direct Investment (FDI) – Eg. Natural disaster – Eg. Singur SEZ.

Delphi's technique. Forecasting – Predict the future (i. Assess the extent of impact of the factors. scenario analysis). Stages in ETOP analysis – List the aspects of the environment that has a bearing on the organization. Strategic responses (including adaptation) to opportunities and threats is critical for survival and success.ETOP       Acronym for Environment – Threat – Opportunity – Profile. It represents a summary picture of the external environmental factors and their likely impact on the organization.e. 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. Relative attractiveness of the market. Some key findings on major performance drivers that explains 75% deviations in performance – Product quality and relative market share. selectively. High investment intensity acts as a drag. An organization can draw upon the experience of its peers in similar situations. 66 Vertical integration is a powerful strategy. It is also a form of assessing vulnerability through longitudinal analysis. .

.LIMITATIONS  The analysis is based on historical data and it does not take care of future challenges.PIMS . when radical changes in the economy takes place. therefore 67 validity may be a question. – Contexts may vary across countries. – Contexts may vary over time. Managers should be particularly cautious while referring to such data during times of discontinuity as it makes past patterns futile. As every organization is unique in its own way. Authenticity of data is of prime importance – Contexts drawn across one organization may not be applicable to another.

KSF helps organizations spot early opportunities and convert them into value adding business propositions.KEY SUCCESS FACTORS (KSF)     KSF relates to identification and putting concentrated effort on a particular activity or process which forms the very basis of competitive advantage. 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.

IDENTIFYING ALTERNATIVE STRATEGIES 69 .

unrelated) and geographical scope (local. national. It indicates the quality of growth an organization is looking for. related.CORPORATE . 70 . global) of a firm and deals with choices of allocating resources across them. dominant. It determines the locus a firm encounters with internal and external environment.GRAND STRATEGY       It is concerned with the overall business scope (single. It reflects the customer needs it intends to satisfy. It provides broad direction to the groups vision and mission. A corporate strategy identifies and fixes the strategic gap it proposes to fill.

CORPORATE STRATEGY MATRIX Corporate Strategy Stability Stability Growth Growth Combination Diversification Divestment Intensification Market Penetration Related Vertical Market Development Product Development Unrelated Horizontal 71 .

Even during adverse times firms need to adopt a strategy to sustain current performance levels. The reasons for stability strategy – – Lack of attractive opportunities. The scale and scope of present operations remains almost intact. – To stop for a while and assess past records. erosion of capabilities. Stability however. (Eg. Citibank). 72 . does not relate to do-nothing (Eg. – Why disturb the existing equilibrium set up? – Limited resource position.STABILITY  It involves maintaining status-quo or growing in a slow and selective manner. Hindustan Motors). – The firm may not be willing to take additional risk associated with new projects.

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 .

direct non-users to users. within a well defined market segment. Nirma. – Helps firms which are not comfortable with unfamiliar terrain. Market penetration can be achieved by – increasing sales to current customers.MARKET PENETRATION  It is a strategy where a firm directs its entire resources to the growth of a single product or a closely knit product set. convert competitors customers. – Elongated product life-cycle. 74 . (Eg. Ujjala. – Suitable for industries where scope for technological breakthrough is limited. – The company carries a risk of product obsolescence. Britannia).

– Unconventional and flexible distribution channels. – Moves across geographical boundaries. – Immense customer reach & flexible advertising. 75 . – Stretches product life cycles.MARKET DEVELOPMENT  It is a strategy where a firm tries to achieve growth by finding new uses of existing products or its close variants and tap a new potential customer base altogether. tyres. (Eg. socks & stockings. upholstery.…… or Teflon: aircraft technologies to cutlery to paints or Raytheon Corp – Microwaves: radars to kitchen appliances). Du Pont – Nylon: parachutes. – Creativity and innovation – thinking out of the box. fabrics. carpets.

– Areas of product improvement – performance. – Substitutes that serve the same needs (Eg.Strolleys). Close Up: Fluoride – Gel toothpaste or VIP . aesthetics. durability. – Deliverable through – redesigning or reengineering.PRODUCT DEVELOPMENT  It is a strategy where a firm tries to achieve growth through a radical new product (Eg. conformance. – Leveraging through – innovation. features. Refills) 76 . reliability. Microsoft: DOS to Windows) or a substantial improved version (incremental) of an existing product to repeatedly enter the same market (Eg. perception. – Leverage on customer and brand loyalty. serviceability.

industrial embassies). – Risk reduction.e. – High transaction costs and institutional gaps. thereby creating a new business. Why do firms diversify in the Indian context? – Shift the growth trajectory or opportunistic. dominance). – Permits: quotas. 77 .e. licenses (i. – Conglomerate or market power (i. From the modern point of view they are strategically dissimilar. – Internal capital market. the new business is distinct from the existing business in terms of – inputs – technologies – markets.DIVERSIFICATION  It marks the entry of a firm into newer markets with new products. From the traditional point of view.

cold wave dominates the planet. If the hot wave dominates the planet. either of which is equally likely to prevail.HOW DIVERSIFICATION REDUCES RISK? Consider a hypothetical planet. Let us assume that there are two businesses constituting the entire market – coffee and icecream. while the coffee business would register a return of 10%. in which a given year is either under hot or cold wave. What would be your ideal diversification strategy through optimization? 78 . the ice-cream business would register a return of 30%. while the coffee business would register a return of 30%. ice-cream business would register a return of 10%. If on the other hand.

DIVERSIFICATION STRATEGY
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
79

HORIZONTAL INTEGRATION

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.

80

HORIZONTAL INTEGRATION

Reliance Capital

Reliance Infrastructure

Reliance Industries

Reliance Ports

Reliance Power
81

VERTICAL INTEGRATION

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.
82

VERTICAL INTEGRATION
Oil & Gas exploration Naptha-cracking Acetic Acid Paraxylene (PX)
(PTA) (MEG)

Purified tetra-pthalic acid

Mono-ethylene glycol

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.
84

Tapered integration . Quasi-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). Ranbaxy. Reddy’s).Where one firm has full ownership and control over all the stages of a value-chain in the manufacturing of a product (Eg. Usually the firm concentrates on its core activities. 85 . and out-sources the noncore activities (Eg.QUASI & TAPERED INTEGRATION    Full Integration . Reliance).A firm produces part of its own requirements and buys the rest from outside suppliers with a variable degree of ownership and control. Dr.

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 .

Firms usually engage in conglomerate diversification when emerging opportunities are very attractive and offers potential growth opportunities.e. Drawbacks of unrelated diversification – – Cost of failure (i.e.CONGLOMERATE DIVERSIFICATION  It relates to entry of firms into businesses which are distinct in terms of – inputs – technologies – markets. 87 . and are also strategically dissimilar. myopia). synergies pulling in opposite directions). core business). lack of knowledge of competitive forces). lack of strategic intent.e. – Cost of neglect (i. – Cost of dysynergy (i.e. – Cost of ignorance (i.

CONGLOMERATE DIVERSIFICATION Paper & Packaging Edible Oils Tobacco Hotels Food & Confectionary 88 .

Glaxo’s “Glucon-D” to Heinz). where a company simply exits because the business no longer contribute to or fit its dominant logic. L&TCement Division to Aditya Birla Group) technically known as divestiture or a product (Eg. Tatas sale of Goodlass Nerolac.DIVESTMENT   Divestment is a defensive strategy involving the sale of entire stake (Eg. ACC) in full to an independent entity. In strategy there is no scope for sentimentality with divestment. (Eg. It taken into account when performance is disappointing (i. reactive) and survival is at stake and the firm does not have resources to fend off competitive forces. It may also involve a SBU (Eg. Tata Press). It is may also be a pro-active strategy.e. Tata Pharma. 89 .

DIVESTMENT .3 billion. involving 608 pence per share). 1956 does not permit this mode. Leveraged Buy-Out (LBO) – Here the company’s shareholders are bought out through a negotiated deal using borrowed funds. Tatas buy-out of Corus for US $ 11. (Eg.ROUTES    Outright Sale – Popularly known as the asset route. Sale of Diamond Beverages to Coca-Cola for US $ 40 million). the Companies Act. Hive-Off – A hive off is the creation of a new entity followed by transfer of assets. 90 . However. where the equity is allotted amongst the existing shareholders on a pro-rata basis. where 100% of the assets (including intangibles) are valued and paid for. (Eg.

There can be no ideal strategy for every business. joint ventures).COMBINATION STRATEGY     It is a mixture of stability. growth. developing facilities right from the scratch) or through brown-field projects (i. mergers and acquisition.e. It is usually pursued by a business group with diverse interests across multiple industries. 91 . and divestment strategies applied simultaneously or sequentially for a portfolio of businesses. A combination strategy can be implemented through green-field projects (i. because every business has its own unique external and internal environment.e.

STRATEGY CHOICE & PORTFOLIO ANALYSIS 92 .

It attempts to answer the following questions – How effective has the existing strategy been? How effective will that strategy be in the future? What will be the effectiveness of alternative strategies? It is impossible for a manager to assess all the alternatives. What then is the magical number? 93 .STRATEGIC CHOICE      A strategic choice seeks to determine the alternative courses of action available before top managers to achieve its strategic intent. In most cases the trade-off is between resources and opportunities. Dominant logic enables top managers to selectively scan the environment and make trade-offs.

managers need to ask the right questions. To identify the right problems.SELECTIVITY IS THE KEY       The role of a top manager is not to solve a problem. will help the firm achieve its intent. 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 . nor is to a define a problem for others to solve. They must choose problems which will lead to the right kind of opportunities. The key task before a top manager is to identify the right problems. if addressed.

Resource sharing. Licenses & Quotas. High degree of centralized control (GEO. .BUSINESS GROUP . embassies). Their roots can be traced to a single family or clan and share broad similarities. keiretsus in Japan. Proximity to the corridors of power (i. 95 Succession planning is critical to continuity.DEFINITION       A business group is known by various names in various countries – guanxique in China. Managing Agency).e. Their origins can be traced back to market imperfections existing in an economy (MRTP Laws. business houses in India. formal and informal ties. chaebols in Korea. BRC).

RESOURCE SHARING ACROSS FIRMS Parent Company Firm 1 Firm 5 Firm 3 Firm 2 Firm 4 96 .

STRATEGIC CHOICE – MACRO TIMING Recession (Stability) Prosperity (Diversificatio n) Depression (Divestmen t) Recovery (Intensification ) 97 .

STRATEGIC CHOICE – MICRO TIMING ReEngineering Growth (%) Maturity Stability Growth Diversification Decline .Divestment Duration (Yrs) Inception Intensification 98 .

PORTFOLIO ANALYSIS      Resource allocation across a portfolio of businesses is an important strategic choice. Investing in emerging businesses may not actually be so simple as it appears to be. sometimes impossible. therefore. Rules of the game are different. Relatedness across resources are difficult to realize. 99 . Power and resources often goes hand in hand. Why? Businesses are not about liquid assets. next only to choice of business. Redeployment of resources upsets the established power bases of a group. there are high costs associated with entry and exit.

BCG GROWTH MODEL Relative Market Share (%) Industry Growth (%) Low High High Low Stars Question Mark ? Cash Cow Dogs 100 .

which remains a big? These businesses are net users of resources. Tata Steel). and their risk profile is high (Eg. product development). Tata Telecom. but to larger extent than a question mark. provided the industry growth rate continues and the company is able to maintain its growth (i. TCS. market development.e.BUSINESS ANALYSIS – TATA GROUP   Question Marks – They have potentials in the long term. market penetration. Stars – They achievers in the near term. 101 .e. diversification). Trent. provided the company is able to build up on its market-share (i. These businesses are also net users of resources (Eg. Tata-AIG).

they are generators of resources.e. Tata Chemicals). cash cows may also need to invest provided the industry takes an upswing (Eg. Tata Tea. harvest. divest) as achieving a dominant position in these businesses is a difficult task. Tata Press). and the company dominates the industry ahead of competition (i. and they lack on competencies to take on competition and are basically cash traps (Eg. Tata Motors. Nelco. Given that the growth potential in the business is low. However. Groups prefer to dispose off such businesses (i. 102 . stability). Dogs – They are a drag on the group. Tata Pharma. Indian Hotels.e.BUSINESS ANALYSIS – TATA GROUP   Cash Cow – These are matured businesses.

e. niche – Rolex. Armani).LIMITATIONS       It does not address the concerns of a business which is in the average category (usually the majority). 103 . The model does not provide specific solutions within a particular category. factors are limited. Cartier. neither in high or low. Mercedes Benz. Cash cows may actually need substantial investments to retain their market position (Eg. Certain businesses in the low market share category may be the result of a conscious strategy (i.BCG . The terminologies used are somewhat prohibitive. Data may be prohibitive. HUL).

-) 104 .MATRIX Distinctive Capabilities Strong High Medium Weak Stability Industry Attractiveness Diversify (++) Intensify (+) Med Intensify(+) Stability Harvest (-) Low Stability Harvest (-) Divest (.GE .

LITTLE Inception Dominant Strong Favourable Tenable Weak Growth Maturity Decline Improve Selective Niche Abandon Industry Life-Cycle Divest Harvest 105 Competitive Position Invest Consolidate Hold .ARTHUR’ D.

SHELL – DIRECTIONAL POLICY MATRIX Business Sector Prospects Attractive Average Unattractive Generate Cash Phased Withdrawal Distinctive Capabilities Strong Market Leadership Try Harder Double Or Quit Growth Average Custodial Weak Phased Expand Withdrawal Divest 106 .

107 .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. BCG – Boston Consulting Group. Disinvestment involves selling in phases. Gap Analysis – It emphasizes what a firm wants to achieve. Divest – Selling a part or the entire business at one go. SBU – A business unit which is strategically different from another and also shares a different SIC code. Portfolio – An organization is perceived as a portfolio of businesses.

BUSINESS STRATEGY & COMPETITION 108 .

COMPETITIVE STRATEGY     A competitive strategy deals with how a firm competes in a particular business or product-market segment. rent). Such resources or activities should be distinctive and sustainable over time. The strength of a firm in a particular business usually stems from its competitive advantage. 109 . Competitive advantage refers to a firms resources or activities in which it is way ahead of competition. building market-share. The principal focus is on meeting competition. Competitive advantage is the back-bone of strategy.e. and earning super-normal profits (i.

preventing new entry and/or competition (Hax & Wilde). involving harmonizing and integrating multiple streams of technologies. leveraging (Prahalad). Delta Lock In – Two dominant players co-opt to selfreinforce and create or escalate an entry barrier. identifying critical success factors. developing competitive advantage (Porter). 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. 110 .

T-Series). Steep experience curve effects. Reliance) or may pass it to customers to increase market-share (Eg. Nirma. 111 . proprietary technology. Sources of cost advantage are varied and depends on the structure of the industry – Economies of size. backward integration. preferential access to raw materials. Ayur. Compress project duration through crashing. Locational or early entry advantage. The firm may retain the benefits of cost advantage by enjoying higher margins (Eg.PORTERS – COST LEADERSHIP      Cost Leadership – It is a strategy that focuses on making a firm more competitive by producing its products more cheaply than its competitors.

Creativity. Culture of experimentation. Intel. avoiding brand dilution. Successful product differentiation is often followed by premium pricing. Means of product differentiation are peculiar to each industry. and sufficient slack.PORTERS – PRODUCT DIFFERENTIATION      Product Differentiation – It is a strategy that attempts to provide products or services that are differentiated from competitive products in terms of its value proposition and uniqueness. Feeling the pulse of the customer. Rayban). It selects one or more attributes that buyers perceive as important. 112 . (Eg. innovation and out of the box thinking. Sony. undeterred attention to quality. Focus on brand loyalty.

Armani). Sub optimization alone may not be a source of superior performance. coupled with fear of structural erosion. They are poorly served by mainstream players. Rolex. Cartier. 113 . A focuser seeks to achieve a competitive advantage in its target segment. though it may not possess an overall competitive advantage. The target segment must have unusual needs or the delivery system catering to this segment must be unique. Mont-Blanc. Maybach.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.

COMPETITIVE POSITIONS Competitive Advantage Cost Differentiation Product Differentiation Competitive Scope Broad Cost Leadership (Toyota) Product Differentiation (General Motors) Narrow Cost Focus (Hyundai) Differentiation Focus (Mercedes) 114 .

Tata Nano). Though cost leadership and differentiation are inconsistent. and usually outperforms a stand alone generic strategy.HYBRID STRATEGY     A hybrid strategy is the simultaneous pursuit of cost leadership and differentiation.e. 115 . similarly differentiation may not always lead to rising costs (i. Reducing cost does not always involve a sacrifice in differentiation. Firms focusing on a hybrid strategy typically aim at shifting the productivity frontier and recreating a new product-market segment altogether (Eg. jugaad or frugal engineering). in a hyper competitive context the two strategies need not be mutually exclusive.

stuck in the middle. The positioning therefore gets – blurred. 116 . It is usually the result of a firm not willing to make trade offs. leading to what is called – straddling. Industry maturity will usually widen the gap. It will have a competitive disadvantage vis-à-vis a clearly positioned generic player. It tries to compete through every means. but achieves none. unless such a player is capable of discovering a profitable segment.STUCK IN THE MIDDLE     A firm that engages in a hybrid strategy and fails to achieve a competitive advantage because it was ill conceived will be .

Consumer behaviour pattern unstable and evolving. Eg. 3D imaging. coupled with low penetration levels. leading to a blurred productivity frontier and steep learning curve.radical environmental changes. ending in a differential cost economics.EMERGING INDUSTRY      Emerging Industry – An evolving industry characterized by . There is a lot of scope to define the rules of competition. First-time buyers. changing customer needs. Market segmentation not well defined. Nano technology. It is characterized by – High level of technological uncertainty. Artificial intelligence). 117 . (Eg. Speech recognition software's.) Excessive turbulence in the dynamics of the environment. technological innovations.

Paints. Eg. It is characterized by – Low entry barriers. IT. 118 . Diverse customer needs. Eg. because of lack of economies of size and scale. Consumer durables. MRTP may also cause fragmentation. Retail and telecom.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). leading to clear fragmentation. High exit barriers because of huge investment in CAPEX. Government regulations in the form Eg. Eg. Air Conditioning. Scope for players to change the rules of the game.

collaboration and co-option. Cartel among existing players through collusion. technological maturity. 119 . Firms are rule takers in the segment as productivity frontier is well defined. Strong entry barriers. because of economies of size and learning curve effects. well defined consumer behavioral patterns and imperfect competition leading to near monopoly.technological maturity. distribution networks. early entry and location advantages.MATURED INDUSTRY      Matured Industry – An industry characterized by saturation in growth rates. Limited scope for innovation . established industry dynamics.

dot-matrix printers). Firms facing a declining phase are characterized by inertia and slow to react to environmental changes. 120 .DECLINING INDUSTRY      Declining Industry – An industry which has outlived its utility due to the entry of close substitutes and or radical product innovations which results in a shift of the productivity frontier. backed by corporate espionage. Exit barriers are extremely high because of limited prospective buyers. and costly price wars. Nature of competition extremely high. with little or no signs of recovery. scooters. Typewriters. Learning abilities have been stunted and firms adverse to investment in R&D and make fresh investments. (Eg.

strike alliances. process innovation. 121 . increasing scope. strictly product differentiation and not standardization. Declining Industry – Redesign. strictly cost differentiation. focus more on product differentiation or even a hybrid one. or else exit the segment. Locate a defendable position. recreate new markets. Matured Industry – Sophisticated cost analysis. move beyond boundaries. mergers and acquisition. aggressive building of distribution networks. premium pricing. Fragmented Industry – Identify. assess and overcome fragmentation. reengineer. branding and promotion.COMPETITIVE STRATEGIES     Emerging Industry – Set benchmarks. regenerate.

brands. 122 . Intangible – These refer to goodwill. A firms resources can be classified into – Tangible – These refer to real assets.RESOURCE BASED VIEW    Differentiation based on cost or products saturates and ceases to exist beyond the medium term. and complex learning experiences in integrating and harmonizing technologies (distinctive capabilities) that play an important role in delivering competitive advantage through “causal ambiguity”. They are a standard in nature. However. positions based on resources which are unique and inimitable are far more sustainable even in the long term. hence very rarely confer competitive advantage as can be easily acquired or replicated. patents.

Therefore firms should concentrate on developing complex resources that forms the very basis of differentiation. There is a high degree of internal and external causal ambiguity involved in it. Hence. but not necessarily. Capabilities can be generic (i. can be leveraged across businesses) or specific to a particular business. They play a very critical role in shaping competitive advantage. differentiation based on capabilities can be sustained even in the long run. 123 .e.CAPABILITIES & COPMPETENCIES   These include a complex combinations of tangible and intangible resources that organizations use to convert inputs to outputs. Typically. they are woven around technologies.

COMPETITIVE ADVANTAGE 124 .

and results in well springs of new business development. It enlarges the scope of an organization. not absolute) to competition. It results in a distinct differentiation advantage or a cost advantage or hybrid as well. 125 . competitive advantage subsequently becomes the back bone for a competitive strategy.COMPETITIVE ADVANTAGE       A competitive advantage is a position of superiority relative (i. Success of a strategy critically depends on SAP.e. A portfolio of competitive advantage comprises strategic advantage profile (SAP). Strategy drives competitive advantage.

In most cases SAP is hidden and dormant.STRATEGIC ADVANTAGE PROFILE (SAP)       Organizations have to systematically and continuously conduct exercises to identify its SAP. Identification of SAP is critical for and stretching and leveraging of resources. 126 . In today's world of discontinuity. SAP changes from time to time. Most successful organizations around the world have a well balanced SAP. Internal strategic fit between its strategy and dominant logics is essential for the top management to stretch and leverage SAP.

Today SCM is integrated with greening the environment as CSR practices. kaizen or internal customer). Inventory Mgt to Logistics Mgt to Supply Chain Mgt (SCM). each of the players need to be efficient backed by sufficient coordination at the contact points (i.e. Competitive advantage arises not from an individual activity but a stream of inter-related activities.VALUE CHAIN ANALYSIS    A value-chain segregates a firm into strategically relevant activities to understand its composite behaviour. 127 . A VC is often compared with a relay team. faster product launches. Substantial cost reductions also follow. and enhanced customer tracking – higher market share. VC pay-offs: better product availability.

THE VALUE CHAIN Support Infrastructure n gi ar M Human Resource Management Technology Development Procurement Out Logistics Mktg & Sales In Logistics Operations Primary Service M ar gi n 128 .

Operational effectiveness is not strategy. – Third order fit refers to optimization of effort. 129 . A learning organization helps create strategic fit. – First order fit refers to simple consistency between each activity and the overall strategy. A high fit involving a complex chain of activities drives both competitive advantage and its sustainability.STRATEGIC FIT – THE PORTER WAY   The sustainability of the value chain depends on the degree of fit between the activities. – Second order fit occurs when activities are reinforcing amongst them. Fit is important because discrete activities result in negative synergy and can also be easily copied by competitors.

CORE COMPETENCE    A core competence represents the collective learning's of an organization around diverse streams of technologies. A core competence usually has its roots in technology. These skills results in distinctive activities and processes. . It should satisfy the following conditions – Contributes significantly to customer benefits. but not necessarily. – Can be leveraged across businesses. – Can be sustained even in the long run. – Cannot be easily imitated or substituted. Core competence has a high degree of external and 130 internal causal ambiguity embedded in it. It forms the very basis of competitive advantage.

A competitive advantage may or may not lead to superior performance. a core competence usually does.CORE COMPETENCE A competitive advantage does not necessarily imply a core competence. a core competence is sustainable even in the long-term. only global leaders possess a core competence. 131      . A competitive advantage manifests from a function. Majority of the firms have competitive advantage. A competitive advantage is sustainable in the shortmedium term. a core competence has its roots in a set of skills. a core competence always implies a competitive advantage.

GAME THEORY     The game theory was developed in 1944 by Oscar Morgenstern. illustrations depicting a win-win situation. each of whom wants to win. In fact there are no. A game is a contest involving two or more players. This is known as a zero-sum game. In a game (similar to a business) one players win is always another's loss. Here the magnitude of gain offsets the magnitude of loss equally. However. the stringent assumptions of game theory and difficulty in ascertaining of pay-offs makes game theory application difficult in business. Subsequent work on game theory by John Nash led him to win the Nobel prize in 1994. 132 .

Firm Y’s Strategy Use Radio Use Radio +2 +6 Use Newspaper +7 -4 133 Firm X’s Strategy Use Newspaper Firm X’s Pay-Off Matrix .BIASED AND UNBIASED GAME  A game is said to be biased when one of the players have a disproportionate chance of winning. An unbiased game is one where both the players have equal chances of winning.

A saddle point is a situation where both the players are facing pure strategies. Firm Y’s Strategy Use Radio +3 +1 Use Newspaper +7 -2 134 Firm X’s Strategy Saddle Point Use Radio Use Newspaper Firm X’s Pay-Off Matrix .PURE STRATEGY GAME  The strategy each player follows will always be the same regardless of the other players strategy.

However.g. It represents the classical “prisoner’s dilemma”.e. Repeated Games – In this situation the players interact repeatedly with each other sub-optimizing the outcome possibilities. there is likely to be temptation by any of the players to try to steal the advantage over the other by breaking the rules of the game (Eg. 135 . iteration) rather than through collusion (E. collaboration or cooption.TYPES OF GAMES   Simultaneous Games – This is a situation where the players have an option to choose to cooperate or not through collusion. Yahoo Vs Microsoft). This is usually through learning by “experience or observation” (i. Coke Vs Pepsi).

but 136 players do not always behave rationally.CHANGING THE RULES OF THE GAME    In a situation where a player is unable to compete with the existing rules of the game may attempt to change the rules of the game altogether. . – Making pricing more transparent. Game theory relies on the principle of rationality. It results in a shift in the productivity frontier. – Building incentives for customer loyalty. 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.

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).
137

THE THREE STRATEGIC POSITIONS

System Lock-In
System Economics Market Dominance Complementary Share

Enabled through effective use of technology

Total Customer Solutions
Customer Economics Cooperation Customer Share

Proprietary Product
Product Economics Rivalry Product Share 138

138

LOCK-IN PAYOFFS

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.

LOCK-IN SUSTAINABILITY

 

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.

STRATEGY IMPLEMENTATION

141

STRATEGY IMPLEMENTATION

   

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.

142

– Resource commitment from top management. internal strategic fit (strategy – dominant logic) is critical to strategy implementation. 143 . A high strategic fit (co alignment) is useful because it enables – – Appropriate and timely response. – Unlearning & learning of new skill sets. – Development of capabilities & competencies.IMPORTANCE OF STRATEGIC FIT  Strategic fit has a central role to play in strategic management. – Better strategic and operational control. – Changing the rules of the game. While external strategic fit (strategy – environment) is relevant for strategy formulation.

learning levels are very low. Some of the key strategic learning's exists at the contact point between the organization and its customer. 144 . According to Mintzberg.e. formulation & implementation can occur simultaneously. In fact. learning levels are very high. emergent strategy vis-à-vis intended & realized).FORMULATION Vs IMPLEMENTATION      Traditionally. effective strategies are better crafted when there is a subtle overlapping between the two (i. while control is very effective. at the cost of sacrificing a lesser degree of control. In such a situation. In such a situation. strategy formulation and implementation has been perceived to be distinct & independent.

ROLE OF TOP MANAGEMENT     To bring about change and to implement strategies successfully. companies depend more on transformational leaders than transactional leaders. transformational leaders go one step beyond – Design a well crafted and designed strategic intent of the organization. Install a system of shared beliefs and values. In contrast. A transactional leader is usually confined to allocating tasks & responsibilities and extracting performance. bring about transparency. shift from compliance to commitment. He should be an agent of change. 145 . Pragmatism is the ability to make things happen.

e. skills) also includes complex resources like capabilities and competencies. labour. brands. land. minimum requirement). patents. 146 . machines) referred to as threshold resources (i.RESOURCE ALLOCATION     Resources allocation includes tangible resources (Eg. Zero Based Budget – In this case the budget of a SBU has to be worked out right from the scratch. Performance Budget – SBU managers need to justify the distinctive resources in terms of the opportunity it is pursuing yields the highest possible pay-offs. Intangible resources (Eg. The various methods of resource allocation includes Historical Budget – The budgets framed by HQ for a particular SBU keeping in mind past trends.

Distinctive capabilities are complex set of skills woven around technologies. 147 . convergence of multiple streams of technologies at the product – market level is becoming increasingly evident (Eg. these capabilities are sustainable even in the medium to long term. Flat Screen Displays. Mobiles). Due to causal ambiguity (complexity). Moreover. though not necessarily in the case of emerging markets.CAPABILITIES & COMPETENCIES     Technology and business are slowly becoming in – separable. Distinctive capabilities helps in stretching and leveraging resources thereby overcoming two major constraints involved in strategy implementation – times & costs.

processes become people independent. 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 firm in several unrelated businesses usually employs a SBU structure. The level of centralization and decentralization is decisive. Once the structure is in place. A single product or a dominant business firm usually employs a functional structure. 148 . A firm in several related businesses usually employs a divisional structure.

processes. based on skills and competencies.TYPES OF STRUCTURES       Functional Structure – Activities grouped together by a common function (Eg. with team members having dual line of control. SBU Structure – Businesses segregated in terms of strategic dissimilarities (Eg. Marketing. disbanded subsequently. Team Structure – An informal group formed for a crisis. or geographical locations. 149 . Output). Project / Matrix Structure – A formal but temporary framework initiated for the completion of a particular project/crisis.Technology. Finance). Divisional Structure – Units grouped together in terms of products. Inputs . Virtual Structure – A boundary less or hollow organization.

Environment & People – Economic and political conditions have a major bearing on structure coupled with the attitude and aspirations of the people in the organization. Technology – With more and more convergence of technologies in business. as span is broader.FACTORS INFLUENCING STRUCTURE    Size – As an organizations size increases there is more specialization and differentiation leading to the top management moving away from operational issues and control. 150 . It includes the desire for independence. structures are becoming flatter and more simpler. leading to a tall structure. facing challenges & crises. assuming responsibility.

Changes in top management and unlearning helps overcome inertia. Top managers resist change. Most firms undergo periods of strategic continuity rather than strategic discontinuity.e. irrespective whether it is from worse to good or good to worse. Inertia is a characteristic of a firm that endures status quo (i. Inertia acts as an impediment in strategy implementation. co0ntinuity). there is a tendency to continue along the same lines.INERTIA  When a firm has been operating in a certain fashion for a long time.  . Common sources of 151 inertia – complacency with past successes.

Since the internal and external environment is in a state of continuous flux.  . Deviation of fit is detrimental to performance and may lead to strategic failure. strategies need to be evaluated on an ongoing basis to prevent deviations of fit. firms should move beyond financial performance to strategic performance as organization systems are becoming complex.STRATEGY EVALUATION    Strategy evaluation centers around assessment of strategic fit. However. To prevent deviation of fit. certain authors propose misfit as a source of superior 152 performance.

. competitive advantages becoming disadvantages? Has the company acquired any new competency? Has the company been able to overcome the 153 environmental threats.STRATEGY CONTROL      It is concerned with trafficking a strategy as it is being implemented. detecting changes in the external and internal environment and taking corrective action wherever necessary. It attempts to answer the following questions – Is the strategic intent appropriate to the changing context? Are the organizations capabilities still holding good.

It involves assessing – strategic thrusts and milestones. However.STRATEGY CONTROL IMPLEMENTATION     It involves steering the company towards its original growth trajectory & stated goals. checking every premise is costly as well as difficult. It is open-ended as well as . Premise Control – Checking the validity of the assumptions on which a strategy was based. Special Alert Control – It intends to uncover unanticipated information having critical impact 154 on strategies. Implementation Control – It aims at assessing whether key activities are proceeding as per schedule.

“If you cannot .BARRIERS TO STRATEGY EXECUTION     Vision and strategy not actionable – Utopian ideas. Strategy not linked to resource allocation & capabilities – Lacking commitment of top management. Performance measures are defective – What to evaluate against? How to measure the 155 construct? As a saying goes. low strategic fit due to consultants intervention. Strategy intent not linked with goals and objectives – Lack of coordination at lower levels leading to negative synergy. difficult to translate into practice.

156 . On top of that. Today it is considered one of the most powerful tools for strategy implementation determining success or failure.7S FRAMEWORK OF Mc KINSEY  The 7-S Framework of McKinsey is a management model that describes 7 factors to organize a company in an holistic and effective way. important or not they're all interdependent. to be sure of successful implementation of a strategy. this may effect all others as well. Managers should take into account all seven of these factors. so if one fails to pay proper attention to one of them. Together these factors determine the way in which a corporation operates. the relative importance of each factor may vary over time and context. Large or small.

The 7-S model was born at a meeting of these four authors in 1982. 157 . They had been investigating how Japanese industry had been so successful. It appeared also in "In Search of Excellence" by Peters and Waterman. At around the same time in the US Tom Peters and Robert Waterman were exploring what made a company excellent. Since then it is known as their 7-S model and is extensively used by corporations worldwide to implement their strategies. 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.

Strategy – Trade-offs for the allocation of a firms scarce resources. 158 . over time. Style – The way in which the top management influences the functioning of an organization. formal & informal . Skills – An organizations capabilities and competencies. Systems – The procedures. Structure – The way in which the organization's units relate to each other in terms of their commonalities. to reach identified & stated goals.THE 7’S        Shared Values – It represents what the organization stands for and what the top management believes in. processes and routines that characterize how work should be done. Staff – Human inter-relationships.

STRATEGIC FIT Strategy Structure Shared Values Systems Skills Staff Style 1st Order Fit 2nd Order Fit 3rd Order Fit 159 .

their Japanese counterparts focus more on the soft S’s for their early success and sustainability.A CRITIC OF THE 7S MODEL     While the hard S’s (strategy. the soft S’s (skill. structure. A choice of an alphabet often limits the scope and skews the interpretation of a model. systems) are comparatively easy to identify and influence. 160 . Ineffective in case of a virtual company. because most often they are culturally embedded and often neglected. style. While the American co’s focuses on the hard S’s. staff. In contrast. Consider the 4P’s of marketing or 3R’s of SCM. shared values) are very malleable and comparatively more difficult to identify & influence.

Low Take Overs 161 .STRATEGY IMPLEMENTATION ROUTES Strategic Fit .High Organic Growth Strategic Alliance Joint Venture Mergers & Acquisition Strategic Fit .

and markets. . the entire value chain. concessions are available for green-field projects. i.e. 162 Risk of cost and time overruns. i. Govt. It has complete control over inputs. green-field projects. (Eg.e. technologies. soft loans.ORGANIC GROWTH      Here a firm builds up its facilities right from the scratch and continues to do so without any external participation. Reliance Industries). subsidized power). (Eg. Long gestation leads to delayed market entry. tax holidays. The entire infra-structural facilities are set up afresh having its own gestation and break-even. SEZ’s.

STRATEGIC ALLIANCE     It involves a pro-active collaboration between two or more firms on a particular domain or function for mutual gain. It touches upon a limited aspects of a firms value chain. 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. Tata Motors & Fiat). 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.

(Eg. .JOINT VENTURES     A joint venture involves an equivalent equity participation between two firms usually of similar strategic intent and comparable size to enter a particular market through a newly formed entity. Degree and extent of management control must be clearly 164 laid down. Selecting the right partner is critical for success.Honda). Dominant logic of both the companies should be complimentary. A comprehensive MOU is essential. leaving minimum scope of overlapping. It is a win-win situation for both the companies. Tata – AIG. Hero .

Coca Cola – Thums Up). Integration of assets and other financial resources. Integrated distribution channel leads to better market penetration and overall synergy. Acquisition is an outright purchase of a firm assets by another independent entity (Eg. ITC Tribeni Tissues. Economies in scale leading to lowering of costs. Brooke Bond & Lipton). Revival of a sick-unit through better management practices is a major motive behind an acquisition 165 strategy.MERGERS & ACQUISITION      It refers to the fusion of two or more firms into a single entity. . with the individual firms ceasing to exist any more (Eg.

Integration of organization structure & cultures is difficult. Inform SEBI / Stock Exchange after 5% stake is 166 acquired. often the new firm is “left alone”. Most countries have stringent laws that prevents hostile take over. Larger geo-graphical diversity. Consolidation in a fragmented industry.Corus). Tata Steel .TAKE OVERS      It refers to the acquisition of significant management control by buying out majority stake in a firm through due diligence or hostility (Eg. Instant access to capacities and markets. Make a public offer of not less than .

MANAGEMENT TOOLS IN STRATEGY 167 .

every time. TQM – Doing the right thing the first time.WHY MANAGEMENT TOOLS?      Change is becoming pertinent in the business environment. Balanced Scorecard – Tracking strategy 3600. or better still create next practices Reengineering – Redesigning work processes right from the scratch. The past is ceasing to be an indication of the future. Radical change is superseding incremental change. Some tools to ensure that – Benchmarking – Adopt certain best practices. it is also a source of potential threat. Change provides enormous opportunities. Companies therefore need to ensure competitive advantages doesn’t become competitive disadvantages. 168 .

BENCHMARKING

  

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.

169

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.
170

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.
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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.
172

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.
173

BENCHMARKING - ADVANTAGES

  

Finding better ways of meeting stakeholder needs. Organizational learning comes from internal as well as external sources. Establishing goals based on formal assessment of external conditions. Defining effective measure of indicators, facilitate comparison, adopt from other organizations. Ensuring a continuous learning organization. Reducing competitive disadvantage. Organizational turnaround, especially effective in case of a wide strategic drift when differentiation strategies fail to work. 174

. Benchmarking is useful for bringing about operational efficiency.LIMITATIONS     More and more companies benchmark. While strategy is all about differentiation and not looking alike. clustering).BENCHMARKING . Benchmarking merely reorients profits in the hands of few to profits in the hands in the hands of many (i. Strategy is more of creating best practices rather than copying them. It can at best complement it. the more similar they end up looking.e. It does not shifts the growth 175 trajectory of the industry as a whole. but it cannot be used as a strategic decision making tool.

for achieving performance improvement (E. Re-engineering involves complete reconstruction and overhauling of job descriptions from the scratch (i. clean sheet). process mapping) and eliminating or improving them (E. The task demands a total change in organisational 176 culture and mindset.e. . Re-engineering attempts to radically change an organizational products or process by challenging the basic assumptions surrounding it.RE-ENGINEERING     Redesigning leads to identification of superfluous activities or product features (i.e. Windows 95 to 97). DOS to Windows).g.g.

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.

structures.REENGINEERING . resource allocation and prepares the organization for the future through a reorientation of the entire strategic architecture. Business – It looks into markets. etc) and supports the organization for the present. Strategic – It looks into the process of strategic planning. 178 . It can be of the following types – Functional – It looks into the flow of operations (i.e. processes. . customers and suppliers and protects the organization from the future (i.LEVELS     Reengineering can be successfully leveraged at all levels of an organization with varying degree of results. BPR).e. products.

It generally acts as a threat to innovation. While traditional manufacturing is a bottom-up approach. However. learning curve advantage. reverse engineering is a top-bottom approach. – Early entry advantages. with an intention to copy it (Eg. – Causal Ambiguity. – High cost and time acts as a deterrent.REVERSE ENGINEERING    It is a process by which a product is dismantled and analyzed in order to understand how the product was designed and manufactured. Indonesia). 179 . Cheaper versions of Intel chips and mother-boards manufactured in Taiwan. protection can be had in the following ways – – Patenting.

Introduction – Launching the product in the market. 180 .e. cost and effort necessary for the purpose of reverse engineering. Usually in such cases segmentation and pricing is different from the original innovator. Actualization – Obtaining and dismantling of the product to assess how it functions.STAGES IN REVERSE ENGINEERING     Awareness – Recognizing whether the product is found to be worth the time. Inaccurate assessment at this stage may lead to a failure of the entire project. Implementation – Developing of a prototype. nano-technology). designing facilities. machine tools to convert ideas into a marketable product (i.

Air bags. – Aesthetics – Appeal in design. – Perception – Customer notions. Car) – – Performance – Mileage of 14 kms to a litre of fuel.WHAT IS QUALITY?  It involves the totality of a product or service in meeting certain stated or implied needs. of service stations. 181 .Euro IV. – Conformance – Emission standards . – Durability – 1980 manufactured cars still on road. – Reliability – Consistency in mileage. – Serviceability – Large no. More and more companies are moving towards meeting implied rather than stated needs. It has eight dimensions (Eg. – Features – Anti-lock braking systems.

TOTAL QUALITY MANAGEMENT     Objective – Management of quality ensures conformance to certain pre-set standards. Management of quality was traditionally inspect it . touching upon a limited aspect of a value chain. TQM is a way of creating an organization culture committed to the continuous improvement of work processes – Deming. which ensures good market standing. It had little impact on improving overall productivity. . zero defects.fix it in nature. It is deeply embedded as an aspect of 182 organisational life & culture.

provided with all relevant information and best possible tools. Be customer centric – Generate the concept of internal customer (Ishikawa). the first time – From reactively fixing error in products to proactively preventing errors from occurring at the first place (Juran). fully involved in decision-making and fairly rewarded for results. Empowerment – It takes place when employees are properly trained.TQM – KEY TENETS     Do it right. Looking at quality as an endless journey. 183 . Kaizen – Make continuous improvement a way of life. not a final destination.

TQM . enabling the firm to concentrate on core activities essential to customer satisfaction. 6-Sigma). It is based on the principles of MBO (i. 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.STRATEGIES    Outsourcing – It is the process of self-contracting services and operations which are routine and mundane. Quality Circles – It a small group of shop-floor employees who meet periodically to take decisions regarding operational problems and crises. 184 . of units meet preset standards (Eg. equal participation).

. it’s bad execution. – Efficiency and effectiveness is passé. strategy implementation has never been more important..... – Less than 10% of strategies effectively formulated are effectively executed.... – In the majority of failures – we estimate 70% – the real problem isn’t (bad strategy) ... Source: Fortune Magazine Why CEO’s fail? 185 ..BALANCED SCORE CARD  Some interesting comments ..

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. Focus more on causes.CONCEPTUALISATION     A company’s performance depends on how it measures performance. These measures worked well when organizational systems were simple and unidirectional and more importantly the environment was static. rather than effects. 186 .BSC . Most managers tend to rely on traditional measures of performance having its origin in finance as they are well tried and tested. Organizations need to move from financial to strategic performance.

BSC – KAPLAN & NORTON (1992)  A BSC helps a manager to track and communicate the different elements of company’s strategy. and distinguish strategic problems from operational ones. 187 . because they have too many. It has four dimensions – – How do customers see us? – What must we excel at? – Can we continue to improve and create value? – How do we look to shareholders?  Firms more often have problems.  The most critical element of a BSC is to measure these four dimensions.

CUSTOMER PERSPECTIVE GOALS Products Supply Preference Relationship MEASURES Relative market share (%) % of sales from new Vs proprietary products Timely deliveries and service Customer credit analysis (i. ageing schedule) % of key customer transactions Ranking of key customer accounts No.e. of visits or calls made % of NPA’s 188 .

of new product launches Vs competition Product pricing Vs competition 189 . 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.

LEARNING PERSPECTIVE GOALS Technology Manufacturing Focus Timing MEASURES No. of new patents registered Time to develop next generation products Average and spread in operating cycle % of products that equal 2/3 sales No. of product innovations 190 .

FINANCIAL PERSPECTIVE GOALS Survival Success Prosper Divestment MEASURES Cash flows Growth in Sales and Profits EPS. Return on Investment Market Capitalization / PE ratio 191 .

STRATEGY MAPPING 192 .

BSC .IMPLEMENTATION 2 Translate strategy into operational terms 1 Mobilize change through effective leadership 5 STRATEGY Make strategy a continual process 3 Align the organization to the strategy 4 Make strategy everyone’s job 193 .

Seek excellence. Focus on cause not effects.e.ADVANTAGES      Most often top managers face information overload. . sharing of vision).e. they don’t know . It helps translating strategy into practice (i. doing right things instead of doing things right).what they don’t know. Shift from control to strategy (i.BSC . Modern managers should be poised to ask the right questions. The BSC brings together the different elements of a company’s strategy at a glance. 194 performance will automatically follow. As a result.

EFFICIENCY Vs EFFECTIVENESS Ineffective Effective Inefficient Goes out of Business quickly Survives Efficient Dies Slowly Thrives 195 .

Porter 196 .Michael E. but also sustains it. .EFFECTIVENESS + STRATEGY  A company which is effective as well as strategic. not only thrives.

CORPORATE RESTRUCTURING 197 .

“every organization must be prepared to abandon everything it does. Tata Group).” 198 . Strategic variety brings paradigm shift.. As Peter Drucker pointed out. To adapt to the changing environment. to survival of the most adaptable.... firms use restructuring strategies.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. from survival of the fittest . Strategic variety may be caused by changes in the as external well as internal environment. Radical change brings about strategic variety...

Instead. Core Business – Company’s should introspect – What business are we in? Business evolved out of opportunism or myopia should be divested. Fax. they should strive to provide unimaginable value ahead of its time (Eg. and dividing the core businesses into SBU’s (i. downscoping).RESTRUCTURING – BASIC TENETS    Customer Focus – Restructuring ideally begins and ends with the customer. Structural Changes – Conventional hierarchical structures should be disbanded in favour of more 199 flexible ones (i. etc). .e. Internal customers should also not be neglected.e. ATM. Company’s should go beyond just asking what he expects. Walkman. downsizing or rightsizing).

.. It is created and institutionalized by the top management. .. Ratan Tata now drives the point the group means business. Kumar Birla today is more dependent on professionals... During the times of JRD... the Tatas were considered a benevolent and charitable organization..) The Aditya Birla group typically relied on the “marwari” community for key management positions . 200 ..RESTRUCTURING – BASIC TENETS     Cultural Changes – A culture represents the values and beliefs of the people about the organization. Restructuring also requires cultural reorientation. started focusing on their capabilities....) Reliance dismantled their industrial embassies .

MOVING CLOSER TO THE CUSTOMER         As companies evolve.” 201 . Carry out PR campaigns. “ … one reason our customers are satisfied is that we aren’t. Use the reach of networking technologies. they tend to move away from the customer. Communicating to the media about organization efforts to deliver quality products. Honda’s ad says. Getting feedback & addressing customer complaints. Publicizing welfare projects to demonstrate CSR. Organizing customer and supplier meets. Restructuring provides a platform to close this gap.

including its intangibles – Mergers – It may be vertical. Mittal – Arcelor) and can take various forms. spin-off and equity carve. 202 . Glaxo – Heinz). horizontal.ASSET RESTRUCTURING     Asset Restructuring – The asset composition of a firm undergoes a major change. It may include brands as well. it may be smooth (Eg. Hive Off – It involves siphoning of assets under control. where the difference in valuation is settled off through cash or equity (Eg. or conglo-merate. Further. Further spin-off can be classified as split-off and split-up. Asset Swaps – It entails divesting and acquisition simultaneously by two companies. Tata – Corus) or hostile (Eg. It can have two forms.

the entire parent company loses its identity after being split into a number of subsidiaries. Equity Carve – It involves selling a minority stake to a third party while retaining control (Eg. – Split-Up – In a split-up. Tata Industries selling 20% stake to Jardine Matheson). – Split-Off – In a split-off. the existing shareholders receive equity in the subsidiary in exchange for the stocks of the parent company.HIVE OFF   Spin-Off – A spin off is the creation of a new entity. Most of these practices are not in consonance with Indian laws. in which the equity is allotted amongst the existing shareholders on a pro-rata basis (Eg. 203 . Reliance Ent).

repay long-term debts. but retained its engineering division. In 1995. 204 . strategic misfit. Parle sold its Thums Up brand to Coke for $40 million apprehending fierce competition. Generic motives include – – Raise working capital. – Poor performance. L&T sold its cements division to Aditya Birla group. for a specified market or in general with full management control. A complete sell-out is known as divestment (TOMCO).DIVESTITURE      It involves the sale of a brand or a division of a company to a third party. Selling out in phases is called disinvestment (IPCL). In 2005.

3 billion. Tatas take-over of Corus for US $11.The internal & external liability composition undergoes a major change – LBO – Acquiring control over a substantially larger company through borrowed funds (Eg. 205 . Share Buyback – It is a process of cancellation of shares out of free reserves to the extent of 25% of paid-up capital (Eg. It provides greater leverage as well as management control. Conversion – Replacing debt with equity or vice-versa or costlier with cheaper debt or cross currency debt. Wipro). involving 608 pence per share).CAPITAL RESTRUCTURING     Capital Restructuring .

1890 cr CMC – Rs.BUSINESS RESTRUCTURING – TATAS Divestments Lakme – Rs.Rs. 42 cr Voltas .Rs. 99 cr Tata Power – Rs. 150 cr VSNL – Rs. 1700 cr Trent – Rs. 120 cr Tata AIG – Rs. 256 cr ACC – Rs. 1439 cr 206 Tata Timken – Rs 120 cr Tata Telecom – Rs. 250 cr Tata Tetley – Rs. 230 cr Diversifications Tata Motors – Rs. 1860 cr . 950 cr Merind . 1170 cr Goodlass Nerolac – Rs.

keeping the composition of business intact (Jet Airways).ORGANIZATIONAL RESTRUCTURING     Organizational structure and systems calls for a change when strategic variety is apparent. of operating units. 207 . Rightsizing – It is phasing of excess and redundant employees resulted out of faulty internal planning (SAIL). Turnaround is the primary motive. It can be carried out in the following ways – Downsizing – It is a systematic one-time reduction in the no. Downscoping – It involves reducing the business and/or geographical scope of a firm (Aditya Birla group). Survival is the primary motive. of a firm’s employees and sometimes in the no. usually as a result external turbulence.

inertia). The dominant logic represents the perceptions and biases (i. 208 . the more difficult it becomes to uproot the paradigm (i. as strategies are based on such beliefs and biases. The longer the period.e.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.e. thumb rules) of the top management. Strategy change is unviable without a preceding change in its dominant logics. Dominant logic becomes deep-rooted in organizational contexts depending on the period it is in place (tenure of the CEO).

Companies achieve real agility only when people at every level rise above the ordinary to face the challenges – revitalization or transformation.e. Successful transformation requires – incorporating employees fully into the process – leading from a different place so as to maintain employee involvement – instill mental disciplines that will enable employees to behave differently. the factor that stifled change & performance was – culture.FORCES AGAINST STRATEGIC CHANGE     The problem with strategic change is that the whole burden typically rests on few people (i. 20% of the people carry out 80% of the changes). In most organizations. 209 .

Create relentless discomfort with the status quo. 210 . Manage from the future. Promote inventive accountability. it is not about winning but about learning. never take no for an answer. process ownership. Questioning every basic action of the organization. The best way is to alter the institutional point of view. Harness setbacks. Encourage uncompromising straight talk.SUCCESSFUL TRANSFORMATION        Build an intricate understanding of the business model at all levels of the organization. Understand and deliver the quid pro quo.

Aspects of current culture which needs to be overcome. Culture and style of management are two main impediments in force-field analysis. 211 . that can be both enablers and blockages to change and restructuring. Identify and implement facilitators of cultural change.FORCE-FIELD ANALYSIS       A force-field analysis provides an initial overview of change problems that needs to tackled. It involves diagnosing a change situation – systems & structures. also known as cultural-web. by identifying forces for and against change. It involves identifying – Aspects of current culture which needs to be reinforced.

Term Reduced labour costs Reduced debt costs Emphasis on strategic control Business High debt costs Higher risk 212 Long .OUTCOMES Alternatives Organizational Short .Term Loss of human capital Lower performance Higher performance Capital .RESTRUCTURING .

focuses on reengineering. 213 .NUMERATOR & DENOMINATOR MGT     Most firms across emerging markets undergo strategic discontinuity and as a result are forced to restructure their businesses. down-scoping or asset stripping. Numerator – It assumes that turnover is not a barrier or constraint. the second one is a more viable strategy and sustainable option in the long run. reverse engineering and regenerating. While the first strategy produces results instantaneously. In order to put back the company on the right track they are resort to – Denominator – It assumes that turnover cannot be increased. hence go in for downsizing.

TURNAROUND MANAGEMENT 214 .

. – Less than 10% of the Fortune 500 companies as first published in 1955. .WHY TURN AROUND MANAGEMENT?  Some interesting insights . still exist as on 2005. Source:  Why do firms atrophy? (Business Today. – Only seven of the first fifty Indian business groups in 1947 were even in business by the turn of this century.. 215 (Govindarajan and Trimble. January 1997)... and that the thirty-two of the country’s largest business groups in 1969 are no longer among the top fifty today...

Stage Theory). As a sequence of events describing how things change and why they change (i.TURN AROUND MANAGEMENT      A turnaround is said to occur when a firm perseveres through an existence threatening performance decline. and achieves sustainable performance recovery. While content focuses on endogenous and exogenous variables.e. A category of underlying principles and concepts. 216 . and capabilities. Both content (what) and process (how) are equally important for a successful turnaround. systems. process focuses on – A logic to explain a causal relationship between intervening variables. skills. ends the threat with a combination of strategies.

Substantial shifts in consumer preferences. Uncompetitive products or services. Low stakeholder confidence. especially in key positions. suppliers and bankers. Some indicators Continuous cash flow crises as a result of dwindling market-share and profits. Rising input costs.TURNAROUND INDICATORS        Most firms atrophy simply because they fail to diagnose the indicators that acts as threat to organizational existence. unavailability or radical lowering of substitute costs or technological obsolescence. leading to lack of acceptability from distributors and customers. 217 . Low employee morale leading to high employee attrition at all levels.

based on elasticity. focus on power brands. 218 . liquidating dead assets. Emphasis on advertising and market penetration. prune work-force. Extending work hours. Common approaches adopted Change in key positions. consider extension. Recalibrate prices. “all is not well”.TURNAROUND ILLUSION        The first step to a successful turnaround is the basic acceptance of the fact that …. which most top managers fail to appreciate.. Hence. Product redesigning or reengineering. Revamp product portfolio. they adopt surface level measures (disprin popping) which most often fail. be more customer centric.

TURNAROUND STAGE THEORY Stage 1 Decline Stage 2 Stage 3 Stage 4 Outcome Response Transition Performance Equilibrium Line Success Failure Indeterminate Nadir Time 219 .

primarily dwindling resources and capabilities are responsible for decline.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. Identification of the stimulus leads to the arrest of the downfall. 220 . It involves the identification of the theoretical perspectives that explains performance decline – K-Extinction – It suggests that macro economic and industry wide factors are responsible for decline. It has its origin in “resource led stretch” and subscribes to the view that a firm has substantial power to override the context. R-Extinction – It suggests that organization factors.

The response must match the cause of the decline. new market initiatives. Operating responses typically focuses on the way the firm conducts business and involves tactics geared towards – cost cutting and process redesigning (BPR). asset reduction. If the decline stems from structural shifts.RESPONSE INITIATION    Turnaround responses are typically categorized as operating or strategic. Strategic responses focus on changing or adjusting the business the firm is engaged in through long term moves such as – integration. the response should be operational. 221 . the response should be strategic. If the underlying cause is internal efficiency. diversification.

which may be unavailable to a focused firm. Scope – A diversified conglomerate may acquire a distressed business to turn it around and gain valuable synergies. Contour – It is easier to reverse decline in the earlier stages through operational measures. Untangling this question brings into focus three events – Domain – Many of the strategic cures have limited applicability for an affiliated firm.RESPONSE DICHOTOMY     The response initiation is somewhat dichotomous and cannot be universally applicable. Similarly new market initiatives is feasible only for multi-product firms. when decline deepens shifts in strategic position becomes essential. 222 .

substantial amount of time usually passes before results begin to show (i. role model.7 years with a range of (4-16) years. many a times early signs of recovery fades out. lead – lag). Sustenance is the key factor in this stage. However.e. participative management (i. Empirical studies show that average time is 7. consensus). 223 . transparency. confidence building measures. Effective levers of transition. The top management has a key role to play through empowerment.e. However. Support from all the stake holders through resource commitment.TRANSITION     Transition usually reflects the first signs of recovery.

Commanding a premium in the market. Share price indications and media coverage. Failure is an indication that initial momentum was not sustainable characterized by irreversibility. Regaining lost market share and distributor confidence. Instead of focusing on financial parameters alone. Cut off points must be unequivocal.OUTCOME        Outcome is said to be successful when a firm breaches the equilibrium performance level. 224 . Supplier and banker confidence. it should adopt a holistic approach. Revival of key customers and new product launches.

COOPERATIVE STRATEGIES & ALLIANCES 225 .

More and more companies worldwide are moving away from competition to co-option to leverage their resources and enhance bargaining power. It can assume any of the following forms – franchising. supply-chain partnership. technology.COOPERATIVE STRATEGIES     Cooperative strategies are a logical and timely response to changes in business dynamics. consortia. or joint venture. Any cooperative strategy maybe between firms within the same country or cross border as well. 226 . the commitment and the involvement between the firms increases manifold. In the cooperative strategy continuum as firms move up the value order. strategic alliance. licensing. and globalization .

Branding is critical to franchising. Switz Foods. 227 . Titan Inds. owners of the brand Monginis allows its franchisees to sell its confectionary products. owners of the brand Tanishq allows its franchisees to sell its jewellery products.FRANCHISING     Franchising – It is a contractual agreement between two legally independent firms whereby the franchiser grants the right to the franchisee to sell the franchisor’s product or service or do business under its brand-name in a given location for a specified period of time for a consideration. It is an effective strategy to penetrate markets in a shortest possible time at a minimum cost.

as in Tata Indica.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. refine processes and adopt necessary technologies (SKD). HM manufacturing GM range of cars in India with a buy-back arrangement is a perfect example of CBU. 228 . Different levels of licensing Manufacturing without embracing any technology (CBU). Develop a product through its crude stage. Become a systems integrator (CKD).

Cross Holdings – A maze of equity holdings through centralised control to ensure earnings stability & threshold resources for critical mass (Eg. Hyundai). 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. 229 . Tata. Coke – Pepsi). Airbus – Boeing).CONSORTIA     Consortia – They are defined as large inter-locking relationships & cross holdings between businesses in a similar industry. enabling them to increase prices (Eg. leverage upon size to preempt competition by escalating entry barriers (Eg.

link their capabilities to create value for end users. Companies in different industries with different but complimentary skills. Tata Motors – IDEA). otherwise it 230 becomes routine outsourcing. Continuous sharing of knowledge is critical to the success of a supply chain partnership.SUPPLY CHAIN PARTNERSHIP     It is a pro-active & collaborative arrangement between supplier and customer aimed at achieving better control over the value chain (Eg. It usually provides a platform to sort out differences between conceptualization and implementation to suit local market needs. .

enter newer markets. Despite their popularity (50-60)% of the alliances fail to accomplish their stated objectives. to gain knowledge and to obtain access to new markets (Eg. 231 . Firm’s should undertake a long courtship with potential partners.learning organization. Partner selection is one of the critical success factors. Generic motives involved are .STRATEGIC ALLIANCE     It is an short to medium term understanding between two or more firms to share knowledge and risk. effective R&D management. preempt competition. instead of hurrying into a relationship. Tata Motors – Fiat. Reliance – Du Pont). design next generation products. enhance credibility.

232 . Complementary Equals – Two firms mutually promoting each others complimentary products (Eg. Bootstrap – An alliance between a weak and a strong company with an intention to acquire it.STRATEGIC ALLIANCE . Backward – An alliance (quasi or tapered) with a supplier of critical components seeking commitment (Eg. Maruti). Coke – Pepsi). Alliances of the Weak – An alliance is entered into to preempt competition (Eg. Airbus – Boeing).TYPES      Collusion – Tacit top management understanding to neutralize price wars (Eg. Bajaj – Castrol). Whirlpool – Tide.

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). 233 . Cultural orientation has been found to have a profound effect on top management’s strategic orientation (Eg. 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. Too much stress on financials & structure be avoided.

234 . Managerial capabilities. Unique Resources – Abilities or skills which cannot be easily duplicated. Experience related to previous alliances.PARTNER CHARACTERISTICS         Complimentarity of Capabilities – The degree to which partners resources can be used in conjunction. including ability to provide quality products and services. Willingness to share knowledge and skills. Partner’s ability to acquire fresh skills. Intangible Assets – Move beyond the financials of the firm. Dominant Logic’s – Similarity in beliefs & biases.

partners should nurture it. 235 . Getting Engaged – It should incorporate a specific joint activity. vows to include commitment to expand the relationship. Changing within. differences not anticipated earlier. Setting up the housekeeping.MANAGING ALLIANCES       Alliances are more than just a deal. understanding the chemistry. Selection & Courtship – It involves self analyzing. Learning to collaborate – strategic. instead of focusing controlling the relationship. degree of compatibility. incorporating clear signs of continuing independence for all partners. operational & cultural integration. the value chain.

There are substantial linkages in the value-chain. It lasts till the vision is reached. . Conceptually. combining parts). whilst the partners continue to operate independently. separation is very 236 bitter.e. a joint venture is a selection among modes by which two or more firms can transact. synergy) rather than mere exchange (i.JOINT VENTURE      A joint venture is a long term association between two equal partners to create an independent firm (SPV) by complementing their resources and capabilities to explore newer businesses or markets for achieving a shared vision.e. It aims at creating new value (i.

It may also be linked to deterring entry or eroding competitors position. 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. Strategic Behaviour – Firms may override transaction costs. 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. Organizational Learning – It is a means through which a firm learns or seeks to retain their capabilities.

Learning new technologies. – Eg. Daimler – Chrysler (Premium Cars) 238 . – Eg. Maruti – Suzuki. Sharing of resources. – Eg. – Eg. TVS – Suzuki (4-Stroke Engines) Fill gaps in existing product lines.OTHER MOTIVES       Entry into newer markets. – Eg. Renault – Nissan (Minivans – Cars). Essar – Hutch (Vodafone). Eli Lily – Ranbaxy. Define future industry standards. – Eg. Yamaha – Escorts. Endorsement from government authorities.

Enka. Tata – Aditya Birla in Idea Cellular 239 . Century . Risk of brain (i.RISKS INVOLVED       Incompatibility – Differences in cultural background. – Maruti – Suzuki. technology) drain.e. LML – Piaggio Differences in size and resource base. – Eg. – Godrej – Procter & Gamble. Modi – Telstra What after exit (parenting disadvantage)? – Eg. PAL – Fiat If the cost of continuing exceeds the exit costs? – Eg. Risk of over dependence. – Eg.

Equality – Lack of dominance. Partner – Avoid duplication of skills and capabilities. Agreement – Clarity on operational control. time sharing. respect. Objectives – Shared vision. Focus – Avoid strategic myopia. Flexibility – Sufficient space to breathe and adjust. Culture – Reconcile gaps. 240 . Incompatibility – Performance expectations.PRE-REQUISITES FOR SUCCESS            Commitment – Mutual trust. Inertia – Differences in age and evolution patterns. Costs – Other modes of transaction becomes cheaper.

MERGERS & ACQUISITION 241 .

242 . The larger objective is to leverage on size. An acquisition is the purchase of a firm by a firm (of larger size. reverses are also taking place through LBO) with a view to acquire conglomerate power and induce synergy (Eg. Ranbaxy . HLL – Tomco). Mittal Arcelor). SEBI Takeover Code.Daichi) and hostile if it is without the consent of the management (Eg.MERGERS & ACQUISITION     A merger is a mutually beneficial consent between two or more firms (usually of similar size) to form a newly evolved entity by absolving their individual entities to preempt competition (Eg. however. An acquisition is said be smooth if it is with the consent of the management (Eg. Brooke Bond – Lipton). Most countries have stringent laws that prevents hostile takeovers (Eg. 2002).

Control – A special resolution of 75% of the share 243 holders approving the change of guard.e.SEBI TAKEOVER CODE. creeping acquisition). Acquirer – Someone (individual or firm) who picks up an atleast 5% stake without mandatory disclosure having an intention to wrest management control (i. Hike – An acquirer who has already picked up a 5% has to make a mandatory disclosure for every additional 1% stake that it acquires. . Preferential – A preferential allottee ending up acquiring 5% stake also comes under its purview. 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.

Grasim – L&T Cement. asset stripping). SEBI – In case of a hostile take over. and/or does not enjoy the confidence of the different stake holders. the SEBI can intervene and block share transfers if: the acquirer has ulterior motives (i. 2002    Pricing – Acquirers will have to offer minority shareholders (at least 20%) the past 26 weeks or past 2 weeks average price.SEBI TAKEOVER CODE. Disclosure – All acquirers have to inform the respective stock exchanges where it is listed and SEBI upon acquiring the basic limit and upon every incremental limit thereon. whichever is higher as an exit route (Eg. credentials or track record is at stake. Gujarat Ambuja – ACC).e. 244 .

The type of merger is depends on the degree of relatedness (strategic) between the two businesses. Conglomerate – It involves integration of two distinctly unrelated businesses.TYPES OF MERGERS      A business is an activity that involves procuring of desired inputs to transform it to an output by using appropriate technologies and thereby creating value for its stake holders in the process. Electrolux . 245 . usually opportunistic (Eg. Horizontal – It involves integration of two highly related businesses (Eg. Reliance). ITC). Godrej. Vertical – It involves complimentarily (partially related) in terms of supply of inputs or marketing activities (Eg.Kelvinator).

Access to newer segments (Eg. Reduction in risk. Overcoming entry barriers (Eg. 246 .MERGERS & ACQUISITION . Ranbaxy – Crosslands). Mittal – Arcelor). ITC Bhadrachalam). Ulterior motives – (Eg. ICICI –ITC Classic). scale and scope. Reduced gestation (i. Global image (Eg. Acquiring assets or capabilities (Eg. Avoiding risk of new product development. Asset Stripping – Shaw Wallace). Tata Steel – Corus). Coinsurance effect – Higher debt raising capability.MOTIVES             Increased market / conglomerate power.e. Economies of size. Tax benefits (Eg. quick access).

MERGERS & ACQUISITIONS PITFALLS        Cultural differences (Eg. Overvaluation is often as a result of an ego drive and substantially affects future returns. Top management overtly focused on due diligence exercise and negotiations. Managing size. When Tata Steel started negotiations with Corus. Merging of organisational structures. Inability to achieve synergy. neglecting core business. 247 . their initial offer was around 420 pence/share. Overvaluation of buying firms (Eg. while the ultimate acquisition was made at 607 pence/share). Managing over-diversification. Tata – Corus).

Growth – This stage may witness parallel merger of two firms of similar size. Brooke Bond – Lipton).MERGER TYPE & PLC     Introduction – A larger firm may acquire a newly formed entity with an objective to preempt new competition or acquire its license (Eg. vertical to save transactions costs. Maturity – A larger firm acquires a smaller firm with an objective to achieve economies of scale and experience curve effects (Eg. with an objective to reinforce its growth trajectory or to take on the might of a comparatively larger player (Eg. Kingfisher – Air Deccan). 248 . Decline – Horizontal mergers are undertaken to ensure survival. Tata Steel – Corus).

Immediate attempts to super impose structure and culture may cause bottle necks.INTERNATIONAL M&A . Strong differences may stifle plans and its execution.FRAMEWORK      Positive contribution to the acquired company. A common shared vision. Blanket promotions across entities and confidence building exercises needs to be practiced. Left alone syndrome. A concern of respect and trust for the business of the acquired company. 249 . active top management intervention in phases. An acquisition just for the sake of it or reputation yields very little value in the long term.

. Redefine responsibilities and authority. Decide upon management control systems.BLUEPRINT         Take the media into confidence. Determine business strategy. Shift attention from business portfolio to people and processes.INTEGRATION . promptly. Decide on the new hierarchy. It will enable focus on customers and key people. Integrating work processes. 250 Do not ignore the “people factor”. They can carry the message to the various stake holders.

– Market for corporate control. The process takes (6-12) months. operational & financial).M&A . Financial motives – Undervaluation relative to true value. While under valuation may be a significant opportunity. over valuation can become a curse. – Synergy – Potential value gain from combining operations (i.VALUATION   The process of valuation is central to M&A. 251 .e. Valuation decisions are arrived through a due diligence process when the prospective acquirer gets access to the books of accounts of acquiring company. – Unstated reasons – Personal self interest and hubris.

when the “fit” between the two entities is very poor. – Conglomerate Synergy – Gains come when one firm complements the resources or capabilities of another (Eg.VALUING OPERATIONAL SYNERGY  Synergy – It refers to the potential value gain where the whole is greater than the sum of the parts. Innovative product – Good distribution network). Synergy can be negative as well. – 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. or from increased market power which increases sales and margins. 252 .

Hotmail). Tax Benefits – Tax benefits may accrue from tax entitlements and depreciation benefits unutilized by a loss making firm.VALUING FINANCIAL SYNERGY    Diversification – Reduce variability in earnings by diversifying into unrelated industries. shareholders can accomplish the same at a much lesser cost. Synergy comes from projects which would not have been undertaken if the two firms stayed apart (Eg. and without paying take-over premiums. but availed after being merged with a profitable firm (Eg. However. Cash Slack – It reduces asymmetry between cash starved firms with deserving projects and cash cows with no investment opportunities. ITC – Bhadrachalam Paper). 253 .

This will induce higher debt capacity. the cash flow the merged firm will be less variable than the individual firms. as risky debt is spread across the new firm's operations.VALUING FINANCIAL SYNERGY   Co-Insurance Effect – If the cash flows of the two firms are less than perfectly correlated. – Coupon rates may also be negotiated at lower rates. hence better performance. – Default risk comes down and credit rating improves. It relates to the concept of diversification. higher leverage. 254 . 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.

The value of wrestling control is inversely proportional to the perceived quality of that management. The value of control can be substantial for firms that are operating well below optimal value.VALUING CORPORATE CONTROL     Premium of M&A are often justified to control the management of the firm. Assessment of perceived quality is critical. 255 . since a restructuring can lead to significant increase in value. While value of corporate control is negligible for firms that are operating close to their optimal value. – – Value of Control = Value of firm after restructuring Value of firm before restructuring.

LEVERAGE BUYOUT (LBO)     The basic difference between a take-over and a LBO is the high inherent leverage (i. 256 . The assets of the acquired company are used as collateral for the borrowed capital. debt component) at the time of buyout and rapid changes in capital structure over time. sometimes in combination with the assets of the acquiring company.e. Confidence of investment bankers and the international financial community is essential. It is a very costly and risky proposition. LBO facilitates a relatively smaller firm to bid for a comparatively larger firm in the bid for management control.

liquidity.TO GO PUBLIC OR NOT?   However. – Separation of ownership from management. – The need to satisfy analysts and shareholders. 257 . – Increased information needs. A research study showed that 30% of the publicly listed firms reported above average returns after going private.  However. off-late many publicly traded firms have gone private keeping in mind the following – – The fear of LBO. on-going valuation. the advantages of going public includes . The increased benefit showed in the following way – reduced costs and increased revenue.access to financial markets.

– Cash trapped company unable to utilize opportunities. – Debts repaid off from increased value after successful restructuring and wresting management control. 258 .e. – Managers cannot be trusted to invest free cash flows wisely.RATIONALE FOR HIGH LEVERAGE  The high leverage in a LBO can be justified by – – If the target firm has too little debt (relative to its optimal capital structure). – It is a temporary phenomenon. co-insurance effect). – Cost of debt coming down (i. which disappears once assets are liquidated and significant portion of debt is paid off.

Therefore. 259 . A LBO has to pass two tests to be viable – – Restructuring to pay-off increased debt. As the firm liquidates / pledges assets and pays off debt. initial rise in leverage is anticipated. – Increase equity valuation. leverage is expected to decrease over time. Any discounting has to reflect these changing cost of capital.EFFECT OF HIGH LEVERAGE      Increases the riskiness of dividend flows to shareholders by increasing the interest cost to debt holders. Lack of sufficient cash flows to repay costly debts resulting in a possible debt trap.

260 . or costly. – Facilitates better valuation and forthcoming offerings. Objectives – – Traditional route of filing prospectus and undergoing an IPO is costly. which has discontinued its operations (i. small in size but having a promising business. – Prevents dilution of equity. shell company) by a private company. – Automatic listing in major exchanges. allowing the private company to bypass the usually lengthy and complex process of going public. – Tax shelter.e. time-barred.REVERSE MERGER  Reverse Merger – The acquisition of a public company.

261 .EFFECT OF TAKE-OVER ANNOUNCEMENT     The shareholders of target firms are the clear winners. – Takeover announcements reported 30% excess returns. However. and 35% during bullish periods. Excess returns also vary across time periods. Most target firms are taken over within (6090) days. – Merger announcements reported 20% excess returns. takeover failures have only initial negative effects on stock prices. During bearish periods excess returns were 19%. Initial anomaly in stock prices usually normalizes over a period of time (6-12) months.

as stock markets become more and more perfect such anomalies would reduce Source: Jensen and Ruback. Bradley. in the event of take-over failure negative returns to the extent of 5% on bidder firm stock prices is reflected. and Kim. Desai. over time. 1983. 1988 . 1983. – However. 262 Jarrel.EFFECT OF TAKE-OVER ANNOUNCEMENT  The effect of take-over announcement on bidder firm’s stock prices are not clear cut. – Most studies reported insignificant excess returns around take-over offers or merger announcements. Brickley. – However. and Netter.

Poison Pill – An offer to existing shareholders to buy shares at a substantial discount to increase their voting rights (Eg. 263 .DEFENSIVE STRATEGIES     Golden Parachute – An employment contract that compensates top managers for loss of jobs as a result of change in management control. Rights). Asset Stripping – The targeted company hives off its key assets to another subsidiary. 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.

Pac Man – The target company makes a counter bid to take over the raider company. East India Hotels – Reliance Industries – ITC). 264 . Gray Knight – The target company takes the help of friendly company to buy the shares of the raiding company. thus thwarting the raider company’s attention. Shapoorji Pallonji).DEFENSIVE STRATEGIES     White Knight – It is the placing of stocks to a cash rich investor and bargaining for protection in return. Green Mail – The targeted company buys large blocks from holders either through premium or through pressure tactics (Eg. But often the White Knight turns a betrayer himself (Eg.

COMPETING FOR THE FUTURE 265 .

Hitachi overpowering Westinghouse. Honda overpowering GM. Most companies were too preoccupied with the present than the future? 99% of the companies overpowered. were spending 99% of their precious time dealing with present. Compaq overpowering IBM. Honda overpowering Volkswagen. British Air overpowering Pan Am. What went wrong???? What were they doing with the present? What were they pre-occupied with? 266 . The reverse was true for the companies overpowering.GETTING OFF THE TREADMILL    Canon overpowering Xerox. Wal-Mart overpowering Sears. Nokia overpowering Motorola.

falling market share). CEO’s brutally pick up the knife and ruthlessly carve away layers of corporate flab (delayering. 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 . most often they ended up cutting corporate muscle as well and became anorexic. declining margins. Not knowing when to stop. decluttering.THE PAST OF COMPETITION     Beyond Restructuring – When a competitiveness become inescapable problem (stagnant growth. Thus efficiency was grievously hurt. downsizing).

268 . However.S. A poll in circa 2000 revealed that 80% of the U. ensuring only survival of the present. but not of the future. On the contrary only 20% of Japanese managers believed that quality will be a source of competitive advantage of the future. but forging ahead in competition. top managers believed that quality will be a source of competitive advantage of the future. incrementalism or nominal innovation has almost reached a plateau.THE PRESENT OF COMPETITION    Beyond Reengineering – Numerator based managers (innovation) at least offers some hope. The future is not about catching up with competition.

Creating the future requires industry foresight. not just the organization. 269 . reinvent its industry. not the other way. Transform the industry. faster. Empower from bottom to top. Companies need to fundamentally reconcieve itself. aspirations and resources. as important as these may be. Create a potential gap. better. demographics and lifestyles. It involves Dream about the company’s future. It is based on deep insights into trends in technology. don’t predict.THE FUTURE OF COMPETITION       Regenerating – Leaner. and regenerate its strategies (breaking its – managerial frames). they are not enough to get a company to the future.

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. Therefore. Create entirely new industries (i. It is about deliberately creating a strategic misfit.ABOUT THE TRANSFORMATION The future does not belong to those who take the industry for granted. by converging technologies complex.e. Successful companies have a complete grip over the industry. 271      . blue oceans). Redraw the boundaries between industries. hence do not fall sick in the first place. they do not need to restructure. It drives a hunger and a passion to transform.

272 . Most successful revolutions (Gandhi to Mandela) rose from the dispossessed. the revolution must start at the bottom and spread in all directions of the organization. More importantly. A revolution that is thrust upon from the top seldom sustains. Transformational leaders merely lead the way.ABOUT THE EMPOWERMENT      Bring about a revolution (a paradigm shift) in the organization. The middle management plays a strong moderating role. Such a process is called institutionalization (from people centric to organisational centric).

It requires a lot of common sense and a little bit of out of the box thinking. Get to the future first. Companies need to strategize (think ahead of times). Apple – iphone). A process for finding and gaining insight into tomorrows opportunities (Eg. South West Airlines – LCC. An ability to energize the company. 273 . without taking undue risk. Toshiba – LCD. What does it take to get to the future first? Understanding how competition for the future is different.THE FUTURE OF STRATEGY       A company must get to the future not only first but also for less. Apply the 40 – 30 – 20 principle.

greatness from mediocrity. but hundreds. As there is no one future. Companies of the future will be not based so much on the strength of their resources. is the ability to imagine in a different way what the future could be. each point in space represents a unique business opportunity. What distinguishes a leader from a laggard. 274 . The farther one can see in this endless space. 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. the farther it will be away from competition. as on their aspirations.

THE EMERGING STRATEGY PARADIGM Not Only Reengineering Processes But Also Regenerating Strategy The Competitive Challenge Organizational Transformation Industry Transformation Competing for Market Share Competing for Opportunity Share Finding the Future Strategy as Learning Strategy as Positioning Strategy as Engineering Strategy as Unlearning Strategy as Dream Strategy as Architecture 275 .

THE EMERGING STRATEGY PARADIGM Not Only But Also Mobilising for the Future Strategic Fit Resource Allocation Strategic Misfit Resource Stretch & Leverage Getting to the Future First Existing Industry Structure Product Leadership Single Entity Product Hits & Timing Future Industry Structure Competency Leadership Dominant Coalitions / Co-option Market Learning & Preemption 276 .

Degree of Learning Unlearning Curve P2: Unlearning in previous period does not necessarily ensure learning in the current period. Learning Curve t1 t2 t3 Time t4 t5 277 .LEARNING TO FORGET P1: The degree of learning in current period is directly proportional to the degree of unlearning in the previous period.

278 . It cannot be matched even by its closest competitors. 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.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. Leverage – They are the gateways to future markets.

MORE ABOUT CORE COMPETENCE      Sony – miniaturization. Toshiba – flat screen displays. Although a core competence may lose value over time. 279 . leaders have one. A core competency cannot be outsourced. it gets more refined and valuable through use. SKF – antifriction and precision. Honda – engines. Canon – imaging. Intel – nano-electronics. Core competencies are the roots of the organization. at the most three to four. it is deeply embedded in the heart of the organization. Wal-Mart – logistics. Nike – designing. Coca Cola – brand. Most companies around the world do not possess one. Toyota – lean manufacturing.

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.
281

CONCENTRATING 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.

282

ACCUMULATING RESOURCES

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.

283

COMPLEMENTING RESOURCES

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).

284

CONSERVING RESOURCES

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.

285

RECOVERING RESOURCES

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.
286

INTERNATIONAL BUSINESS ENVIRONMENT 287 .

Emerging markets are characterised by infrastructural bottlenecks. China. Chile) provide a different context (i. Korea. Therefore. institutional gaps. Therefore focused strategies based on core competence may not be suitable for emerging markets (Khanna & Palepu.e. 1997). strategies suited for the developed markets may not be appropriate for emerging markets.EMERGING MARKETS    Emerging markets (India. Diversified groups in operating in emerging markets therefore benefit from unrelated diversification. high levels of market imperfection). 288 . and high transaction costs.

Size & Scale. Synergy. Experience Strategic Fit Diversity Palich. (2000) 289 . Concentric. et al. Entropy). subsequently negatively related across developed markets.PERFORMANCE (I) Diversity attempts to measure the degree and extent of diversification (Herfindahl. Optimum level of diversification Performance Diversity is initially positively related with performance.DIVERSITY .

2001) 290 .DIVERSITY . subsequently positively related across emerging markets. conglomerate power Threshold level of diversification Performance Diversity (Khanna & Palepu. Huge initial investment. brand building Risk diversification.PERFORMANCE (II) Diversity is initially negatively related with performance.

291 . It should have a spread of manufacturing facilities. It should think globally. act locally (Eg. HSBC). It should have a spread of assets.INTERNATIONAL IDENTITY       MNC’s consciously engage in FDI in different parts of the globe to forge resource diversity as a distinct competitive advantage. Characteristics – It should have a spread of affiliates or subsidiaries. It should have a spread of interest groups / stake holders. revenues and profits.

292 . low group scale in developed markets and vice versa for emerging markets).It reflects the relative role of team building (Eg. Group Scale .GLOBAL BUSINESS ENVIRONMENT     Power Distance – It reflects the disparities in income and intellectual development (Eg. Feminity Index . high feminity index in developed markets and vice versa for emerging markets). Risk Profile – It reflects the risk attitude of the top management (Eg. low power distance in developed markets and vice versa for emerging markets).It reflects the disparities in women in workforce (Eg. low risk profile in developed markets and vice versa for emerging markets).

corruption. attitude. credit rating.culture. terrorism (9/11). high cultural adaptability in developed markets and vice versa for emerging markets). 293 . customs. way of life. time value. FOREX reserves. political stability. low country risk in developed markets and vice versa for emerging markets). interest rates. dress sense. code of conduct. Country Risk – It reflects the political and economic risk (Eg.GLOBAL BUSINESS ENVIRONMENT   Cultural Adaptability – It reflects the adaptive ability to a changing environment . judiciary) of doing business in a particular country (Eg. currency. flexibility (Eg. inflation.

294 . and vice-versa. in most emerging markets meetings are delayed and lasts unusually long. time-zones. Language Barriers – Developed country managers expect foreign partners to communicate in their languages. however. Ethnocentrism – Developed country managers tend to regard their own culture as superior. Other factors – local celebrations. High levels of ethnocentrism usually has a negative effect on business. in most emerging markets use of an interpreter may be a standard protocol.GLOBAL BUSINESS ENVIRONMENT    Time Sensitiveness – Developed country managers regard time as precious.

It also initiated provisions on anti-dumping. In 1995 (Uruguay Round) GATT was renamed to WTO. The 2001 (Doha Round) focused on power blocks (NAFTA. It a multi-lateral treaty with 143 (as on 2002) member countries to reduce tariff and non-tariff (quota) barriers. It focused largely on TRIPS (patents. trademarks). ASEAN.GATT    GATT was a bi-lateral treaty initiated between US and some member countries in 1947 to promote free trade. The 1999 (Seattle Round) saw a lot of protest amidst bringing agriculture under the purview of TRIPS. 295 . copyrights. BRIC). It also highlighted the nexus between US & WTO.

three countries joined in 2002 increasing it to fifteen members as of 2008. 296 . Euro).e.EURO – SINGLE CURRENCY    In 1999 twelve member countries in Europe joined hands to move over to a single currency (i. the Euro slowly started outperforming the Dollar. Sterling . the Dollar still remains the most preferred currency globally. The Euro was significantly devalued against the Dollar till 2002. However with current recession in the US 2002 onwards.Pound). However.e. primarily the OPEC countries. The notable exception was Great Britain which still continues with its local currency (i.

297 . it helps avoiding transaction costs associated with a multiple currency. Rate Uncertainty – A single currency eliminates the risk of competitive devaluations. However. Trade Block – It will strengthen the EU identity which would not have been possible otherwise. Transparency – A single currency is transparent and competitive. a multiple currency is preferable where the business cycles of member nations are different. but it may have spill-over effects.SINGLE Vs MULTIPLE CURRENCY     Transaction Costs – Though the initial cost of introduction of a single currency is very complicated and costly.

– FDI (transfer of tangible resources) is slow but steady for the purpose of economic growth. – FII (transfer of intangible resources) is fast but may have strong repercussions (i. Neo classical economists believe that foreign investment may in fact be a win-win game. hot money). It is long term with high levels of commitment.e. the gain of one country is loss of another). 298 . It is short-medium term with comparatively low levels of commitment.e.FII Vs FDI INVESTMENT  Classical economists believed that foreign investment (in any form) is basically a zero sum game (i.

INTERNATION MARKETING    Product – The various attributes of a product may receive different degrees of emphasis depending on differences in . economic (middle class buying power). Pricing – It depends on the competitive structure (PLC – Kellogg's). technology (microchip).culture (food habits). customer awareness (microwaves). buying patterns (spread). promotion (surrogate advertising). lifestyle (petroleum 299 outlets – departmental stores). Distribution – It depends on the market characteristics (fragmented – concentrated). usage (talk time). .

. Leverage – The leverage may vary across countries depending upon money and capital market conditions (Eg. equity is cheap in India). Cost Structure – Companies in India need to investment in fixed costs due to poor infra-structure 300 compared to developed markets. Accounting Norms – The accounting norms of one country (AS .INTERNATION FINANCE     Currency Risk – Many Indian IT companies (Rs) having business in US (Dollar) are asking for quotes in (Euro) or are shifting bases out of US to avoid risk of devaluation of Dollar.India) may be different from that another trading country (US – GAAP or IRS). debt is cheap in US.

social security. technology (convergence. 301 . in most cases it is not desirable nor practiced. and cultural barriers (language) vis-à-vis emerging markets.INTERNATIONAL HR     An uniform HR policy is idealistic to enable parity in performance appraisal. skills are more important that cultural fit and vice-versa. Recruitment – In local recruitment. labour laws. Training – It is a pre-requisite for international business to reduce language. however. double taxation. shortened life cycles). Compensation – Differential pay packages exists because of differences in purchasing power.

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). Technology – The cost to be evaluated in terms of latest technology (Euro VI) vis-à-vis effective cost of appropriate technology (Euro II). .

CONTEMPORARY TOPICS 303 .

Innovation is all about staying ahead of competition. Innovations typically paves the way for more secured and improved lifestyle for consumers in general. 304 . While innovation typically adds value for organizations. but has inherent risks involved as well. it has destructive effects as well. innovation is the first attempt to carry it out in practice.INNOVATION      An invention is the first occurrence of an idea for a new product or process. Innovation is the most preferred strategy today to maintain competitive advantage in the present turbulent business environment.

     305 . Tangible impact of product innovation on performance is significantly higher than process innovation. Process innovation usually follows product innovation.TYPES OF INNOVATION A key challenge is maintaining a balance between process and product innovations. However. While product innovations are typically customer driven. process innovations are organizational driven. process innovation is necessary to sustain the competitive advantage of product innovation. Strategic innovation has the potential to change the rules of the game.

Disruptive business models brings in a new frame of reference (i. Medical Surgery (Lasik). about how an organization makes money (i. Telecom (CDMA Technology). Innovations are the back-bone of successful business models . It leads to a shift in the price – performance envelope. a paradigm shift).e. putting an idea into practice). Processors (Pentium).BUSINESS MODEL    It is a simplified description and representation of a complex real world.e. Data Storage (Pen Drives). Drug Development (Bio Chemicals).  306 .

The channels to reach out to the clients. The segment(s) of clients to be addressed.NINE BUILDING BLOCKS          Value proposition offered to the market. The key resources and capabilities required. The key activities / processes necessary for execution. The revenue streams generated by the activities. The key partners involved in the activities. The cost structure resulting from the business model. 307 . The proposed relationships established with clients.

BUSINESS MODEL FRAMEWORK 308 .

innovative companies to carve out unique business models to fend off competition. The revenue model described here are the means to generate revenues. It is just one piece of the puzzle. Real Estate) companies need to untangle and understand the intricacies of their business model.REVENUE MODEL     Positioning is just not sufficient. With the rapid erosion of certain industries (IT. Investment Banking. It involves – Product Visualization – Product Prototype – Product Test – Capacity – Pricing – Distribution. 309 .

Promote the grape-vine.HOW TO MAKE INNOVATIVE CO’S         Innovative company’s are a matter of culture and aspirations rather than tangible resources. Provide reasonable incentives (not necessarily monetary). Allow the management sufficient slack to be future oriented. Allow the workforce idiosyncrasies for their errors. Promote the culture of experimentation. 310 . A favourable intellectual property (IP) climate. Have a lean and a flat organization structure.

Collusion with the judiciary is also another distinct possibility in emerging markets.HOW TO PROTECT INNOVATION?     Without adequate protection (external or otherwise) the effects of innovation does not translate to performance. companies are increasingly relying on internal protection to sustain innovation effects. The most preferred strategy of internal protection includes imbibing “causal ambiguity” in the production process to make reverse engineering difficult. however that possibility is slowly atrophying. 311 311 . In most emerging markets where the IP climate is not so favorable.

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. In fact the principles of corporate governance implies that managers go beyond in satisfying the stated and unstated needs of the multiple stakeholders. 312 312 .

AGENCY THEORY     The root of Corporate Governance goes back to the Agency Theory. This exposes the shareholders to additional risks and higher costs. not present in portfolio diversifications. From the strategic point of view managers tend to diversify into unrelated businesses as it provides higher returns hence a more favourable appraisal. However. 313 . shareholders can diversify their portfolio at a much lesser risk and cost. 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.

defines corporate governance (headed by Kumar Mangalam Birla) as the acceptance by management of the inalienable rights of shareholders as the true owners of the corporation and of their own role as trustees on behalf of the 314 shareholders. various laws were enacted to ensure proper usage of these funds. After the Enron downfall. . the US government passed the Sarbanes – Oxley Act.ORIGIN & CONTEXT    Since the early 20th century since a large part of public funds were held by publicly traded firms in the US. 2002 to restore public confidence in corporate governance. SEBI Report – 2005.

315 . including the society at large.GOVERNANCE PRINCIPLES    Rights and equitable treatment of shareholders: Help shareholders exercise their rights by effectively communicating information in transparent ways that is understandable and accessible and encouraging shareholders to participate in general meetings. The key roles of chairperson and CEO should not be held by the same person and their offices be clearly separated. Interests of other stakeholders: Recognize the legal and other obligations of all legitimate stakeholders. Role and responsibilities of the board: It deals with issues about an appropriate mix of executive and nonexecutive directors.

. Disclosure and transparency: Disclosure of information should be timely and balanced to ensure that investors have clear access to data and facts.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 . assessment and mitigation of risks and retirement by rotation over a fixed period of time. They should also implement systems to independently verify and safeguard the integrity of the company's financial reporting.

fire and compensate top management. However. with its legal authority to hire.GOVERNANCE STRATEGIES    Monitoring by the board of directors: The board of directors. Remuneration: Performance-based remuneration is designed to relate some proportion of salary to individual performance. a person benefitting from a decision should abstain from it. they should provide no mechanism or scope for opportunistic behaviour. safeguards invested capital. 317 . Balance of power: The simplest balance of power is very common. discussed and resolved. Regular board meetings allow potential problems to be identified.

318  . They defined a well-governed company as one that had mostly out-side directors. who had no management ties. Egypt and Russia) to around 40% for Canadian & European companies. The size of the premium varied by market. from 10% for companies where the regulatory backdrop was least certain (those in Morocco. McKinsey found that 80% of the respondents would pay a premium for wellgoverned companies.GOVERNANCE & PERFORMANCE In its “Global Investor Opinion Survey” of over 200 institutional investors in 2002. undertook formal evaluation of its directors. and was responsive to investors' requests for information on governance issues.

The basic premise is that firms cannot exist in vacuum.SHAREHODER – STAKE HOLDER THEORY    Till the early part of the 20th the basic objective of modern organizations was to provide goods and services for public consumption for profit maximisation. the short-term view of profit maximisation gave way to a more broader and mediumterm view wealth maximisation of the shareholders. corporate philanthropy should be a part of every corporate mission. Over a period of time. However. Therefore. today economic institutions are considered as a major drivers of improvement in quality of life in general and therefore needs to include multiple stakeholders. 319 .

However. giving a very important message that one cannot exist without the other. Therefore. CSR can be defined as. “an enterprises decisions and actions being taken for reasons at least partially beyond its immediate economic interests”. economic and social responsibilities cannot be mutually exclusive.CORPORATE SOCIAL RESPONSIBILITY     As Peter Drucker rightly pointed out that. Therefore. the debate on CRS still continues whether firms should detract its focus from its business? 320 . “a healthy business cannot exist in a sick and impoverished society”. in fact a large part of it is significantly overlapping.

GROWING CONCERN FOR CSR     Awareness due to education: With growing literacy. 321 . Fear of government interference: Excessive quench for profits may lead to build up of adverse public opinion compelling the government to intervene (Eg. Public image: Entrepreneurs are increasingly relying on public image as a source of competitive advantage and a higher financial discounting. MRTP). The role of media: The media and various consumer organizations have come up in protecting consumer rights and exposing mal-practices. people are becoming increasingly aware of their right to a decent and healthy life.

designing eco-friendly products. Refrigerators – CFC. Cement .CSR STRATEGIES  Green Supply Chain Management: It includes environmentally preferable purchasing. Aditya Birla Research Centre – LBS).Paper packaging. Literacy & Training Programs – (Eg. Education. eco efficiency. Health & Hygiene – Attending the health hazards due to wastes and by-products to employees and society in proximity (Eg. and extended producer responsibility (Eg. Exide – Product take back). Tata Steel – Life Line Express).   322 .

They represent an enormous opportunity for companies who learn how to serve them. across the world's billions of poor people having immense untapped buying power.BOTTOM OF THE PYRAMID    With the market across most developed markets including the US getting saturated. K. In turn companies by serving these markets. C. Prahalad notes that future markets exist collectively. 323 . Strategic innovations leading to disruptive business models can show the way out. they're helping millions of the world's poorest people to escape poverty.

BLUE OCEAN STRATEGY 324 .

MARKETSPACE .TWO WORLDS 325 .

battled over market-share. In today’s red oceans.WHAT IS RED OCEAN?    Companies have long engaged in head-to-head competition in search of sustained. where most industries are saturated. profitable growth. and struggled for differentiation (cost or product). They have fought for profits. Yet in today’s overcrowded industries. competing head on results in nothing but a bloody red ocean of rivals fighting over a shrinking profit pool. . one companies gain is always at the 326 cost of another companies loss.

Blue Ocean’s have existed in the past. Such strategic moves are possible through the pursuit of product differentiation and low cost simultaneously.WHAT IS BLUE OCEAN?    Tomorrow’s leading companies will succeed not by battling in red oceans. It helps in creating powerful leaps in value for both the firm and its buyers. rendering rivals obsolete and unleashing new demand. it will exist 327 in the future as well. but by creating blue oceans of uncontested market space ripe for growth . It is only the frames of the .

RED OCEAN Vs BLUE OCEAN Compete in existing markets Compete in uncontested markets Beat the competition Exploit existing demand Make the competition irrelevant Create and capture demand Make the value-cost trade off Break the value-cost trade off Demand is the limiting factor Supply is the limiting factor 328 .

BLUE OCEAN STRATEGY IMPERATIVES       Prospects in most established market spaces – red oceans – are shrinking steadily. Population shrinkage across a no. Technological advances have substantially 329 improved industrial productivity. Demand across developed markets reaching a plateau. As trade barriers between nations & regions fall. . Niche markets & monopoly havens are continuing to disappear. of European nations. information imperfections atrophy instantly.

CONCEPTUAL UNDERPINNINGS       Blue oceans have existed in the past and will exist in the future as well. They are not necessarily about technology. managerial moves are. Incumbents often create blue oceans within the ambit of their core business. History indicates that blue oceans exist in three basic industries – automobiles (how people get to work) – computers (what people use at work) – entertainment (what people do after work). the underlying technology was often already in existence. Company & industry are the wrong units of 330 strategic analysis. .

BLUE OCEAN .IMPLEMENTATION Reduce Which factors to be reduced below the industry standard Eliminate Which of the industry factors that the industry takes for granted should be eliminated Create VI Which factors should be created that the industry has not offered Raise Which of the factors should be raised above the industry’s standard 331 .

IMPLEMENTATION SEQUENCE Buyer Utility (1) Is there exceptional buyer utility in your business idea? Price (2) Is your price easily accessible to the mass of buyers? Blue Ocean Strategy Adoption (4) What are the adoption hurdles in actualizing your business idea? Are you addressing them up front? Cost (3) Can you attain your cost target to profit at your strategic price? 332 .

Southwest Airlines: Pioneering the concept of LCC. Citibank – Automated teller machines & credit 333 cards. .SOME GLARING EXAMPLES      In the last century authors Kim and Mauborgne have documented the creation of more than 150 blue ocean creations across 30 industries – Virgin Atlantic: Fractional jet ownership or travel to space. Sony Play Station: Redefining machine-human interface in entertainment and targeting an altogether new user base.

companies & managers are largely at the mercy of economic forces. greater than themselves.WHAT THEN IS THE HANDICAP?     Most of the traditional views in strategy having its origin in (Economic Theory) led to what is called the – structuralist paradigm. 334 . According to this view. All they need to do is change their managerial frames. Off late emerging views in strategy having its origin in (Organization Theory) led to a paradigm shift to what is called the – reconstructionist view. According to this view managers need not be constrained to act within the confines of their industry.