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Course Code: 611 & 612 Dr. Subir Sen – Faculty Member, IBS
E-Mail: firstname.lastname@example.org, 9830697368 1) Crafting & Executing Strategy – Thompson & Strickland. 2) Strategic Management – Pearce & Robinson. 3) Strategic Management – Fred. R. David. 4) Exploring Corporate Strategy – Johnson & Scholes. 5) Competitive Advantage – Michael E. Porter. 6) HBR – Articles & Case Studies.
STRATEGY - DEFINITION
Strategy is all about making trade-offs between what to do and more importantly what not to do; consciously choosing to differentiate. It reflects a congruence between external opportunities and internal capabilities. Types of strategies – Corporate Strategies – It is all about making choices across various businesses and allocating resources among them. Business Strategies – It is all about developing leveraging and sustaining competitive advantage. Functional Strategies – It is all about finding newer ways to perform existing processes, or 3 better still adopting new processes altogether.
STRATEGIC MANAGEMENT DEFINITION
Strategic management attempts to integrate the traditional management functions and align the organization as a whole with the broader environment to make resource allocations in a way to achieve the strategic intent of the organization. This alignment is called strategic fit. It serves as a road-map for the organization in its growth trajectory. It provides the direction – extent – pace – timing. It depends on the turbulence of the environment and the aggressiveness of the organization. It distinguishes the winners from the losers.
PILLARS OF STRATEGIC MANAGEMENT
Differentiation – Differentiation of key inputs and technologies helps a firm to consciously move away from homogeneous to heterogeneous markets enabling them to earn super-normal profits from normal profits. Integration – Whenever dealing with a complex task of managing a business (i.e. involving a no. of variables with cross linkages) it is in the interest of simplicity that the task be broken up in smaller components. However, for effective control, integration is essential. Alignment – Since differentiation is prone to replication, it is in the interest of the firm to differentiate continuously by aligning the resources with environmental opportunities.
STRATEGIC MANAGEMENT FRAMEWORK
Economic al Strategic Finance Fit Political Strategic Intent Fit Political Marketin g Manageme nt Social & Cultural
It is about adaptation and response to the same. It provides broad guidelines.STRATEGIC MANAGEMENT . 7 . It requires full commitment of the top management. It involves substantial resource outlay. It is long-term in nature. It is a holistic and integrated approach.FEATURES It forms the core activity of the top management. It is all about creativity and innovation. It is irreversible.
8 . It is about forecasting. It involves only the top management. It is rocket science. It involves nitty-gritty's. It is about a definite formula.STRATEGIC MANAGEMENT – MYTHS It involves short-cuts. It attempts to minimize risk. It about mere data and facts. It a bundle of techniques or even tricks. It brings instant success. It is fool-proof in nature.
rather than reactive. To be insulated against environmental threats. again and again ……. To be future oriented. 9 To develop core–competencies. To leverage size. scale and scope. To be proactive. . To innovate.STRATEGIC MANAGEMENT IMPERATIVES To be continuously alert. To assimilate change faster. To generate large resource pool. To tap markets across boundaries. To gain expertise in technologies.
In the ancient days battles were won not by virtue of size of the army or armory. but by virtue of their courage. and more importantly .STRATEGY . but with a lot a rigour and robustness. In contrast.ORIGIN The word strategy has its origin from the Greek word strategia meaning Military Commander. obsession.strategies. whose origin can be traced to some of the greatest battles fought in the ancient days. It is an old wine in a new bottle. 10 . today's battles are fought over markets. Even in today’s markets. In the ancient days battles were fought over land. battles fought on the market front are won by companies by virtue of their obsession & strategies.
challenging GM and Ford. Allied Forces Vs Germany (WW-II) – Strategy: Forging alliances. US attack of Morocco to capture Germany – Strategy: Pin-hole strategy – Wal-Mart challenging Sears by entering small towns.SOME PARALLELS Japan’s attack on Pearl Harbour – Strategy: Attack where it hurts the most. – Yahoo and Microsoft challenging Google. – Reliance’s entry into telecom. 11 . – Toyota’s entry in the US. Napoleon’s attack on Russia – Strategy: Waiting for the right time.
A paradigm is a dominant belief about how the business and its environment operates.EVOLUTION OF MANAGEMENT As Peter Drucker refers to it. 1910). 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. 12 . a radical change in the business environment brings about discontinuity. The first major discontinuity in the history of global business environment was the .
push to pull). The question of outperforming the benchmark became the new buzzword. From uniform performance. Survival of the most adaptable becomes a new management paradigm (Ansoff. performance across firms became differentiated. Efficiency and effectiveness are no longer sufficient. – Changes in the technology fore-front. – Global market place. 1960).e. – Affluence of the new customer (i.EVOLUTION OF STRATEGIC MANAGEMENT The second major discontinuity in the history of global economic environment – World War II. – Homogeneous to heterogeneous products. 13 .
ENVIRONMENTAL CHANGE Phase IV: Horizon of Scenarios 2 1 Phase I: Extrapolation of the past 1 3 1990 onwards 1 2 1 3 1A 1B 2A Prior to 1950 Phase II: Discrete Scenarios Phase III: Range of Scenarios 1970 to 1990 2 2B 1950 to 1970 14 .
Ansoff (1960) – Strategy can be segregated into certain mutually exclusive and inter-related components aimed at managing the growth of an organization. Learning always begin on a clean sheet of paper. – The choice of strategy is primarily concerned with external ones rather than internal ones. – Biases and prejudices has a very little role to play in strategic choices pursued by managers. 15 . – It is primarily the top management’s prerogative.APPROACHES TO STRATEGY Analytical Approach – Igor H. – The choice of product-market mix is based on conscious evaluation of risk – return factors.
– The top managers then decide on the type of organization structure & systems to be in place.APPROACHES TO STRATEGY Design Approach – Alfred Chandler (1970) – Structure follows strategy. – Management control systems has a dominating role in influencing firm performance. The organization initially decides which industry to enter. Successful organizations align authority and responsibility of various departments in way to reach overall objectives. Once the control systems are in place. – Organization structure will precede and cause changes in strategy. who will be the top managers. everything else follows. how it will compete. 16 .
– An organization is seldom in a position to influence the larger business environment. – The organization will outperform the industry where environmental forces are weak and vice-versa. 17 .APPROACHES TO STRATEGY Positioning Approach – Michael E. – The environmental forces comprises of – supplier. competitors. substitutes. – A firms performance is inversely related with the bargaining power of environmental forces to which it is exposed. new entrant. customer. Porter (1980) – Choose a consumer segment and position your product accordingly.
APPROACHES TO STRATEGY Core Competence – C. but exploiting the resource differences among them. K. 18 . They are complex resources and undermines a firms competitive advantage. – It enables a firm to deliver unimaginable value ahead of time. – Organizations can significantly alter the way an industry functions. – Core competencies are a set of skills that are unique and can be leveraged. locating in most attractive industries and pursuing the same strategy. Prahalad (1990) – The key to superior performance is not doing the same as other organizations.
STRATEGIC MANAGEMENT PROCESS Strategic Intent Strategic Planning Strategic Gap – Environmental Scanning – Internal Appraisal of the Firm Strategy Formulation – Corporate Strategy – Business Strategy Strategic Choices – Functional Strategy Strategy Implementation Strategy Performance Strategy Evaluation & Control 19 .
TOP MANAGEMENT PERSPECTIVE 20 .
It’s a philosophy that distinguishes it from its competitors. It provides a sense of direction and destiny. A gap that consciously manages between stagnation and atrophy. 21 . you cannot reach there. A strategic intent is a statement of purpose of existence. A substantial gap between its resources and aspirations.STRATEGIC INTENT If you cannot see the future. It involves an obsession to be the best or outperform the best. It is the cornerstone of an organizations strategic architecture reflecting its desired future state or its aspirations. It implies a significant stretch.
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 .
23 . It is core to the strategic intent of the firm. To put it more simply.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. when radical changes in the internal and external environment (i. 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. Dominant logic changes.e.
24 . It is a combination of three basic elements – – An organizations fundamental reason for existence. It ensures that the company does not wander off into unrelated zones or fall into an activity trap. beyond just making money.VISION It is a dream (not a forecast) about what the company wants to become in the foreseeable future. – It stands for the unchanging core values of the company. It enables the top management to remain focused. but achievable aspirations. – It represents the company’s audacious. It provides an unity of purpose amidst diversity of personal goals.
Reachable – It should be within a reasonable target in the known future. Brevity – It should be short. 25 .CHARACTERISTICS Reliance – Where growth is a way of life. and memorizable. not an utopian dream. Clarity – Vividly descriptive image of what the company wants to be known for in the future.VISION . 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. Empathy – It should reflect the company’s beliefs to which it is sensitive. clear.
It lends integrity and genuineness. It gives enlightment. It provides a holistic picture. It facilitates development of skills & capabilities. It gives a shared platform.VISION . 26 . To prevent the fall in a activity trap. It fosters risk taking and experimentation. It gives the impression of a forward-looking organisation.ADVANTAGES To stay focused on the right track. It makes strategic alignment easier.
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. 27 . Although the purpose may change over time. its reason for existence. 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 serves as a road map to reach the vision.
We offer comfort. 28 . …………………. Some other examples – We do not offer shoes. …………………. though some may seem unrelated in nature. We offer security. …………………. We offer solutions.MISSION – SOME IDEAS Reliance – We are in the business of integration. – We do not offer software's. We offer strength. – We do not offer steel. All the businesses of the company are strongly integrated with their main business. – We do not offer insurance. ………………….
– It lends direction – time frame in the medium term. 29 . – It keeps the mid management pre-occupied. – It is based on Management by Objectives (MBO). – It adds legitimacy and motivation.GOALS & OBJECTIVES Reliance – We want to become a Rs.100K crore company by the year 2005. – It helps identifying key success factors. – It prevents deviation. – It provides a benchmark for evaluation. It provides a quantitative feel to an abstract proposition. It is an end result (quantifiable) something a firm aims and tries to reach in a time bound frame.
– Leverage economies of size and scale. It is the process of garnering necessary inputs. The details of the plan Reliance Telecom adopted were – Backward integrate process technologies. coordinating appropriate technologies.PLANS Reliance – Desire to invest 25K crore in telecom business by circa 2010. – Compress project times. 30 . – Acquire a market share of indomitable position. – Use price-elasticity to break market barriers. It is specific to a particular business. and gaining access to desired markets to achieve the desired goals and objectives.
It often leads to an organizational crisis. In such a context. Historical studies have shown that most organizations tend to continue with their existing strategies.STRATEGIC DRIFT Due to top management commitment. However. radical change may lead to disequilibrium. equilibrium is maintained. past strategies tend to have a bearing on future strategies. This tendency to restore continuity is known as inertia (resistance to change). When changes in the environment is incremental. This state of affairs is known as strategic drift. strategies lose touch with the emerging realities. 31 .
STRATEGIC DRIFT FRAMEWORK Environmental Change Degree of change Strategic Change Radical Change Incremental Change State of Flux Continuity Stage of Transformation Strategic Drift Stage of Atrophy Time 32 .
ORGANIZATIONAL POLITICS Strategic drift often leads to organizational politics. – Creating a favourable image. – Hiding vulnerability. – Distorting information to gain mileage. – Creating obligations of reciprocity. – Using covert tactics to pursue self interests. 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. – Developing a platform of support. 33 .
INTENDED & REALISED STRATEGIES An intended strategy is an expression of interest of a desired strategic direction. Usually there is wide gap between the two when organizational politics is evident. – The environment context has changed. – Influential stake-holders back out. A realized strategy is what the top management actually translates into practice. . – Persons responsible for strategy conceptualization and implementation are34 divergent. Other causes – – The plans are unworkable and utopian.
but the master scheme of the rational comprehensive scheme is not apparent.LOGICAL INCREMENTALISM According to the incrementalism approach (contrary to integrated approach) practitioners simply do not arrive at goals and announce them in crafted and well defined packages. However. They simply unfold the particulars of the sub-system in stages. 35 . this is not to be treated as “muddling”. 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. Learning is an integral part of logical incrementalism.
Agent of Change – Formal ratification of a change plan through MBO. 36 . Macro Broadcasting – The broad idea is floated without details to invite pros and cons leading to finer refinements. Leveraging Crisis – A sudden crisis or an opportunity should be used as a trigger to facilitate acceptance and implementation of change.IMPLEMENTING INCREMENTALISM General Concern – A vaguely felt awareness of an issue or opportunity. Adaptation – As implementation progresses. The broader objective should serve the overall interest of the organization.
Strategic transformation becomes smooth through a change in top leadership. It creates blinders. Tampering with surface level factors often leads to atrophy. Dominant logic’s are very rigid and sticky and prone to inertia. As it brings 37 with it a different dominant logic. . Dominant logic’s are the cornerstones of change when strategic transformation is apparent.STRATEGIC TRANSFORMATION Strategic transformation (a complete overhauling of the strategic architecture) becomes inevitable whenever a strategic drift takes place.
experience. – Informal Networks – Emerging of new ideas. – Constructive Bargaining – Agree to disagree. 38 . A learning organization must continuously focus on unlearning as well. Factors that fosters a learning organization – Pluralistic – An environment where different and even conflicting ideas are welcome. – Experimentation – Fosters a culture of risk taking. – Organisational Slack – Enough free space. and skills that fosters experimentation and questioning and challenge around a shared purpose.LEARNING ORGANIZATION A learning organization is capable of continual regeneration from knowledge. It helps prevent a strategic drift from occurring at the first place.
ENVIRONMENTAL CONDITIONS Dynamic Scenario Planning Learning Organization Static Forecasting Decentralization Simple Complex 39 .
ANALYZING BUSINESS ENVIRONMENT 40 .
It points to a position of superiority with relation to competition. It is based on the assumption of incremental change. It requires a quantum leap (i. 41 . Strategic gap basically points towards a vacuum of where the organisation wants to be and where it is. Competitive advantage provides the surest way to fulfill the strategic gap. It is based on the assumption of radical change.PLANNING & STRATEGIC PLANNING Formal planning is a function of extrapolating the past. It is reactive in nature. It is pro-active in nature. gap analysis).e. Strategic planning is a function of discounting the future.
Environmental factors can be external as well as internal to the organization. 42 . A manager has to continuously scan the environment to ensure alignment of the strategies with the radically changing environment. not guided by any boundaries. events. resources and ideas move unhindered. and influences that affect an organizations way of doing things. The world is flat. The segments of the environment a top manager scans selectively depends upon his dominant logics. It is exploratory in nature. Environmental scanning is very important component of strategic planning.ENVIRONMENTAL SCANNING The environment is defined as the aggregate of conditions.
43 . It is important not only to identify the structural drivers of change. Understanding the composite effect is critical. but also to analyze the complex linkages across them. which may be different from the past impact. for which a holistic picture is required. It is particularly important that PESTEL be used to look at the future impact of environmental factors.PESTEL PESTEL attempts to provide a broad framework on how the broader environmental forces affects an organization and influences the way it practices strategy. It is not intended to be used as an exhaustive list.
PESTEL FRAMEWORK Political – Government Stability. Economic – GDP. Economic Model. Government Attitude. Licensing & Quotas. Currency Stability. Monsoon & Food Grains Reserves. Language Barriers. Central – State Co-alignment. 44 . Income & Age Distribution. Social – Population Diversity. Religious Sentiments. Economic Cycles. Literacy Levels. Social Values. Infra-Structural Investments. Inflation & Interest Rates. Subsidies & Protection. FDI Inflows. Capital Market & Forex Reserves. Fiscal Deficit. Savings & Investment.
Consumer Protection Laws. Pollution Control Laws. Environmental – Global Warming & CSR. Product Design. Non-Fossil & Alternative Fuels. Research & Development. Environmentally Preferable Purchasing. Carbon Credits. ERP. Employment Laws. Product Safety & Health Hazards.PESTEL FRAMEWORK Technological – Innovation. Technological Convergence. Legal – Monopolies Legislation. Obsolescence Rate. Waste Disposal & Emissions. Patents. 45 . Extended Producer Responsibility. Direct & Indirect Taxes. Patent Laws.
New Trade Policy (NTP) – Lowering import tariffs. Banking Sector Reforms. Dismantling price controls. 46 . Encouraging FDI. PSU Disinvestments. Curtailment of PSU’s.VRS. Encouraging exports. MRTP Liberalization. FERA Liberalization. Rupee convertibility. Structural Adjustments – Phasing out subsidies. Exit Policy. Economic Reforms – Fiscal & Monetary Reforms.ECONOMIC LIBERALISATION New Industrial Policy (NIP) – Liberalizing industrial licensing. Capital Market Reforms. Abolition of import licenses.
Mergers & Acquisitions 47 .Survival of the fittest MNC Onslaught – Enhancing stakes – Power Equation – Joint Ventures – Technological Alliances – Take-over threat.DISCONTINUITY Destabilization due to entrepreneurial freedom – Cocoon of protection disappears – Diversification spree – Existing notions of size shaken – Industry structures change radically – Economic Darwinism .
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 .
FIVE FORCES MODEL ASSUMPTIONS The model is to be used at the SBU level and not at the industry level. It should not only be used to understand the forces. the forces are subject to changes. 51 . profit potential) per se. but also used to understand how they can be countered and overcome.e. It is even wiser to apply the same at the product – market level. The five forces have strong cross-linkages. It depicts the attractiveness of an industry (i. incremental or otherwise. The model should not be used as a snapshot in time.
Low margins & stagnancy. Industry stagnation. Government policy. Low relative importance of the segment. Capital requirements. Resource profile & fear of retaliation. Threat of Customers – Buyer concentration and volumes. Learning curve advantages. 52 . Undifferentiated product. Low customer switching costs. High switching costs. Presence of substitutes or unorganized sector. Product differentiation through proprietary technology or brand power.PORTERS FIVE FORCES ANALYSIS Threat to Entry – Economies of size and scale. Access to distribution channels. Scope for backward integration. Unimportance of product quality.
Unorganised sector. Low level of differentiation. Buyer’s propensity to substitute. Product perishability. Industry stagnancy. Lack of substitute inputs.PORTERS FIVE FORCES ANALYSIS Threat of Suppliers – Supplier monopoly. Jockeying for position – Fragmented market. Diversity of players. 53 . Intermittent overcapacity. Scope for forward integration. Low relative importance of the segment. Threat of Substitutes – Improvement in price -performance trade-off. High customer switching costs. Differentiated inputs. Piracy and counterfeits. High exit barriers. Produced by industries earning high profits.
dominant or related diversified or unrelated diversified businesses (Infosys. Inertia – Excessive commitment to past strategies prevents firms from tapping emerging opportunities. Cohesiveness – Degree of bonding existing across affiliated firms.FIRM ENVIRONMENT Size and Scale of Operations – It is a very important component of competitiveness in today's global context (Bharti – MTN. Reliance). 54 . Business Scope – The intention whether the firm wants to be in a single. Tata). Resource Profile – It highlights the capabilities (generic) or competencies (business specific) of the firm.
experience teaches better and more effective way of doing things.EXPERIENCE CURVE The cost of performing an activity declines on per-unit basis as a firm becomes more efficient. 55 . With lower costs. However. leverage it as a competitive advantage. an E-Curve can prove to be futile during discontinuity. which further reduces costs. it can price its products more competitively. Experience curve has strong linkages with performance. The E-Curve thus enables organisations to build entry barriers. Matured firms will always be positioned advantageously on the ECurve than new entrants. and with lower prices it can increase its sales volume.
EXPERIENCE CURVE Cost per unit of output Decreases at an increasing rate Point of inflexion Decreases at a constant rate Decreases at a decreasing rate Production / Volume 56 .
EXPERIENCE CURVE .TRADITIONAL VIEW Efficiency = Lower Costs 2 3 1 Experience = Efficiency Lower Costs = Higher Sales Entry Barrier = Better Performance 4 6 5 Higher Sales = Lower Costs Lower Costs = Entry Barrier 57 .
STRATEGIC VIEW Inertia = Limited Growth Experience = Inertia 2 3 1 Limited Growth = Diversification Strategic Failure = Poor Performance 6 5 4 Diversification = New Experience New Experience ≠ Old Experience 58 .EXPERIENCE CURVE .
Suppliers. It helps an organisation to capitalize on the opportunities by maximizing its strengths and neutralizing the threats minimizing the weaknesses. Case Studies – Structured Questionnaires. It is one of the earliest models in environmental scanning. Press Clippings & Interviews. Interviews. . A SWOT audit involves – Company Records – Annual Reports. Customers. 59 Analysts. Observation. Acronym for Strengths – Weaknesses – Opportunities – Threats. Competitors. Business Intelligence – Bankers.SWOT The framework was originally conceptualized by Kenneth Andrews in 1970.VULNERABILITY ANALYSIS . Websites.
SWOT ANALYSIS .FRAMEWORK Opportunities Nullify weaknesses which prevents you from exploiting opportunities Leverage strengths to make use of opportunities Weaknesses Minimize weaknesses which prevents you from countering threats Strengths Threats Utilise strengths to counter threats (?) 60 .
Volkswagen. Dr. Infosys. Sony. Ranbaxy.SOURCES OF STRENGTH Strong brand identity – Eg. Aditya Birla. HUL. Toyota. SBI. Strong R&D base – Eg. Caterpillar. Good credit rating – Eg. Tata Steel. 61 . Large resource pool – Eg. Motivated employees & cordial industrial relations – Eg. Siemens. Reddy’s. Biocon. ITC. Reliance. Engineering Skills – Eg. Economies of scale – Eg. Tata. High quality products – Eg. Infosys. Honda. Reliance. Excellent penetration – Eg. Strong after sales & service network – Eg.
J. K. Narrow business scope – Eg. K. CESC. Excess manpower – Eg. Modi Group. Nirma.Raymond. Strategic myopia – Eg. B. Ballarpur Inds. Inertia – Eg. Bijoligrill. Single product syndrome – Eg. Organizational Politics – Eg. Procter & Gamble. Tatas. Group . CMC (Tata Group) 62 . SAIL. Excessive diversification – Eg. Hindustan Motors. Inefficient top management – Eg. Lacking experimentation culture – Eg. Lack of product / brand clout – Eg.SOURCES OF WEAKNESSES Outdated technology – Eg.
Capital market reforms – Eg. Middle-class buying power. Insurance. Free pricing – Eg. Telecom. Sugar. Market driven Pricing – Eg. Maruti. Abolishing CCI. Exit Policy – Eg. Sugar. Abolishing MRTP – Eg. GDR’s. Retailing. Banking.Tata Motors. Life style changes – Eg.SOURCES OF OPPORTUNITIES Delicensing of Industries – Eg. Fertilizer. Collaborations & Joint Ventures – Bharti & WalMart. ECB’s. Growing population – Eg. Fertilizers. Market driven Interest rates – Eg. VRS. Globalization – Eg. 63 .
Nationalisation – Eg. Foreign Direct Investment (FDI) – Eg. Economic recession – Eg. 26/11. Onida. Dumping from China. Group disintegration – Eg. (1985–1990). Bajoria – Bombay Dyeing. Lack of Corporate Governance – Eg. (2008). Land acquisition . Tsunami. Import relaxation – Eg. Singur SEZ. Terrorist attacks – Eg. Natural disaster – Eg.SOURCES OF THREATS Political instability – Eg. Hostile take-over – Eg. Satyam. Earth Quake. 11/9. Tata Steel. 64 . Reliance.Social activism – Eg.
e. Strategic responses (including adaptation) to opportunities and threats is critical for survival and success. scenario analysis). Holistic view – Prepare a complete overall picture. Delphi's technique. It represents a summary picture of the external environmental factors and their likely impact on the organization. Stages in ETOP analysis – List the aspects of the environment that has a bearing on the organization.ETOP Acronym for Environment – Threat – Opportunity – Profile. Assess the extent of impact of the factors. Forecasting – Predict the future (i. 65 . time series.
PROFIT IMPACT OF MARKET STRATEGY PIMS is a database model developed by GE and later extended by HBS to examine the impact of a wide range of strategy variables on business performance. High investment intensity acts as a drag. Relative attractiveness of the market. It is also a form of assessing vulnerability through longitudinal analysis. Some key findings on major performance drivers that explains 75% deviations in performance – Product quality and relative market share. . selectively. 66 Vertical integration is a powerful strategy. An organization can draw upon the experience of its peers in similar situations.
– Contexts may vary over time.PIMS .LIMITATIONS The analysis is based on historical data and it does not take care of future challenges. when radical changes in the economy takes place. As every organization is unique in its own way. – Contexts may vary across countries. Authenticity of data is of prime importance – Contexts drawn across one organization may not be applicable to another. therefore 67 validity may be a question. . Managers should be particularly cautious while referring to such data during times of discontinuity as it makes past patterns futile.
It enables the top management to draw focus. KSF helps organizations spot early opportunities and convert them into value adding business propositions. 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 .KEY SUCCESS FACTORS (KSF) KSF relates to identification and putting concentrated effort on a particular activity or process which forms the very basis of competitive advantage.
IDENTIFYING ALTERNATIVE STRATEGIES 69 .
It reflects the customer needs it intends to satisfy. A corporate strategy identifies and fixes the strategic gap it proposes to fill. national. It determines the locus a firm encounters with internal and external environment. global) of a firm and deals with choices of allocating resources across them.CORPORATE .GRAND STRATEGY It is concerned with the overall business scope (single. related. It provides broad direction to the groups vision and mission. 70 . It indicates the quality of growth an organization is looking for. unrelated) and geographical scope (local. dominant.
CORPORATE STRATEGY MATRIX Corporate Strategy Stability Stability Growth Growth Combination Diversification Divestment Intensification Market Penetration Related Vertical Market Development Product Development Unrelated Horizontal 71 .
does not relate to do-nothing (Eg. – Why disturb the existing equilibrium set up? – Limited resource position. Even during adverse times firms need to adopt a strategy to sustain current performance levels. Stability however. (Eg. Citibank).STABILITY It involves maintaining status-quo or growing in a slow and selective manner. Hindustan Motors). The scale and scope of present operations remains almost intact. – To stop for a while and assess past records. The reasons for stability strategy – – Lack of attractive opportunities. erosion of capabilities. 72 . – 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. 73 .GROWTH .
Ujjala. – Suitable for industries where scope for technological breakthrough is limited. Market penetration can be achieved by – increasing sales to current customers.MARKET PENETRATION It is a strategy where a firm directs its entire resources to the growth of a single product or a closely knit product set. – The company carries a risk of product obsolescence. within a well defined market segment. – Elongated product life-cycle. – Helps firms which are not comfortable with unfamiliar terrain. direct non-users to users. (Eg. convert competitors customers. 74 . Britannia). Nirma.
fabrics. carpets.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. upholstery.…… or Teflon: aircraft technologies to cutlery to paints or Raytheon Corp – Microwaves: radars to kitchen appliances). – Moves across geographical boundaries. – Stretches product life cycles. – Creativity and innovation – thinking out of the box. 75 . tyres. socks & stockings. (Eg. – Immense customer reach & flexible advertising. – Unconventional and flexible distribution channels. Du Pont – Nylon: parachutes.
– Substitutes that serve the same needs (Eg. perception. – Leverage on customer and brand loyalty. conformance. Microsoft: DOS to Windows) or a substantial improved version (incremental) of an existing product to repeatedly enter the same market (Eg. – Deliverable through – redesigning or reengineering.PRODUCT DEVELOPMENT It is a strategy where a firm tries to achieve growth through a radical new product (Eg.Strolleys). – Leveraging through – innovation. reliability. features. aesthetics. Close Up: Fluoride – Gel toothpaste or VIP . – Areas of product improvement – performance. serviceability. Refills) 76 . durability.
– Internal capital market. Why do firms diversify in the Indian context? – Shift the growth trajectory or opportunistic. – Permits: quotas. industrial embassies). 77 .e.DIVERSIFICATION It marks the entry of a firm into newer markets with new products.e. thereby creating a new business. dominance). – Conglomerate or market power (i. From the modern point of view they are strategically dissimilar. – Risk reduction. – High transaction costs and institutional gaps. the new business is distinct from the existing business in terms of – inputs – technologies – markets. From the traditional point of view. licenses (i.
cold wave dominates the planet. Let us assume that there are two businesses constituting the entire market – coffee and icecream. If on the other hand. either of which is equally likely to prevail. If the hot wave dominates the planet. while the coffee business would register a return of 30%. in which a given year is either under hot or cold wave.HOW DIVERSIFICATION REDUCES RISK? Consider a hypothetical planet. while the coffee business would register a return of 10%. the ice-cream business would register a return of 30%. What would be your ideal diversification strategy through optimization? 78 . ice-cream business would register a return of 10%.
If we diversified in either of the two businesses, our expected return will be 20%, with a possible risk of 10%. If, we split our investment between the two businesses in equal proportion, half of our investment will earn a return of 30%, while the other half would earn 10%, so our expected return would still be 20%. But in the second instance there is no possibility of deviation of returns (i.e. risk). Diversification results in 20% expected return with zero risk, whereas investing in individual businesses was yielding an expected return of 20% with a risk factor of 10%. The pivotal point is that the two businesses are negatively correlated. 79
It takes place when a company increases the breadth of a firms business or geographical scope by getting into product – market segments which compliments its existing businesses (Eg. Reliance). Alternatively, existing business may recreate new businesses, which are distinct, but supplements its existing business (Eg. Bajaj – scooters to motorcycles, Dove – soaps to shampoo). – It results in increased market power. – Leveraging existing capabilities. – Resources can be shared for mutual benefit. – Reduces economic risk (i.e. business cycles). – Enables brand or product line extension.
It increases the depth of its business scope either in a backward business process or in a forward one. Backward integration occurs when the company starts manufacturing its inputs or catalysts. In forward integration a firm moves into marketing of its products and services. Advantages of backward integration – – Cost competitiveness – entry barrier. – Better operational control – timely supplies, quality control, coordination – JIT, savings in indirect taxes. Disadvantages of backward integration – – It may spark of a chain reaction - contagion effect. – Long gestation & break even - investment in CAPEX.
Oil & Gas exploration Naptha-cracking Acetic Acid Paraxylene (PX)
Purified tetra-pthalic acid
Polyester Filament Polyester Staple Fibre (PSF) Yarn (PFY) Textiles 83
DIVERSIFICATION SUCCESS ?
While diversifying into new businesses, the scope of relatedness or unrelatedness should not be judged from the traditional static view, but from the modern dynamic view which incorporates strategic factors like capabilities and dominant logic. Countermanding reasons – Potential to reap economies of scope across SBU’s that can share the same strategic asset. Potential to use an existing capability to help improve the quality of a strategic asset in another business. Potential to use an existing capability to create a new strategic asset in another business. Potential to expand the existing pool of capabilities. Dominant logic ensures timely & appropriate response.
Usually the firm concentrates on its core activities. Dr. 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. 85 .Where one firm has full ownership and control over all the stages of a value-chain in the manufacturing of a product (Eg. Ranbaxy. Maruti – Sona Steering). Reliance). Reddy’s).A firm produces part of its own requirements and buys the rest from outside suppliers with a variable degree of ownership and control.QUASI & TAPERED INTEGRATION Full Integration . Tapered integration . and out-sources the noncore activities (Eg.
A CASE OF TAPERED INTEGRATION Partial Ownershi p Transmission Engine Design Electricals Steering 86 Seats & Carpets Windscreen Ordinary Components Zero Ownership Very Critical Component s Full Ownership Critical Component s .
myopia). synergies pulling in opposite directions). core business). lack of knowledge of competitive forces).e. and are also strategically dissimilar. – Cost of dysynergy (i. lack of strategic intent. 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. – Cost of ignorance (i. 87 . – Cost of neglect (i.CONGLOMERATE DIVERSIFICATION It relates to entry of firms into businesses which are distinct in terms of – inputs – technologies – markets.e.e.
CONGLOMERATE DIVERSIFICATION Paper & Packaging Edible Oils Tobacco Hotels Food & Confectionary 88 .
Glaxo’s “Glucon-D” to Heinz). reactive) and survival is at stake and the firm does not have resources to fend off competitive forces. ACC) in full to an independent entity.e. 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. It taken into account when performance is disappointing (i.DIVESTMENT Divestment is a defensive strategy involving the sale of entire stake (Eg. It is may also be a pro-active strategy. In strategy there is no scope for sentimentality with divestment. 89 . Tata Pharma. Tata Press). It may also involve a SBU (Eg. Tatas sale of Goodlass Nerolac. (Eg.
Hive-Off – A hive off is the creation of a new entity followed by transfer of assets. 1956 does not permit this mode. Tatas buy-out of Corus for US $ 11. (Eg. Sale of Diamond Beverages to Coca-Cola for US $ 40 million).ROUTES Outright Sale – Popularly known as the asset route. involving 608 pence per share). the Companies Act. Leveraged Buy-Out (LBO) – Here the company’s shareholders are bought out through a negotiated deal using borrowed funds.3 billion. However. 90 . where 100% of the assets (including intangibles) are valued and paid for. where the equity is allotted amongst the existing shareholders on a pro-rata basis.DIVESTMENT . (Eg.
It is usually pursued by a business group with diverse interests across multiple industries.e. A combination strategy can be implemented through green-field projects (i. because every business has its own unique external and internal environment. joint ventures). developing facilities right from the scratch) or through brown-field projects (i.e. mergers and acquisition.COMBINATION STRATEGY It is a mixture of stability. There can be no ideal strategy for every business. growth. and divestment strategies applied simultaneously or sequentially for a portfolio of businesses. 91 .
STRATEGY CHOICE & PORTFOLIO ANALYSIS 92 .
What then is the magical number? 93 . Dominant logic enables top managers to selectively scan the environment and make trade-offs.STRATEGIC CHOICE A strategic choice seeks to determine the alternative courses of action available before top managers to achieve its strategic intent. It attempts to answer the following questions – How effective has the existing strategy been? How effective will that strategy be in the future? What will be the effectiveness of alternative strategies? It is impossible for a manager to assess all the alternatives. In most cases the trade-off is between resources and opportunities.
nor is to a define a problem for others to solve. For an optimal choice the following four issues need to be resolved – Is the strategy clearly identifiable? Is it consistent with the resources of the firm? Will it be able to exploit the opportunities in full? Is it in tune with the values and beliefs of the firm? 94 . will help the firm achieve its intent. The key task before a top manager is to identify the right problems.SELECTIVITY IS THE KEY The role of a top manager is not to solve a problem. They must choose problems which will lead to the right kind of opportunities. if addressed. managers need to ask the right questions. To identify the right problems.
95 Succession planning is critical to continuity. Their roots can be traced to a single family or clan and share broad similarities. chaebols in Korea.BUSINESS GROUP . Licenses & Quotas. Their origins can be traced back to market imperfections existing in an economy (MRTP Laws. Resource sharing. formal and informal ties. . Managing Agency). BRC). keiretsus in Japan. embassies). Proximity to the corridors of power (i. High degree of centralized control (GEO.DEFINITION A business group is known by various names in various countries – guanxique in China. business houses in India.e.
RESOURCE SHARING ACROSS FIRMS Parent Company Firm 1 Firm 5 Firm 3 Firm 2 Firm 4 96 .
STRATEGIC CHOICE – MACRO TIMING Recession (Stability) Prosperity (Diversificatio n) Depression (Divestmen t) Recovery (Intensification ) 97 .
Divestment Duration (Yrs) Inception Intensification 98 .STRATEGIC CHOICE – MICRO TIMING ReEngineering Growth (%) Maturity Stability Growth Diversification Decline .
99 . Why? Businesses are not about liquid assets. Rules of the game are different.PORTFOLIO ANALYSIS Resource allocation across a portfolio of businesses is an important strategic choice. Redeployment of resources upsets the established power bases of a group. Investing in emerging businesses may not actually be so simple as it appears to be. therefore. next only to choice of business. Power and resources often goes hand in hand. Relatedness across resources are difficult to realize. there are high costs associated with entry and exit. sometimes impossible.
BCG GROWTH MODEL Relative Market Share (%) Industry Growth (%) Low High High Low Stars Question Mark ? Cash Cow Dogs 100 .
provided the industry growth rate continues and the company is able to maintain its growth (i. market development. Tata-AIG).e. Stars – They achievers in the near term.BUSINESS ANALYSIS – TATA GROUP Question Marks – They have potentials in the long term. Trent. but to larger extent than a question mark. provided the company is able to build up on its market-share (i. Tata Telecom. which remains a big? These businesses are net users of resources. diversification). market penetration. These businesses are also net users of resources (Eg. 101 . and their risk profile is high (Eg. Tata Steel). product development). TCS.e.
they are generators of resources. However. Groups prefer to dispose off such businesses (i. divest) as achieving a dominant position in these businesses is a difficult task. Dogs – They are a drag on the group. and they lack on competencies to take on competition and are basically cash traps (Eg.e. Tata Motors. Tata Press). Given that the growth potential in the business is low.BUSINESS ANALYSIS – TATA GROUP Cash Cow – These are matured businesses. Tata Tea. cash cows may also need to invest provided the industry takes an upswing (Eg. stability). Tata Pharma. Indian Hotels.e. Tata Chemicals). 102 . Nelco. and the company dominates the industry ahead of competition (i. harvest.
niche – Rolex.e. Certain businesses in the low market share category may be the result of a conscious strategy (i. Data may be prohibitive. The terminologies used are somewhat prohibitive. factors are limited. Cash cows may actually need substantial investments to retain their market position (Eg.LIMITATIONS It does not address the concerns of a business which is in the average category (usually the majority). Armani). Cartier. 103 .BCG . The model does not provide specific solutions within a particular category. HUL). Mercedes Benz. neither in high or low.
MATRIX Distinctive Capabilities Strong High Medium Weak Stability Industry Attractiveness Diversify (++) Intensify (+) Med Intensify(+) Stability Harvest (-) Low Stability Harvest (-) Divest (.-) 104 .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 .
BCG – Boston Consulting Group. Gap Analysis – It emphasizes what a firm wants to achieve.TERMINOLOGIES Harvest – It entails minimizing investments while trying to maximize short-run profits and cash flow with the intention to exit the business in the near future. Divest – Selling a part or the entire business at one go. Disinvestment involves selling in phases. 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. 107 .
BUSINESS STRATEGY & COMPETITION 108 .
COMPETITIVE STRATEGY A competitive strategy deals with how a firm competes in a particular business or product-market segment. The strength of a firm in a particular business usually stems from its competitive advantage. Competitive advantage is the back-bone of strategy. and earning super-normal profits (i. rent).e. Competitive advantage refers to a firms resources or activities in which it is way ahead of competition. Such resources or activities should be distinctive and sustainable over time. building market-share. 109 . The principal focus is on meeting competition.
Blue Ocean – Consciously moving away from overcrowded industries to uncharted territories and making competition irrelevant (Kim & Mauborgne). involving harmonizing and integrating multiple streams of technologies.BUSINESS STRATEGY FRAMEWORKS How to be distinctive and yet sustainable – Differentiation – Understanding of the dynamics of competition. 110 . preventing new entry and/or competition (Hax & Wilde). leveraging (Prahalad). Delta Lock In – Two dominant players co-opt to selfreinforce and create or escalate an entry barrier. Resource Based View – Obsession with competence building. identifying critical success factors. developing competitive advantage (Porter).
preferential access to raw materials. Reliance) or may pass it to customers to increase market-share (Eg. Compress project duration through crashing. backward integration. Steep experience curve effects. The firm may retain the benefits of cost advantage by enjoying higher margins (Eg. Sources of cost advantage are varied and depends on the structure of the industry – Economies of size. Ayur. 111 . Locational or early entry advantage. proprietary technology.PORTERS – COST LEADERSHIP Cost Leadership – It is a strategy that focuses on making a firm more competitive by producing its products more cheaply than its competitors. Nirma. T-Series).
It selects one or more attributes that buyers perceive as important. and sufficient slack. undeterred attention to quality. Rayban). 112 . avoiding brand dilution. (Eg. Means of product differentiation are peculiar to each industry. Feeling the pulse of the customer. Culture of experimentation. Focus on brand loyalty. Creativity.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. innovation and out of the box thinking. Sony. Successful product differentiation is often followed by premium pricing. Intel.
coupled with fear of structural erosion. Rolex.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. 113 . A focuser seeks to achieve a competitive advantage in its target segment. Cartier. Armani). Sub optimization alone may not be a source of superior performance. They are poorly served by mainstream players. The target segment must have unusual needs or the delivery system catering to this segment must be unique. though it may not possess an overall competitive advantage. Maybach. Mont-Blanc.
COMPETITIVE POSITIONS Competitive Advantage Cost Differentiation Product Differentiation Competitive Scope Broad Cost Leadership (Toyota) Product Differentiation (General Motors) Narrow Cost Focus (Hyundai) Differentiation Focus (Mercedes) 114 .
jugaad or frugal engineering). Though cost leadership and differentiation are inconsistent. similarly differentiation may not always lead to rising costs (i. Firms focusing on a hybrid strategy typically aim at shifting the productivity frontier and recreating a new product-market segment altogether (Eg.HYBRID STRATEGY A hybrid strategy is the simultaneous pursuit of cost leadership and differentiation. and usually outperforms a stand alone generic strategy. Tata Nano). 115 . Reducing cost does not always involve a sacrifice in differentiation. in a hyper competitive context the two strategies need not be mutually exclusive.e.
116 . It is usually the result of a firm not willing to make trade offs. unless such a player is capable of discovering a profitable segment. It tries to compete through every means.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 .stuck in the middle. It will have a competitive disadvantage vis-à-vis a clearly positioned generic player. but achieves none. Industry maturity will usually widen the gap. leading to what is called – straddling. The positioning therefore gets – blurred.
coupled with low penetration levels. Speech recognition software's. Nano technology. Artificial intelligence). (Eg. ending in a differential cost economics. It is characterized by – High level of technological uncertainty.) Excessive turbulence in the dynamics of the environment. Consumer behaviour pattern unstable and evolving. First-time buyers. 117 . Market segmentation not well defined. leading to a blurred productivity frontier and steep learning curve. technological innovations. changing customer needs.radical environmental changes. Eg.EMERGING INDUSTRY Emerging Industry – An evolving industry characterized by . There is a lot of scope to define the rules of competition. 3D imaging.
MRTP may also cause fragmentation. High exit barriers because of huge investment in CAPEX. Eg. It is characterized by – Low entry barriers. leading to clear fragmentation. Eg. Retail and telecom. because of lack of economies of size and scale. IT. Eg. Air Conditioning. 118 . Diverse customer needs.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). Paints. Consumer durables. Scope for players to change the rules of the game. Government regulations in the form Eg.
distribution networks. well defined consumer behavioral patterns and imperfect competition leading to near monopoly. Strong entry barriers. 119 . Cartel among existing players through collusion. Limited scope for innovation . technological maturity.technological maturity. established industry dynamics. collaboration and co-option.MATURED INDUSTRY Matured Industry – An industry characterized by saturation in growth rates. early entry and location advantages. because of economies of size and learning curve effects. Firms are rule takers in the segment as productivity frontier is well defined.
and costly price wars. Typewriters.DECLINING INDUSTRY Declining Industry – An industry which has outlived its utility due to the entry of close substitutes and or radical product innovations which results in a shift of the productivity frontier. 120 . Learning abilities have been stunted and firms adverse to investment in R&D and make fresh investments. with little or no signs of recovery. (Eg. backed by corporate espionage. Firms facing a declining phase are characterized by inertia and slow to react to environmental changes. scooters. dot-matrix printers). Exit barriers are extremely high because of limited prospective buyers. Nature of competition extremely high.
Matured Industry – Sophisticated cost analysis. strictly product differentiation and not standardization. mergers and acquisition. or else exit the segment. 121 . increasing scope. premium pricing.COMPETITIVE STRATEGIES Emerging Industry – Set benchmarks. recreate new markets. strictly cost differentiation. Fragmented Industry – Identify. aggressive building of distribution networks. branding and promotion. Declining Industry – Redesign. process innovation. Locate a defendable position. regenerate. focus more on product differentiation or even a hybrid one. reengineer. move beyond boundaries. assess and overcome fragmentation. strike alliances.
A firms resources can be classified into – Tangible – These refer to real assets. brands. However. positions based on resources which are unique and inimitable are far more sustainable even in the long term. patents. hence very rarely confer competitive advantage as can be easily acquired or replicated.RESOURCE BASED VIEW Differentiation based on cost or products saturates and ceases to exist beyond the medium term. Intangible – These refer to goodwill. They are a standard in nature. 122 . and complex learning experiences in integrating and harmonizing technologies (distinctive capabilities) that play an important role in delivering competitive advantage through “causal ambiguity”.
123 . Hence. There is a high degree of internal and external causal ambiguity involved in it. but not necessarily. Therefore firms should concentrate on developing complex resources that forms the very basis of differentiation.e. Capabilities can be generic (i. differentiation based on capabilities can be sustained even in the long run. Typically. they are woven around technologies. They play a very critical role in shaping competitive advantage.CAPABILITIES & COPMPETENCIES These include a complex combinations of tangible and intangible resources that organizations use to convert inputs to outputs. can be leveraged across businesses) or specific to a particular business.
COMPETITIVE ADVANTAGE 124 .
It results in a distinct differentiation advantage or a cost advantage or hybrid as well. and results in well springs of new business development. 125 .COMPETITIVE ADVANTAGE A competitive advantage is a position of superiority relative (i. Success of a strategy critically depends on SAP. It enlarges the scope of an organization. Strategy drives competitive advantage. A portfolio of competitive advantage comprises strategic advantage profile (SAP). not absolute) to competition.e. competitive advantage subsequently becomes the back bone for a competitive strategy.
SAP changes from time to time.STRATEGIC ADVANTAGE PROFILE (SAP) Organizations have to systematically and continuously conduct exercises to identify its SAP. 126 . Internal strategic fit between its strategy and dominant logics is essential for the top management to stretch and leverage SAP. In most cases SAP is hidden and dormant. In today's world of discontinuity. Most successful organizations around the world have a well balanced SAP. Identification of SAP is critical for and stretching and leveraging of resources.
Substantial cost reductions also follow. Today SCM is integrated with greening the environment as CSR practices. Competitive advantage arises not from an individual activity but a stream of inter-related activities. faster product launches. 127 . each of the players need to be efficient backed by sufficient coordination at the contact points (i. and enhanced customer tracking – higher market share. VC pay-offs: better product availability. kaizen or internal customer). Inventory Mgt to Logistics Mgt to Supply Chain Mgt (SCM).e. A VC is often compared with a relay team.VALUE CHAIN ANALYSIS A value-chain segregates a firm into strategically relevant activities to understand its composite behaviour.
THE VALUE CHAIN Support Infrastructure n gi ar M Human Resource Management Technology Development Procurement Out Logistics Mktg & Sales In Logistics Operations Primary Service M ar gi n 128 .
Fit is important because discrete activities result in negative synergy and can also be easily copied by competitors. – First order fit refers to simple consistency between each activity and the overall strategy. A high fit involving a complex chain of activities drives both competitive advantage and its sustainability. – Second order fit occurs when activities are reinforcing amongst them. Operational effectiveness is not strategy. A learning organization helps create strategic fit.STRATEGIC FIT – THE PORTER WAY The sustainability of the value chain depends on the degree of fit between the activities. – Third order fit refers to optimization of effort. 129 .
– Cannot be easily imitated or substituted. A core competence usually has its roots in technology. Core competence has a high degree of external and 130 internal causal ambiguity embedded in it. but not necessarily. It should satisfy the following conditions – Contributes significantly to customer benefits. These skills results in distinctive activities and processes. – Can be sustained even in the long run. .CORE COMPETENCE A core competence represents the collective learning's of an organization around diverse streams of technologies. It forms the very basis of competitive advantage. – Can be leveraged across businesses.
a core competence is sustainable even in the long-term. A competitive advantage is sustainable in the shortmedium term. only global leaders possess a core competence. a core competence has its roots in a set of skills. A competitive advantage manifests from a function.CORE COMPETENCE A competitive advantage does not necessarily imply a core competence. A competitive advantage may or may not lead to superior performance. a core competence usually does. a core competence always implies a competitive advantage. 131 . Majority of the firms have competitive advantage.
However. Subsequent work on game theory by John Nash led him to win the Nobel prize in 1994. the stringent assumptions of game theory and difficulty in ascertaining of pay-offs makes game theory application difficult in business. each of whom wants to win. A game is a contest involving two or more players. In a game (similar to a business) one players win is always another's loss.GAME THEORY The game theory was developed in 1944 by Oscar Morgenstern. 132 . Here the magnitude of gain offsets the magnitude of loss equally. This is known as a zero-sum game. In fact there are no. illustrations depicting a win-win situation.
BIASED AND UNBIASED GAME A game is said to be biased when one of the players have a disproportionate chance of winning. An unbiased game is one where both the players have equal chances of winning. Firm Y’s Strategy Use Radio Use Radio +2 +6 Use Newspaper +7 -4 133 Firm X’s Strategy Use Newspaper Firm X’s Pay-Off Matrix .
A saddle point is a situation where both the players are facing pure strategies.PURE STRATEGY GAME The strategy each player follows will always be the same regardless of the other players strategy. 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 .
Yahoo Vs Microsoft). Coke Vs Pepsi). collaboration or cooption. there is likely to be temptation by any of the players to try to steal the advantage over the other by breaking the rules of the game (Eg. It represents the classical “prisoner’s dilemma”.g.e. iteration) rather than through collusion (E.TYPES OF GAMES Simultaneous Games – This is a situation where the players have an option to choose to cooperate or not through collusion. This is usually through learning by “experience or observation” (i. However. Repeated Games – In this situation the players interact repeatedly with each other sub-optimizing the outcome possibilities. 135 .
– Building incentives for customer loyalty.CHANGING THE RULES OF THE GAME In a situation where a player is unable to compete with the existing rules of the game may attempt to change the rules of the game altogether. In a market dominated by price-based differentiation one may attempt to change the rules of the game by/when – – Bases of differentiation dependent on clear identification of what customer wants or value. Game theory relies on the principle of rationality. – Making pricing more transparent. It results in a shift in the productivity frontier. but 136 players do not always behave rationally. .
DELTA MODEL & LOCK-IN
Its a systematic approach where-in two or more industry majors, who by default has achieved a proprietary position (Microsoft – Software / IBM – Computers) which are not necessarily best-products in the industry, co-opt to create a lock-in. A lock-in implies that other players has to conform or relate to that standard in order to prosper. Becoming the industry standard requires – strong brand, causal ambiguity, and close relationship with other companies offering complimentary services. Lock-in is self reinforcing and escalating (i.e. accelerating effect).
THE THREE STRATEGIC POSITIONS
System Economics Market Dominance Complementary Share
Enabled through effective use of technology
Total Customer Solutions
Customer Economics Cooperation Customer Share
Product Economics Rivalry Product Share 138
Bill Gates is the richest man in the world not necessarily because he has developed the world’s best software's or excels at customer satisfaction; but he has got an army of people working for him who are not on his payroll – all the application software providers who are writing programs based on “Windows” compatible operating platform. Once you create the lock-in it is sustainable because of the “network effects”; which creates the proverbial “virtuous cycle” – customers want to buy the computer with largest set of applications and software developers want to write programs for the computers with the largest installed base.
The proponents (Hax & Wilde) believe that every organization has the ability to create and sustain a “lock-in” positioning (though in varying degree). This “system lock-in” is referred to as “delta” – delta being the Greek letter that stands for transformation and change amongst the players. The lock-in once created becomes very difficult for a firm to penetrate, and becomes a distinct entry barrier. The model is based on the belief that it compliments Porter’s differentiation model and RBV framework instead of contradicting them. In a lock-in strategy the performance outcomes are dependent on the success of another.
It relates to translating strategy formulations into practice. Performance realization of a strategy depends on the implementation effort. Successful implementation also depends on the appropriateness of the strategy. Since strategy implementation is a time bound process, alignment (i.e. strategic fit) is a key variable during times of radical change. Some of the other levers of successful strategy implementation are – Transformational leadership and motivating power. Resource allocation; its stretching and leveraging. Compatible organization structure & control systems. Inertia & resistance to change.
A high strategic fit (co alignment) is useful because it enables – – Appropriate and timely response. – Resource commitment from top management. While external strategic fit (strategy – environment) is relevant for strategy formulation. internal strategic fit (strategy – dominant logic) is critical to strategy implementation. – Changing the rules of the game. – Better strategic and operational control.IMPORTANCE OF STRATEGIC FIT Strategic fit has a central role to play in strategic management. – Development of capabilities & competencies. 143 . – Unlearning & learning of new skill sets.
strategy formulation and implementation has been perceived to be distinct & independent. In fact. According to Mintzberg. learning levels are very low. while control is very effective.e. In such a situation. formulation & implementation can occur simultaneously. Some of the key strategic learning's exists at the contact point between the organization and its customer. 144 . effective strategies are better crafted when there is a subtle overlapping between the two (i.FORMULATION Vs IMPLEMENTATION Traditionally. learning levels are very high. at the cost of sacrificing a lesser degree of control. In such a situation. emergent strategy vis-à-vis intended & realized).
shift from compliance to commitment. bring about transparency. companies depend more on transformational leaders than transactional leaders. A transactional leader is usually confined to allocating tasks & responsibilities and extracting performance. Pragmatism is the ability to make things happen.ROLE OF TOP MANAGEMENT To bring about change and to implement strategies successfully. Install a system of shared beliefs and values. He should be an agent of change. 145 . transformational leaders go one step beyond – Design a well crafted and designed strategic intent of the organization. In contrast.
skills) also includes complex resources like capabilities and competencies. machines) referred to as threshold resources (i.e.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. labour. Performance Budget – SBU managers need to justify the distinctive resources in terms of the opportunity it is pursuing yields the highest possible pay-offs. land. Intangible resources (Eg. brands. The various methods of resource allocation includes Historical Budget – The budgets framed by HQ for a particular SBU keeping in mind past trends. 146 . patents. minimum requirement).
convergence of multiple streams of technologies at the product – market level is becoming increasingly evident (Eg. 147 . Distinctive capabilities helps in stretching and leveraging resources thereby overcoming two major constraints involved in strategy implementation – times & costs. Distinctive capabilities are complex set of skills woven around technologies. Moreover. Due to causal ambiguity (complexity). Flat Screen Displays. though not necessarily in the case of emerging markets. these capabilities are sustainable even in the medium to long term.CAPABILITIES & COMPETENCIES Technology and business are slowly becoming in – separable. Mobiles).
processes become people independent. A single product or a dominant business firm usually employs a functional structure.STRATEGY & STRUCTURE It is a framework within which individual efforts are coordinated to bring synergy. The level of centralization and decentralization is decisive. Once the structure is in place. 148 . An appropriate organization structure & adequate control systems are essential to implement strategies and achieve stated goals. A firm in several related businesses usually employs a divisional structure. A firm in several unrelated businesses usually employs a SBU structure.
Inputs . Project / Matrix Structure – A formal but temporary framework initiated for the completion of a particular project/crisis. with team members having dual line of control. 149 . Output).TYPES OF STRUCTURES Functional Structure – Activities grouped together by a common function (Eg. Divisional Structure – Units grouped together in terms of products. processes. Marketing.Technology. Virtual Structure – A boundary less or hollow organization. disbanded subsequently. Team Structure – An informal group formed for a crisis. SBU Structure – Businesses segregated in terms of strategic dissimilarities (Eg. Finance). based on skills and competencies. or geographical locations.
It includes the desire for independence. leading to a tall structure.FACTORS INFLUENCING STRUCTURE Size – As an organizations size increases there is more specialization and differentiation leading to the top management moving away from operational issues and control. Technology – With more and more convergence of technologies in business. as span is broader. structures are becoming flatter and more simpler. Environment & People – Economic and political conditions have a major bearing on structure coupled with the attitude and aspirations of the people in the organization. 150 . facing challenges & crises. assuming responsibility.
INERTIA When a firm has been operating in a certain fashion for a long time. Changes in top management and unlearning helps overcome inertia. irrespective whether it is from worse to good or good to worse. Most firms undergo periods of strategic continuity rather than strategic discontinuity. Inertia acts as an impediment in strategy implementation. there is a tendency to continue along the same lines.e. co0ntinuity). Inertia is a characteristic of a firm that endures status quo (i. . Top managers resist change. Common sources of 151 inertia – complacency with past successes.
certain authors propose misfit as a source of superior 152 performance. However. strategies need to be evaluated on an ongoing basis to prevent deviations of fit. Deviation of fit is detrimental to performance and may lead to strategic failure. Since the internal and external environment is in a state of continuous flux. To prevent deviation 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.
. competitive advantages becoming disadvantages? Has the company acquired any new competency? Has the company been able to overcome the 153 environmental threats. It attempts to answer the following questions – Is the strategic intent appropriate to the changing context? Are the organizations capabilities still holding good. detecting changes in the external and internal environment and taking corrective action wherever necessary.STRATEGY CONTROL It is concerned with trafficking a strategy as it is being implemented.
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.STRATEGY CONTROL IMPLEMENTATION It involves steering the company towards its original growth trajectory & stated goals. However. 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. It involves assessing – strategic thrusts and milestones.
low strategic fit due to consultants intervention. Performance measures are defective – What to evaluate against? How to measure the 155 construct? As a saying goes. Strategy intent not linked with goals and objectives – Lack of coordination at lower levels leading to negative synergy. “If you cannot . difficult to translate into practice. Strategy not linked to resource allocation & capabilities – Lacking commitment of top management.BARRIERS TO STRATEGY EXECUTION Vision and strategy not actionable – Utopian ideas.
156 . so if one fails to pay proper attention to one of them.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. Today it is considered one of the most powerful tools for strategy implementation determining success or failure. to be sure of successful implementation of a strategy. Large or small. Together these factors determine the way in which a corporation operates. important or not they're all interdependent. the relative importance of each factor may vary over time and context. Managers should take into account all seven of these factors. this may effect all others as well. On top of that.
BACKGROUND & ORIGIN The 7-S Framework was first mentioned in "The Art Of Japanese Management" by Richard Pascale and Anthony Athos in 1981. At around the same time in the US Tom Peters and Robert Waterman were exploring what made a company excellent. It appeared also in "In Search of Excellence" by Peters and Waterman. The 7-S model was born at a meeting of these four authors in 1982. 157 . Since then it is known as their 7-S model and is extensively used by corporations worldwide to implement their strategies. They had been investigating how Japanese industry had been so successful. and was taken up as a basic tool by the global management consultancy company McKinsey.
Style – The way in which the top management influences the functioning of an organization. over time. Strategy – Trade-offs for the allocation of a firms scarce resources. processes and routines that characterize how work should be done. Systems – The procedures.THE 7’S Shared Values – It represents what the organization stands for and what the top management believes in. 158 . Skills – An organizations capabilities and competencies. Staff – Human inter-relationships. Structure – The way in which the organization's units relate to each other in terms of their commonalities. to reach identified & stated goals. formal & informal .
STRATEGIC FIT Strategy Structure Shared Values Systems Skills Staff Style 1st Order Fit 2nd Order Fit 3rd Order Fit 159 .
Consider the 4P’s of marketing or 3R’s of SCM. In contrast. style. Ineffective in case of a virtual company. staff. While the American co’s focuses on the hard S’s. shared values) are very malleable and comparatively more difficult to identify & influence. structure.A CRITIC OF THE 7S MODEL While the hard S’s (strategy. because most often they are culturally embedded and often neglected. 160 . systems) are comparatively easy to identify and influence. A choice of an alphabet often limits the scope and skews the interpretation of a model. their Japanese counterparts focus more on the soft S’s for their early success and sustainability. the soft S’s (skill.
Low Take Overs 161 .High Organic Growth Strategic Alliance Joint Venture Mergers & Acquisition Strategic Fit .STRATEGY IMPLEMENTATION ROUTES Strategic Fit .
It has complete control over inputs. technologies. concessions are available for green-field projects. green-field projects. Long gestation leads to delayed market entry. subsidized power). SEZ’s. i. Reliance Industries). (Eg. and markets. i. tax holidays.ORGANIC GROWTH Here a firm builds up its facilities right from the scratch and continues to do so without any external participation. 162 Risk of cost and time overruns. the entire value chain. (Eg.e. soft loans. . The entire infra-structural facilities are set up afresh having its own gestation and break-even. Govt.e.
STRATEGIC ALLIANCE It involves a pro-active collaboration between two or more firms on a particular domain or function for mutual gain. It has limited intervention power and usually lacks holistic commitment from the alliance partner. It touches upon a limited aspects of a firms value chain. Alliances are usually in the areas of technologies or markets (Eg. Alliances are usually short-lived and disbanded once the purpose is achieved. . Tata Motors & Fiat). 163 It is a form of competitive collaboration. There is no funding or equity participation from the alliance partner & both the firms continue to operate independently.
Tata – AIG.JOINT VENTURES A joint venture involves an equivalent equity participation between two firms usually of similar strategic intent and comparable size to enter a particular market through a newly formed entity. Dominant logic of both the companies should be complimentary. Hero . A comprehensive MOU is essential. . leaving minimum scope of overlapping.Honda). It is a win-win situation for both the companies. Selecting the right partner is critical for success. Degree and extent of management control must be clearly 164 laid down. (Eg.
Integration of assets and other financial resources. Economies in scale leading to lowering of costs. Acquisition is an outright purchase of a firm assets by another independent entity (Eg. Coca Cola – Thums Up). ITC Tribeni Tissues. Integrated distribution channel leads to better market penetration and overall synergy. . Revival of a sick-unit through better management practices is a major motive behind an acquisition 165 strategy. with the individual firms ceasing to exist any more (Eg.MERGERS & ACQUISITION It refers to the fusion of two or more firms into a single entity. Brooke Bond & Lipton).
Integration of organization structure & cultures is difficult. Instant access to capacities and markets. Inform SEBI / Stock Exchange after 5% stake is 166 acquired. Consolidation in a fragmented industry. Make a public offer of not less than .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.Corus). Tata Steel . often the new firm is “left alone”. Larger geo-graphical diversity. Most countries have stringent laws that prevents hostile take over.
MANAGEMENT TOOLS IN STRATEGY 167 .
every time. The past is ceasing to be an indication of the future. TQM – Doing the right thing the first time. Balanced Scorecard – Tracking strategy 3600. Some tools to ensure that – Benchmarking – Adopt certain best practices. 168 .WHY MANAGEMENT TOOLS? Change is becoming pertinent in the business environment. or better still create next practices Reengineering – Redesigning work processes right from the scratch. Change provides enormous opportunities. it is also a source of potential threat. Radical change is superseding incremental change. Companies therefore need to ensure competitive advantages doesn’t become competitive disadvantages.
A best practice is defined as an activity performed by a company in a particular domain or function which distinguishes it from others and making them world-class. These exemplary practices involves the stakeholders of the company and helps achieve its strategic intent. Best practices centers around looking at a different way to satisfy various stakeholders. Benchmarking involves the identification, understanding and adapting of certain best practices and implementing them to enhance performance. Firms are moving towards next practices as best practices make firms look more and more homogeneous.
SOME BEST PRACTICES
Dell: Customized configuration of computers. Caterpillar: 48 hours delivery anywhere in the world. Citi Bank : Priority banking services. Maruti: Certified “true value” pre-owned cars. Microsoft: ESOP to employees. Infosys: Customized work-stations. TCS: Referencing potential new recruits. ITC: Shareholders factory visit. AmEx: Outsourcing data warehousing mining. MARG: Set-top box to study viewing patterns. Honda: CEO’s visit to dealers.
TYPES OF BENCHMARKING
Functional – Used by companies to improve a particular management activity. Eg. Motorola learnt delivery scheduling from Domino’s. Process – Improving specific key processes and operations from experiences in similar businesses. Eg. Ford adopting assembly lay-out plan of Toyota. Competitive – It involves assessing the sources of competitive advantage and imitating them. Eg. Samsung leveraging miniaturization skills of Sony. Strategic – It involves assessing business models and replicating them in a different market. Eg. Reliance replicating AT&T business model.
HOW TO BENCHMARK?
Phase 1: Planning – What to benchmark? Whom to benchmark? – Identify key performance indicators & Data source. Phase 2: Analysis – Assessment of performance gaps. – Predict future performance levels. Phase 3: Integration – Communicate findings and gain acceptance. – Establish functional goals and its implementation. Phase 4: Action – Implement and monitor progress. – Measure results against stakeholder wants and needs. – Recalibrate or outperform benchmarks.
WHOM TO BENCHMARK?
Selecting the benchmarking partner is critical to solving the problem. Firms should generally avoid selecting the industry leader, because it may not always adopt the best practices for every process or activity. Benchmarking partners may also be from different industries. Types – – Internal – It involves benchmarking against its own branches, divisions, SBU’s. Proximity to data and cooperation is taken care of automatically. – External – It involves benchmarking against firms that succeeded on account of their best practices. It may also involve benchmarking against world-class firms. Friction may arise due to presence in competing industries.
BENCHMARKING - ADVANTAGES
Finding better ways of meeting stakeholder needs. Organizational learning comes from internal as well as external sources. Establishing goals based on formal assessment of external conditions. Defining effective measure of indicators, facilitate comparison, adopt from other organizations. Ensuring a continuous learning organization. Reducing competitive disadvantage. Organizational turnaround, especially effective in case of a wide strategic drift when differentiation strategies fail to work. 174
. Benchmarking is useful for bringing about operational efficiency. the more similar they end up looking.BENCHMARKING . It can at best complement it.e. It does not shifts the growth 175 trajectory of the industry as a whole.LIMITATIONS More and more companies benchmark. While strategy is all about differentiation and not looking alike. but it cannot be used as a strategic decision making tool. Strategy is more of creating best practices rather than copying them. clustering). Benchmarking merely reorients profits in the hands of few to profits in the hands in the hands of many (i.
Re-engineering attempts to radically change an organizational products or process by challenging the basic assumptions surrounding it. for achieving performance improvement (E. DOS to Windows). . The task demands a total change in organisational 176 culture and mindset. Windows 95 to 97). Re-engineering involves complete reconstruction and overhauling of job descriptions from the scratch (i. clean sheet).e.e.g. process mapping) and eliminating or improving them (E.RE-ENGINEERING Redesigning leads to identification of superfluous activities or product features (i.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.
e. It can be of the following types – Functional – It looks into the flow of operations (i.e. Business – It looks into markets. 178 . processes.LEVELS Reengineering can be successfully leveraged at all levels of an organization with varying degree of results. resource allocation and prepares the organization for the future through a reorientation of the entire strategic architecture. . products. Strategic – It looks into the process of strategic planning. structures. BPR).REENGINEERING . etc) and supports the organization for the present. customers and suppliers and protects the organization from the future (i.
While traditional manufacturing is a bottom-up approach. learning curve advantage. – Causal Ambiguity. Indonesia). reverse engineering is a top-bottom approach. – High cost and time acts as a deterrent. Cheaper versions of Intel chips and mother-boards manufactured in Taiwan.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. 179 . It generally acts as a threat to innovation. – Early entry advantages. protection can be had in the following ways – – Patenting. However. with an intention to copy it (Eg.
Actualization – Obtaining and dismantling of the product to assess how it functions. Usually in such cases segmentation and pricing is different from the original innovator. designing facilities. Introduction – Launching the product in the market. Inaccurate assessment at this stage may lead to a failure of the entire project. Implementation – Developing of a prototype. nano-technology). 180 . cost and effort necessary for the purpose of reverse engineering. machine tools to convert ideas into a marketable product (i.STAGES IN REVERSE ENGINEERING Awareness – Recognizing whether the product is found to be worth the time.e.
– Serviceability – Large no. – Aesthetics – Appeal in design. It has eight dimensions (Eg.WHAT IS QUALITY? It involves the totality of a product or service in meeting certain stated or implied needs. More and more companies are moving towards meeting implied rather than stated needs. Car) – – Performance – Mileage of 14 kms to a litre of fuel. 181 . Air bags. – Perception – Customer notions.Euro IV. of service stations. – Reliability – Consistency in mileage. – Features – Anti-lock braking systems. – Durability – 1980 manufactured cars still on road. – Conformance – Emission standards .
touching upon a limited aspect of a value chain. zero defects.TOTAL QUALITY MANAGEMENT Objective – Management of quality ensures conformance to certain pre-set standards. . which ensures good market standing. Management of quality was traditionally inspect it . It is deeply embedded as an aspect of 182 organisational life & culture.fix it in nature. TQM is a way of creating an organization culture committed to the continuous improvement of work processes – Deming. It had little impact on improving overall productivity.
fully involved in decision-making and fairly rewarded for results. not a final destination. Be customer centric – Generate the concept of internal customer (Ishikawa). Looking at quality as an endless journey. the first time – From reactively fixing error in products to proactively preventing errors from occurring at the first place (Juran). Empowerment – It takes place when employees are properly trained. 183 . provided with all relevant information and best possible tools. Kaizen – Make continuous improvement a way of life.TQM – KEY TENETS Do it right.
enabling the firm to concentrate on core activities essential to customer satisfaction.STRATEGIES Outsourcing – It is the process of self-contracting services and operations which are routine and mundane.TQM . Quality Circles – It a small group of shop-floor employees who meet periodically to take decisions regarding operational problems and crises. 6-Sigma). It is based on the principles of MBO (i. equal participation). of units meet preset standards (Eg.e. saving precious top management time. 184 . 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.
. it’s bad execution. strategy implementation has never been more important. – In the majority of failures – we estimate 70% – the real problem isn’t (bad strategy) .. – Efficiency and effectiveness is passé...BALANCED SCORE CARD Some interesting comments .. – Less than 10% of strategies effectively formulated are effectively executed....... Source: Fortune Magazine Why CEO’s fail? 185 ..
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. These measures worked well when organizational systems were simple and unidirectional and more importantly the environment was static. Most managers tend to rely on traditional measures of performance having its origin in finance as they are well tried and tested. rather than effects.BSC . 186 . Organizations need to move from financial to strategic performance. Focus more on causes.CONCEPTUALISATION A company’s performance depends on how it measures performance.
The most critical element of a BSC is to measure these four dimensions. 187 . because they have too many.BSC – KAPLAN & NORTON (1992) A BSC helps a manager to track and communicate the different elements of company’s strategy. It has four dimensions – – How do customers see us? – What must we excel at? – Can we continue to improve and create value? – How do we look to shareholders? Firms more often have problems. and distinguish strategic problems from operational ones.
of visits or calls made % of NPA’s 188 .e. ageing schedule) % of key customer transactions Ranking of key customer accounts No.CUSTOMER PERSPECTIVE GOALS Products Supply Preference Relationship MEASURES Relative market share (%) % of sales from new Vs proprietary products Timely deliveries and service Customer credit analysis (i.
BUSINESS PERSPECTIVE GOALS Skills Excellence Exposure Introduction MEASURES New capabilities and competencies Implementation & gestation period Bank and supplier credit limits & PLR Unit Costs / Conversion Ratio / Defect Ratio No. of new product launches Vs competition Product pricing Vs competition 189 . of times covered in media No.
of product innovations 190 . of new patents registered Time to develop next generation products Average and spread in operating cycle % of products that equal 2/3 sales No.LEARNING PERSPECTIVE GOALS Technology Manufacturing Focus Timing MEASURES No.
Return on Investment Market Capitalization / PE ratio 191 .FINANCIAL PERSPECTIVE GOALS Survival Success Prosper Divestment MEASURES Cash flows Growth in Sales and Profits EPS.
STRATEGY MAPPING 192 .
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 .
ADVANTAGES Most often top managers face information overload.e.BSC . As a result. Shift from control to strategy (i. Seek excellence.e. they don’t know . doing right things instead of doing things right). 194 performance will automatically follow.what they don’t know. The BSC brings together the different elements of a company’s strategy at a glance. It helps translating strategy into practice (i. . sharing of vision). Modern managers should be poised to ask the right questions. Focus on cause not effects.
EFFICIENCY Vs EFFECTIVENESS Ineffective Effective Inefficient Goes out of Business quickly Survives Efficient Dies Slowly Thrives 195 .
Michael E. not only thrives. . but also sustains it. Porter 196 .EFFECTIVENESS + STRATEGY A company which is effective as well as strategic.
CORPORATE RESTRUCTURING 197 .
... from survival of the fittest . to survival of the most adaptable. Strategic variety brings paradigm shift... Restructuring involves consciously driving significant changes in the way an organizations thinks and looks (Eg.. As Peter Drucker pointed out.” 198 .CORPORATE RESTRUCTURING The only thing constant in today's business environment is change. firms use restructuring strategies. “every organization must be prepared to abandon everything it does. Strategic variety may be caused by changes in the as external well as internal environment. Tata Group). Radical change brings about strategic variety. To adapt to the changing environment.
and dividing the core businesses into SBU’s (i. downscoping). they should strive to provide unimaginable value ahead of its time (Eg. Fax. Walkman.e. etc). downsizing or rightsizing). Internal customers should also not be neglected.e. Core Business – Company’s should introspect – What business are we in? Business evolved out of opportunism or myopia should be divested. Company’s should go beyond just asking what he expects. . Structural Changes – Conventional hierarchical structures should be disbanded in favour of more 199 flexible ones (i. ATM.RESTRUCTURING – BASIC TENETS Customer Focus – Restructuring ideally begins and ends with the customer. Instead.
.. Kumar Birla today is more dependent on professionals.) The Aditya Birla group typically relied on the “marwari” community for key management positions . started focusing on their capabilities..RESTRUCTURING – BASIC TENETS Cultural Changes – A culture represents the values and beliefs of the people about the organization. During the times of JRD... the Tatas were considered a benevolent and charitable organization. Ratan Tata now drives the point the group means business..) Reliance dismantled their industrial embassies . It is created and institutionalized by the top management. Restructuring also requires cultural reorientation..... . 200 ...
MOVING CLOSER TO THE CUSTOMER As companies evolve.” 201 . Honda’s ad says. “ … one reason our customers are satisfied is that we aren’t. Getting feedback & addressing customer complaints. Restructuring provides a platform to close this gap. Carry out PR campaigns. Communicating to the media about organization efforts to deliver quality products. they tend to move away from the customer. Publicizing welfare projects to demonstrate CSR. Organizing customer and supplier meets. Use the reach of networking technologies.
horizontal. Tata – Corus) or hostile (Eg. It can have two forms. It may include brands as well. where the difference in valuation is settled off through cash or equity (Eg. 202 . Asset Swaps – It entails divesting and acquisition simultaneously by two companies. Mittal – Arcelor) and can take various forms. it may be smooth (Eg. including its intangibles – Mergers – It may be vertical. Glaxo – Heinz). spin-off and equity carve. or conglo-merate. Further spin-off can be classified as split-off and split-up. Hive Off – It involves siphoning of assets under control. Further.ASSET RESTRUCTURING Asset Restructuring – The asset composition of a firm undergoes a major change.
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. 203 . Most of these practices are not in consonance with Indian laws. the entire parent company loses its identity after being split into a number of subsidiaries. Reliance Ent). in which the equity is allotted amongst the existing shareholders on a pro-rata basis (Eg. – Split-Up – In a split-up. Tata Industries selling 20% stake to Jardine Matheson). – Split-Off – In a split-off. Equity Carve – It involves selling a minority stake to a third party while retaining control (Eg.
Selling out in phases is called disinvestment (IPCL). Generic motives include – – Raise working capital. repay long-term debts.DIVESTITURE It involves the sale of a brand or a division of a company to a third party. In 2005. In 1995. for a specified market or in general with full management control. Parle sold its Thums Up brand to Coke for $40 million apprehending fierce competition. L&T sold its cements division to Aditya Birla group. 204 . strategic misfit. – Poor performance. but retained its engineering division. A complete sell-out is known as divestment (TOMCO).
Wipro). It provides greater leverage as well as management control.The internal & external liability composition undergoes a major change – LBO – Acquiring control over a substantially larger company through borrowed funds (Eg.CAPITAL RESTRUCTURING Capital Restructuring . Conversion – Replacing debt with equity or vice-versa or costlier with cheaper debt or cross currency debt. involving 608 pence per share). Share Buyback – It is a process of cancellation of shares out of free reserves to the extent of 25% of paid-up capital (Eg.3 billion. 205 . Tatas take-over of Corus for US $11.
Rs. 1860 cr . 230 cr Diversifications Tata Motors – Rs. 42 cr Voltas . 150 cr VSNL – Rs. 950 cr Merind . 250 cr Tata Tetley – Rs. 99 cr Tata Power – Rs. 1700 cr Trent – Rs. 1890 cr CMC – Rs. 120 cr Tata AIG – Rs. 256 cr ACC – Rs.Rs.BUSINESS RESTRUCTURING – TATAS Divestments Lakme – Rs. 1439 cr 206 Tata Timken – Rs 120 cr Tata Telecom – Rs. 1170 cr Goodlass Nerolac – Rs.
keeping the composition of business intact (Jet Airways). Turnaround is the primary motive. Rightsizing – It is phasing of excess and redundant employees resulted out of faulty internal planning (SAIL). of a firm’s employees and sometimes in the no. of operating units. Downscoping – It involves reducing the business and/or geographical scope of a firm (Aditya Birla group). 207 . It can be carried out in the following ways – Downsizing – It is a systematic one-time reduction in the no.ORGANIZATIONAL RESTRUCTURING Organizational structure and systems calls for a change when strategic variety is apparent. usually as a result external turbulence. Survival is the primary motive.
as strategies are based on such beliefs and biases.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. The dominant logic represents the perceptions and biases (i. inertia). The longer the period. thumb rules) of the top management. 208 .e. Strategy change is unviable without a preceding change in its dominant logics. the more difficult it becomes to uproot the paradigm (i. Dominant logic becomes deep-rooted in organizational contexts depending on the period it is in place (tenure of the CEO).
209 . Successful transformation requires – incorporating employees fully into the process – leading from a different place so as to maintain employee involvement – instill mental disciplines that will enable employees to behave differently. Companies achieve real agility only when people at every level rise above the ordinary to face the challenges – revitalization or transformation. the factor that stifled change & performance was – culture. In most organizations.e.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).
Manage from the future. process ownership. Harness setbacks.SUCCESSFUL TRANSFORMATION Build an intricate understanding of the business model at all levels of the organization. Understand and deliver the quid pro quo. 210 . Encourage uncompromising straight talk. Questioning every basic action of the organization. Create relentless discomfort with the status quo. never take no for an answer. The best way is to alter the institutional point of view. it is not about winning but about learning. Promote inventive accountability.
FORCE-FIELD ANALYSIS A force-field analysis provides an initial overview of change problems that needs to tackled. Aspects of current culture which needs to be overcome. Identify and implement facilitators of cultural change. Culture and style of management are two main impediments in force-field analysis. It involves diagnosing a change situation – systems & structures. 211 . also known as cultural-web. that can be both enablers and blockages to change and restructuring. It involves identifying – Aspects of current culture which needs to be reinforced. by identifying forces for and against change.
RESTRUCTURING .Term Reduced labour costs Reduced debt costs Emphasis on strategic control Business High debt costs Higher risk 212 Long .Term Loss of human capital Lower performance Higher performance Capital .OUTCOMES Alternatives Organizational Short .
reverse engineering and regenerating. hence go in for downsizing. While the first strategy produces results instantaneously. focuses on reengineering. down-scoping or asset stripping. 213 . the second one is a more viable strategy and sustainable option in the long run. Numerator – It assumes that turnover is not a barrier or constraint.NUMERATOR & DENOMINATOR MGT Most firms across emerging markets undergo strategic discontinuity and as a result are forced to restructure their businesses. In order to put back the company on the right track they are resort to – Denominator – It assumes that turnover cannot be increased.
TURNAROUND MANAGEMENT 214 .
... January 1997). – Only seven of the first fifty Indian business groups in 1947 were even in business by the turn of this century. still exist as on 2005. Source: Why do firms atrophy? (Business Today.. . 215 (Govindarajan and Trimble.WHY TURN AROUND MANAGEMENT? Some interesting insights .. – Less than 10% of the Fortune 500 companies as first published in 1955. and that the thirty-two of the country’s largest business groups in 1969 are no longer among the top fifty today..
Both content (what) and process (how) are equally important for a successful turnaround. As a sequence of events describing how things change and why they change (i. and achieves sustainable performance recovery.TURN AROUND MANAGEMENT A turnaround is said to occur when a firm perseveres through an existence threatening performance decline. While content focuses on endogenous and exogenous variables. skills. A category of underlying principles and concepts. 216 . ends the threat with a combination of strategies. and capabilities. Stage Theory). process focuses on – A logic to explain a causal relationship between intervening variables.e. systems.
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. Uncompetitive products or services. Low employee morale leading to high employee attrition at all levels. Some indicators Continuous cash flow crises as a result of dwindling market-share and profits. suppliers and bankers. 217 . Substantial shifts in consumer preferences. Low stakeholder confidence. especially in key positions. Rising input costs.
focus on power brands. which most top managers fail to appreciate. prune work-force. be more customer centric. “all is not well”. consider extension. Common approaches adopted Change in key positions. Recalibrate prices. Hence. Product redesigning or reengineering.TURNAROUND ILLUSION The first step to a successful turnaround is the basic acceptance of the fact that …. Emphasis on advertising and market penetration. based on elasticity. Revamp product portfolio. they adopt surface level measures (disprin popping) which most often fail. liquidating dead assets. 218 .. Extending work hours.
TURNAROUND STAGE THEORY Stage 1 Decline Stage 2 Stage 3 Stage 4 Outcome Response Transition Performance Equilibrium Line Success Failure Indeterminate Nadir Time 219 .
220 . primarily dwindling resources and capabilities are responsible for decline. Identification of the stimulus leads to the arrest of the downfall. It has its origin in “environment led fit” that subscribes to the view that a firm has little control over external factors. It involves the identification of the theoretical perspectives that explains performance decline – K-Extinction – It suggests that macro economic and industry wide factors are responsible for decline. R-Extinction – It suggests that organization factors.DECLINE Decline is the first stage in the turnaround process. It has its origin in “resource led stretch” and subscribes to the view that a firm has substantial power to override the context.
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 strategic. If the underlying cause is internal efficiency. new market initiatives. asset reduction. 221 . The response must match the cause of the decline. If the decline stems from structural shifts. diversification.RESPONSE INITIATION Turnaround responses are typically categorized as operating or strategic. Operating responses typically focuses on the way the firm conducts business and involves tactics geared towards – cost cutting and process redesigning (BPR). the response should be operational.
222 . Similarly new market initiatives is feasible only for multi-product firms. Contour – It is easier to reverse decline in the earlier stages through operational measures. Scope – A diversified conglomerate may acquire a distressed business to turn it around and gain valuable synergies.RESPONSE DICHOTOMY The response initiation is somewhat dichotomous and cannot be universally applicable. when decline deepens shifts in strategic position becomes essential. Untangling this question brings into focus three events – Domain – Many of the strategic cures have limited applicability for an affiliated firm. which may be unavailable to a focused firm.
Effective levers of transition. substantial amount of time usually passes before results begin to show (i. However. confidence building measures. lead – lag). However. role model. consensus).e. many a times early signs of recovery fades out. transparency. participative management (i. Sustenance is the key factor in this stage.7 years with a range of (4-16) years. Support from all the stake holders through resource commitment. Empirical studies show that average time is 7. The top management has a key role to play through empowerment.e. 223 .TRANSITION Transition usually reflects the first signs of recovery.
Supplier and banker confidence. Revival of key customers and new product launches. Instead of focusing on financial parameters alone. it should adopt a holistic approach. Failure is an indication that initial momentum was not sustainable characterized by irreversibility. Commanding a premium in the market. Regaining lost market share and distributor confidence. Share price indications and media coverage.OUTCOME Outcome is said to be successful when a firm breaches the equilibrium performance level. 224 . Cut off points must be unequivocal.
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. technology. 226 . supply-chain partnership. the commitment and the involvement between the firms increases manifold. It can assume any of the following forms – franchising. In the cooperative strategy continuum as firms move up the value order. Any cooperative strategy maybe between firms within the same country or cross border as well. or joint venture. licensing. and globalization .COOPERATIVE STRATEGIES Cooperative strategies are a logical and timely response to changes in business dynamics. consortia. strategic alliance.
227 . Titan Inds.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. owners of the brand Tanishq allows its franchisees to sell its jewellery products. It is an effective strategy to penetrate markets in a shortest possible time at a minimum cost. Branding is critical to franchising. Switz Foods. owners of the brand Monginis allows its franchisees to sell its confectionary products.
Become a systems integrator (CKD).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. 228 . refine processes and adopt necessary technologies (SKD). Develop a product through its crude stage. as in Tata Indica. Different levels of licensing Manufacturing without embracing any technology (CBU). HM manufacturing GM range of cars in India with a buy-back arrangement is a perfect example of CBU.
229 . It can be of the following types – Multipartner – Intends to share an underlying technology or asset.CONSORTIA Consortia – They are defined as large inter-locking relationships & cross holdings between businesses in a similar industry. Hyundai). Tata. Cross Holdings – A maze of equity holdings through centralised control to ensure earnings stability & threshold resources for critical mass (Eg. leverage upon size to preempt competition by escalating entry barriers (Eg. Coke – Pepsi). Airbus – Boeing). Collusion – Few firms in a matured industry collude to reduce industry output below the equilibrium level. enabling them to increase prices (Eg.
Tata Motors – IDEA). Companies in different industries with different but complimentary skills. otherwise it 230 becomes routine outsourcing. link their capabilities to create value for end users. It usually provides a platform to sort out differences between conceptualization and implementation to suit local market needs.SUPPLY CHAIN PARTNERSHIP It is a pro-active & collaborative arrangement between supplier and customer aimed at achieving better control over the value chain (Eg. . Continuous sharing of knowledge is critical to the success of a supply chain partnership.
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. to gain knowledge and to obtain access to new markets (Eg. Generic motives involved are . enhance credibility. Partner selection is one of the critical success factors. Despite their popularity (50-60)% of the alliances fail to accomplish their stated objectives. Reliance – Du Pont).learning organization. design next generation products. 231 . Firm’s should undertake a long courtship with potential partners. Tata Motors – Fiat. enter newer markets.
Complementary Equals – Two firms mutually promoting each others complimentary products (Eg. Bajaj – Castrol). Coke – Pepsi).STRATEGIC ALLIANCE .TYPES Collusion – Tacit top management understanding to neutralize price wars (Eg. Bootstrap – An alliance between a weak and a strong company with an intention to acquire it. Backward – An alliance (quasi or tapered) with a supplier of critical components seeking commitment (Eg. Maruti). Whirlpool – Tide. Alliances of the Weak – An alliance is entered into to preempt competition (Eg. 232 . Airbus – Boeing).
233 . Too much stress on financials & structure be avoided. Firms from developed markets seek access to markets and firms from emerging markets seeking access to technology.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. Cultural orientation has been found to have a profound effect on top management’s strategic orientation (Eg. – Japan Vs US). Differences in level of economic development can produce differences in alliances motives.
Managerial capabilities. Experience related to previous alliances. Intangible Assets – Move beyond the financials of the firm. including ability to provide quality products and services. Willingness to share knowledge and skills.PARTNER CHARACTERISTICS Complimentarity of Capabilities – The degree to which partners resources can be used in conjunction. 234 . Partner’s ability to acquire fresh skills. Dominant Logic’s – Similarity in beliefs & biases. Unique Resources – Abilities or skills which cannot be easily duplicated.
Setting up the housekeeping. 235 .MANAGING ALLIANCES Alliances are more than just a deal. instead of focusing controlling the relationship. Selection & Courtship – It involves self analyzing. operational & cultural integration. Learning to collaborate – strategic. understanding the chemistry. Getting Engaged – It should incorporate a specific joint activity. vows to include commitment to expand the relationship. the value chain. degree of compatibility. differences not anticipated earlier. partners should nurture it. Changing within. incorporating clear signs of continuing independence for all partners.
whilst the partners continue to operate independently.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. It lasts till the vision is reached. Conceptually. a joint venture is a selection among modes by which two or more firms can transact. . There are substantial linkages in the value-chain. synergy) rather than mere exchange (i. It aims at creating new value (i. separation is very 236 bitter.e. combining parts).e.
Organizational Learning – It is a means through which a firm learns or seeks to retain their capabilities. It may also be linked to deterring entry or eroding competitors position.JOINT VENTURE – GENERIC MOTIVES Transaction Cost – The situational characteristics best suited for a JV are high performance uncertainty. though more profitable alternative to other choices. in addition to a high degree of asset specificity. The market fails as sellers are unwilling to reveal their technology and buyers are unwilling to purchase in the absence of inspection. Strategic Behaviour – Firms may override transaction costs. 237 .
– Eg. Define future industry standards. – Eg. Daimler – Chrysler (Premium Cars) 238 . – Eg. Renault – Nissan (Minivans – Cars). Eli Lily – Ranbaxy. Sharing of resources. Learning new technologies. Yamaha – Escorts.OTHER MOTIVES Entry into newer markets. Maruti – Suzuki. – Eg. Endorsement from government authorities. – Eg. Essar – Hutch (Vodafone). TVS – Suzuki (4-Stroke Engines) Fill gaps in existing product lines. – Eg.
Risk of over dependence. Tata – Aditya Birla in Idea Cellular 239 . LML – Piaggio Differences in size and resource base. – Maruti – Suzuki. Century .Enka. PAL – Fiat If the cost of continuing exceeds the exit costs? – Eg.e. technology) drain.RISKS INVOLVED Incompatibility – Differences in cultural background. – Godrej – Procter & Gamble. – Eg. Risk of brain (i. Modi – Telstra What after exit (parenting disadvantage)? – Eg. – Eg.
Focus – Avoid strategic myopia. Partner – Avoid duplication of skills and capabilities. respect. Equality – Lack of dominance. Costs – Other modes of transaction becomes cheaper. time sharing. Objectives – Shared vision. Agreement – Clarity on operational control. Incompatibility – Performance expectations. Inertia – Differences in age and evolution patterns. Culture – Reconcile gaps.PRE-REQUISITES FOR SUCCESS Commitment – Mutual trust. 240 . Flexibility – Sufficient space to breathe and adjust.
MERGERS & ACQUISITION 241 .
Mittal Arcelor). Ranbaxy . however.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. Most countries have stringent laws that prevents hostile takeovers (Eg. reverses are also taking place through LBO) with a view to acquire conglomerate power and induce synergy (Eg. SEBI Takeover Code. 2002). The larger objective is to leverage on size. An acquisition is the purchase of a firm by a firm (of larger size. Brooke Bond – Lipton). An acquisition is said be smooth if it is with the consent of the management (Eg. HLL – Tomco). 242 .
SEBI TAKEOVER CODE. creeping acquisition). 2002 Promoter – A person who has a clear control of atleast 51% of the voting rights of the company and confidence of all the major stakeholders.e. . 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. Control – A special resolution of 75% of the share 243 holders approving the change of guard. Preferential – A preferential allottee ending up acquiring 5% stake also comes under its purview.
whichever is higher as an exit route (Eg. 2002 Pricing – Acquirers will have to offer minority shareholders (at least 20%) the past 26 weeks or past 2 weeks average price. 244 . and/or does not enjoy the confidence of the different stake holders.SEBI TAKEOVER CODE. the SEBI can intervene and block share transfers if: the acquirer has ulterior motives (i. Grasim – L&T Cement. credentials or track record is at stake. Gujarat Ambuja – ACC). SEBI – In case of a hostile take over.e. asset stripping). 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.
Godrej.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. usually opportunistic (Eg. Reliance). 245 . Vertical – It involves complimentarily (partially related) in terms of supply of inputs or marketing activities (Eg. ITC).Kelvinator). 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. Electrolux . Horizontal – It involves integration of two highly related businesses (Eg.
Acquiring assets or capabilities (Eg. quick access). Avoiding risk of new product development. Reduced gestation (i. Economies of size.MERGERS & ACQUISITION . ITC Bhadrachalam). Mittal – Arcelor). ICICI –ITC Classic). Overcoming entry barriers (Eg. Asset Stripping – Shaw Wallace). Tax benefits (Eg. Access to newer segments (Eg. Ranbaxy – Crosslands). Reduction in risk.e.MOTIVES Increased market / conglomerate power. scale and scope. Tata Steel – Corus). Global image (Eg. 246 . Ulterior motives – (Eg. Coinsurance effect – Higher debt raising capability.
Overvaluation of buying firms (Eg.MERGERS & ACQUISITIONS PITFALLS Cultural differences (Eg. their initial offer was around 420 pence/share. Managing size. neglecting core business. 247 . When Tata Steel started negotiations with Corus. Tata – Corus). Top management overtly focused on due diligence exercise and negotiations. Merging of organisational structures. Overvaluation is often as a result of an ego drive and substantially affects future returns. while the ultimate acquisition was made at 607 pence/share). Inability to achieve synergy. Managing over-diversification.
Growth – This stage may witness parallel merger of two firms of similar size. 248 . Tata Steel – Corus).MERGER TYPE & PLC Introduction – A larger firm may acquire a newly formed entity with an objective to preempt new competition or acquire its license (Eg. Kingfisher – Air Deccan). with an objective to reinforce its growth trajectory or to take on the might of a comparatively larger player (Eg. Decline – Horizontal mergers are undertaken to ensure survival. Brooke Bond – Lipton). 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.
Immediate attempts to super impose structure and culture may cause bottle necks.INTERNATIONAL M&A . active top management intervention in phases. Left alone syndrome. Blanket promotions across entities and confidence building exercises needs to be practiced. An acquisition just for the sake of it or reputation yields very little value in the long term. 249 . A concern of respect and trust for the business of the acquired company. A common shared vision.FRAMEWORK Positive contribution to the acquired company. Strong differences may stifle plans and its execution.
.INTEGRATION . Determine business strategy. Decide upon management control systems.BLUEPRINT Take the media into confidence. They can carry the message to the various stake holders. Shift attention from business portfolio to people and processes. promptly. Redefine responsibilities and authority. Integrating work processes. It will enable focus on customers and key people. Decide on the new hierarchy. 250 Do not ignore the “people factor”.
operational & financial). The process takes (6-12) months. – Unstated reasons – Personal self interest and hubris. – Synergy – Potential value gain from combining operations (i. over valuation can become a curse. – Market for corporate control.e. Financial motives – Undervaluation relative to true value. While under valuation may be a significant opportunity. 251 . Valuation decisions are arrived through a due diligence process when the prospective acquirer gets access to the books of accounts of acquiring company.M&A .VALUATION The process of valuation is central to M&A.
VALUING OPERATIONAL SYNERGY Synergy – It refers to the potential value gain where the whole is greater than the sum of the parts. or from increased market power which increases sales and margins. – Vertical Synergy – Gains come from controlling the supplychain and savings in transaction costs. 252 . Sources of operational synergy – Horizontal Synergy – Gains come from economies of scale which reduces costs. – Conglomerate Synergy – Gains come when one firm complements the resources or capabilities of another (Eg. when the “fit” between the two entities is very poor. Innovative product – Good distribution network). Synergy can be negative as well.
and without paying take-over premiums. 253 .VALUING FINANCIAL SYNERGY Diversification – Reduce variability in earnings by diversifying into unrelated industries. Synergy comes from projects which would not have been undertaken if the two firms stayed apart (Eg. Hotmail). Cash Slack – It reduces asymmetry between cash starved firms with deserving projects and cash cows with no investment opportunities. but availed after being merged with a profitable firm (Eg. shareholders can accomplish the same at a much lesser cost. However. Tax Benefits – Tax benefits may accrue from tax entitlements and depreciation benefits unutilized by a loss making firm. ITC – Bhadrachalam Paper).
This will induce higher debt capacity. The likelihood of default decreases when two firms' assets and liabilities are combined through a M&A compared to the likelihood of default in the individual companies.VALUING FINANCIAL SYNERGY Co-Insurance Effect – If the cash flows of the two firms are less than perfectly correlated. higher leverage. – Coupon rates may also be negotiated at lower rates. 254 . the cash flow the merged firm will be less variable than the individual firms. – Default risk comes down and credit rating improves. It relates to the concept of diversification. hence better performance. as risky debt is spread across the new firm's operations.
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. The value of control can be substantial for firms that are operating well below optimal value. Assessment of perceived quality is critical. since a restructuring can lead to significant increase in value.VALUING CORPORATE CONTROL Premium of M&A are often justified to control the management of the firm. The value of wrestling control is inversely proportional to the perceived quality of that management. 255 .
sometimes in combination with the assets of the acquiring company.LEVERAGE BUYOUT (LBO) The basic difference between a take-over and a LBO is the high inherent leverage (i. debt component) at the time of buyout and rapid changes in capital structure over time. LBO facilitates a relatively smaller firm to bid for a comparatively larger firm in the bid for management control.e. 256 . The assets of the acquired company are used as collateral for the borrowed capital. Confidence of investment bankers and the international financial community is essential. It is a very costly and risky proposition.
However. on-going valuation. 257 . The increased benefit showed in the following way – reduced costs and increased revenue. off-late many publicly traded firms have gone private keeping in mind the following – – The fear of LBO. the advantages of going public includes . A research study showed that 30% of the publicly listed firms reported above average returns after going private. – Separation of ownership from management. – Increased information needs.TO GO PUBLIC OR NOT? However. – The need to satisfy analysts and shareholders. liquidity.access to financial markets.
co-insurance effect). – Cash trapped company unable to utilize opportunities. – Debts repaid off from increased value after successful restructuring and wresting management control.RATIONALE FOR HIGH LEVERAGE The high leverage in a LBO can be justified by – – If the target firm has too little debt (relative to its optimal capital structure). – Cost of debt coming down (i. 258 . – Managers cannot be trusted to invest free cash flows wisely. – It is a temporary phenomenon.e. which disappears once assets are liquidated and significant portion of debt is paid off.
Any discounting has to reflect these changing cost of capital. 259 . As the firm liquidates / pledges assets and pays off debt. Therefore. Lack of sufficient cash flows to repay costly debts resulting in a possible debt trap. initial rise in leverage is anticipated.EFFECT OF HIGH LEVERAGE Increases the riskiness of dividend flows to shareholders by increasing the interest cost to debt holders. leverage is expected to decrease over time. – Increase equity valuation. A LBO has to pass two tests to be viable – – Restructuring to pay-off increased debt.
which has discontinued its operations (i. – Tax shelter. – Facilitates better valuation and forthcoming offerings. Objectives – – Traditional route of filing prospectus and undergoing an IPO is costly. allowing the private company to bypass the usually lengthy and complex process of going public. 260 .REVERSE MERGER Reverse Merger – The acquisition of a public company. or costly. – Automatic listing in major exchanges. – Prevents dilution of equity.e. small in size but having a promising business. shell company) by a private company. time-barred.
However. Excess returns also vary across time periods. Most target firms are taken over within (6090) days. – Merger announcements reported 20% excess returns. and 35% during bullish periods. – Takeover announcements reported 30% excess returns.EFFECT OF TAKE-OVER ANNOUNCEMENT The shareholders of target firms are the clear winners. Initial anomaly in stock prices usually normalizes over a period of time (6-12) months. During bearish periods excess returns were 19%. takeover failures have only initial negative effects on stock prices. 261 .
over time. in the event of take-over failure negative returns to the extent of 5% on bidder firm stock prices is reflected. – However. Desai. 1983. as stock markets become more and more perfect such anomalies would reduce Source: Jensen and Ruback. and Netter. Brickley. and Kim. 1988 . – However.EFFECT OF TAKE-OVER ANNOUNCEMENT The effect of take-over announcement on bidder firm’s stock prices are not clear cut. 1983. Bradley. 262 Jarrel. – Most studies reported insignificant excess returns around take-over offers or merger announcements.
so that nothing is left for the raider to strip off.DEFENSIVE STRATEGIES Golden Parachute – An employment contract that compensates top managers for loss of jobs as a result of change in management control. Asset Stripping – The targeted company hives off its key assets to another subsidiary. Rights). Poison Pill – An offer to existing shareholders to buy shares at a substantial discount to increase their voting rights (Eg. Poison Put – Premature retirement of bonds at attractive rates to pour surplus cash and make target investment unattractive. 263 .
Green Mail – The targeted company buys large blocks from holders either through premium or through pressure tactics (Eg. thus thwarting the raider company’s attention. Gray Knight – The target company takes the help of friendly company to buy the shares of the raiding company. East India Hotels – Reliance Industries – ITC). Pac Man – The target company makes a counter bid to take over the raider company. 264 .DEFENSIVE STRATEGIES White Knight – It is the placing of stocks to a cash rich investor and bargaining for protection in return. Shapoorji Pallonji). But often the White Knight turns a betrayer himself (Eg.
COMPETING FOR THE FUTURE 265 .
Honda overpowering Volkswagen. British Air overpowering Pan Am. were spending 99% of their precious time dealing with present.GETTING OFF THE TREADMILL Canon overpowering Xerox. Wal-Mart overpowering Sears. Honda overpowering GM. The reverse was true for the companies overpowering. Most companies were too preoccupied with the present than the future? 99% of the companies overpowered. What went wrong???? What were they doing with the present? What were they pre-occupied with? 266 . Hitachi overpowering Westinghouse. Nokia overpowering Motorola. Compaq overpowering IBM.
most often they ended up cutting corporate muscle as well and became anorexic. Not knowing when to stop. 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 . falling market share). CEO’s brutally pick up the knife and ruthlessly carve away layers of corporate flab (delayering.THE PAST OF COMPETITION Beyond Restructuring – When a competitiveness become inescapable problem (stagnant growth. downsizing). Thus efficiency was grievously hurt. declining margins. decluttering.
However. ensuring only survival of the present. but forging ahead in competition. On the contrary only 20% of Japanese managers believed that quality will be a source of competitive advantage of the future.THE PRESENT OF COMPETITION Beyond Reengineering – Numerator based managers (innovation) at least offers some hope.S. 268 . The future is not about catching up with competition. A poll in circa 2000 revealed that 80% of the U. incrementalism or nominal innovation has almost reached a plateau. top managers believed that quality will be a source of competitive advantage of the future. but not of the future.
demographics and lifestyles.THE FUTURE OF COMPETITION Regenerating – Leaner. not just the organization. It is based on deep insights into trends in technology. Create a potential gap. 269 . they are not enough to get a company to the future. It involves Dream about the company’s future. reinvent its industry. aspirations and resources. faster. not the other way. Empower from bottom to top. don’t predict. Companies need to fundamentally reconcieve itself. as important as these may be. Creating the future requires industry foresight. and regenerate its strategies (breaking its – managerial frames). Transform the industry. better.
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 .
by converging technologies complex. Change in at least one fundamental way the rules of engagement in an industry.e. It drives a hunger and a passion to transform. Create entirely new industries (i. Redraw the boundaries between industries. It is about deliberately creating a strategic misfit. 271 .ABOUT THE TRANSFORMATION The future does not belong to those who take the industry for granted. Therefore. Successful companies have a complete grip over the industry. hence do not fall sick in the first place. blue oceans). they do not need to restructure.
The middle management plays a strong moderating role. Most successful revolutions (Gandhi to Mandela) rose from the dispossessed. A revolution that is thrust upon from the top seldom sustains. 272 . Transformational leaders merely lead the way. Such a process is called institutionalization (from people centric to organisational centric).ABOUT THE EMPOWERMENT Bring about a revolution (a paradigm shift) in the organization. More importantly. the revolution must start at the bottom and spread in all directions of the organization.
Toshiba – LCD. 273 . It requires a lot of common sense and a little bit of out of the box thinking. What does it take to get to the future first? Understanding how competition for the future is different. Apple – iphone). A process for finding and gaining insight into tomorrows opportunities (Eg. without taking undue risk. An ability to energize the company.THE FUTURE OF STRATEGY A company must get to the future not only first but also for less. Companies need to strategize (think ahead of times). South West Airlines – LCC. Get to the future first. Apply the 40 – 30 – 20 principle.
is the ability to imagine in a different way what the future could be. Companies of the future will be not based so much on the strength of their resources. What distinguishes a leader from a laggard. each point in space represents a unique business opportunity. but hundreds. the farther it will be away from competition. We are in the midst of a 3600 vacuum. as on their aspirations. greatness from mediocrity.HOW DOES THE FUTURE LOOK LIKE? There is no rule which says that for every leader there will be a follower. The farther one can see in this endless space. 274 . As there is no one future.
THE EMERGING STRATEGY PARADIGM Not Only Reengineering Processes But Also Regenerating Strategy The Competitive Challenge Organizational Transformation Industry Transformation Competing for Market Share Competing for Opportunity Share Finding the Future Strategy as Learning Strategy as Positioning Strategy as Engineering Strategy as Unlearning Strategy as Dream Strategy as Architecture 275 .
THE EMERGING STRATEGY PARADIGM Not Only But Also Mobilising for the Future Strategic Fit Resource Allocation Strategic Misfit Resource Stretch & Leverage Getting to the Future First Existing Industry Structure Product Leadership Single Entity Product Hits & Timing Future Industry Structure Competency Leadership Dominant Coalitions / Co-option Market Learning & Preemption 276 .
Degree of Learning Unlearning Curve P2: Unlearning in previous period does not necessarily ensure learning in the current period. Learning Curve t1 t2 t3 Time t4 t5 277 .LEARNING TO FORGET P1: The degree of learning in current period is directly proportional to the degree of unlearning in the previous period.
Leverage – They are the gateways to future markets.CORE COMPETENCE A core competence relates to a bundle of skills (not an asset or a business) that revolves around activities or processes and critically underpins a firm’s competitive advantage. It is characterized by the following – Unique – It provides unimaginable customer value ahead of its times. It cannot be matched even by its closest competitors. It represents the collective learning's of an organization centering around diverse streams of technologies. 278 . Inimitable & Insubstitutable – A high degree causal ambiguity between these skills yield sustainable competitive advantage.
SKF – antifriction and precision. Nike – designing. Toyota – lean manufacturing. at the most three to four. it gets more refined and valuable through use. A core competency cannot be outsourced. leaders have one. Although a core competence may lose value over time. Wal-Mart – logistics.MORE ABOUT CORE COMPETENCE Sony – miniaturization. Coca Cola – brand. 279 . Honda – engines. Toshiba – flat screen displays. Most companies around the world do not possess one. Core competencies are the roots of the organization. it is deeply embedded in the heart of the organization. Intel – nano-electronics. Canon – imaging.
ROOTS OF COMPETITIVENESS End Products 1 2 3 4 5 6 7 8 9 10 Core Businesses Core Business 1 Core Business 2 Core Business 3 Core Business 4 Core Product 2 Core Products Core Competencies Core Product 1 Competence 1 Competence 2 Competence 3 Competence 4 280 .
RESOURCE STRETCH & LEVERAGE
Initial resource position is a very poor indicator of future performance. It leads to atrophy and stagnation. Successful companies consciously create a potential gap between aspirations and resources. Resource crunch is a common factor among firms that faces a wealthy rival, and outperforms them. Leveraging what a company already has, rather than allocating it is a more creative response to scarcity. – By concentrating existing resources. – By accumulating existing resources. – By complementing existing resources. – By conserving existing resources. – By recovering existing resources.
Concentrating – It involves effectively directing portfolio of resources on key strategic goals in which individual efforts converge over time. It is a balance between individual mediocrity and collective brilliance. It is achieved through – Converging – Redirecting multiple diverging (i.e. fragmented) short term goals into one long term goal. It is then resources can be stretched over time. Focusing – Making trade-offs and preventing dilution of resources at a particular point of time. Targeting – Focusing on the right innovations that are likely to have the biggest impact on customer value.
Accumulating – Using existing reservoir of resources to build new resources. Each and every individual is a rich & potential source of learning, discover better ways of doing things. It is achieved through Mining – Extracting learning experiences from existing body of each additional experience (i.e. success or failure). It is an attitude that can be acquired, but never learnt. It leads to a substantial jump in the experience curve. Borrowing – Utilizing resources outside the firm through licensing, alliances, joint ventures. A firms absorptive capacity is as important as its inventive capacity.
Complementing – Using resources of one type with another that aligns smoothly to create higher order value. In a way it produces an accelerating effect on each individual resource. It is achieved through – Blending – Interweaving discrete capabilities to create world class technologies (GM – Honda) through integration and imagination. Different functional skills can also be blended to create a world class end products (Yamaha – Keyboard). Balancing – An ability to exploit excellence in one area is never imperiled by mediocrity in another (GE acquiring the CT scanning rights from EMI because of its inadequate market reach).
Conserving – Sustaining competencies over time through frequent usage. Resources are never abandoned; they are always preserved for future use. Recycling – Increasing the velocity of use of a competencies over time. As a result core competencies can be leveraged across an array of products (Sony - Betamax). It includes brand extensions as well. Co-Opting – Enticing resources of potential competitors to exercise influence in an industry (Fujitsu – IBM). Shielding – It involves identifying competitors blind spots and then attacking without having the fear of retaliation.
Recovering - It is the process of reducing the elapsed time between investing in resources and the recovery of those resources in the form of revenues via the market. Speeding – Prior to the 1980’s Detroit’s majors took an average of 8 years to develop an entirely new model; the Japanese reduced it to less than 4.5 years, with major new variants in 2 years. This envisaged Japanese players in giving customers more opportunities to switch allegiance and loyalty (Toyota). Protecting – It uses competitors strength to one’s own advantage, by deflecting it, rather than absorbing it as practiced in Judo.
INTERNATIONAL BUSINESS ENVIRONMENT 287 .
strategies suited for the developed markets may not be appropriate for emerging markets. Therefore focused strategies based on core competence may not be suitable for emerging markets (Khanna & Palepu. Korea. China. 288 .EMERGING MARKETS Emerging markets (India. Chile) provide a different context (i.e. high levels of market imperfection). Therefore. 1997). institutional gaps. Diversified groups in operating in emerging markets therefore benefit from unrelated diversification. and high transaction costs. Emerging markets are characterised by infrastructural bottlenecks.
Experience Strategic Fit Diversity Palich. (2000) 289 . Concentric. Size & Scale. Synergy. Entropy). subsequently negatively related across developed markets. et al. Optimum level of diversification Performance Diversity is initially positively related with performance.DIVERSITY .PERFORMANCE (I) Diversity attempts to measure the degree and extent of diversification (Herfindahl.
DIVERSITY . Huge initial investment. brand building Risk diversification.PERFORMANCE (II) Diversity is initially negatively related with performance. conglomerate power Threshold level of diversification Performance Diversity (Khanna & Palepu. subsequently positively related across emerging markets. 2001) 290 .
Characteristics – It should have a spread of affiliates or subsidiaries. 291 . It should think globally. It should have a spread of interest groups / stake holders. It should have a spread of manufacturing facilities. It should have a spread of assets. HSBC). revenues and profits.INTERNATIONAL IDENTITY MNC’s consciously engage in FDI in different parts of the globe to forge resource diversity as a distinct competitive advantage. act locally (Eg.
Risk Profile – It reflects the risk attitude of the top management (Eg.It reflects the relative role of team building (Eg. low risk profile in developed markets and vice versa for emerging markets).It reflects the disparities in women in workforce (Eg. high feminity index in developed markets and vice versa for emerging markets).GLOBAL BUSINESS ENVIRONMENT Power Distance – It reflects the disparities in income and intellectual development (Eg. low group scale in developed markets and vice versa for emerging markets). Feminity Index . 292 . Group Scale . low power distance in developed markets and vice versa for emerging markets).
political stability. flexibility (Eg. low country risk in developed markets and vice versa for emerging markets). dress sense. code of conduct. way of life. FOREX reserves. judiciary) of doing business in a particular country (Eg. corruption. interest rates.GLOBAL BUSINESS ENVIRONMENT Cultural Adaptability – It reflects the adaptive ability to a changing environment . high cultural adaptability in developed markets and vice versa for emerging markets). attitude. currency. 293 . terrorism (9/11). inflation. Country Risk – It reflects the political and economic risk (Eg. customs. credit rating. time value.culture.
GLOBAL BUSINESS ENVIRONMENT Time Sensitiveness – Developed country managers regard time as precious. 294 . time-zones. Ethnocentrism – Developed country managers tend to regard their own culture as superior. Other factors – local celebrations. in most emerging markets use of an interpreter may be a standard protocol. High levels of ethnocentrism usually has a negative effect on business. in most emerging markets meetings are delayed and lasts unusually long. however. Language Barriers – Developed country managers expect foreign partners to communicate in their languages. and vice-versa.
It focused largely on TRIPS (patents. It also initiated provisions on anti-dumping. BRIC).GATT GATT was a bi-lateral treaty initiated between US and some member countries in 1947 to promote free trade. The 2001 (Doha Round) focused on power blocks (NAFTA. copyrights. It a multi-lateral treaty with 143 (as on 2002) member countries to reduce tariff and non-tariff (quota) barriers. The 1999 (Seattle Round) saw a lot of protest amidst bringing agriculture under the purview of TRIPS. ASEAN. It also highlighted the nexus between US & WTO. 295 . trademarks). In 1995 (Uruguay Round) GATT was renamed to WTO.
Sterling .e.EURO – SINGLE CURRENCY In 1999 twelve member countries in Europe joined hands to move over to a single currency (i.e. However.Pound). The Euro was significantly devalued against the Dollar till 2002. Euro). However with current recession in the US 2002 onwards. the Euro slowly started outperforming the Dollar. three countries joined in 2002 increasing it to fifteen members as of 2008. the Dollar still remains the most preferred currency globally. primarily the OPEC countries. The notable exception was Great Britain which still continues with its local currency (i. 296 .
a multiple currency is preferable where the business cycles of member nations are different. Rate Uncertainty – A single currency eliminates the risk of competitive devaluations. but it may have spill-over effects. Transparency – A single currency is transparent and competitive. it helps avoiding transaction costs associated with a multiple currency. 297 . However.SINGLE Vs MULTIPLE CURRENCY Transaction Costs – Though the initial cost of introduction of a single currency is very complicated and costly. Trade Block – It will strengthen the EU identity which would not have been possible otherwise.
e.e. 298 . the gain of one country is loss of another). – FDI (transfer of tangible resources) is slow but steady for the purpose of economic growth.FII Vs FDI INVESTMENT Classical economists believed that foreign investment (in any form) is basically a zero sum game (i. It is long term with high levels of commitment. Neo classical economists believe that foreign investment may in fact be a win-win game. hot money). – FII (transfer of intangible resources) is fast but may have strong repercussions (i. It is short-medium term with comparatively low levels of commitment.
technology (microchip). Pricing – It depends on the competitive structure (PLC – Kellogg's). lifestyle (petroleum 299 outlets – departmental stores). promotion (surrogate advertising). customer awareness (microwaves).culture (food habits). . usage (talk time). buying patterns (spread).INTERNATION MARKETING Product – The various attributes of a product may receive different degrees of emphasis depending on differences in . Distribution – It depends on the market characteristics (fragmented – concentrated). economic (middle class buying power).
debt is cheap in US. Cost Structure – Companies in India need to investment in fixed costs due to poor infra-structure 300 compared to developed markets.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. Accounting Norms – The accounting norms of one country (AS . Leverage – The leverage may vary across countries depending upon money and capital market conditions (Eg. equity is cheap in India).India) may be different from that another trading country (US – GAAP or IRS). .
Training – It is a pre-requisite for international business to reduce language. social security. technology (convergence. double taxation. however. and cultural barriers (language) vis-à-vis emerging markets. shortened life cycles). in most cases it is not desirable nor practiced. Recruitment – In local recruitment. labour laws. skills are more important that cultural fit and vice-versa. 301 .INTERNATIONAL HR An uniform HR policy is idealistic to enable parity in performance appraisal. Compensation – Differential pay packages exists because of differences in purchasing power.
Bosch spark plugs are used by car manufacturers worldwide). . reduce power costs) vis-à-vis infrastructural bottlenecks. Technology – The cost to be evaluated in terms of latest technology (Euro VI) vis-à-vis effective cost of appropriate technology (Euro II). Outsourcing – A company having a core competence may be the source of global outsourcing (Eg.INTERNATIONAL OPERATIONS Location Incentives – FDI in emerging markets should explore options for SEZ’s to explore benefits (tax holidays. SCM – Use of ERP to network the extended enterprise 302 across the globe.
CONTEMPORARY TOPICS 303 .
it has destructive effects as well. Innovation is the most preferred strategy today to maintain competitive advantage in the present turbulent business environment.INNOVATION An invention is the first occurrence of an idea for a new product or process. innovation is the first attempt to carry it out in practice. 304 . Innovation is all about staying ahead of competition. Innovations typically paves the way for more secured and improved lifestyle for consumers in general. While innovation typically adds value for organizations. but has inherent risks involved as well.
305 .TYPES OF INNOVATION A key challenge is maintaining a balance between process and product innovations. Tangible impact of product innovation on performance is significantly higher than process innovation. process innovation is necessary to sustain the competitive advantage of product innovation. Strategic innovation has the potential to change the rules of the game. Process innovation usually follows product innovation. However. process innovations are organizational driven. While product innovations are typically customer driven.
Processors (Pentium). Medical Surgery (Lasik). 306 . putting an idea into practice).e. Drug Development (Bio Chemicals).BUSINESS MODEL It is a simplified description and representation of a complex real world. Innovations are the back-bone of successful business models .e. about how an organization makes money (i. Disruptive business models brings in a new frame of reference (i. Data Storage (Pen Drives). Telecom (CDMA Technology). a paradigm shift). It leads to a shift in the price – performance envelope.
The cost structure resulting from the business model. The channels to reach out to the clients. The segment(s) of clients to be addressed. The revenue streams generated by the activities. 307 . The key partners involved in the activities. The key activities / processes necessary for execution. The key resources and capabilities required. The proposed relationships established with clients.NINE BUILDING BLOCKS Value proposition offered to the market.
BUSINESS MODEL FRAMEWORK 308 .
With the rapid erosion of certain industries (IT. The revenue model described here are the means to generate revenues. It is just one piece of the puzzle. 309 . It involves – Product Visualization – Product Prototype – Product Test – Capacity – Pricing – Distribution. innovative companies to carve out unique business models to fend off competition. Real Estate) companies need to untangle and understand the intricacies of their business model.REVENUE MODEL Positioning is just not sufficient. Investment Banking.
HOW TO MAKE INNOVATIVE CO’S Innovative company’s are a matter of culture and aspirations rather than tangible resources. Allow the management sufficient slack to be future oriented. Have a lean and a flat organization structure. A favourable intellectual property (IP) climate. Promote the culture of experimentation. 310 . Provide reasonable incentives (not necessarily monetary). Promote the grape-vine. Allow the workforce idiosyncrasies for their errors.
however that possibility is slowly atrophying. 311 311 . 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. The most preferred strategy of internal protection includes imbibing “causal ambiguity” in the production process to make reverse engineering difficult. companies are increasingly relying on internal protection to sustain innovation effects. 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. 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 .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.
shareholders can diversify their portfolio at a much lesser risk and cost. From the strategic point of view managers tend to diversify into unrelated businesses as it provides higher returns hence a more favourable appraisal. According to the agency theory top managers and shareholders interests are usually conflicting in nature and tend to pull in opposite directions.AGENCY THEORY The root of Corporate Governance goes back to the Agency Theory. This exposes the shareholders to additional risks and higher costs. 313 . also known as the principal-agent problem or agency dilemma. However. not present in portfolio diversifications.
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. 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. After the Enron downfall. SEBI Report – 2005. . various laws were enacted to ensure proper usage of these funds.
315 . Role and responsibilities of the board: It deals with issues about an appropriate mix of executive and nonexecutive directors. 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.
Disclosure and transparency: Disclosure of information should be timely and balanced to ensure that investors have clear access to data and facts. assessment and mitigation of risks and retirement by rotation over a fixed period of time. 316 316 . They should also implement systems to independently verify and safeguard the integrity of the company's financial reporting.GOVERNANCE PRINCIPLES Integrity and ethical behaviour: Organizations should develop a code of conduct for their top management that promotes ethical and responsible decision making. Independence of the entity's auditors: Identification..
fire and compensate top management. a person benefitting from a decision should abstain from it. discussed and resolved. they should provide no mechanism or scope for opportunistic behaviour. with its legal authority to hire. However. Balance of power: The simplest balance of power is very common. safeguards invested capital. Remuneration: Performance-based remuneration is designed to relate some proportion of salary to individual performance.GOVERNANCE STRATEGIES Monitoring by the board of directors: The board of directors. Regular board meetings allow potential problems to be identified. 317 .
GOVERNANCE & PERFORMANCE In its “Global Investor Opinion Survey” of over 200 institutional investors in 2002. from 10% for companies where the regulatory backdrop was least certain (those in Morocco. Egypt and Russia) to around 40% for Canadian & European companies. undertook formal evaluation of its directors. 318 . The size of the premium varied by market. who had no management ties. They defined a well-governed company as one that had mostly out-side directors. and was responsive to investors' requests for information on governance issues. McKinsey found that 80% of the respondents would pay a premium for wellgoverned companies.
319 . corporate philanthropy should be a part of every corporate mission. Therefore. 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. However. the short-term view of profit maximisation gave way to a more broader and mediumterm view wealth maximisation of the shareholders. today economic institutions are considered as a major drivers of improvement in quality of life in general and therefore needs to include multiple stakeholders. Over a period of time.
“an enterprises decisions and actions being taken for reasons at least partially beyond its immediate economic interests”. in fact a large part of it is significantly overlapping. Therefore. “a healthy business cannot exist in a sick and impoverished society”. the debate on CRS still continues whether firms should detract its focus from its business? 320 .CORPORATE SOCIAL RESPONSIBILITY As Peter Drucker rightly pointed out that. economic and social responsibilities cannot be mutually exclusive. CSR can be defined as. However. giving a very important message that one cannot exist without the other. Therefore.
people are becoming increasingly aware of their right to a decent and healthy life. MRTP).GROWING CONCERN FOR CSR Awareness due to education: With growing literacy. The role of media: The media and various consumer organizations have come up in protecting consumer rights and exposing mal-practices. Public image: Entrepreneurs are increasingly relying on public image as a source of competitive advantage and a higher financial discounting. 321 . Fear of government interference: Excessive quench for profits may lead to build up of adverse public opinion compelling the government to intervene (Eg.
and extended producer responsibility (Eg.CSR STRATEGIES Green Supply Chain Management: It includes environmentally preferable purchasing. Education. designing eco-friendly products. Cement . 322 . eco efficiency. Health & Hygiene – Attending the health hazards due to wastes and by-products to employees and society in proximity (Eg. Tata Steel – Life Line Express). Aditya Birla Research Centre – LBS). Exide – Product take back).Paper packaging. Refrigerators – CFC. Literacy & Training Programs – (Eg.
They represent an enormous opportunity for companies who learn how to serve them. In turn companies by serving these markets. they're helping millions of the world's poorest people to escape poverty. K. Strategic innovations leading to disruptive business models can show the way out.BOTTOM OF THE PYRAMID With the market across most developed markets including the US getting saturated. 323 . C. across the world's billions of poor people having immense untapped buying power. Prahalad notes that future markets exist collectively.
BLUE OCEAN STRATEGY 324 .
TWO WORLDS 325 .MARKETSPACE .
. and struggled for differentiation (cost or product). one companies gain is always at the 326 cost of another companies loss. where most industries are saturated. In today’s red oceans. They have fought for profits. competing head on results in nothing but a bloody red ocean of rivals fighting over a shrinking profit pool. Yet in today’s overcrowded industries. profitable growth. battled over market-share.WHAT IS RED OCEAN? Companies have long engaged in head-to-head competition in search of sustained.
rendering rivals obsolete and unleashing new demand. Blue Ocean’s have existed in the past. it will exist 327 in the future as well. It helps in creating powerful leaps in value for both the firm and its buyers. Such strategic moves are possible through the pursuit of product differentiation and low cost simultaneously. but by creating blue oceans of uncontested market space ripe for growth . It is only the frames of the .WHAT IS BLUE OCEAN? Tomorrow’s leading companies will succeed not by battling in red oceans.
RED OCEAN Vs BLUE OCEAN Compete in existing markets Compete in uncontested markets Beat the competition Exploit existing demand Make the competition irrelevant Create and capture demand Make the value-cost trade off Break the value-cost trade off Demand is the limiting factor Supply is the limiting factor 328 .
Demand across developed markets reaching a plateau. . Technological advances have substantially 329 improved industrial productivity. As trade barriers between nations & regions fall. Population shrinkage across a no. Niche markets & monopoly havens are continuing to disappear. information imperfections atrophy instantly. of European nations.BLUE OCEAN STRATEGY IMPERATIVES Prospects in most established market spaces – red oceans – are shrinking steadily.
Company & industry are the wrong units of 330 strategic analysis. the underlying technology was often already in existence.CONCEPTUAL UNDERPINNINGS Blue oceans have existed in the past and will exist in the future as well. Incumbents often create blue oceans within the ambit of their core business. . They are not necessarily about technology. History indicates that blue oceans exist in three basic industries – automobiles (how people get to work) – computers (what people use at work) – entertainment (what people do after work). managerial moves are.
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 .
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. Citibank – Automated teller machines & credit 333 cards. . Sony Play Station: Redefining machine-human interface in entertainment and targeting an altogether new user base. Southwest Airlines: Pioneering the concept of LCC.
According to this view. All they need to do is change their managerial frames. greater than themselves. Off late emerging views in strategy having its origin in (Organization Theory) led to a paradigm shift to what is called the – reconstructionist view. 334 . companies & managers are largely at the mercy of economic forces. According to this view managers need not be constrained to act within the confines of their industry.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.
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