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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 all about creativity and innovation. It is about adaptation and response to the same.FEATURES It forms the core activity of the top management. 7 .STRATEGIC MANAGEMENT . It involves substantial resource outlay. It is a holistic and integrated approach. It requires full commitment of the top management. It provides broad guidelines. It is long-term in nature. It is irreversible.
It about mere data and facts. It is about a definite formula. It involves only the top management. It involves nitty-gritty's. It is rocket science. It brings instant success. It is about forecasting.STRATEGIC MANAGEMENT – MYTHS It involves short-cuts. It attempts to minimize risk. It is fool-proof in nature. It a bundle of techniques or even tricks. 8 .
.STRATEGIC MANAGEMENT IMPERATIVES To be continuously alert. To innovate. To gain expertise in technologies. again and again ……. 9 To develop core–competencies. To leverage size. To assimilate change faster. To be future oriented. To be proactive. rather than reactive. To tap markets across boundaries. scale and scope. To generate large resource pool. To be insulated against environmental threats.
ORIGIN The word strategy has its origin from the Greek word strategia meaning Military Commander. battles fought on the market front are won by companies by virtue of their obsession & strategies. It is an old wine in a new bottle. but by virtue of their courage. whose origin can be traced to some of the greatest battles fought in the ancient days.STRATEGY . and more importantly .strategies. today's battles are fought over markets. In the ancient days battles were won not by virtue of size of the army or armory. 10 . In the ancient days battles were fought over land. but with a lot a rigour and robustness. obsession. Even in today’s markets. In contrast.
– Toyota’s entry in the US. – Yahoo and Microsoft challenging Google.SOME PARALLELS Japan’s attack on Pearl Harbour – Strategy: Attack where it hurts the most. US attack of Morocco to capture Germany – Strategy: Pin-hole strategy – Wal-Mart challenging Sears by entering small towns. – Reliance’s entry into telecom. Allied Forces Vs Germany (WW-II) – Strategy: Forging alliances. Napoleon’s attack on Russia – Strategy: Waiting for the right time. 11 . challenging GM and Ford.
A paradigm is a dominant belief about how the business and its environment operates. a radical change in the business environment brings about discontinuity. – Mass Production Organization Size – Complicated Processes – Complex Structures Evolving of an emerging paradigm – survival of the fittest (Fayol & Taylor. The first major discontinuity in the history of global business environment was the . 12 . The things happening around the firm when totally disconnected from the past leads to a paradigm shift.EVOLUTION OF MANAGEMENT As Peter Drucker refers to it. 1910).Industrial Revolution.
– Changes in the technology fore-front. push to pull). 1960). performance across firms became differentiated. Survival of the most adaptable becomes a new management paradigm (Ansoff. Efficiency and effectiveness are no longer sufficient. – Affluence of the new customer (i. – Homogeneous to heterogeneous products.EVOLUTION OF STRATEGIC MANAGEMENT The second major discontinuity in the history of global economic environment – World War II. From uniform performance. The question of outperforming the benchmark became the new buzzword. – Global market place. 13 .e.
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. – Biases and prejudices has a very little role to play in strategic choices pursued by managers. – The choice of strategy is primarily concerned with external ones rather than internal ones.APPROACHES TO STRATEGY Analytical Approach – Igor H. 15 . – It is primarily the top management’s prerogative. Learning always begin on a clean sheet of paper. – The choice of product-market mix is based on conscious evaluation of risk – return factors.
Once the control systems are in place. how it will compete. everything else follows. 16 . – Management control systems has a dominating role in influencing firm performance. – Organization structure will precede and cause changes in strategy.APPROACHES TO STRATEGY Design Approach – Alfred Chandler (1970) – Structure follows strategy. who will be the top managers. The organization initially decides which industry to enter. – The top managers then decide on the type of organization structure & systems to be in place. Successful organizations align authority and responsibility of various departments in way to reach overall objectives.
competitors. – The environmental forces comprises of – supplier. Porter (1980) – Choose a consumer segment and position your product accordingly. – An organization is seldom in a position to influence the larger business environment. new entrant.APPROACHES TO STRATEGY Positioning Approach – Michael E. substitutes. customer. – A firms performance is inversely related with the bargaining power of environmental forces to which it is exposed. 17 . – The organization will outperform the industry where environmental forces are weak and vice-versa.
– Core competencies are a set of skills that are unique and can be leveraged. Prahalad (1990) – The key to superior performance is not doing the same as other organizations. locating in most attractive industries and pursuing the same strategy. – Organizations can significantly alter the way an industry functions. – It enables a firm to deliver unimaginable value ahead of time. but exploiting the resource differences among them.APPROACHES TO STRATEGY Core Competence – C. K. 18 . They are complex resources and undermines a firms competitive advantage.
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 provides a sense of direction and destiny. It implies a significant stretch. you cannot reach there. A strategic intent is a statement of purpose of existence. 21 . It is the cornerstone of an organizations strategic architecture reflecting its desired future state or its aspirations.STRATEGIC INTENT If you cannot see the future. A gap that consciously manages between stagnation and atrophy. It’s a philosophy that distinguishes it from its competitors. A substantial gap between its resources and aspirations. It involves an obsession to be the best or outperform the best.
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 .STRATEGIC INTENT .
when radical changes in the internal and external environment (i.e. 23 . Dominant logic changes. 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 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. To put it more simply. It is core to the strategic intent of the firm.
24 . – It stands for the unchanging core values of the company. – It represents the company’s audacious. It is a combination of three basic elements – – An organizations fundamental reason for existence.VISION It is a dream (not a forecast) about what the company wants to become in the foreseeable future. It enables the top management to remain focused. It ensures that the company does not wander off into unrelated zones or fall into an activity trap. but achievable aspirations. beyond just making money. It provides an unity of purpose amidst diversity of personal goals.
In Reliance when a new project becomes operational top managers hand over charge to the SBU heads and move on to a new project. Brevity – It should be short. Empathy – It should reflect the company’s beliefs to which it is sensitive.CHARACTERISTICS Reliance – Where growth is a way of life. clear. Reachable – It should be within a reasonable target in the known future. 25 . 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. and memorizable. not an utopian dream.
It gives the impression of a forward-looking organisation. It fosters risk taking and experimentation. It facilitates development of skills & capabilities.VISION . 26 . It gives a shared platform.ADVANTAGES To stay focused on the right track. To prevent the fall in a activity trap. It lends integrity and genuineness. It gives enlightment. It makes strategic alignment easier. It provides a holistic picture.
MISSION Mission defines the space that a business wants to create for itself in a competitive terrain. Although the purpose may change over time. It enables the firm to define its business landscape and identify its competitive forces. It is intuitive for managers to conceive their business in terms of the customer needs they are serving – What business are we in? – Which customer needs are we serving? It should be broad based and relevant to all stake-holders. It serves as a road map to reach the vision. A broad mission statement helps in fending competitors. its reason for existence. 27 .
…………………. …………………. – We do not offer software's. We offer security. – We do not offer insurance.MISSION – SOME IDEAS Reliance – We are in the business of integration. – We do not offer steel. We offer solutions. Some other examples – We do not offer shoes. though some may seem unrelated in nature. …………………. All the businesses of the company are strongly integrated with their main business. We offer strength. 28 . …………………. We offer comfort.
It is an end result (quantifiable) something a firm aims and tries to reach in a time bound frame. – It helps identifying key success factors. – It prevents deviation. 29 . – It is based on Management by Objectives (MBO). – It keeps the mid management pre-occupied. – It provides a benchmark for evaluation.100K crore company by the year 2005.GOALS & OBJECTIVES Reliance – We want to become a Rs. It provides a quantitative feel to an abstract proposition. – It lends direction – time frame in the medium term. – It adds legitimacy and motivation.
– Leverage economies of size and scale. It is specific to a particular business. coordinating appropriate technologies. – Acquire a market share of indomitable position.PLANS Reliance – Desire to invest 25K crore in telecom business by circa 2010. – Compress project times. The details of the plan Reliance Telecom adopted were – Backward integrate process technologies. – Use price-elasticity to break market barriers. and gaining access to desired markets to achieve the desired goals and objectives. It is the process of garnering necessary inputs. 30 .
This state of affairs is known as strategic drift. equilibrium is maintained. When changes in the environment is incremental.STRATEGIC DRIFT Due to top management commitment. This tendency to restore continuity is known as inertia (resistance to change). 31 . It often leads to an organizational crisis. radical change may lead to disequilibrium. Historical studies have shown that most organizations tend to continue with their existing strategies. past strategies tend to have a bearing on future strategies. strategies lose touch with the emerging realities. In such a context. However.
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 .
– Using covert tactics to pursue self interests. – Creating a favourable image. Organizational politics involves intentional acts of influence to enhance or protect the self-interest of individuals or groups over organizational goals. – Distorting information to gain mileage. Some instances of organizational politics – Formation of powerful groups or coteries. – Creating obligations of reciprocity. – Hiding vulnerability.ORGANIZATIONAL POLITICS Strategic drift often leads to organizational politics. – Developing a platform of support. 33 .
A realized strategy is what the top management actually translates into practice. .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. Other causes – – The plans are unworkable and utopian. – Influential stake-holders back out. – Persons responsible for strategy conceptualization and implementation are34 divergent. – The environment context has changed.
35 .LOGICAL INCREMENTALISM According to the incrementalism approach (contrary to integrated approach) practitioners simply do not arrive at goals and announce them in crafted and well defined packages. this is not to be treated as “muddling”. Strategy formulation and implementation are linked together in a continuous improvement cycle. However. 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. but the master scheme of the rational comprehensive scheme is not apparent. They simply unfold the particulars of the sub-system in stages.
Agent of Change – Formal ratification of a change plan through MBO. Macro Broadcasting – The broad idea is floated without details to invite pros and cons leading to finer refinements. Adaptation – As implementation progresses.IMPLEMENTING INCREMENTALISM General Concern – A vaguely felt awareness of an issue or opportunity. Leveraging Crisis – A sudden crisis or an opportunity should be used as a trigger to facilitate acceptance and implementation of change. 36 . The broader objective should serve the overall interest of the organization.
Strategic transformation becomes smooth through a change in top leadership.STRATEGIC TRANSFORMATION Strategic transformation (a complete overhauling of the strategic architecture) becomes inevitable whenever a strategic drift takes place. It creates blinders. Tampering with surface level factors often leads to atrophy. Dominant logic’s are the cornerstones of change when strategic transformation is apparent. Dominant logic’s are very rigid and sticky and prone to inertia. As it brings 37 with it a different dominant logic. .
– Constructive Bargaining – Agree to disagree. – Experimentation – Fosters a culture of risk taking. experience. Factors that fosters a learning organization – Pluralistic – An environment where different and even conflicting ideas are welcome. 38 . It helps prevent a strategic drift from occurring at the first place. and skills that fosters experimentation and questioning and challenge around a shared purpose. – Organisational Slack – Enough free space. – Informal Networks – Emerging of new ideas. A learning organization must continuously focus on unlearning as well.LEARNING ORGANIZATION A learning organization is capable of continual regeneration from knowledge.
ENVIRONMENTAL CONDITIONS Dynamic Scenario Planning Learning Organization Static Forecasting Decentralization Simple Complex 39 .
ANALYZING BUSINESS ENVIRONMENT 40 .
It is pro-active in nature. Strategic gap basically points towards a vacuum of where the organisation wants to be and where it is. It is reactive in nature. gap analysis). It points to a position of superiority with relation to competition. It is based on the assumption of incremental change.PLANNING & STRATEGIC PLANNING Formal planning is a function of extrapolating the past. It requires a quantum leap (i. It is based on the assumption of radical change. Competitive advantage provides the surest way to fulfill the strategic gap. Strategic planning is a function of discounting the future.e. 41 .
A manager has to continuously scan the environment to ensure alignment of the strategies with the radically changing environment. events. not guided by any boundaries. and influences that affect an organizations way of doing things. The world is flat. 42 . Environmental factors can be external as well as internal to the organization. The segments of the environment a top manager scans selectively depends upon his dominant logics. It is exploratory in nature.ENVIRONMENTAL SCANNING The environment is defined as the aggregate of conditions. resources and ideas move unhindered. Environmental scanning is very important component of strategic planning.
It is not intended to be used as an exhaustive list. for which a holistic picture is required. It is particularly important that PESTEL be used to look at the future impact of environmental factors. but also to analyze the complex linkages across them. 43 . It is important not only to identify the structural drivers of change.PESTEL PESTEL attempts to provide a broad framework on how the broader environmental forces affects an organization and influences the way it practices strategy. which may be different from the past impact. Understanding the composite effect is critical.
Literacy Levels. FDI Inflows. Savings & Investment. Economic Cycles. Government Attitude. Social – Population Diversity. Income & Age Distribution. Economic Model. Capital Market & Forex Reserves. 44 . Infra-Structural Investments. Language Barriers. Religious Sentiments. Social Values. Monsoon & Food Grains Reserves. Inflation & Interest Rates.PESTEL FRAMEWORK Political – Government Stability. Licensing & Quotas. Economic – GDP. Currency Stability. Subsidies & Protection. Central – State Co-alignment. Fiscal Deficit.
Obsolescence Rate. Extended Producer Responsibility. Direct & Indirect Taxes. Product Design. Technological Convergence. Waste Disposal & Emissions. Product Safety & Health Hazards. Legal – Monopolies Legislation. Carbon Credits. 45 . Environmentally Preferable Purchasing. Research & Development.PESTEL FRAMEWORK Technological – Innovation. Employment Laws. Non-Fossil & Alternative Fuels. ERP. Patents. Environmental – Global Warming & CSR. Consumer Protection Laws. Patent Laws. Pollution Control Laws.
Rupee convertibility. Abolition of import licenses. 46 . Banking Sector Reforms.VRS. Dismantling price controls. Exit Policy. New Trade Policy (NTP) – Lowering import tariffs.ECONOMIC LIBERALISATION New Industrial Policy (NIP) – Liberalizing industrial licensing. Economic Reforms – Fiscal & Monetary Reforms. MRTP Liberalization. FERA Liberalization. Curtailment of PSU’s. Structural Adjustments – Phasing out subsidies. Capital Market Reforms. PSU Disinvestments. Encouraging exports. Encouraging FDI.
Mergers & Acquisitions 47 .DISCONTINUITY Destabilization due to entrepreneurial freedom – Cocoon of protection disappears – Diversification spree – Existing notions of size shaken – Industry structures change radically – Economic Darwinism .Survival of the fittest MNC Onslaught – Enhancing stakes – Power Equation – Joint Ventures – Technological Alliances – Take-over threat.
Globalization – Cheap Imports & Dumping – Push to Pull Marketing Buyers exacting demands – Shortage to surplus – Price competition – Life-style changes – Stress on quality.DISCONTINUITY Hyper Competition – MNC’s . Consumerism Challenges on the technology front – Competencies become technology based – Investment in R&D become inescapable 48 .
DISCONTINUITY Compulsion to find export markets – Identifying competitive advantage – Technological gap – Global presence – Depreciating currency – Exports Corporate vulnerability – It is no longer business as usual – Capital inadequacy – Lack of product clout and brand power – One product syndrome – Loss of monopoly 49 .
PORTER Threat of New Entrants Bargainin g power of Suppliers Competition from Existing Players Bargainin gBargainin power g of power of Suppliers Customer s Threat of Substitutes 50 .FIVE FORCES MODEL .
It should not only be used to understand the forces. It is even wiser to apply the same at the product – market level. The model should not be used as a snapshot in time.e. profit potential) per se. 51 . It depicts the attractiveness of an industry (i. The five forces have strong cross-linkages. but also used to understand how they can be countered and overcome.FIVE FORCES MODEL ASSUMPTIONS The model is to be used at the SBU level and not at the industry level. the forces are subject to changes. incremental or otherwise.
Industry stagnation. Threat of Customers – Buyer concentration and volumes. High switching costs. Product differentiation through proprietary technology or brand power. Access to distribution channels. 52 .PORTERS FIVE FORCES ANALYSIS Threat to Entry – Economies of size and scale. Undifferentiated product. Government policy. Resource profile & fear of retaliation. Scope for backward integration. Unimportance of product quality. Capital requirements. Low margins & stagnancy. Learning curve advantages. Low relative importance of the segment. Presence of substitutes or unorganized sector. Low customer switching costs.
Intermittent overcapacity. Low relative importance of the segment. Lack of substitute inputs. Low level of differentiation.PORTERS FIVE FORCES ANALYSIS Threat of Suppliers – Supplier monopoly. Diversity of players. 53 . Jockeying for position – Fragmented market. Piracy and counterfeits. Threat of Substitutes – Improvement in price -performance trade-off. Unorganised sector. High exit barriers. Product perishability. Buyer’s propensity to substitute. Differentiated inputs. Produced by industries earning high profits. Scope for forward integration. Industry stagnancy. High customer switching costs.
54 . dominant or related diversified or unrelated diversified businesses (Infosys.FIRM ENVIRONMENT Size and Scale of Operations – It is a very important component of competitiveness in today's global context (Bharti – MTN. Inertia – Excessive commitment to past strategies prevents firms from tapping emerging opportunities. Reliance). Resource Profile – It highlights the capabilities (generic) or competencies (business specific) of the firm. Tata). Cohesiveness – Degree of bonding existing across affiliated firms. Business Scope – The intention whether the firm wants to be in a single.
However.EXPERIENCE CURVE The cost of performing an activity declines on per-unit basis as a firm becomes more efficient. The E-Curve thus enables organisations to build entry barriers. it can price its products more competitively. experience teaches better and more effective way of doing things. 55 . an E-Curve can prove to be futile during discontinuity. Matured firms will always be positioned advantageously on the ECurve than new entrants. leverage it as a competitive advantage. which further reduces costs. and with lower prices it can increase its sales volume. With lower costs. Experience curve has strong linkages with performance.
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 .
Observation. Interviews. 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. Business Intelligence – Bankers. 59 Analysts. It is one of the earliest models in environmental scanning. Websites. A SWOT audit involves – Company Records – Annual Reports.VULNERABILITY ANALYSIS . Acronym for Strengths – Weaknesses – Opportunities – Threats. . Competitors.SWOT The framework was originally conceptualized by Kenneth Andrews in 1970. Press Clippings & Interviews. Customers.
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 .SWOT ANALYSIS .
Siemens.SOURCES OF STRENGTH Strong brand identity – Eg. Strong R&D base – Eg. Sony. Toyota. Reddy’s. Volkswagen. 61 . Excellent penetration – Eg. Engineering Skills – Eg. Tata. Aditya Birla. Infosys. Reliance. Infosys. Economies of scale – Eg. Ranbaxy. Good credit rating – Eg. Strong after sales & service network – Eg. Caterpillar. ITC. Reliance. Dr. Motivated employees & cordial industrial relations – Eg. HUL. Honda. Biocon. High quality products – Eg. SBI. Tata Steel. Large resource pool – Eg.
Tatas. K. Group . CESC. Modi Group. Ballarpur Inds. Nirma. Organizational Politics – Eg. Procter & Gamble. Excessive diversification – Eg. SAIL.SOURCES OF WEAKNESSES Outdated technology – Eg. Inefficient top management – Eg. CMC (Tata Group) 62 . K. Lacking experimentation culture – Eg. B. Hindustan Motors. Single product syndrome – Eg. Narrow business scope – Eg. Bijoligrill.Raymond. Inertia – Eg. Lack of product / brand clout – Eg. Strategic myopia – Eg. Excess manpower – Eg. J.
Capital market reforms – Eg. Life style changes – Eg. Exit Policy – Eg. Middle-class buying power. Telecom. Market driven Pricing – Eg. Growing population – Eg. Sugar. 63 .Tata Motors. Collaborations & Joint Ventures – Bharti & WalMart. Fertilizers. Insurance. Retailing. GDR’s. Banking. Fertilizer. Abolishing CCI. VRS. Free pricing – Eg. Market driven Interest rates – Eg. Abolishing MRTP – Eg. ECB’s. Globalization – Eg. Maruti. Sugar.SOURCES OF OPPORTUNITIES Delicensing of Industries – Eg.
Tsunami.Social activism – Eg. Earth Quake. Singur SEZ. (2008). 26/11. Group disintegration – Eg. Import relaxation – Eg. Nationalisation – Eg. (1985–1990).SOURCES OF THREATS Political instability – Eg. Lack of Corporate Governance – Eg. Economic recession – Eg. Dumping from China. Hostile take-over – Eg. Land acquisition . Tata Steel. Onida. Bajoria – Bombay Dyeing. Reliance. 64 . 11/9. Natural disaster – Eg. Terrorist attacks – Eg. Foreign Direct Investment (FDI) – Eg. Satyam.
e. Assess the extent of impact of the factors. time series. scenario analysis). Holistic view – Prepare a complete overall picture. 65 .ETOP Acronym for Environment – Threat – Opportunity – Profile. Strategic responses (including adaptation) to opportunities and threats is critical for survival and success. Delphi's technique. Forecasting – Predict the future (i. 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.
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. 66 Vertical integration is a powerful strategy. Some key findings on major performance drivers that explains 75% deviations in performance – Product quality and relative market share. High investment intensity acts as a drag. An organization can draw upon the experience of its peers in similar situations. . It is also a form of assessing vulnerability through longitudinal analysis. Relative attractiveness of the market. selectively.
therefore 67 validity may be a question. As every organization is unique in its own way. – Contexts may vary over time.PIMS .LIMITATIONS The analysis is based on historical data and it does not take care of future challenges. – Contexts may vary across countries. Managers should be particularly cautious while referring to such data during times of discontinuity as it makes past patterns futile. Authenticity of data is of prime importance – Contexts drawn across one organization may not be applicable to another. when radical changes in the economy takes place. .
KSF helps organizations spot early opportunities and convert them into value adding business propositions.KEY SUCCESS FACTORS (KSF) KSF relates to identification and putting concentrated effort on a particular activity or process which forms the very basis of competitive advantage. It involves a three-stage process – Identify KSF – What does it take to be successful in a business? Drawing KSF – What should be the organizations response to the same? Benchmarking KSF – How do we evaluate organization success on this factor? 68 . It enables the top management to draw focus.
IDENTIFYING ALTERNATIVE STRATEGIES 69 .
national. unrelated) and geographical scope (local. It provides broad direction to the groups vision and mission. It determines the locus a firm encounters with internal and external environment.CORPORATE .GRAND STRATEGY It is concerned with the overall business scope (single. A corporate strategy identifies and fixes the strategic gap it proposes to fill. 70 . related. global) of a firm and deals with choices of allocating resources across them. It indicates the quality of growth an organization is looking for. dominant. It reflects the customer needs it intends to satisfy.
CORPORATE STRATEGY MATRIX Corporate Strategy Stability Stability Growth Growth Combination Diversification Divestment Intensification Market Penetration Related Vertical Market Development Product Development Unrelated Horizontal 71 .
– To stop for a while and assess past records. – The firm may not be willing to take additional risk associated with new projects. Hindustan Motors).STABILITY It involves maintaining status-quo or growing in a slow and selective manner. Even during adverse times firms need to adopt a strategy to sustain current performance levels. erosion of capabilities. The reasons for stability strategy – – Lack of attractive opportunities. Stability however. – Why disturb the existing equilibrium set up? – Limited resource position. 72 . The scale and scope of present operations remains almost intact. does not relate to do-nothing (Eg. Citibank). (Eg.
GROWTH . 73 .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.
– The company carries a risk of product obsolescence.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. – Helps firms which are not comfortable with unfamiliar terrain. Ujjala. convert competitors customers. Nirma. 74 . within a well defined market segment. (Eg. – Elongated product life-cycle. direct non-users to users. Britannia). Market penetration can be achieved by – increasing sales to current customers. – Suitable for industries where scope for technological breakthrough is limited.
Du Pont – Nylon: parachutes. 75 . socks & stockings.…… or Teflon: aircraft technologies to cutlery to paints or Raytheon Corp – Microwaves: radars to kitchen appliances).MARKET DEVELOPMENT It is a strategy where a firm tries to achieve growth by finding new uses of existing products or its close variants and tap a new potential customer base altogether. – Creativity and innovation – thinking out of the box. – Unconventional and flexible distribution channels. tyres. (Eg. fabrics. – Moves across geographical boundaries. – Immense customer reach & flexible advertising. carpets. – Stretches product life cycles. upholstery.
reliability. – Leveraging through – innovation. – Areas of product improvement – performance. perception.Strolleys). 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. – Leverage on customer and brand loyalty. aesthetics. serviceability. Refills) 76 . durability. features. Close Up: Fluoride – Gel toothpaste or VIP .PRODUCT DEVELOPMENT It is a strategy where a firm tries to achieve growth through a radical new product (Eg. conformance. – Substitutes that serve the same needs (Eg.
Why do firms diversify in the Indian context? – Shift the growth trajectory or opportunistic.e. From the modern point of view they are strategically dissimilar.DIVERSIFICATION It marks the entry of a firm into newer markets with new products. the new business is distinct from the existing business in terms of – inputs – technologies – markets. dominance). – High transaction costs and institutional gaps. – Risk reduction. – Permits: quotas. – Internal capital market.e. industrial embassies). – Conglomerate or market power (i. thereby creating a new business. 77 . licenses (i. From the traditional point of view.
ice-cream business would register a return of 10%. cold wave dominates the planet. in which a given year is either under hot or cold wave. If on the other hand. while the coffee business would register a return of 10%. while the coffee business would register a return of 30%. Let us assume that there are two businesses constituting the entire market – coffee and icecream.HOW DIVERSIFICATION REDUCES RISK? Consider a hypothetical planet. the ice-cream business would register a return of 30%. If the hot wave dominates the planet. either of which is equally likely to prevail. What would be your ideal diversification strategy through optimization? 78 .
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.
Reliance). Ranbaxy. Reddy’s).A firm gets most of its requirements from one or more outside suppliers that is under its partial control through value chain partnerships (Eg.A firm produces part of its own requirements and buys the rest from outside suppliers with a variable degree of ownership and control. and out-sources the noncore activities (Eg. Quasi-integration . Tapered integration . Maruti – Sona Steering).QUASI & TAPERED INTEGRATION Full Integration . Usually the firm concentrates on its core activities.Where one firm has full ownership and control over all the stages of a value-chain in the manufacturing of a product (Eg. Dr. 85 .
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 .
and are also strategically dissimilar. synergies pulling in opposite directions). lack of knowledge of competitive forces).e.e. – Cost of ignorance (i. – 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. 87 . Drawbacks of unrelated diversification – – Cost of failure (i.e.e.CONGLOMERATE DIVERSIFICATION It relates to entry of firms into businesses which are distinct in terms of – inputs – technologies – markets. myopia). – Cost of neglect (i. core business).
CONGLOMERATE DIVERSIFICATION Paper & Packaging Edible Oils Tobacco Hotels Food & Confectionary 88 .
Glaxo’s “Glucon-D” to Heinz). In strategy there is no scope for sentimentality with divestment. reactive) and survival is at stake and the firm does not have resources to fend off competitive forces. It is may also be a pro-active strategy. Tatas sale of Goodlass Nerolac. ACC) in full to an independent entity. (Eg.e. 89 . L&TCement Division to Aditya Birla Group) technically known as divestiture or a product (Eg. where a company simply exits because the business no longer contribute to or fit its dominant logic. Tata Pharma. It may also involve a SBU (Eg.DIVESTMENT Divestment is a defensive strategy involving the sale of entire stake (Eg. It taken into account when performance is disappointing (i. Tata Press).
ROUTES Outright Sale – Popularly known as the asset route.3 billion. involving 608 pence per share). Hive-Off – A hive off is the creation of a new entity followed by transfer of assets. where 100% of the assets (including intangibles) are valued and paid for. (Eg.DIVESTMENT . 90 . Leveraged Buy-Out (LBO) – Here the company’s shareholders are bought out through a negotiated deal using borrowed funds. (Eg. 1956 does not permit this mode. Sale of Diamond Beverages to Coca-Cola for US $ 40 million). However. Tatas buy-out of Corus for US $ 11. the Companies Act. where the equity is allotted amongst the existing shareholders on a pro-rata basis.
joint ventures). 91 . A combination strategy can be implemented through green-field projects (i. developing facilities right from the scratch) or through brown-field projects (i.e. growth. It is usually pursued by a business group with diverse interests across multiple industries. There can be no ideal strategy for every business. mergers and acquisition. because every business has its own unique external and internal environment. and divestment strategies applied simultaneously or sequentially for a portfolio of businesses.COMBINATION STRATEGY It is a mixture of stability.e.
STRATEGY CHOICE & PORTFOLIO ANALYSIS 92 .
Dominant logic enables top managers to selectively scan the environment and make trade-offs.STRATEGIC CHOICE A strategic choice seeks to determine the alternative courses of action available before top managers to achieve its strategic intent. 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. What then is the magical number? 93 .
will help the firm achieve its intent. They must choose problems which will lead to the right kind of opportunities. To identify the right problems. if addressed.SELECTIVITY IS THE KEY The role of a top manager is not to solve a problem. The key task before a top manager is to identify the right problems. For an optimal choice the following four issues need to be resolved – Is the strategy clearly identifiable? Is it consistent with the resources of the firm? Will it be able to exploit the opportunities in full? Is it in tune with the values and beliefs of the firm? 94 . nor is to a define a problem for others to solve. managers need to ask the right questions.
embassies).e. Managing Agency). High degree of centralized control (GEO. keiretsus in Japan. Their roots can be traced to a single family or clan and share broad similarities. Their origins can be traced back to market imperfections existing in an economy (MRTP Laws.DEFINITION A business group is known by various names in various countries – guanxique in China. Resource sharing. 95 Succession planning is critical to continuity. chaebols in Korea.BUSINESS GROUP . Licenses & Quotas. . business houses in India. BRC). formal and informal ties. Proximity to the corridors of power (i.
RESOURCE SHARING ACROSS FIRMS Parent Company Firm 1 Firm 5 Firm 3 Firm 2 Firm 4 96 .
STRATEGIC CHOICE – MACRO TIMING Recession (Stability) Prosperity (Diversificatio n) Depression (Divestmen t) Recovery (Intensification ) 97 .
STRATEGIC CHOICE – MICRO TIMING ReEngineering Growth (%) Maturity Stability Growth Diversification Decline .Divestment Duration (Yrs) Inception Intensification 98 .
next only to choice of business. Power and resources often goes hand in hand.PORTFOLIO ANALYSIS Resource allocation across a portfolio of businesses is an important strategic choice. Rules of the game are different. 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. there are high costs associated with entry and exit. therefore. Relatedness across resources are difficult to realize. Why? Businesses are not about liquid assets. sometimes impossible. 99 .
BCG GROWTH MODEL Relative Market Share (%) Industry Growth (%) Low High High Low Stars Question Mark ? Cash Cow Dogs 100 .
These businesses are also net users of resources (Eg. Stars – They achievers in the near term. TCS. 101 . Trent. which remains a big? These businesses are net users of resources.e. market development. product development). diversification). market penetration. provided the company is able to build up on its market-share (i. Tata Telecom.BUSINESS ANALYSIS – TATA GROUP Question Marks – They have potentials in the long term. provided the industry growth rate continues and the company is able to maintain its growth (i. and their risk profile is high (Eg. Tata Steel). Tata-AIG).e. but to larger extent than a question mark.
However. stability). Dogs – They are a drag on the group.e. divest) as achieving a dominant position in these businesses is a difficult task.e. they are generators of resources. Tata Press). harvest. and the company dominates the industry ahead of competition (i. Indian Hotels. cash cows may also need to invest provided the industry takes an upswing (Eg. Given that the growth potential in the business is low. Nelco. Tata Pharma. 102 .BUSINESS ANALYSIS – TATA GROUP Cash Cow – These are matured businesses. Tata Chemicals). Groups prefer to dispose off such businesses (i. Tata Tea. and they lack on competencies to take on competition and are basically cash traps (Eg. Tata Motors.
niche – Rolex. Data may be prohibitive.e. Armani). Mercedes Benz. Cash cows may actually need substantial investments to retain their market position (Eg.BCG . 103 . neither in high or low. The model does not provide specific solutions within a particular category.LIMITATIONS It does not address the concerns of a business which is in the average category (usually the majority). factors are limited. The terminologies used are somewhat prohibitive. Cartier. Certain businesses in the low market share category may be the result of a conscious strategy (i. HUL).
-) 104 .GE .MATRIX Distinctive Capabilities Strong High Medium Weak Stability Industry Attractiveness Diversify (++) Intensify (+) Med Intensify(+) Stability Harvest (-) Low Stability Harvest (-) Divest (.
ARTHUR’ D. LITTLE Inception Dominant Strong Favourable Tenable Weak Growth Maturity Decline Improve Selective Niche Abandon Industry Life-Cycle Divest Harvest 105 Competitive Position Invest Consolidate Hold .
SHELL – DIRECTIONAL POLICY MATRIX Business Sector Prospects Attractive Average Unattractive Generate Cash Phased Withdrawal Distinctive Capabilities Strong Market Leadership Try Harder Double Or Quit Growth Average Custodial Weak Phased Expand Withdrawal Divest 106 .
Divest – Selling a part or the entire business at one go.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. Disinvestment involves selling in phases. Portfolio – An organization is perceived as a portfolio of businesses. BCG – Boston Consulting Group. 107 . SBU – A business unit which is strategically different from another and also shares a different SIC code. Gap Analysis – It emphasizes what a firm wants to achieve.
BUSINESS STRATEGY & COMPETITION 108 .
and earning super-normal profits (i. Competitive advantage is the back-bone of strategy.e. building market-share. rent).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. The principal focus is on meeting competition. Competitive advantage refers to a firms resources or activities in which it is way ahead of competition. 109 . Such resources or activities should be distinctive and sustainable over time.
Resource Based View – Obsession with competence building. 110 .BUSINESS STRATEGY FRAMEWORKS How to be distinctive and yet sustainable – Differentiation – Understanding of the dynamics of 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. identifying critical success factors. leveraging (Prahalad). preventing new entry and/or competition (Hax & Wilde). developing competitive advantage (Porter). Delta Lock In – Two dominant players co-opt to selfreinforce and create or escalate an entry barrier.
preferential access to raw materials. Compress project duration through crashing. The firm may retain the benefits of cost advantage by enjoying higher margins (Eg. proprietary technology. Nirma.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. 111 . Sources of cost advantage are varied and depends on the structure of the industry – Economies of size. Reliance) or may pass it to customers to increase market-share (Eg. Ayur. T-Series). Steep experience curve effects. backward integration. Locational or early entry advantage.
PORTERS – PRODUCT DIFFERENTIATION Product Differentiation – It is a strategy that attempts to provide products or services that are differentiated from competitive products in terms of its value proposition and uniqueness. Creativity. Focus on brand loyalty. (Eg. Rayban). innovation and out of the box thinking. It selects one or more attributes that buyers perceive as important. Intel. avoiding brand dilution. Feeling the pulse of the customer. Successful product differentiation is often followed by premium pricing. Sony. 112 . Means of product differentiation are peculiar to each industry. Culture of experimentation. undeterred attention to quality. and sufficient slack.
coupled with fear of structural erosion. Mont-Blanc. though it may not possess an overall competitive advantage.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. The target segment must have unusual needs or the delivery system catering to this segment must be unique. Maybach. Armani). A focuser seeks to achieve a competitive advantage in its target segment. They are poorly served by mainstream players. 113 . Cartier. Sub optimization alone may not be a source of superior performance. Rolex.
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 .
115 . Firms focusing on a hybrid strategy typically aim at shifting the productivity frontier and recreating a new product-market segment altogether (Eg. Though cost leadership and differentiation are inconsistent. Reducing cost does not always involve a sacrifice in differentiation. similarly differentiation may not always lead to rising costs (i.e.HYBRID STRATEGY A hybrid strategy is the simultaneous pursuit of cost leadership and differentiation. in a hyper competitive context the two strategies need not be mutually exclusive. and usually outperforms a stand alone generic strategy. Tata Nano). jugaad or frugal engineering).
116 .stuck in the middle. The positioning therefore gets – blurred. 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 . but achieves none. Industry maturity will usually widen the gap. leading to what is called – straddling. unless such a player is capable of discovering a profitable segment. It will have a competitive disadvantage vis-à-vis a clearly positioned generic player. It is usually the result of a firm not willing to make trade offs.
technological innovations. leading to a blurred productivity frontier and steep learning curve. 3D imaging. Artificial intelligence). It is characterized by – High level of technological uncertainty.EMERGING INDUSTRY Emerging Industry – An evolving industry characterized by . Speech recognition software's. There is a lot of scope to define the rules of competition.radical environmental changes. coupled with low penetration levels. ending in a differential cost economics.) Excessive turbulence in the dynamics of the environment. Market segmentation not well defined. 117 . Consumer behaviour pattern unstable and evolving. Eg. (Eg. Nano technology. First-time buyers. changing customer needs.
Eg. Paints. Air Conditioning. IT. 118 . Government regulations in the form Eg. Scope for players to change the rules of the game.GROWTH / FRAGMENTED INDUSTRY Growth Industry – An industry characterized by high growth potential in the long run and where no firm has a significant market share (an edge over another). MRTP may also cause fragmentation. Eg. Retail and telecom. Consumer durables. leading to clear fragmentation. High exit barriers because of huge investment in CAPEX. because of lack of economies of size and scale. It is characterized by – Low entry barriers. Eg. Diverse customer needs.
early entry and location advantages. Firms are rule takers in the segment as productivity frontier is well defined. 119 . established industry dynamics. Limited scope for innovation .technological maturity. technological maturity. collaboration and co-option. distribution networks. Cartel among existing players through collusion. well defined consumer behavioral patterns and imperfect competition leading to near monopoly. because of economies of size and learning curve effects. Strong entry barriers.MATURED INDUSTRY Matured Industry – An industry characterized by saturation in growth rates.
backed by corporate espionage. scooters. Exit barriers are extremely high because of limited prospective buyers. Learning abilities have been stunted and firms adverse to investment in R&D and make fresh investments. Typewriters. dot-matrix printers). (Eg. Nature of competition extremely high. Firms facing a declining phase are characterized by inertia and slow to react to environmental changes.DECLINING INDUSTRY Declining Industry – An industry which has outlived its utility due to the entry of close substitutes and or radical product innovations which results in a shift of the productivity frontier. and costly price wars. 120 . with little or no signs of recovery.
mergers and acquisition. premium pricing. 121 . strictly cost differentiation. Fragmented Industry – Identify. Matured Industry – Sophisticated cost analysis. Locate a defendable position. move beyond boundaries. recreate new markets. focus more on product differentiation or even a hybrid one.COMPETITIVE STRATEGIES Emerging Industry – Set benchmarks. strictly product differentiation and not standardization. strike alliances. process innovation. Declining Industry – Redesign. aggressive building of distribution networks. regenerate. or else exit the segment. increasing scope. assess and overcome fragmentation. branding and promotion. reengineer.
brands. Intangible – These refer to goodwill. hence very rarely confer competitive advantage as can be easily acquired or replicated. However. They are a standard in nature.RESOURCE BASED VIEW Differentiation based on cost or products saturates and ceases to exist beyond the medium term. 122 . patents. and complex learning experiences in integrating and harmonizing technologies (distinctive capabilities) that play an important role in delivering competitive advantage through “causal ambiguity”. positions based on resources which are unique and inimitable are far more sustainable even in the long term. A firms resources can be classified into – Tangible – These refer to real assets.
but not necessarily. differentiation based on capabilities can be sustained even in the long run.e. They play a very critical role in shaping competitive advantage. Therefore firms should concentrate on developing complex resources that forms the very basis of differentiation. Typically. they are woven around technologies. Capabilities can be generic (i. Hence.CAPABILITIES & COPMPETENCIES These include a complex combinations of tangible and intangible resources that organizations use to convert inputs to outputs. There is a high degree of internal and external causal ambiguity involved in it. 123 . can be leveraged across businesses) or specific to a particular business.
COMPETITIVE ADVANTAGE 124 .
Strategy drives competitive advantage. Success of a strategy critically depends on SAP. 125 . It results in a distinct differentiation advantage or a cost advantage or hybrid as well.e. not absolute) to competition. competitive advantage subsequently becomes the back bone for a competitive strategy. It enlarges the scope of an organization. and results in well springs of new business development.COMPETITIVE ADVANTAGE A competitive advantage is a position of superiority relative (i. A portfolio of competitive advantage comprises strategic advantage profile (SAP).
Identification of SAP is critical for and stretching and leveraging of resources. SAP changes from time to time. 126 . Internal strategic fit between its strategy and dominant logics is essential for the top management to stretch and leverage SAP. Most successful organizations around the world have a well balanced SAP. In today's world of discontinuity. In most cases SAP is hidden and dormant.STRATEGIC ADVANTAGE PROFILE (SAP) Organizations have to systematically and continuously conduct exercises to identify its SAP.
e. A VC is often compared with a relay team. Today SCM is integrated with greening the environment as CSR practices. Inventory Mgt to Logistics Mgt to Supply Chain Mgt (SCM). and enhanced customer tracking – higher market share. each of the players need to be efficient backed by sufficient coordination at the contact points (i. faster product launches. 127 . kaizen or internal customer). Competitive advantage arises not from an individual activity but a stream of inter-related activities. VC pay-offs: better product availability. Substantial cost reductions also follow.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 .
– Third order fit refers to optimization of effort. A high fit involving a complex chain of activities drives both competitive advantage and its sustainability. A learning organization helps create strategic fit. – First order fit refers to simple consistency between each activity and the overall strategy. Fit is important because discrete activities result in negative synergy and can also be easily copied by competitors. – Second order fit occurs when activities are reinforcing amongst them. Operational effectiveness is not strategy.STRATEGIC FIT – THE PORTER WAY The sustainability of the value chain depends on the degree of fit between the activities. 129 .
– Can be sustained even in the long run. – Cannot be easily imitated or substituted. Core competence has a high degree of external and 130 internal causal ambiguity embedded in it. It should satisfy the following conditions – Contributes significantly to customer benefits. It forms the very basis of competitive advantage. A core competence usually has its roots in technology. – Can be leveraged across businesses. but not necessarily. . These skills results in distinctive activities and processes.CORE COMPETENCE A core competence represents the collective learning's of an organization around diverse streams of technologies.
only global leaders possess a core competence. A competitive advantage manifests from a function. a core competence always implies a competitive advantage. A competitive advantage is sustainable in the shortmedium term. Majority of the firms have competitive advantage. a core competence has its roots in a set of skills. a core competence usually does. a core competence is sustainable even in the long-term. A competitive advantage may or may not lead to superior performance. 131 .CORE COMPETENCE A competitive advantage does not necessarily imply a core competence.
Subsequent work on game theory by John Nash led him to win the Nobel prize in 1994. Here the magnitude of gain offsets the magnitude of loss equally. A game is a contest involving two or more players. the stringent assumptions of game theory and difficulty in ascertaining of pay-offs makes game theory application difficult in business. This is known as a zero-sum game.GAME THEORY The game theory was developed in 1944 by Oscar Morgenstern. In a game (similar to a business) one players win is always another's loss. each of whom wants to win. 132 . However. illustrations depicting a win-win situation. In fact there are no.
Firm Y’s Strategy Use Radio Use Radio +2 +6 Use Newspaper +7 -4 133 Firm X’s Strategy Use Newspaper Firm X’s Pay-Off Matrix .BIASED AND UNBIASED GAME A game is said to be biased when one of the players have a disproportionate chance of winning. An unbiased game is one where both the players have equal chances of winning.
A saddle point is a situation where both the players are facing pure strategies. Firm Y’s Strategy Use Radio +3 +1 Use Newspaper +7 -2 134 Firm X’s Strategy Saddle Point Use Radio Use Newspaper Firm X’s Pay-Off Matrix .PURE STRATEGY GAME The strategy each player follows will always be the same regardless of the other players strategy.
135 . iteration) rather than through collusion (E. collaboration or cooption. Coke Vs Pepsi). Yahoo Vs Microsoft). Repeated Games – In this situation the players interact repeatedly with each other sub-optimizing the outcome possibilities.e. However. This is usually through learning by “experience or observation” (i.TYPES OF GAMES Simultaneous Games – This is a situation where the players have an option to choose to cooperate or not through collusion. It represents the classical “prisoner’s dilemma”. 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.g.
– Making pricing more transparent. In a market dominated by price-based differentiation one may attempt to change the rules of the game by/when – – Bases of differentiation dependent on clear identification of what customer wants or value. but 136 players do not always behave rationally. – 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. Game theory relies on the principle of rationality. It results in a shift in the productivity frontier.
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.
– Unlearning & learning of new skill sets. internal strategic fit (strategy – dominant logic) is critical to strategy implementation. – Development of capabilities & competencies. A high strategic fit (co alignment) is useful because it enables – – Appropriate and timely response. While external strategic fit (strategy – environment) is relevant for strategy formulation. – Resource commitment from top management. – Better strategic and operational control. 143 . – Changing the rules of the game.IMPORTANCE OF STRATEGIC FIT Strategic fit has a central role to play in strategic management.
at the cost of sacrificing a lesser degree of control. According to Mintzberg. In such a situation. effective strategies are better crafted when there is a subtle overlapping between the two (i.FORMULATION Vs IMPLEMENTATION Traditionally. Some of the key strategic learning's exists at the contact point between the organization and its customer.e. while control is very effective. 144 . In fact. emergent strategy vis-à-vis intended & realized). strategy formulation and implementation has been perceived to be distinct & independent. formulation & implementation can occur simultaneously. learning levels are very high. In such a situation. learning levels are very low.
shift from compliance to commitment.ROLE OF TOP MANAGEMENT To bring about change and to implement strategies successfully. He should be an agent of change. Install a system of shared beliefs and values. bring about transparency. companies depend more on transformational leaders than transactional leaders. In contrast. Pragmatism is the ability to make things happen. 145 . A transactional leader is usually confined to allocating tasks & responsibilities and extracting performance. transformational leaders go one step beyond – Design a well crafted and designed strategic intent of the organization.
Performance Budget – SBU managers need to justify the distinctive resources in terms of the opportunity it is pursuing yields the highest possible pay-offs.e. Intangible resources (Eg. machines) referred to as threshold resources (i. brands. labour. skills) also includes complex resources like capabilities and competencies. patents. Zero Based Budget – In this case the budget of a SBU has to be worked out right from the scratch. The various methods of resource allocation includes Historical Budget – The budgets framed by HQ for a particular SBU keeping in mind past trends. land. 146 .RESOURCE ALLOCATION Resources allocation includes tangible resources (Eg. minimum requirement).
Distinctive capabilities are complex set of skills woven around technologies. though not necessarily in the case of emerging markets.CAPABILITIES & COMPETENCIES Technology and business are slowly becoming in – separable. Moreover. these capabilities are sustainable even in the medium to long term. convergence of multiple streams of technologies at the product – market level is becoming increasingly evident (Eg. Distinctive capabilities helps in stretching and leveraging resources thereby overcoming two major constraints involved in strategy implementation – times & costs. Flat Screen Displays. 147 . Due to causal ambiguity (complexity). Mobiles).
Once the structure is in place. 148 . The level of centralization and decentralization is decisive. A firm in several unrelated businesses usually employs a SBU structure. processes become people independent. An appropriate organization structure & adequate control systems are essential to implement strategies and achieve stated goals. A single product or a dominant business firm usually employs a functional structure. A firm in several related businesses usually employs a divisional structure.STRATEGY & STRUCTURE It is a framework within which individual efforts are coordinated to bring synergy.
Technology. with team members having dual line of control. based on skills and competencies. Divisional Structure – Units grouped together in terms of products.TYPES OF STRUCTURES Functional Structure – Activities grouped together by a common function (Eg. 149 . Virtual Structure – A boundary less or hollow organization. Inputs . Project / Matrix Structure – A formal but temporary framework initiated for the completion of a particular project/crisis. disbanded subsequently. Marketing. processes. or geographical locations. SBU Structure – Businesses segregated in terms of strategic dissimilarities (Eg. Team Structure – An informal group formed for a crisis. Finance). Output).
It includes the desire for independence. 150 . Technology – With more and more convergence of technologies in business. as span is broader. assuming responsibility.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. structures are becoming flatter and more simpler. leading to a tall structure. Environment & People – Economic and political conditions have a major bearing on structure coupled with the attitude and aspirations of the people in the organization. facing challenges & crises.
INERTIA When a firm has been operating in a certain fashion for a long time. Inertia is a characteristic of a firm that endures status quo (i. Top managers resist change. Inertia acts as an impediment in strategy implementation. Common sources of 151 inertia – complacency with past successes. Changes in top management and unlearning helps overcome inertia. there is a tendency to continue along the same lines.e. co0ntinuity). . irrespective whether it is from worse to good or good to worse. Most firms undergo periods of strategic continuity rather than strategic discontinuity.
STRATEGY EVALUATION Strategy evaluation centers around assessment of strategic fit. firms should move beyond financial performance to strategic performance as organization systems are becoming complex. strategies need to be evaluated on an ongoing basis to prevent deviations of fit. To prevent deviation of fit. certain authors propose misfit as a source of superior 152 performance. However. Since the internal and external environment is in a state of continuous flux. . Deviation of fit is detrimental to performance and may lead to strategic failure.
. detecting changes in the external and internal environment and taking corrective action wherever necessary. 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.STRATEGY CONTROL It is concerned with trafficking a strategy as it is being implemented.
checking every premise is costly as well as difficult. It involves assessing – strategic thrusts and milestones. 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. Implementation Control – It aims at assessing whether key activities are proceeding as per schedule. However. Special Alert Control – It intends to uncover unanticipated information having critical impact 154 on strategies. It is open-ended as well as .
Strategy intent not linked with goals and objectives – Lack of coordination at lower levels leading to negative synergy. Strategy not linked to resource allocation & capabilities – Lacking commitment of top management. difficult to translate into practice. “If you cannot .BARRIERS TO STRATEGY EXECUTION Vision and strategy not actionable – Utopian ideas. 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.
156 . this may effect all others as well.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. Large or small. to be sure of successful implementation of a strategy. Managers should take into account all seven of these factors. Today it is considered one of the most powerful tools for strategy implementation determining success or failure. the relative importance of each factor may vary over time and context. Together these factors determine the way in which a corporation operates. On top of that. important or not they're all interdependent. so if one fails to pay proper attention to one of them.
They had been investigating how Japanese industry had been so successful. 157 . The 7-S model was born at a meeting of these four authors in 1982. and was taken up as a basic tool by the global management consultancy company McKinsey. Since then it is known as their 7-S model and is extensively used by corporations worldwide to implement their strategies.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 Shared Values – It represents what the organization stands for and what the top management believes in. processes and routines that characterize how work should be done. to reach identified & stated goals. over time. Structure – The way in which the organization's units relate to each other in terms of their commonalities. Systems – The procedures. formal & informal . 158 . Skills – An organizations capabilities and competencies. Strategy – Trade-offs for the allocation of a firms scarce resources. Style – The way in which the top management influences the functioning of an organization. Staff – Human inter-relationships.
STRATEGIC FIT Strategy Structure Shared Values Systems Skills Staff Style 1st Order Fit 2nd Order Fit 3rd Order Fit 159 .
staff. While the American co’s focuses on the hard S’s. style. because most often they are culturally embedded and often neglected. A choice of an alphabet often limits the scope and skews the interpretation of a model. shared values) are very malleable and comparatively more difficult to identify & influence. 160 . the soft S’s (skill.A CRITIC OF THE 7S MODEL While the hard S’s (strategy. Ineffective in case of a virtual company. systems) are comparatively easy to identify and influence. structure. In contrast. Consider the 4P’s of marketing or 3R’s of SCM. their Japanese counterparts focus more on the soft S’s for their early success and sustainability.
Low Take Overs 161 .High Organic Growth Strategic Alliance Joint Venture Mergers & Acquisition Strategic Fit .STRATEGY IMPLEMENTATION ROUTES Strategic Fit .
soft loans.ORGANIC GROWTH Here a firm builds up its facilities right from the scratch and continues to do so without any external participation. The entire infra-structural facilities are set up afresh having its own gestation and break-even.e. concessions are available for green-field projects. (Eg. and markets. technologies. . green-field projects. subsidized power). Long gestation leads to delayed market entry. tax holidays. It has complete control over inputs. Govt. the entire value chain. i. 162 Risk of cost and time overruns. (Eg. i. Reliance Industries).e. SEZ’s.
. There is no funding or equity participation from the alliance partner & both the firms continue to operate independently. 163 It is a form of competitive collaboration. Tata Motors & Fiat).STRATEGIC ALLIANCE It involves a pro-active collaboration between two or more firms on a particular domain or function for mutual gain. Alliances are usually short-lived and disbanded once the purpose is achieved. Alliances are usually in the areas of technologies or markets (Eg. It touches upon a limited aspects of a firms value chain. It has limited intervention power and usually lacks holistic commitment from the alliance partner.
Degree and extent of management control must be clearly 164 laid down.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. Hero . Selecting the right partner is critical for success. leaving minimum scope of overlapping. (Eg. .Honda). It is a win-win situation for both the companies. Dominant logic of both the companies should be complimentary. Tata – AIG. A comprehensive MOU is essential.
Coca Cola – Thums Up). . Revival of a sick-unit through better management practices is a major motive behind an acquisition 165 strategy. Integration of assets and other financial resources. Brooke Bond & Lipton).MERGERS & ACQUISITION It refers to the fusion of two or more firms into a single entity. Economies in scale leading to lowering of costs. ITC Tribeni Tissues. with the individual firms ceasing to exist any more (Eg. Integrated distribution channel leads to better market penetration and overall synergy. Acquisition is an outright purchase of a firm assets by another independent entity (Eg.
Larger geo-graphical diversity. Consolidation in a fragmented industry. often the new firm is “left alone”.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. Make a public offer of not less than .Corus). Inform SEBI / Stock Exchange after 5% stake is 166 acquired. Most countries have stringent laws that prevents hostile take over. Integration of organization structure & cultures is difficult. Tata Steel . Instant access to capacities and markets.
MANAGEMENT TOOLS IN STRATEGY 167 .
Some tools to ensure that – Benchmarking – Adopt certain best practices.WHY MANAGEMENT TOOLS? Change is becoming pertinent in the business environment. Change provides enormous opportunities. it is also a source of potential threat. Balanced Scorecard – Tracking strategy 3600. Companies therefore need to ensure competitive advantages doesn’t become competitive disadvantages. or better still create next practices Reengineering – Redesigning work processes right from the scratch. TQM – Doing the right thing the first time. Radical change is superseding incremental change. The past is ceasing to be an indication of the future. every time. 168 .
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 merely reorients profits in the hands of few to profits in the hands in the hands of many (i. but it cannot be used as a strategic decision making tool. .e. It does not shifts the growth 175 trajectory of the industry as a whole. Strategy is more of creating best practices rather than copying them. Benchmarking is useful for bringing about operational efficiency.LIMITATIONS More and more companies benchmark. While strategy is all about differentiation and not looking alike. It can at best complement it. clustering).BENCHMARKING . the more similar they end up looking.
Re-engineering attempts to radically change an organizational products or process by challenging the basic assumptions surrounding it.RE-ENGINEERING Redesigning leads to identification of superfluous activities or product features (i.e. DOS to Windows). Windows 95 to 97). for achieving performance improvement (E.e. . Re-engineering involves complete reconstruction and overhauling of job descriptions from the scratch (i. The task demands a total change in organisational 176 culture and mindset.g. process mapping) and eliminating or improving them (E. clean sheet).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.
. Business – It looks into markets. 178 . BPR).e.LEVELS Reengineering can be successfully leveraged at all levels of an organization with varying degree of results. structures. etc) and supports the organization for the present. resource allocation and prepares the organization for the future through a reorientation of the entire strategic architecture.REENGINEERING . It can be of the following types – Functional – It looks into the flow of operations (i. Strategic – It looks into the process of strategic planning. customers and suppliers and protects the organization from the future (i. products.e. processes.
reverse engineering is a top-bottom approach. While traditional manufacturing is a bottom-up approach. – High cost and time acts as a deterrent.REVERSE ENGINEERING It is a process by which a product is dismantled and analyzed in order to understand how the product was designed and manufactured. It generally acts as a threat to innovation. protection can be had in the following ways – – Patenting. – Causal Ambiguity. 179 . Indonesia). – Early entry advantages. with an intention to copy it (Eg. learning curve advantage. Cheaper versions of Intel chips and mother-boards manufactured in Taiwan. However.
e. Inaccurate assessment at this stage may lead to a failure of the entire project. nano-technology). Implementation – Developing of a prototype. Usually in such cases segmentation and pricing is different from the original innovator. Introduction – Launching the product in the market. 180 . machine tools to convert ideas into a marketable product (i. Actualization – Obtaining and dismantling of the product to assess how it functions.STAGES IN REVERSE ENGINEERING Awareness – Recognizing whether the product is found to be worth the time. designing facilities. cost and effort necessary for the purpose of reverse engineering.
– Aesthetics – Appeal in design. Car) – – Performance – Mileage of 14 kms to a litre of fuel.WHAT IS QUALITY? It involves the totality of a product or service in meeting certain stated or implied needs. – Conformance – Emission standards . 181 . – Serviceability – Large no. More and more companies are moving towards meeting implied rather than stated needs.Euro IV. – Perception – Customer notions. – Features – Anti-lock braking systems. Air bags. of service stations. – Durability – 1980 manufactured cars still on road. – Reliability – Consistency in mileage. It has eight dimensions (Eg.
TQM is a way of creating an organization culture committed to the continuous improvement of work processes – Deming. which ensures good market standing.TOTAL QUALITY MANAGEMENT Objective – Management of quality ensures conformance to certain pre-set standards. zero defects. . It is deeply embedded as an aspect of 182 organisational life & culture. touching upon a limited aspect of a value chain. Management of quality was traditionally inspect it . It had little impact on improving overall productivity.fix it in nature.
TQM – KEY TENETS Do it right. Kaizen – Make continuous improvement a way of life. provided with all relevant information and best possible tools. 183 . not a final destination. Be customer centric – Generate the concept of internal customer (Ishikawa). Looking at quality as an endless journey. fully involved in decision-making and fairly rewarded for results. the first time – From reactively fixing error in products to proactively preventing errors from occurring at the first place (Juran). Empowerment – It takes place when employees are properly trained.
184 . Quality Circles – It a small group of shop-floor employees who meet periodically to take decisions regarding operational problems and crises. 6-Sigma). of units meet preset standards (Eg.TQM . It is based on the principles of MBO (i. 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. 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. equal participation).e. saving precious top management time.
... – In the majority of failures – we estimate 70% – the real problem isn’t (bad strategy) .......BALANCED SCORE CARD Some interesting comments ... Source: Fortune Magazine Why CEO’s fail? 185 . – Efficiency and effectiveness is passé.. – Less than 10% of strategies effectively formulated are effectively executed. it’s bad execution. strategy implementation has never been more important.
rather than effects. Focus more on causes. Most managers tend to rely on traditional measures of performance having its origin in finance as they are well tried and tested.CONCEPTUALISATION A company’s performance depends on how it measures performance. 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.BSC . Organizations need to move from financial to strategic performance. 186 . These measures worked well when organizational systems were simple and unidirectional and more importantly the environment was static.
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.BSC – KAPLAN & NORTON (1992) A BSC helps a manager to track and communicate the different elements of company’s strategy. The most critical element of a BSC is to measure these four dimensions. and distinguish strategic problems from operational ones. because they have too many. 187 .
e. of visits or calls made % of NPA’s 188 .CUSTOMER PERSPECTIVE GOALS Products Supply Preference Relationship MEASURES Relative market share (%) % of sales from new Vs proprietary products Timely deliveries and service Customer credit analysis (i. ageing schedule) % of key customer transactions Ranking of key customer accounts No.
BUSINESS PERSPECTIVE GOALS Skills Excellence Exposure Introduction MEASURES New capabilities and competencies Implementation & gestation period Bank and supplier credit limits & PLR Unit Costs / Conversion Ratio / Defect Ratio No. of times covered in media No. of new product launches Vs competition Product pricing Vs competition 189 .
of new patents registered Time to develop next generation products Average and spread in operating cycle % of products that equal 2/3 sales No. of product innovations 190 .LEARNING PERSPECTIVE GOALS Technology Manufacturing Focus Timing MEASURES No.
FINANCIAL PERSPECTIVE GOALS Survival Success Prosper Divestment MEASURES Cash flows Growth in Sales and Profits EPS. Return on Investment Market Capitalization / PE ratio 191 .
STRATEGY MAPPING 192 .
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 .
sharing of vision). doing right things instead of doing things right). It helps translating strategy into practice (i.what they don’t know.ADVANTAGES Most often top managers face information overload. 194 performance will automatically follow. . Seek excellence. The BSC brings together the different elements of a company’s strategy at a glance. Modern managers should be poised to ask the right questions. As a result. Focus on cause not effects.e.BSC . Shift from control to strategy (i.e. they don’t know .
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.EFFECTIVENESS + STRATEGY A company which is effective as well as strategic. Porter 196 . .
CORPORATE RESTRUCTURING 197 .
to survival of the most adaptable.” 198 . “every organization must be prepared to abandon everything it does. from survival of the fittest . To adapt to the changing environment. Strategic variety brings paradigm shift...CORPORATE RESTRUCTURING The only thing constant in today's business environment is change.. Tata Group). Restructuring involves consciously driving significant changes in the way an organizations thinks and looks (Eg.. As Peter Drucker pointed out. Radical change brings about strategic variety. Strategic variety may be caused by changes in the as external well as internal environment. firms use restructuring strategies...
e. Instead. and dividing the core businesses into SBU’s (i.RESTRUCTURING – BASIC TENETS Customer Focus – Restructuring ideally begins and ends with the customer. Company’s should go beyond just asking what he expects. downsizing or rightsizing). they should strive to provide unimaginable value ahead of its time (Eg. etc). Fax. Walkman. ATM. Core Business – Company’s should introspect – What business are we in? Business evolved out of opportunism or myopia should be divested. . Internal customers should also not be neglected. Structural Changes – Conventional hierarchical structures should be disbanded in favour of more 199 flexible ones (i.e. downscoping).
.. It is created and institutionalized by the top management. Kumar Birla today is more dependent on professionals.) The Aditya Birla group typically relied on the “marwari” community for key management positions . 200 ... started focusing on their capabilities... During the times of JRD....RESTRUCTURING – BASIC TENETS Cultural Changes – A culture represents the values and beliefs of the people about the organization.) Reliance dismantled their industrial embassies . Restructuring also requires cultural reorientation. Ratan Tata now drives the point the group means business... .. the Tatas were considered a benevolent and charitable organization.
” 201 . Honda’s ad says. Communicating to the media about organization efforts to deliver quality products. Use the reach of networking technologies. Restructuring provides a platform to close this gap. they tend to move away from the customer. “ … one reason our customers are satisfied is that we aren’t. Getting feedback & addressing customer complaints. Publicizing welfare projects to demonstrate CSR.MOVING CLOSER TO THE CUSTOMER As companies evolve. Carry out PR campaigns. Organizing customer and supplier meets.
Further spin-off can be classified as split-off and split-up. Tata – Corus) or hostile (Eg. Mittal – Arcelor) and can take various forms. spin-off and equity carve. or conglo-merate. 202 . It may include brands as well. where the difference in valuation is settled off through cash or equity (Eg.ASSET RESTRUCTURING Asset Restructuring – The asset composition of a firm undergoes a major change. horizontal. Further. including its intangibles – Mergers – It may be vertical. Asset Swaps – It entails divesting and acquisition simultaneously by two companies. it may be smooth (Eg. It can have two forms. Hive Off – It involves siphoning of assets under control. Glaxo – Heinz).
Reliance Ent). the entire parent company loses its identity after being split into a number of subsidiaries. Equity Carve – It involves selling a minority stake to a third party while retaining control (Eg. 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. – Split-Up – In a split-up. Most of these practices are not in consonance with Indian laws. 203 . – Split-Off – In a split-off. in which the equity is allotted amongst the existing shareholders on a pro-rata basis (Eg. Tata Industries selling 20% stake to Jardine Matheson).
204 . repay long-term debts. Parle sold its Thums Up brand to Coke for $40 million apprehending fierce competition. strategic misfit. In 2005. Selling out in phases is called disinvestment (IPCL). Generic motives include – – Raise working capital. A complete sell-out is known as divestment (TOMCO). but retained its engineering division. L&T sold its cements division to Aditya Birla group.DIVESTITURE It involves the sale of a brand or a division of a company to a third party. for a specified market or in general with full management control. In 1995. – Poor performance.
involving 608 pence per share).CAPITAL RESTRUCTURING Capital Restructuring . Wipro).The internal & external liability composition undergoes a major change – LBO – Acquiring control over a substantially larger company through borrowed funds (Eg. 205 . Tatas take-over of Corus for US $11.3 billion. It provides greater leverage as well as management control. Share Buyback – It is a process of cancellation of shares out of free reserves to the extent of 25% of paid-up capital (Eg. Conversion – Replacing debt with equity or vice-versa or costlier with cheaper debt or cross currency debt.
150 cr VSNL – Rs. 120 cr Tata AIG – Rs. 1860 cr . 99 cr Tata Power – Rs.BUSINESS RESTRUCTURING – TATAS Divestments Lakme – Rs.Rs. 230 cr Diversifications Tata Motors – Rs. 256 cr ACC – Rs. 1170 cr Goodlass Nerolac – Rs. 1890 cr CMC – Rs. 1439 cr 206 Tata Timken – Rs 120 cr Tata Telecom – Rs. 250 cr Tata Tetley – Rs. 1700 cr Trent – Rs. 950 cr Merind . 42 cr Voltas .Rs.
usually as a result external turbulence. 207 . Rightsizing – It is phasing of excess and redundant employees resulted out of faulty internal planning (SAIL). keeping the composition of business intact (Jet Airways). Downscoping – It involves reducing the business and/or geographical scope of a firm (Aditya Birla group).ORGANIZATIONAL RESTRUCTURING Organizational structure and systems calls for a change when strategic variety is apparent. of operating units. of a firm’s employees and sometimes in the no. It can be carried out in the following ways – Downsizing – It is a systematic one-time reduction in the no. Survival is the primary motive. Turnaround is the primary motive.
e. 208 . as strategies are based on such beliefs and biases. Strategy change is unviable without a preceding change in its dominant logics. The dominant logic represents the perceptions and biases (i. Dominant logic becomes deep-rooted in organizational contexts depending on the period it is in place (tenure of the CEO). inertia). thumb rules) of the top management.STRATEGIC CHANGE One of the most difficult components of organization restructuring is the mindset of the top management represented through its dominant logic and its shared values reflected in cultural orientation. The longer the period.e. the more difficult it becomes to uproot the paradigm (i.
20% of the people carry out 80% of the changes). Companies achieve real agility only when people at every level rise above the ordinary to face the challenges – revitalization or transformation. In most organizations.e. Successful transformation requires – incorporating employees fully into the process – leading from a different place so as to maintain employee involvement – instill mental disciplines that will enable employees to behave differently. 209 .FORCES AGAINST STRATEGIC CHANGE The problem with strategic change is that the whole burden typically rests on few people (i. the factor that stifled change & performance was – culture.
Manage from the future. Questioning every basic action of the organization. process ownership. never take no for an answer. Understand and deliver the quid pro quo.SUCCESSFUL TRANSFORMATION Build an intricate understanding of the business model at all levels of the organization. Create relentless discomfort with the status quo. Harness setbacks. Encourage uncompromising straight talk. it is not about winning but about learning. Promote inventive accountability. 210 . The best way is to alter the institutional point of view.
Aspects of current culture which needs to be overcome. It involves diagnosing a change situation – systems & structures. that can be both enablers and blockages to change and restructuring. Identify and implement facilitators of cultural change.FORCE-FIELD ANALYSIS A force-field analysis provides an initial overview of change problems that needs to tackled. Culture and style of management are two main impediments in force-field analysis. also known as cultural-web. by identifying forces for and against change. It involves identifying – Aspects of current culture which needs to be reinforced. 211 .
OUTCOMES Alternatives Organizational Short .Term Loss of human capital Lower performance Higher performance Capital .RESTRUCTURING .Term Reduced labour costs Reduced debt costs Emphasis on strategic control Business High debt costs Higher risk 212 Long .
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. 213 . hence go in for downsizing. the second one is a more viable strategy and sustainable option in the long run. While the first strategy produces results instantaneously. reverse engineering and regenerating. focuses on reengineering. down-scoping or asset stripping.
TURNAROUND MANAGEMENT 214 .
– Less than 10% of the Fortune 500 companies as first published in 1955. and that the thirty-two of the country’s largest business groups in 1969 are no longer among the top fifty today.... 215 (Govindarajan and Trimble.. – Only seven of the first fifty Indian business groups in 1947 were even in business by the turn of this century.WHY TURN AROUND MANAGEMENT? Some interesting insights . January 1997). still exist as on 2005.. Source: Why do firms atrophy? (Business Today.. .
Stage Theory). 216 . While content focuses on endogenous and exogenous variables. process focuses on – A logic to explain a causal relationship between intervening variables. As a sequence of events describing how things change and why they change (i. and achieves sustainable performance recovery. systems. Both content (what) and process (how) are equally important for a successful turnaround. A category of underlying principles and concepts.TURN AROUND MANAGEMENT A turnaround is said to occur when a firm perseveres through an existence threatening performance decline. skills. ends the threat with a combination of strategies.e. and capabilities.
leading to lack of acceptability from distributors and customers. 217 . Some indicators Continuous cash flow crises as a result of dwindling market-share and profits. especially in key positions. unavailability or radical lowering of substitute costs or technological obsolescence. Uncompetitive products or services.TURNAROUND INDICATORS Most firms atrophy simply because they fail to diagnose the indicators that acts as threat to organizational existence. Low employee morale leading to high employee attrition at all levels. Rising input costs. Low stakeholder confidence. Substantial shifts in consumer preferences. suppliers and bankers.
Extending work hours.TURNAROUND ILLUSION The first step to a successful turnaround is the basic acceptance of the fact that ….. Hence. 218 . Recalibrate prices. be more customer centric. Emphasis on advertising and market penetration. Revamp product portfolio. Product redesigning or reengineering. liquidating dead assets. based on elasticity. Common approaches adopted Change in key positions. prune work-force. consider extension. they adopt surface level measures (disprin popping) which most often fail. “all is not well”. focus on power brands. which most top managers fail to appreciate.
TURNAROUND STAGE THEORY Stage 1 Decline Stage 2 Stage 3 Stage 4 Outcome Response Transition Performance Equilibrium Line Success Failure Indeterminate Nadir Time 219 .
R-Extinction – It suggests that organization factors. 220 . Identification of the stimulus leads to the arrest of the downfall. It has its origin in “resource led stretch” and subscribes to the view that a firm has substantial power to override the context. It involves the identification of the theoretical perspectives that explains performance decline – K-Extinction – It suggests that macro economic and industry wide factors are responsible for decline. primarily dwindling resources and capabilities are responsible for decline.DECLINE Decline is the first stage in the turnaround process. It has its origin in “environment led fit” that subscribes to the view that a firm has little control over external factors.
the response should be strategic. If the decline stems from structural shifts.RESPONSE INITIATION Turnaround responses are typically categorized as operating or strategic. the response should be operational. asset reduction. Operating responses typically focuses on the way the firm conducts business and involves tactics geared towards – cost cutting and process redesigning (BPR). Strategic responses focus on changing or adjusting the business the firm is engaged in through long term moves such as – integration. diversification. If the underlying cause is internal efficiency. The response must match the cause of the decline. new market initiatives. 221 .
222 . 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. Similarly new market initiatives is feasible only for multi-product firms. which may be unavailable to a focused firm. Untangling this question brings into focus three events – Domain – Many of the strategic cures have limited applicability for an affiliated firm. Contour – It is easier to reverse decline in the earlier stages through operational measures. when decline deepens shifts in strategic position becomes essential.
7 years with a range of (4-16) years. transparency. substantial amount of time usually passes before results begin to show (i. 223 . participative management (i. Sustenance is the key factor in this stage. Empirical studies show that average time is 7. Effective levers of transition.e.TRANSITION Transition usually reflects the first signs of recovery. The top management has a key role to play through empowerment. lead – lag). role model. confidence building measures. consensus). However.e. However. Support from all the stake holders through resource commitment. many a times early signs of recovery fades out.
Cut off points must be unequivocal. Share price indications and media coverage. it should adopt a holistic approach. Commanding a premium in the market.OUTCOME Outcome is said to be successful when a firm breaches the equilibrium performance level. Instead of focusing on financial parameters alone. Supplier and banker confidence. 224 . Failure is an indication that initial momentum was not sustainable characterized by irreversibility. Revival of key customers and new product launches. Regaining lost market share and distributor confidence.
COOPERATIVE STRATEGIES & ALLIANCES 225 .
In the cooperative strategy continuum as firms move up the value order. supply-chain partnership. the commitment and the involvement between the firms increases manifold. technology. Any cooperative strategy maybe between firms within the same country or cross border as well. More and more companies worldwide are moving away from competition to co-option to leverage their resources and enhance bargaining power. and globalization . licensing. 226 . or joint venture. It can assume any of the following forms – franchising. consortia.COOPERATIVE STRATEGIES Cooperative strategies are a logical and timely response to changes in business dynamics. strategic alliance.
owners of the brand Monginis allows its franchisees to sell its confectionary products. It is an effective strategy to penetrate markets in a shortest possible time at a minimum cost.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. Branding is critical to franchising. Titan Inds. 227 . owners of the brand Tanishq allows its franchisees to sell its jewellery products. Switz Foods.
Different levels of licensing Manufacturing without embracing any technology (CBU). 228 . HM manufacturing GM range of cars in India with a buy-back arrangement is a perfect example of CBU. refine processes and adopt necessary technologies (SKD).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. Become a systems integrator (CKD). as in Tata Indica. Develop a product through its crude stage.
Airbus – Boeing). Tata. Coke – Pepsi). enabling them to increase prices (Eg. It can be of the following types – Multipartner – Intends to share an underlying technology or asset. 229 . Cross Holdings – A maze of equity holdings through centralised control to ensure earnings stability & threshold resources for critical mass (Eg. Collusion – Few firms in a matured industry collude to reduce industry output below the equilibrium level. Hyundai).CONSORTIA Consortia – They are defined as large inter-locking relationships & cross holdings between businesses in a similar industry. leverage upon size to preempt competition by escalating entry barriers (Eg.
link their capabilities to create value for end users. Continuous sharing of knowledge is critical to the success of a supply chain partnership.SUPPLY CHAIN PARTNERSHIP It is a pro-active & collaborative arrangement between supplier and customer aimed at achieving better control over the value chain (Eg. . It usually provides a platform to sort out differences between conceptualization and implementation to suit local market needs. Tata Motors – IDEA). otherwise it 230 becomes routine outsourcing. Companies in different industries with different but complimentary skills.
preempt competition. instead of hurrying into a relationship. to gain knowledge and to obtain access to new markets (Eg. 231 . Reliance – Du Pont). effective R&D management. enhance credibility.learning organization. design next generation products. enter newer markets. Partner selection is one of the critical success factors.STRATEGIC ALLIANCE It is an short to medium term understanding between two or more firms to share knowledge and risk. Despite their popularity (50-60)% of the alliances fail to accomplish their stated objectives. Tata Motors – Fiat. Generic motives involved are . Firm’s should undertake a long courtship with potential partners.
Bajaj – Castrol). Maruti). Complementary Equals – Two firms mutually promoting each others complimentary products (Eg. Alliances of the Weak – An alliance is entered into to preempt competition (Eg. Bootstrap – An alliance between a weak and a strong company with an intention to acquire it.TYPES Collusion – Tacit top management understanding to neutralize price wars (Eg. Airbus – Boeing). Coke – Pepsi). Backward – An alliance (quasi or tapered) with a supplier of critical components seeking commitment (Eg. 232 . Whirlpool – Tide.STRATEGIC ALLIANCE .
Too much stress on financials & structure be avoided. – Japan Vs US). Differences in level of economic development can produce differences in alliances motives. Firms from developed markets seek access to markets and firms from emerging markets seeking access to technology.PARTNER SELECTION CRITERIA It is likely that partners will not have complete consent on alliance objectives because the institutional context in which the alliance embedded varies from country to country. 233 . Cultural orientation has been found to have a profound effect on top management’s strategic orientation (Eg.
Managerial capabilities. Willingness to share knowledge and skills. Dominant Logic’s – Similarity in beliefs & biases. Experience related to previous alliances.PARTNER CHARACTERISTICS Complimentarity of Capabilities – The degree to which partners resources can be used in conjunction. Unique Resources – Abilities or skills which cannot be easily duplicated. Partner’s ability to acquire fresh skills. including ability to provide quality products and services. Intangible Assets – Move beyond the financials of the firm. 234 .
Getting Engaged – It should incorporate a specific joint activity. Selection & Courtship – It involves self analyzing. differences not anticipated earlier. 235 .MANAGING ALLIANCES Alliances are more than just a deal. Setting up the housekeeping. degree of compatibility. the value chain. Changing within. operational & cultural integration. instead of focusing controlling the relationship. partners should nurture it. vows to include commitment to expand the relationship. incorporating clear signs of continuing independence for all partners. understanding the chemistry. Learning to collaborate – strategic.
It aims at creating new value (i. Conceptually.e.e. a joint venture is a selection among modes by which two or more firms can transact. whilst the partners continue to operate independently. synergy) rather than mere exchange (i.JOINT VENTURE A joint venture is a long term association between two equal partners to create an independent firm (SPV) by complementing their resources and capabilities to explore newer businesses or markets for achieving a shared vision. There are substantial linkages in the value-chain. combining parts). It lasts till the vision is reached. . separation is very 236 bitter.
though more profitable alternative to other choices. It may also be linked to deterring entry or eroding competitors position. in addition to a high degree of asset specificity. 237 . Organizational Learning – It is a means through which a firm learns or seeks to retain their capabilities. Strategic Behaviour – Firms may override transaction costs. The market fails as sellers are unwilling to reveal their technology and buyers are unwilling to purchase in the absence of inspection.JOINT VENTURE – GENERIC MOTIVES Transaction Cost – The situational characteristics best suited for a JV are high performance uncertainty.
– Eg. Essar – Hutch (Vodafone). – Eg. – Eg. – Eg. Maruti – Suzuki. Sharing of resources. TVS – Suzuki (4-Stroke Engines) Fill gaps in existing product lines. – Eg. Define future industry standards.OTHER MOTIVES Entry into newer markets. – Eg. Yamaha – Escorts. Eli Lily – Ranbaxy. Learning new technologies. Daimler – Chrysler (Premium Cars) 238 . Renault – Nissan (Minivans – Cars). Endorsement from government authorities.
Modi – Telstra What after exit (parenting disadvantage)? – Eg. LML – Piaggio Differences in size and resource base. Risk of over dependence.RISKS INVOLVED Incompatibility – Differences in cultural background. Tata – Aditya Birla in Idea Cellular 239 . Century . – Godrej – Procter & Gamble. – Eg.e. technology) drain. – Maruti – Suzuki.Enka. – Eg. PAL – Fiat If the cost of continuing exceeds the exit costs? – Eg. Risk of brain (i.
time sharing. Focus – Avoid strategic myopia. Flexibility – Sufficient space to breathe and adjust. Partner – Avoid duplication of skills and capabilities. Inertia – Differences in age and evolution patterns. Costs – Other modes of transaction becomes cheaper. Incompatibility – Performance expectations. respect. Culture – Reconcile gaps.PRE-REQUISITES FOR SUCCESS Commitment – Mutual trust. Agreement – Clarity on operational control. Objectives – Shared vision. Equality – Lack of dominance. 240 .
MERGERS & ACQUISITION 241 .
however. Mittal Arcelor). The larger objective is to leverage on size. 2002). Most countries have stringent laws that prevents hostile takeovers (Eg. An acquisition is said be smooth if it is with the consent of the management (Eg. An acquisition is the purchase of a firm by a firm (of larger size.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. reverses are also taking place through LBO) with a view to acquire conglomerate power and induce synergy (Eg. Brooke Bond – Lipton). SEBI Takeover Code. HLL – Tomco). Ranbaxy . 242 .
SEBI TAKEOVER CODE. creeping acquisition). . Preferential – A preferential allottee ending up acquiring 5% stake also comes under its purview.e. Control – A special resolution of 75% of the share 243 holders approving the change of guard. Hike – An acquirer who has already picked up a 5% has to make a mandatory disclosure for every additional 1% stake that it acquires. Acquirer – Someone (individual or firm) who picks up an atleast 5% stake without mandatory disclosure having an intention to wrest management control (i. 2002 Promoter – A person who has a clear control of atleast 51% of the voting rights of the company and confidence of all the major stakeholders.
Grasim – L&T Cement. Disclosure – All acquirers have to inform the respective stock exchanges where it is listed and SEBI upon acquiring the basic limit and upon every incremental limit thereon.SEBI TAKEOVER CODE. Gujarat Ambuja – ACC). SEBI – In case of a hostile take over. credentials or track record is at stake. asset stripping). 2002 Pricing – Acquirers will have to offer minority shareholders (at least 20%) the past 26 weeks or past 2 weeks average price. whichever is higher as an exit route (Eg. and/or does not enjoy the confidence of the different stake holders.e. the SEBI can intervene and block share transfers if: the acquirer has ulterior motives (i. 244 .
Horizontal – It involves integration of two highly related businesses (Eg.Kelvinator). Godrej. Vertical – It involves complimentarily (partially related) in terms of supply of inputs or marketing activities (Eg. The type of merger is depends on the degree of relatedness (strategic) between the two businesses. 245 . usually opportunistic (Eg. ITC). Reliance).TYPES OF MERGERS A business is an activity that involves procuring of desired inputs to transform it to an output by using appropriate technologies and thereby creating value for its stake holders in the process. Conglomerate – It involves integration of two distinctly unrelated businesses. Electrolux .
Asset Stripping – Shaw Wallace). scale and scope. Tax benefits (Eg.e. Global image (Eg. Ulterior motives – (Eg. Avoiding risk of new product development. 246 . Access to newer segments (Eg. Mittal – Arcelor). Tata Steel – Corus). Reduction in risk.MERGERS & ACQUISITION . Overcoming entry barriers (Eg. Economies of size. ICICI –ITC Classic). Ranbaxy – Crosslands). Coinsurance effect – Higher debt raising capability. Acquiring assets or capabilities (Eg. ITC Bhadrachalam). quick access).MOTIVES Increased market / conglomerate power. Reduced gestation (i.
Managing size. Overvaluation of buying firms (Eg. Overvaluation is often as a result of an ego drive and substantially affects future returns. Tata – Corus). Managing over-diversification. Inability to achieve synergy. When Tata Steel started negotiations with Corus. neglecting core business. their initial offer was around 420 pence/share. Merging of organisational structures. while the ultimate acquisition was made at 607 pence/share). Top management overtly focused on due diligence exercise and negotiations. 247 .MERGERS & ACQUISITIONS PITFALLS Cultural differences (Eg.
with an objective to reinforce its growth trajectory or to take on the might of a comparatively larger player (Eg.MERGER TYPE & PLC Introduction – A larger firm may acquire a newly formed entity with an objective to preempt new competition or acquire its license (Eg. Maturity – A larger firm acquires a smaller firm with an objective to achieve economies of scale and experience curve effects (Eg. Growth – This stage may witness parallel merger of two firms of similar size. Kingfisher – Air Deccan). vertical to save transactions costs. Tata Steel – Corus). 248 . Decline – Horizontal mergers are undertaken to ensure survival. Brooke Bond – Lipton).
Blanket promotions across entities and confidence building exercises needs to be practiced. Left alone syndrome. active top management intervention in phases. Immediate attempts to super impose structure and culture may cause bottle necks. A concern of respect and trust for the business of the acquired company. 249 . Strong differences may stifle plans and its execution. A common shared vision.INTERNATIONAL M&A .FRAMEWORK Positive contribution to the acquired company. An acquisition just for the sake of it or reputation yields very little value in the long term.
Integrating work processes. It will enable focus on customers and key people. 250 Do not ignore the “people factor”. Redefine responsibilities and authority. Determine business strategy. promptly.INTEGRATION . Decide upon management control systems. Decide on the new hierarchy. They can carry the message to the various stake holders. Shift attention from business portfolio to people and processes.BLUEPRINT Take the media into confidence. .
While under valuation may be a significant opportunity. – Unstated reasons – Personal self interest and hubris. – Market for corporate control.e. operational & financial).VALUATION The process of valuation is central to M&A. 251 . The process takes (6-12) months. Valuation decisions are arrived through a due diligence process when the prospective acquirer gets access to the books of accounts of acquiring company. Financial motives – Undervaluation relative to true value.M&A . – Synergy – Potential value gain from combining operations (i. over valuation can become a curse.
Synergy can be negative as well. Sources of operational synergy – Horizontal Synergy – Gains come from economies of scale which reduces costs. – Vertical Synergy – Gains come from controlling the supplychain and savings in transaction costs. Innovative product – Good distribution network). when the “fit” between the two entities is very poor. 252 .VALUING OPERATIONAL SYNERGY Synergy – It refers to the potential value gain where the whole is greater than the sum of the parts. – Conglomerate Synergy – Gains come when one firm complements the resources or capabilities of another (Eg. or from increased market power which increases sales and margins.
ITC – Bhadrachalam Paper). Cash Slack – It reduces asymmetry between cash starved firms with deserving projects and cash cows with no investment opportunities. shareholders can accomplish the same at a much lesser cost. Synergy comes from projects which would not have been undertaken if the two firms stayed apart (Eg.VALUING FINANCIAL SYNERGY Diversification – Reduce variability in earnings by diversifying into unrelated industries. 253 . and without paying take-over premiums. Hotmail). However. Tax Benefits – Tax benefits may accrue from tax entitlements and depreciation benefits unutilized by a loss making firm. but availed after being merged with a profitable firm (Eg.
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. the cash flow the merged firm will be less variable than the individual firms. hence better performance. – Default risk comes down and credit rating improves. 254 . as risky debt is spread across the new firm's operations. It relates to the concept of diversification. higher leverage. – Coupon rates may also be negotiated at lower rates. This will induce higher debt capacity.
255 . The value of control can be substantial for firms that are operating well below optimal value. The value of wrestling control is inversely proportional to the perceived quality of that management. While value of corporate control is negligible for firms that are operating close to their optimal value. Assessment of perceived quality is critical.VALUING CORPORATE CONTROL Premium of M&A are often justified to control the management of the firm. – – Value of Control = Value of firm after restructuring Value of firm before restructuring. since a restructuring can lead to significant increase in value.
Confidence of investment bankers and the international financial community is essential. The assets of the acquired company are used as collateral for the borrowed capital. It is a very costly and risky proposition.e. sometimes in combination with the assets of the acquiring company. 256 . LBO facilitates a relatively smaller firm to bid for a comparatively larger firm in the bid for management control.LEVERAGE BUYOUT (LBO) The basic difference between a take-over and a LBO is the high inherent leverage (i. debt component) at the time of buyout and rapid changes in capital structure over time.
257 . the advantages of going public includes . A research study showed that 30% of the publicly listed firms reported above average returns after going private. However. – The need to satisfy analysts and shareholders. The increased benefit showed in the following way – reduced costs and increased revenue. on-going valuation.access to financial markets. liquidity. – Increased information needs. off-late many publicly traded firms have gone private keeping in mind the following – – The fear of LBO.TO GO PUBLIC OR NOT? However. – Separation of ownership from management.
– Cash trapped company unable to utilize opportunities.RATIONALE FOR HIGH LEVERAGE The high leverage in a LBO can be justified by – – If the target firm has too little debt (relative to its optimal capital structure). – It is a temporary phenomenon. 258 .e. – Cost of debt coming down (i. co-insurance effect). – Managers cannot be trusted to invest free cash flows wisely. – Debts repaid off from increased value after successful restructuring and wresting management control. which disappears once assets are liquidated and significant portion of debt is paid off.
259 . initial rise in leverage is anticipated. Any discounting has to reflect these changing cost of capital. Therefore. – Increase equity valuation. As the firm liquidates / pledges assets and pays off debt. A LBO has to pass two tests to be viable – – Restructuring to pay-off increased debt. leverage is expected to decrease over time.EFFECT OF HIGH LEVERAGE Increases the riskiness of dividend flows to shareholders by increasing the interest cost to debt holders. Lack of sufficient cash flows to repay costly debts resulting in a possible debt trap.
– Tax shelter.REVERSE MERGER Reverse Merger – The acquisition of a public company. small in size but having a promising business. – Facilitates better valuation and forthcoming offerings. shell company) by a private company. which has discontinued its operations (i. allowing the private company to bypass the usually lengthy and complex process of going public. – Prevents dilution of equity. – Automatic listing in major exchanges. time-barred. Objectives – – Traditional route of filing prospectus and undergoing an IPO is costly. or costly.e. 260 .
Most target firms are taken over within (6090) days. During bearish periods excess returns were 19%. However. – Takeover announcements reported 30% excess returns. Initial anomaly in stock prices usually normalizes over a period of time (6-12) months. – Merger announcements reported 20% excess returns.EFFECT OF TAKE-OVER ANNOUNCEMENT The shareholders of target firms are the clear winners. Excess returns also vary across time periods. takeover failures have only initial negative effects on stock prices. and 35% during bullish periods. 261 .
as stock markets become more and more perfect such anomalies would reduce Source: Jensen and Ruback.EFFECT OF TAKE-OVER ANNOUNCEMENT The effect of take-over announcement on bidder firm’s stock prices are not clear cut. 1983. and Netter. Bradley. – Most studies reported insignificant excess returns around take-over offers or merger announcements. Brickley. and Kim. Desai. – However. 1988 . – However. in the event of take-over failure negative returns to the extent of 5% on bidder firm stock prices is reflected. 262 Jarrel. over time. 1983.
Poison Pill – An offer to existing shareholders to buy shares at a substantial discount to increase their voting rights (Eg. 263 . Rights).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. so that nothing is left for the raider to strip off. Poison Put – Premature retirement of bonds at attractive rates to pour surplus cash and make target investment unattractive.
Shapoorji Pallonji).DEFENSIVE STRATEGIES White Knight – It is the placing of stocks to a cash rich investor and bargaining for protection in return. 264 . thus thwarting the raider company’s attention. Green Mail – The targeted company buys large blocks from holders either through premium or through pressure tactics (Eg. Pac Man – The target company makes a counter bid to take over the raider company. But often the White Knight turns a betrayer himself (Eg. 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).
COMPETING FOR THE FUTURE 265 .
Compaq overpowering IBM.GETTING OFF THE TREADMILL Canon overpowering Xerox. Nokia overpowering Motorola. Hitachi overpowering Westinghouse. Wal-Mart overpowering Sears. Honda overpowering Volkswagen. What went wrong???? What were they doing with the present? What were they pre-occupied with? 266 . The reverse was true for the companies overpowering. were spending 99% of their precious time dealing with present. Most companies were too preoccupied with the present than the future? 99% of the companies overpowered. Honda overpowering GM. British Air overpowering Pan Am.
decluttering. most often they ended up cutting corporate muscle as well and became anorexic. Not knowing when to stop. falling market share). Thus efficiency was grievously hurt. downsizing).THE PAST OF COMPETITION Beyond Restructuring – When a competitiveness become inescapable problem (stagnant growth. CEO’s brutally pick up the knife and ruthlessly carve away layers of corporate flab (delayering. declining margins. 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 .
On the contrary only 20% of Japanese managers believed that quality will be a source of competitive advantage of the future. 268 . top managers believed that quality will be a source of competitive advantage of the future.S. The future is not about catching up with competition. but forging ahead in competition. However. A poll in circa 2000 revealed that 80% of the U. incrementalism or nominal innovation has almost reached a plateau. ensuring only survival of the present. but not of the future.THE PRESENT OF COMPETITION Beyond Reengineering – Numerator based managers (innovation) at least offers some hope.
Transform the industry. Empower from bottom to top.THE FUTURE OF COMPETITION Regenerating – Leaner. Companies need to fundamentally reconcieve itself. aspirations and resources. Creating the future requires industry foresight. not just the organization. as important as these may be. reinvent its industry. Create a potential gap. It involves Dream about the company’s future. It is based on deep insights into trends in technology. they are not enough to get a company to the future. better. and regenerate its strategies (breaking its – managerial frames). faster. demographics and lifestyles. 269 . not the other way. don’t predict.
ABOUT THE DREAM Which customers will you be serving? What will the potential customer look like? Who will be your future competitors? What will be the basis of your competitive advantage? Where would your margins come from? What will be your future competencies? Which end product markets would you cater? 270 .
Change in at least one fundamental way the rules of engagement in an industry. 271 . It is about deliberately creating a strategic misfit.ABOUT THE TRANSFORMATION The future does not belong to those who take the industry for granted. Redraw the boundaries between industries. Successful companies have a complete grip over the industry. by converging technologies complex. It drives a hunger and a passion to transform. blue oceans). Therefore.e. they do not need to restructure. Create entirely new industries (i. hence do not fall sick in the first place.
ABOUT THE EMPOWERMENT Bring about a revolution (a paradigm shift) in the organization. Such a process is called institutionalization (from people centric to organisational centric). A revolution that is thrust upon from the top seldom sustains. 272 . Most successful revolutions (Gandhi to Mandela) rose from the dispossessed. the revolution must start at the bottom and spread in all directions of the organization. More importantly. Transformational leaders merely lead the way. The middle management plays a strong moderating role.
THE FUTURE OF STRATEGY A company must get to the future not only first but also for less. 273 . Toshiba – LCD. Apply the 40 – 30 – 20 principle. South West Airlines – LCC. A process for finding and gaining insight into tomorrows opportunities (Eg. without taking undue risk. Apple – iphone). An ability to energize the company. It requires a lot of common sense and a little bit of out of the box thinking. Get to the future first. What does it take to get to the future first? Understanding how competition for the future is different. Companies need to strategize (think ahead of times).
but hundreds. greatness from mediocrity. What distinguishes a leader from a laggard. as on their aspirations. each point in space represents a unique business opportunity.HOW DOES THE FUTURE LOOK LIKE? There is no rule which says that for every leader there will be a follower. We are in the midst of a 3600 vacuum. As there is no one future. is the ability to imagine in a different way what the future could be. 274 . the farther it will be away from competition. The farther one can see in this endless space. Companies of the future will be not based so much on the strength of their resources.
THE EMERGING STRATEGY PARADIGM Not Only Reengineering Processes But Also Regenerating Strategy The Competitive Challenge Organizational Transformation Industry Transformation Competing for Market Share Competing for Opportunity Share Finding the Future Strategy as Learning Strategy as Positioning Strategy as Engineering Strategy as Unlearning Strategy as Dream Strategy as Architecture 275 .
THE EMERGING STRATEGY PARADIGM Not Only But Also Mobilising for the Future Strategic Fit Resource Allocation Strategic Misfit Resource Stretch & Leverage Getting to the Future First Existing Industry Structure Product Leadership Single Entity Product Hits & Timing Future Industry Structure Competency Leadership Dominant Coalitions / Co-option Market Learning & Preemption 276 .
Learning Curve t1 t2 t3 Time t4 t5 277 .LEARNING TO FORGET P1: The degree of learning in current period is directly proportional to the degree of unlearning in the previous period. Degree of Learning Unlearning Curve P2: Unlearning in previous period does not necessarily ensure learning in the current period.
It cannot be matched even by its closest competitors. Inimitable & Insubstitutable – A high degree causal ambiguity between these skills yield sustainable competitive advantage. 278 . It represents the collective learning's of an organization centering around diverse streams of technologies. 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 gets more refined and valuable through use. leaders have one. Although a core competence may lose value over time. Honda – engines. Core competencies are the roots of the organization. Toshiba – flat screen displays. Most companies around the world do not possess one. Nike – designing. A core competency cannot be outsourced. Wal-Mart – logistics. Coca Cola – brand. at the most three to four. SKF – antifriction and precision. it is deeply embedded in the heart of the organization.MORE ABOUT CORE COMPETENCE Sony – miniaturization. Intel – nano-electronics. Canon – imaging. 279 . Toyota – lean manufacturing.
ROOTS OF COMPETITIVENESS End Products 1 2 3 4 5 6 7 8 9 10 Core Businesses Core Business 1 Core Business 2 Core Business 3 Core Business 4 Core Product 2 Core Products Core Competencies Core Product 1 Competence 1 Competence 2 Competence 3 Competence 4 280 .
RESOURCE STRETCH & LEVERAGE
Initial resource position is a very poor indicator of future performance. It leads to atrophy and stagnation. Successful companies consciously create a potential gap between aspirations and resources. Resource crunch is a common factor among firms that faces a wealthy rival, and outperforms them. Leveraging what a company already has, rather than allocating it is a more creative response to scarcity. – By concentrating existing resources. – By accumulating existing resources. – By complementing existing resources. – By conserving existing resources. – By recovering existing resources.
Concentrating – It involves effectively directing portfolio of resources on key strategic goals in which individual efforts converge over time. It is a balance between individual mediocrity and collective brilliance. It is achieved through – Converging – Redirecting multiple diverging (i.e. fragmented) short term goals into one long term goal. It is then resources can be stretched over time. Focusing – Making trade-offs and preventing dilution of resources at a particular point of time. Targeting – Focusing on the right innovations that are likely to have the biggest impact on customer value.
Accumulating – Using existing reservoir of resources to build new resources. Each and every individual is a rich & potential source of learning, discover better ways of doing things. It is achieved through Mining – Extracting learning experiences from existing body of each additional experience (i.e. success or failure). It is an attitude that can be acquired, but never learnt. It leads to a substantial jump in the experience curve. Borrowing – Utilizing resources outside the firm through licensing, alliances, joint ventures. A firms absorptive capacity is as important as its inventive capacity.
Complementing – Using resources of one type with another that aligns smoothly to create higher order value. In a way it produces an accelerating effect on each individual resource. It is achieved through – Blending – Interweaving discrete capabilities to create world class technologies (GM – Honda) through integration and imagination. Different functional skills can also be blended to create a world class end products (Yamaha – Keyboard). Balancing – An ability to exploit excellence in one area is never imperiled by mediocrity in another (GE acquiring the CT scanning rights from EMI because of its inadequate market reach).
Conserving – Sustaining competencies over time through frequent usage. Resources are never abandoned; they are always preserved for future use. Recycling – Increasing the velocity of use of a competencies over time. As a result core competencies can be leveraged across an array of products (Sony - Betamax). It includes brand extensions as well. Co-Opting – Enticing resources of potential competitors to exercise influence in an industry (Fujitsu – IBM). Shielding – It involves identifying competitors blind spots and then attacking without having the fear of retaliation.
Recovering - It is the process of reducing the elapsed time between investing in resources and the recovery of those resources in the form of revenues via the market. Speeding – Prior to the 1980’s Detroit’s majors took an average of 8 years to develop an entirely new model; the Japanese reduced it to less than 4.5 years, with major new variants in 2 years. This envisaged Japanese players in giving customers more opportunities to switch allegiance and loyalty (Toyota). Protecting – It uses competitors strength to one’s own advantage, by deflecting it, rather than absorbing it as practiced in Judo.
INTERNATIONAL BUSINESS ENVIRONMENT 287 .
Emerging markets are characterised by infrastructural bottlenecks. 288 . Diversified groups in operating in emerging markets therefore benefit from unrelated diversification. high levels of market imperfection). institutional gaps. strategies suited for the developed markets may not be appropriate for emerging markets. China. Therefore. 1997). Korea. and high transaction costs. Therefore focused strategies based on core competence may not be suitable for emerging markets (Khanna & Palepu.EMERGING MARKETS Emerging markets (India. Chile) provide a different context (i.e.
Size & Scale.DIVERSITY . et al. Synergy.PERFORMANCE (I) Diversity attempts to measure the degree and extent of diversification (Herfindahl. Optimum level of diversification Performance Diversity is initially positively related with performance. Entropy). Concentric. Experience Strategic Fit Diversity Palich. (2000) 289 . subsequently negatively related across developed markets.
Huge initial investment.PERFORMANCE (II) Diversity is initially negatively related with performance. subsequently positively related across emerging markets. 2001) 290 . conglomerate power Threshold level of diversification Performance Diversity (Khanna & Palepu. brand building Risk diversification.DIVERSITY .
HSBC). It should have a spread of interest groups / stake holders.INTERNATIONAL IDENTITY MNC’s consciously engage in FDI in different parts of the globe to forge resource diversity as a distinct competitive advantage. Characteristics – It should have a spread of affiliates or subsidiaries. act locally (Eg. 291 . It should have a spread of manufacturing facilities. It should have a spread of assets. revenues and profits. It should think globally.
Risk Profile – It reflects the risk attitude of the top management (Eg. low group scale in developed markets and vice versa for emerging markets). 292 .GLOBAL BUSINESS ENVIRONMENT Power Distance – It reflects the disparities in income and intellectual development (Eg. low risk profile in developed markets and vice versa for emerging markets).It reflects the disparities in women in workforce (Eg. Feminity Index . Group Scale . low power distance in developed markets and vice versa for emerging markets).It reflects the relative role of team building (Eg. high feminity index in developed markets and vice versa for emerging markets).
time value. FOREX reserves. attitude. currency. terrorism (9/11). flexibility (Eg. judiciary) of doing business in a particular country (Eg. code of conduct. political stability. inflation.GLOBAL BUSINESS ENVIRONMENT Cultural Adaptability – It reflects the adaptive ability to a changing environment . corruption. Country Risk – It reflects the political and economic risk (Eg. high cultural adaptability in developed markets and vice versa for emerging markets). low country risk in developed markets and vice versa for emerging markets). credit rating. 293 . way of life. dress sense. customs.culture. interest rates.
294 . in most emerging markets use of an interpreter may be a standard protocol. Language Barriers – Developed country managers expect foreign partners to communicate in their languages. Other factors – local celebrations.GLOBAL BUSINESS ENVIRONMENT Time Sensitiveness – Developed country managers regard time as precious. time-zones. in most emerging markets meetings are delayed and lasts unusually long. Ethnocentrism – Developed country managers tend to regard their own culture as superior. and vice-versa. however. High levels of ethnocentrism usually has a negative effect on business.
It a multi-lateral treaty with 143 (as on 2002) member countries to reduce tariff and non-tariff (quota) barriers. It also initiated provisions on anti-dumping. 295 . ASEAN. BRIC). copyrights. In 1995 (Uruguay Round) GATT was renamed to WTO. trademarks). The 1999 (Seattle Round) saw a lot of protest amidst bringing agriculture under the purview of TRIPS. It focused largely on TRIPS (patents. It also highlighted the nexus between US & WTO. The 2001 (Doha Round) focused on power blocks (NAFTA.GATT GATT was a bi-lateral treaty initiated between US and some member countries in 1947 to promote free trade.
Sterling . However. The notable exception was Great Britain which still continues with its local currency (i. However with current recession in the US 2002 onwards. the Euro slowly started outperforming the Dollar. The Euro was significantly devalued against the Dollar till 2002.Pound). primarily the OPEC countries. 296 . Euro). three countries joined in 2002 increasing it to fifteen members as of 2008. the Dollar still remains the most preferred currency globally.e.EURO – SINGLE CURRENCY In 1999 twelve member countries in Europe joined hands to move over to a single currency (i.e.
it helps avoiding transaction costs associated with a multiple currency. Trade Block – It will strengthen the EU identity which would not have been possible otherwise. a multiple currency is preferable where the business cycles of member nations are different. 297 . Transparency – A single currency is transparent and competitive.SINGLE Vs MULTIPLE CURRENCY Transaction Costs – Though the initial cost of introduction of a single currency is very complicated and costly. However. Rate Uncertainty – A single currency eliminates the risk of competitive devaluations. but it may have spill-over effects.
the gain of one country is loss of another). It is long term with high levels of commitment. Neo classical economists believe that foreign investment may in fact be a win-win game.e. 298 .FII Vs FDI INVESTMENT Classical economists believed that foreign investment (in any form) is basically a zero sum game (i. – FDI (transfer of tangible resources) is slow but steady for the purpose of economic growth. hot money). It is short-medium term with comparatively low levels of commitment. – FII (transfer of intangible resources) is fast but may have strong repercussions (i.e.
INTERNATION MARKETING Product – The various attributes of a product may receive different degrees of emphasis depending on differences in . lifestyle (petroleum 299 outlets – departmental stores). usage (talk time). technology (microchip). economic (middle class buying power). . customer awareness (microwaves).culture (food habits). Distribution – It depends on the market characteristics (fragmented – concentrated). buying patterns (spread). promotion (surrogate advertising). Pricing – It depends on the competitive structure (PLC – Kellogg's).
India) may be different from that another trading country (US – GAAP or IRS).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. equity is cheap in India). Cost Structure – Companies in India need to investment in fixed costs due to poor infra-structure 300 compared to developed markets. debt is cheap in US. Accounting Norms – The accounting norms of one country (AS . Leverage – The leverage may vary across countries depending upon money and capital market conditions (Eg. .
301 . social security.INTERNATIONAL HR An uniform HR policy is idealistic to enable parity in performance appraisal. in most cases it is not desirable nor practiced. skills are more important that cultural fit and vice-versa. Compensation – Differential pay packages exists because of differences in purchasing power. double taxation. and cultural barriers (language) vis-à-vis emerging markets. shortened life cycles). Training – It is a pre-requisite for international business to reduce language. labour laws. technology (convergence. however. Recruitment – In local recruitment.
SCM – Use of ERP to network the extended enterprise 302 across the globe. Bosch spark plugs are used by car manufacturers worldwide). reduce power costs) vis-à-vis infrastructural bottlenecks. Outsourcing – A company having a core competence may be the source of global outsourcing (Eg.INTERNATIONAL OPERATIONS Location Incentives – FDI in emerging markets should explore options for SEZ’s to explore benefits (tax holidays. . Technology – The cost to be evaluated in terms of latest technology (Euro VI) vis-à-vis effective cost of appropriate technology (Euro II).
CONTEMPORARY TOPICS 303 .
Innovations typically paves the way for more secured and improved lifestyle for consumers in general. 304 . While innovation typically adds value for organizations.INNOVATION An invention is the first occurrence of an idea for a new product or process. Innovation is all about staying ahead of competition. it has destructive effects as well. but has inherent risks involved as well. Innovation is the most preferred strategy today to maintain competitive advantage in the present turbulent business environment. innovation is the first attempt to carry it out in practice.
TYPES OF INNOVATION A key challenge is maintaining a balance between process and product innovations. However. While product innovations are typically customer driven. process innovation is necessary to sustain the competitive advantage of product innovation. Process innovation usually follows product innovation. Tangible impact of product innovation on performance is significantly higher than process innovation. process innovations are organizational driven. 305 . Strategic innovation has the potential to change the rules of the game.
It leads to a shift in the price – performance envelope. Data Storage (Pen Drives). a paradigm shift). Telecom (CDMA Technology).e. putting an idea into practice). Disruptive business models brings in a new frame of reference (i. Drug Development (Bio Chemicals). Processors (Pentium). Innovations are the back-bone of successful business models .e.BUSINESS MODEL It is a simplified description and representation of a complex real world. about how an organization makes money (i. 306 . Medical Surgery (Lasik).
The proposed relationships established with clients. 307 . The key activities / processes necessary for execution. The key resources and capabilities required.NINE BUILDING BLOCKS Value proposition offered to the market. The revenue streams generated by the activities. The segment(s) of clients to be addressed. The key partners involved in the activities. The channels to reach out to the clients. The cost structure resulting from the business model.
BUSINESS MODEL FRAMEWORK 308 .
REVENUE MODEL Positioning is just not sufficient. With the rapid erosion of certain industries (IT. It is just one piece of the puzzle. Real Estate) companies need to untangle and understand the intricacies of their business model. The revenue model described here are the means to generate revenues. Investment Banking. 309 . It involves – Product Visualization – Product Prototype – Product Test – Capacity – Pricing – Distribution. innovative companies to carve out unique business models to fend off competition.
Provide reasonable incentives (not necessarily monetary). Allow the workforce idiosyncrasies for their errors.HOW TO MAKE INNOVATIVE CO’S Innovative company’s are a matter of culture and aspirations rather than tangible resources. 310 . Promote the grape-vine. Allow the management sufficient slack to be future oriented. Promote the culture of experimentation. A favourable intellectual property (IP) climate. Have a lean and a flat organization structure.
Collusion with the judiciary is also another distinct possibility in emerging markets. The most preferred strategy of internal protection includes imbibing “causal ambiguity” in the production process to make reverse engineering difficult. companies are increasingly relying on internal protection to sustain innovation effects. 311 311 . In most emerging markets where the IP climate is not so favorable. however that possibility is slowly atrophying.HOW TO PROTECT INNOVATION? Without adequate protection (external or otherwise) the effects of innovation does not translate to performance.
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. Corporate governance aims to reduce the principal-agent problem present in most professional managed organizations through appropriate forms of accountability and control mechanisms.
This exposes the shareholders to additional risks and higher costs. shareholders can diversify their portfolio at a much lesser risk and cost. 313 . However. From the strategic point of view managers tend to diversify into unrelated businesses as it provides higher returns hence a more favourable appraisal. not present in portfolio diversifications.AGENCY THEORY The root of Corporate Governance goes back to the Agency Theory. also known as the principal-agent problem or agency dilemma. According to the agency theory top managers and shareholders interests are usually conflicting in nature and tend to pull in opposite directions.
SEBI Report – 2005. 2002 to restore public confidence in corporate governance. . the US government passed the Sarbanes – Oxley Act. various laws were enacted to ensure proper usage of these funds.ORIGIN & CONTEXT Since the early 20th century since a large part of public funds were held by publicly traded firms in the US. After the Enron downfall. 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.
315 . 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. including the society at large. Role and responsibilities of the board: It deals with issues about an appropriate mix of executive and nonexecutive directors.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.
GOVERNANCE PRINCIPLES Integrity and ethical behaviour: Organizations should develop a code of conduct for their top management that promotes ethical and responsible decision making. They should also implement systems to independently verify and safeguard the integrity of the company's financial reporting. Independence of the entity's auditors: Identification. Disclosure and transparency: Disclosure of information should be timely and balanced to ensure that investors have clear access to data and facts. 316 316 .. assessment and mitigation of risks and retirement by rotation over a fixed period of time.
GOVERNANCE STRATEGIES Monitoring by the board of directors: The board of directors. discussed and resolved. fire and compensate top management. Remuneration: Performance-based remuneration is designed to relate some proportion of salary to individual performance. Regular board meetings allow potential problems to be identified. a person benefitting from a decision should abstain from it. safeguards invested capital. However. they should provide no mechanism or scope for opportunistic behaviour. with its legal authority to hire. Balance of power: The simplest balance of power is very common. 317 .
who had no management ties. undertook formal evaluation of its directors. They defined a well-governed company as one that had mostly out-side directors.GOVERNANCE & PERFORMANCE In its “Global Investor Opinion Survey” of over 200 institutional investors in 2002. McKinsey found that 80% of the respondents would pay a premium for wellgoverned companies. from 10% for companies where the regulatory backdrop was least certain (those in Morocco. Egypt and Russia) to around 40% for Canadian & European companies. 318 . and was responsive to investors' requests for information on governance issues. The size of the premium varied by market.
319 . Therefore. However. corporate philanthropy should be a part of every corporate mission. today economic institutions are considered as a major drivers of improvement in quality of life in general and therefore needs to include multiple stakeholders.SHAREHODER – STAKE HOLDER THEORY Till the early part of the 20th the basic objective of modern organizations was to provide goods and services for public consumption for profit maximisation. the short-term view of profit maximisation gave way to a more broader and mediumterm view wealth maximisation of the shareholders. Over a period of time. The basic premise is that firms cannot exist in vacuum.
However. CSR can be defined as. “a healthy business cannot exist in a sick and impoverished society”. Therefore. the debate on CRS still continues whether firms should detract its focus from its business? 320 . in fact a large part of it is significantly overlapping. giving a very important message that one cannot exist without the other. “an enterprises decisions and actions being taken for reasons at least partially beyond its immediate economic interests”. Therefore.CORPORATE SOCIAL RESPONSIBILITY As Peter Drucker rightly pointed out that. economic and social responsibilities cannot be mutually exclusive.
Fear of government interference: Excessive quench for profits may lead to build up of adverse public opinion compelling the government to intervene (Eg. MRTP). Public image: Entrepreneurs are increasingly relying on public image as a source of competitive advantage and a higher financial discounting. people are becoming increasingly aware of their right to a decent and healthy life. 321 .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.
and extended producer responsibility (Eg. Refrigerators – CFC. eco efficiency. designing eco-friendly products. Health & Hygiene – Attending the health hazards due to wastes and by-products to employees and society in proximity (Eg. Literacy & Training Programs – (Eg. Aditya Birla Research Centre – LBS). Tata Steel – Life Line Express). Cement .Paper packaging. Education. Exide – Product take back). 322 .CSR STRATEGIES Green Supply Chain Management: It includes environmentally preferable purchasing.
They represent an enormous opportunity for companies who learn how to serve them. they're helping millions of the world's poorest people to escape poverty. 323 . 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. C. Prahalad notes that future markets exist collectively. In turn companies by serving these markets. across the world's billions of poor people having immense untapped buying power.
BLUE OCEAN STRATEGY 324 .
TWO WORLDS 325 .MARKETSPACE .
one companies gain is always at the 326 cost of another companies loss. competing head on results in nothing but a bloody red ocean of rivals fighting over a shrinking profit pool. . where most industries are saturated.WHAT IS RED OCEAN? Companies have long engaged in head-to-head competition in search of sustained. profitable growth. and struggled for differentiation (cost or product). Yet in today’s overcrowded industries. They have fought for profits. battled over market-share. In today’s red oceans.
Such strategic moves are possible through the pursuit of product differentiation and low cost simultaneously. rendering rivals obsolete and unleashing new demand. It helps in creating powerful leaps in value for both the firm and its buyers.WHAT IS BLUE OCEAN? Tomorrow’s leading companies will succeed not by battling in red oceans. Blue Ocean’s have existed in the past. It is only the frames of the . but by creating blue oceans of uncontested market space ripe for growth . it will exist 327 in the future as well.
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.BLUE OCEAN STRATEGY IMPERATIVES Prospects in most established market spaces – red oceans – are shrinking steadily. . Niche markets & monopoly havens are continuing to disappear. information imperfections atrophy instantly. Population shrinkage across a no. As trade barriers between nations & regions fall. of European nations. Technological advances have substantially 329 improved industrial productivity.
History indicates that blue oceans exist in three basic industries – automobiles (how people get to work) – computers (what people use at work) – entertainment (what people do after work).CONCEPTUAL UNDERPINNINGS Blue oceans have existed in the past and will exist in the future as well. They are not necessarily about technology. the underlying technology was often already in existence. Company & industry are the wrong units of 330 strategic analysis. managerial moves are. . Incumbents often create blue oceans within the ambit of their core business.
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 .
. Citibank – Automated teller machines & credit 333 cards. Southwest Airlines: Pioneering the concept of LCC.SOME GLARING EXAMPLES In the last century authors Kim and Mauborgne have documented the creation of more than 150 blue ocean creations across 30 industries – Virgin Atlantic: Fractional jet ownership or travel to space. Sony Play Station: Redefining machine-human interface in entertainment and targeting an altogether new user base.
334 . greater than themselves. All they need to do is change their managerial frames. Off late emerging views in strategy having its origin in (Organization Theory) led to a paradigm shift to what is called the – reconstructionist view. According to this view. companies & managers are largely at the mercy of economic forces.WHAT THEN IS THE HANDICAP? Most of the traditional views in strategy having its origin in (Economic Theory) led to what is called the – structuralist paradigm. According to this view managers need not be constrained to act within the confines of their industry.
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