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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
FEATURES It forms the core activity of the top management. 7 . It provides broad guidelines. It involves substantial resource outlay. It is about adaptation and response to the same. It is irreversible.STRATEGIC MANAGEMENT . It is long-term in nature. It requires full commitment of the top management. It is a holistic and integrated approach. It is all about creativity and innovation.
It is about a definite formula. It involves only the top management. It a bundle of techniques or even tricks. It about mere data and facts. It is rocket science. It is fool-proof in nature.STRATEGIC MANAGEMENT – MYTHS It involves short-cuts. 8 . It attempts to minimize risk. It brings instant success. It is about forecasting. It involves nitty-gritty's.
scale and scope. To assimilate change faster. To be insulated against environmental threats. 9 To develop core–competencies. To tap markets across boundaries. again and again ……. To innovate. To be proactive. To be future oriented. rather than reactive. To generate large resource pool. .STRATEGIC MANAGEMENT IMPERATIVES To be continuously alert. To gain expertise in technologies. To leverage size.
10 .STRATEGY . It is an old wine in a new bottle. and more importantly .strategies. In contrast.ORIGIN The word strategy has its origin from the Greek word strategia meaning Military Commander. Even in today’s markets. In the ancient days battles were won not by virtue of size of the army or armory. battles fought on the market front are won by companies by virtue of their obsession & strategies. but by virtue of their courage. obsession. but with a lot a rigour and robustness. In the ancient days battles were fought over land. whose origin can be traced to some of the greatest battles fought in the ancient days. today's battles are fought over markets.
– Reliance’s entry into telecom. challenging GM and Ford.SOME PARALLELS Japan’s attack on Pearl Harbour – Strategy: Attack where it hurts the most. 11 . US attack of Morocco to capture Germany – Strategy: Pin-hole strategy – Wal-Mart challenging Sears by entering small towns. Allied Forces Vs Germany (WW-II) – Strategy: Forging alliances. Napoleon’s attack on Russia – Strategy: Waiting for the right time. – Yahoo and Microsoft challenging Google. – Toyota’s entry in the US.
12 .EVOLUTION OF MANAGEMENT As Peter Drucker refers to it.Industrial Revolution. 1910). The first major discontinuity in the history of global business environment was the . A paradigm is a dominant belief about how the business and its environment operates. a radical change in the business environment brings about discontinuity. – Mass Production Organization Size – Complicated Processes – Complex Structures Evolving of an emerging paradigm – survival of the fittest (Fayol & Taylor. The things happening around the firm when totally disconnected from the past leads to a paradigm shift.
The question of outperforming the benchmark became the new buzzword. performance across firms became differentiated. – Affluence of the new customer (i. Efficiency and effectiveness are no longer sufficient. From uniform performance. 1960). Survival of the most adaptable becomes a new management paradigm (Ansoff.EVOLUTION OF STRATEGIC MANAGEMENT The second major discontinuity in the history of global economic environment – World War II. 13 . push to pull). – Changes in the technology fore-front. – Global market place.e. – Homogeneous to heterogeneous products.
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. 15 . – Biases and prejudices has a very little role to play in strategic choices pursued by managers. – It is primarily the top management’s prerogative.APPROACHES TO STRATEGY Analytical Approach – Igor H. Learning always begin on a clean sheet of paper. – The choice of product-market mix is based on conscious evaluation of risk – return factors. – The choice of strategy is primarily concerned with external ones rather than internal ones.
The organization initially decides which industry to enter. 16 . – Organization structure will precede and cause changes in strategy. how it will compete. who will be the top managers. Once the control systems are in place. – Management control systems has a dominating role in influencing firm performance.APPROACHES TO STRATEGY Design Approach – Alfred Chandler (1970) – Structure follows strategy. Successful organizations align authority and responsibility of various departments in way to reach overall objectives. – The top managers then decide on the type of organization structure & systems to be in place. everything else follows.
– The organization will outperform the industry where environmental forces are weak and vice-versa. 17 . competitors. customer. Porter (1980) – Choose a consumer segment and position your product accordingly. – A firms performance is inversely related with the bargaining power of environmental forces to which it is exposed. – An organization is seldom in a position to influence the larger business environment.APPROACHES TO STRATEGY Positioning Approach – Michael E. substitutes. – The environmental forces comprises of – supplier. new entrant.
APPROACHES TO STRATEGY Core Competence – C. – It enables a firm to deliver unimaginable value ahead of time. Prahalad (1990) – The key to superior performance is not doing the same as other organizations. – Core competencies are a set of skills that are unique and can be leveraged. K. 18 . They are complex resources and undermines a firms competitive advantage. but exploiting the resource differences among them. locating in most attractive industries and pursuing the same strategy. – Organizations can significantly alter the way an industry functions.
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 is the cornerstone of an organizations strategic architecture reflecting its desired future state or its aspirations. A gap that consciously manages between stagnation and atrophy. It implies a significant stretch. It provides a sense of direction and destiny.STRATEGIC INTENT If you cannot see the future. A strategic intent is a statement of purpose of existence. It’s a philosophy that distinguishes it from its competitors. 21 . A substantial gap between its resources and aspirations. you cannot reach there. 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 .
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. Dominant logic changes. 23 . when radical changes in the internal and external environment (i. It is core to the strategic intent of the firm.e.
but achievable aspirations.VISION It is a dream (not a forecast) about what the company wants to become in the foreseeable future. beyond just making money. 24 . It ensures that the company does not wander off into unrelated zones or fall into an activity trap. It provides an unity of purpose amidst diversity of personal goals. – It stands for the unchanging core values of the company. It is a combination of three basic elements – – An organizations fundamental reason for existence. It enables the top management to remain focused. – It represents the company’s audacious.
and memorizable. In Reliance when a new project becomes operational top managers hand over charge to the SBU heads and move on to a new project. clear.VISION . Reachable – It should be within a reasonable target in the known future. Sharing – The company across all hierarchies should have faith in it. Clarity – Vividly descriptive image of what the company wants to be known for in the future. Brevity – It should be short. not an utopian dream.CHARACTERISTICS Reliance – Where growth is a way of life. Empathy – It should reflect the company’s beliefs to which it is sensitive. 25 .
It gives enlightment. To prevent the fall in a activity trap. It lends integrity and genuineness. It gives a shared platform. It fosters risk taking and experimentation. 26 .VISION . It gives the impression of a forward-looking organisation.ADVANTAGES To stay focused on the right track. It facilitates development of skills & capabilities. It makes strategic alignment easier. It provides a holistic picture.
It serves as a road map to reach the vision. It enables the firm to define its business landscape and identify its competitive forces. its reason for existence. 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. A broad mission statement helps in fending competitors. 27 . Although the purpose may change over time.MISSION Mission defines the space that a business wants to create for itself in a competitive terrain.
…………………. We offer strength. though some may seem unrelated in nature. We offer comfort. …………………. – We do not offer software's. …………………. We offer solutions. – We do not offer insurance. – We do not offer steel. 28 . ………………….MISSION – SOME IDEAS Reliance – We are in the business of integration. We offer security. Some other examples – We do not offer shoes. All the businesses of the company are strongly integrated with their main business.
– It keeps the mid management pre-occupied. It is an end result (quantifiable) something a firm aims and tries to reach in a time bound frame. – It helps identifying key success factors. – It is based on Management by Objectives (MBO). – It adds legitimacy and motivation. 29 . It provides a quantitative feel to an abstract proposition. – It prevents deviation.GOALS & OBJECTIVES Reliance – We want to become a Rs. – It provides a benchmark for evaluation. – It lends direction – time frame in the medium term.100K crore company by the year 2005.
and gaining access to desired markets to achieve the desired goals and objectives. – Use price-elasticity to break market barriers. The details of the plan Reliance Telecom adopted were – Backward integrate process technologies. coordinating appropriate technologies. – Compress project times. – Acquire a market share of indomitable position. 30 . – Leverage economies of size and scale.PLANS Reliance – Desire to invest 25K crore in telecom business by circa 2010. It is the process of garnering necessary inputs. It is specific to a particular business.
31 . This tendency to restore continuity is known as inertia (resistance to change). radical change may lead to disequilibrium. It often leads to an organizational crisis. This state of affairs is known as strategic drift. strategies lose touch with the emerging realities. equilibrium is maintained. However. past strategies tend to have a bearing on future strategies.STRATEGIC DRIFT Due to top management commitment. Historical studies have shown that most organizations tend to continue with their existing strategies. In such a context. When changes in the environment is incremental.
STRATEGIC DRIFT FRAMEWORK Environmental Change Degree of change Strategic Change Radical Change Incremental Change State of Flux Continuity Stage of Transformation Strategic Drift Stage of Atrophy Time 32 .
33 . – Hiding vulnerability. – Creating obligations of reciprocity. – Using covert tactics to pursue self interests. Some instances of organizational politics – Formation of powerful groups or coteries.ORGANIZATIONAL POLITICS Strategic drift often leads to organizational politics. – 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. – Developing a platform of support.
INTENDED & REALISED STRATEGIES An intended strategy is an expression of interest of a desired strategic direction. Other causes – – The plans are unworkable and utopian. A realized strategy is what the top management actually translates into practice. – The environment context has changed. – Influential stake-holders back out. . Usually there is wide gap between the two when organizational politics is evident. – Persons responsible for strategy conceptualization and implementation are34 divergent.
LOGICAL INCREMENTALISM According to the incrementalism approach (contrary to integrated approach) practitioners simply do not arrive at goals and announce them in crafted and well defined packages. However. 35 . Learning is an integral part of logical incrementalism. this is not to be treated as “muddling”. They simply unfold the particulars of the sub-system in stages. but the master scheme of the rational comprehensive scheme is not apparent. but as a defensible response to the complexities of a large organization that mitigate against publicizing goals. Strategy formulation and implementation are linked together in a continuous improvement cycle.
36 . 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. Agent of Change – Formal ratification of a change plan through MBO. Leveraging Crisis – A sudden crisis or an opportunity should be used as a trigger to facilitate acceptance and implementation of change. The broader objective should serve the overall interest of the organization.
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. Dominant logic’s are the cornerstones of change when strategic transformation is apparent. . Tampering with surface level factors often leads to atrophy. Dominant logic’s are very rigid and sticky and prone to inertia. As it brings 37 with it a different dominant logic. It creates blinders.
– Organisational Slack – Enough free space. – Constructive Bargaining – Agree to disagree. It helps prevent a strategic drift from occurring at the first place. Factors that fosters a learning organization – Pluralistic – An environment where different and even conflicting ideas are welcome. – Experimentation – Fosters a culture of risk taking. 38 .LEARNING ORGANIZATION A learning organization is capable of continual regeneration from knowledge. – Informal Networks – Emerging of new ideas. experience. and skills that fosters experimentation and questioning and challenge around a shared purpose. A learning organization must continuously focus on unlearning as well.
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 based on the assumption of radical change. Strategic planning is a function of discounting the future. It is reactive in nature. 41 .e. It points to a position of superiority with relation to competition. It requires a quantum leap (i. It is based on the assumption of incremental change. gap analysis).PLANNING & STRATEGIC PLANNING Formal planning is a function of extrapolating the past. Competitive advantage provides the surest way to fulfill the strategic gap.
A manager has to continuously scan the environment to ensure alignment of the strategies with the radically changing environment. not guided by any boundaries. Environmental factors can be external as well as internal to the organization. It is exploratory in nature. The world is flat. Environmental scanning is very important component of strategic planning.ENVIRONMENTAL SCANNING The environment is defined as the aggregate of conditions. and influences that affect an organizations way of doing things. The segments of the environment a top manager scans selectively depends upon his dominant logics. events. resources and ideas move unhindered. 42 .
PESTEL PESTEL attempts to provide a broad framework on how the broader environmental forces affects an organization and influences the way it practices strategy. It is particularly important that PESTEL be used to look at the future impact of environmental factors. but also to analyze the complex linkages across them. It is important not only to identify the structural drivers of change. Understanding the composite effect is critical. for which a holistic picture is required. 43 . which may be different from the past impact. It is not intended to be used as an exhaustive list.
44 . Inflation & Interest Rates. Religious Sentiments. FDI Inflows. Infra-Structural Investments. Savings & Investment. Literacy Levels. Monsoon & Food Grains Reserves. Central – State Co-alignment. Subsidies & Protection. Social – Population Diversity. Economic – GDP. Economic Cycles. Licensing & Quotas. Social Values. Language Barriers. Fiscal Deficit.PESTEL FRAMEWORK Political – Government Stability. Government Attitude. Currency Stability. Economic Model. Income & Age Distribution. Capital Market & Forex Reserves.
PESTEL FRAMEWORK Technological – Innovation. Extended Producer Responsibility. Patent Laws. Patents. Product Safety & Health Hazards. Technological Convergence. Direct & Indirect Taxes. Employment Laws. Research & Development. 45 . Pollution Control Laws. Environmentally Preferable Purchasing. Product Design. Consumer Protection Laws. Legal – Monopolies Legislation. Carbon Credits. ERP. Obsolescence Rate. Non-Fossil & Alternative Fuels. Waste Disposal & Emissions. Environmental – Global Warming & CSR.
VRS. Capital Market Reforms. Banking Sector Reforms. FERA Liberalization. 46 . Structural Adjustments – Phasing out subsidies. Rupee convertibility. Encouraging FDI. PSU Disinvestments. Curtailment of PSU’s. Encouraging exports.ECONOMIC LIBERALISATION New Industrial Policy (NIP) – Liberalizing industrial licensing. Abolition of import licenses. Exit Policy. MRTP Liberalization. New Trade Policy (NTP) – Lowering import tariffs. Economic Reforms – Fiscal & Monetary Reforms. Dismantling price controls.
Mergers & Acquisitions 47 .Survival of the fittest MNC Onslaught – Enhancing stakes – Power Equation – Joint Ventures – Technological Alliances – Take-over threat.DISCONTINUITY Destabilization due to entrepreneurial freedom – Cocoon of protection disappears – Diversification spree – Existing notions of size shaken – Industry structures change radically – Economic Darwinism .
Globalization – Cheap Imports & Dumping – Push to Pull Marketing Buyers exacting demands – Shortage to surplus – Price competition – Life-style changes – Stress on quality. Consumerism Challenges on the technology front – Competencies become technology based – Investment in R&D become inescapable 48 .DISCONTINUITY Hyper Competition – MNC’s .
DISCONTINUITY Compulsion to find export markets – Identifying competitive advantage – Technological gap – Global presence – Depreciating currency – Exports Corporate vulnerability – It is no longer business as usual – Capital inadequacy – Lack of product clout and brand power – One product syndrome – Loss of monopoly 49 .
FIVE FORCES MODEL .PORTER Threat of New Entrants Bargainin g power of Suppliers Competition from Existing Players Bargainin gBargainin power g of power of Suppliers Customer s Threat of Substitutes 50 .
The five forces have strong cross-linkages. It should not only be used to understand the forces.FIVE FORCES MODEL ASSUMPTIONS The model is to be used at the SBU level and not at the industry level. but also used to understand how they can be countered and overcome. incremental or otherwise. It depicts the attractiveness of an industry (i. the forces are subject to changes. 51 . The model should not be used as a snapshot in time. profit potential) per se. It is even wiser to apply the same at the product – market level.e.
Low margins & stagnancy. Threat of Customers – Buyer concentration and volumes. Low customer switching costs. Resource profile & fear of retaliation. 52 . Industry stagnation. Capital requirements. Learning curve advantages. High switching costs. Undifferentiated product. Presence of substitutes or unorganized sector. Product differentiation through proprietary technology or brand power. Government policy. Scope for backward integration.PORTERS FIVE FORCES ANALYSIS Threat to Entry – Economies of size and scale. Low relative importance of the segment. Unimportance of product quality. Access to distribution channels.
PORTERS FIVE FORCES ANALYSIS Threat of Suppliers – Supplier monopoly. Unorganised sector. Jockeying for position – Fragmented market. Diversity of players. 53 . High customer switching costs. Lack of substitute inputs. Produced by industries earning high profits. Threat of Substitutes – Improvement in price -performance trade-off. Industry stagnancy. Low relative importance of the segment. Intermittent overcapacity. Scope for forward integration. Buyer’s propensity to substitute. High exit barriers. Differentiated inputs. Piracy and counterfeits. Product perishability. Low level of differentiation.
Reliance). Business Scope – The intention whether the firm wants to be in a single.FIRM ENVIRONMENT Size and Scale of Operations – It is a very important component of competitiveness in today's global context (Bharti – MTN. Resource Profile – It highlights the capabilities (generic) or competencies (business specific) of the firm. 54 . Cohesiveness – Degree of bonding existing across affiliated firms. Tata). Inertia – Excessive commitment to past strategies prevents firms from tapping emerging opportunities. dominant or related diversified or unrelated diversified businesses (Infosys.
Experience curve has strong linkages with performance. leverage it as a competitive advantage. However.EXPERIENCE CURVE The cost of performing an activity declines on per-unit basis as a firm becomes more efficient. With lower costs. Matured firms will always be positioned advantageously on the ECurve than new entrants. The E-Curve thus enables organisations to build entry barriers. and with lower prices it can increase its sales volume. it can price its products more competitively. 55 . which further reduces costs. an E-Curve can prove to be futile during discontinuity. experience teaches better and more effective way of doing things.
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 .
EXPERIENCE CURVE .STRATEGIC VIEW Inertia = Limited Growth Experience = Inertia 2 3 1 Limited Growth = Diversification Strategic Failure = Poor Performance 6 5 4 Diversification = New Experience New Experience ≠ Old Experience 58 .
SWOT The framework was originally conceptualized by Kenneth Andrews in 1970. 59 Analysts. Acronym for Strengths – Weaknesses – Opportunities – Threats. Customers. Case Studies – Structured Questionnaires. Websites. . Interviews.VULNERABILITY ANALYSIS . Competitors. A SWOT audit involves – Company Records – Annual Reports. Press Clippings & Interviews. It is one of the earliest models in environmental scanning. It helps an organisation to capitalize on the opportunities by maximizing its strengths and neutralizing the threats minimizing the weaknesses. Business Intelligence – Bankers. Observation. Suppliers.
SWOT ANALYSIS .FRAMEWORK Opportunities Nullify weaknesses which prevents you from exploiting opportunities Leverage strengths to make use of opportunities Weaknesses Minimize weaknesses which prevents you from countering threats Strengths Threats Utilise strengths to counter threats (?) 60 .
Reliance. Engineering Skills – Eg. 61 . High quality products – Eg. Large resource pool – Eg. Aditya Birla. Reliance. Volkswagen. Reddy’s. Siemens. Good credit rating – Eg. Biocon. Excellent penetration – Eg. Tata. HUL.SOURCES OF STRENGTH Strong brand identity – Eg. Infosys. Strong R&D base – Eg. Economies of scale – Eg. Dr. Infosys. Toyota. Tata Steel. Sony. Strong after sales & service network – Eg. Motivated employees & cordial industrial relations – Eg. Honda. Ranbaxy. SBI. ITC. Caterpillar.
SOURCES OF WEAKNESSES Outdated technology – Eg. SAIL. K. Excess manpower – Eg. Strategic myopia – Eg. Inefficient top management – Eg. CESC. Nirma. Lack of product / brand clout – Eg. Bijoligrill. Tatas. Lacking experimentation culture – Eg. Group . Organizational Politics – Eg. Ballarpur Inds.Raymond. CMC (Tata Group) 62 . K. Hindustan Motors. J. Modi Group. Single product syndrome – Eg. Inertia – Eg. Procter & Gamble. Narrow business scope – Eg. Excessive diversification – Eg. B.
Market driven Pricing – Eg. Capital market reforms – Eg. Sugar. Banking. Life style changes – Eg. VRS. Fertilizer. Market driven Interest rates – Eg. Growing population – Eg.Tata Motors. Insurance. ECB’s. Globalization – Eg.SOURCES OF OPPORTUNITIES Delicensing of Industries – Eg. Retailing. Fertilizers. Abolishing MRTP – Eg. Maruti. 63 . Abolishing CCI. Free pricing – Eg. GDR’s. Collaborations & Joint Ventures – Bharti & WalMart. Telecom. Sugar. Exit Policy – Eg. Middle-class buying power.
SOURCES OF THREATS Political instability – Eg. Economic recession – Eg. Singur SEZ. 11/9. Import relaxation – Eg. (2008). Nationalisation – Eg. Dumping from China. (1985–1990). Earth Quake. Foreign Direct Investment (FDI) – Eg. Reliance. Onida. Group disintegration – Eg. Tsunami. Lack of Corporate Governance – Eg. Bajoria – Bombay Dyeing. 26/11. Land acquisition .Social activism – Eg. Satyam. Tata Steel. Hostile take-over – Eg. Terrorist attacks – Eg. 64 . Natural disaster – Eg.
ETOP Acronym for Environment – Threat – Opportunity – Profile. Forecasting – Predict the future (i. It represents a summary picture of the external environmental factors and their likely impact on the organization. scenario analysis). 65 . Assess the extent of impact of the factors.e. Holistic view – Prepare a complete overall picture. Strategic responses (including adaptation) to opportunities and threats is critical for survival and success. Stages in ETOP analysis – List the aspects of the environment that has a bearing on the organization. Delphi's technique. time series.
High investment intensity acts as a drag. An organization can draw upon the experience of its peers in similar situations. selectively. It is also a form of assessing vulnerability through longitudinal analysis. Some key findings on major performance drivers that explains 75% deviations in performance – Product quality and relative market share. 66 Vertical integration is a powerful strategy. . Relative attractiveness of the market.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.
– 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.PIMS . therefore 67 validity may be a question. Authenticity of data is of prime importance – Contexts drawn across one organization may not be applicable to another. – Contexts may vary over time. when radical changes in the economy takes place. .LIMITATIONS The analysis is based on historical data and it does not take care of future challenges. As every organization is unique in its own way.
It involves a three-stage process – Identify KSF – What does it take to be successful in a business? Drawing KSF – What should be the organizations response to the same? Benchmarking KSF – How do we evaluate organization success on this factor? 68 .KEY SUCCESS FACTORS (KSF) KSF relates to identification and putting concentrated effort on a particular activity or process which forms the very basis of competitive advantage. It enables the top management to draw focus. KSF helps organizations spot early opportunities and convert them into value adding business propositions.
IDENTIFYING ALTERNATIVE STRATEGIES 69 .
national. It provides broad direction to the groups vision and mission. dominant. It reflects the customer needs it intends to satisfy. A corporate strategy identifies and fixes the strategic gap it proposes to fill. It determines the locus a firm encounters with internal and external environment.GRAND STRATEGY It is concerned with the overall business scope (single. 70 . global) of a firm and deals with choices of allocating resources across them.CORPORATE . unrelated) and geographical scope (local. It indicates the quality of growth an organization is looking for. related.
CORPORATE STRATEGY MATRIX Corporate Strategy Stability Stability Growth Growth Combination Diversification Divestment Intensification Market Penetration Related Vertical Market Development Product Development Unrelated Horizontal 71 .
Even during adverse times firms need to adopt a strategy to sustain current performance levels. Hindustan Motors). – To stop for a while and assess past records. does not relate to do-nothing (Eg. – The firm may not be willing to take additional risk associated with new projects. Stability however. Citibank). The reasons for stability strategy – – Lack of attractive opportunities. (Eg. – Why disturb the existing equilibrium set up? – Limited resource position. The scale and scope of present operations remains almost intact. 72 . erosion of capabilities.STABILITY It involves maintaining status-quo or growing in a slow and selective manner.
ANSOFF’S MODEL New Product Existing Product Existing Market Market Penetration (+) Product Development (++) New Market Market Development (++) Diversificatio n (+++) Note: (+) indicates degree of growth and risk involved. 73 .GROWTH .
74 . Britannia). (Eg. direct non-users to users. convert competitors customers. Market penetration can be achieved by – increasing sales to current customers. Ujjala. – The company carries a risk of product obsolescence. within a well defined market segment.MARKET PENETRATION It is a strategy where a firm directs its entire resources to the growth of a single product or a closely knit product set. – Elongated product life-cycle. – Suitable for industries where scope for technological breakthrough is limited. – Helps firms which are not comfortable with unfamiliar terrain. Nirma.
– Stretches product life cycles. tyres. upholstery. Du Pont – Nylon: parachutes. socks & stockings. – Creativity and innovation – thinking out of the box. – Moves across geographical boundaries.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.…… or Teflon: aircraft technologies to cutlery to paints or Raytheon Corp – Microwaves: radars to kitchen appliances). carpets. – Immense customer reach & flexible advertising. (Eg. 75 . – Unconventional and flexible distribution channels. fabrics.
serviceability. – Deliverable through – redesigning or reengineering. Close Up: Fluoride – Gel toothpaste or VIP . – Leverage on customer and brand loyalty. Microsoft: DOS to Windows) or a substantial improved version (incremental) of an existing product to repeatedly enter the same market (Eg. reliability. aesthetics.Strolleys). – Leveraging through – innovation. durability. – Substitutes that serve the same needs (Eg. – Areas of product improvement – performance. features. Refills) 76 . perception. conformance.PRODUCT DEVELOPMENT It is a strategy where a firm tries to achieve growth through a radical new product (Eg.
– Internal capital market. 77 .e. – Risk reduction. From the traditional point of view. – Permits: quotas. – High transaction costs and institutional gaps. Why do firms diversify in the Indian context? – Shift the growth trajectory or opportunistic. – Conglomerate or market power (i. licenses (i. the new business is distinct from the existing business in terms of – inputs – technologies – markets. dominance). thereby creating a new business.e. From the modern point of view they are strategically dissimilar. industrial embassies).DIVERSIFICATION It marks the entry of a firm into newer markets with new products.
What would be your ideal diversification strategy through optimization? 78 . If the hot wave dominates the planet. either of which is equally likely to prevail. cold wave dominates the planet. Let us assume that there are two businesses constituting the entire market – coffee and icecream.HOW DIVERSIFICATION REDUCES RISK? Consider a hypothetical planet. ice-cream business would register a return of 10%. If on the other hand. the ice-cream business would register a return of 30%. while the coffee business would register a return of 30%. in which a given year is either under hot or cold wave. while the coffee business would register a return of 10%.
If we diversified in either of the two businesses, our expected return will be 20%, with a possible risk of 10%. If, we split our investment between the two businesses in equal proportion, half of our investment will earn a return of 30%, while the other half would earn 10%, so our expected return would still be 20%. But in the second instance there is no possibility of deviation of returns (i.e. risk). Diversification results in 20% expected return with zero risk, whereas investing in individual businesses was yielding an expected return of 20% with a risk factor of 10%. The pivotal point is that the two businesses are negatively correlated. 79
It takes place when a company increases the breadth of a firms business or geographical scope by getting into product – market segments which compliments its existing businesses (Eg. Reliance). Alternatively, existing business may recreate new businesses, which are distinct, but supplements its existing business (Eg. Bajaj – scooters to motorcycles, Dove – soaps to shampoo). – It results in increased market power. – Leveraging existing capabilities. – Resources can be shared for mutual benefit. – Reduces economic risk (i.e. business cycles). – Enables brand or product line extension.
It increases the depth of its business scope either in a backward business process or in a forward one. Backward integration occurs when the company starts manufacturing its inputs or catalysts. In forward integration a firm moves into marketing of its products and services. Advantages of backward integration – – Cost competitiveness – entry barrier. – Better operational control – timely supplies, quality control, coordination – JIT, savings in indirect taxes. Disadvantages of backward integration – – It may spark of a chain reaction - contagion effect. – Long gestation & break even - investment in CAPEX.
Oil & Gas exploration Naptha-cracking Acetic Acid Paraxylene (PX)
Purified tetra-pthalic acid
Polyester Filament Polyester Staple Fibre (PSF) Yarn (PFY) Textiles 83
DIVERSIFICATION SUCCESS ?
While diversifying into new businesses, the scope of relatedness or unrelatedness should not be judged from the traditional static view, but from the modern dynamic view which incorporates strategic factors like capabilities and dominant logic. Countermanding reasons – Potential to reap economies of scope across SBU’s that can share the same strategic asset. Potential to use an existing capability to help improve the quality of a strategic asset in another business. Potential to use an existing capability to create a new strategic asset in another business. Potential to expand the existing pool of capabilities. Dominant logic ensures timely & appropriate response.
Usually the firm concentrates on its core activities. Dr.A firm produces part of its own requirements and buys the rest from outside suppliers with a variable degree of ownership and control. Maruti – Sona Steering).QUASI & TAPERED INTEGRATION Full Integration . and out-sources the noncore activities (Eg.Where one firm has full ownership and control over all the stages of a value-chain in the manufacturing of a product (Eg. Tapered integration . 85 . Reddy’s). Reliance). Ranbaxy. Quasi-integration .A firm gets most of its requirements from one or more outside suppliers that is under its partial control through value chain partnerships (Eg.
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 .
e.e.e. lack of knowledge of competitive forces).e. and are also strategically dissimilar. – Cost of dysynergy (i. Drawbacks of unrelated diversification – – Cost of failure (i.CONGLOMERATE DIVERSIFICATION It relates to entry of firms into businesses which are distinct in terms of – inputs – technologies – markets. myopia). lack of strategic intent. Firms usually engage in conglomerate diversification when emerging opportunities are very attractive and offers potential growth opportunities. – Cost of neglect (i. – Cost of ignorance (i. core business). synergies pulling in opposite directions). 87 .
CONGLOMERATE DIVERSIFICATION Paper & Packaging Edible Oils Tobacco Hotels Food & Confectionary 88 .
where a company simply exits because the business no longer contribute to or fit its dominant logic. ACC) in full to an independent entity. It may also involve a SBU (Eg. (Eg. Glaxo’s “Glucon-D” to Heinz).DIVESTMENT Divestment is a defensive strategy involving the sale of entire stake (Eg. Tatas sale of Goodlass Nerolac. It taken into account when performance is disappointing (i. reactive) and survival is at stake and the firm does not have resources to fend off competitive forces. Tata Pharma. Tata Press). 89 . In strategy there is no scope for sentimentality with divestment.e. It is may also be a pro-active strategy. L&TCement Division to Aditya Birla Group) technically known as divestiture or a product (Eg.
(Eg. 90 . the Companies Act. where the equity is allotted amongst the existing shareholders on a pro-rata basis. involving 608 pence per share). Sale of Diamond Beverages to Coca-Cola for US $ 40 million). Tatas buy-out of Corus for US $ 11. where 100% of the assets (including intangibles) are valued and paid for.DIVESTMENT . Leveraged Buy-Out (LBO) – Here the company’s shareholders are bought out through a negotiated deal using borrowed funds. Hive-Off – A hive off is the creation of a new entity followed by transfer of assets.ROUTES Outright Sale – Popularly known as the asset route. 1956 does not permit this mode.3 billion. However. (Eg.
developing facilities right from the scratch) or through brown-field projects (i. mergers and acquisition. joint ventures).COMBINATION STRATEGY It is a mixture of stability. It is usually pursued by a business group with diverse interests across multiple industries.e. growth. because every business has its own unique external and internal environment. A combination strategy can be implemented through green-field projects (i.e. and divestment strategies applied simultaneously or sequentially for a portfolio of businesses. There can be no ideal strategy for every business. 91 .
STRATEGY CHOICE & PORTFOLIO ANALYSIS 92 .
It attempts to answer the following questions – How effective has the existing strategy been? How effective will that strategy be in the future? What will be the effectiveness of alternative strategies? It is impossible for a manager to assess all the alternatives. Dominant logic enables top managers to selectively scan the environment and make trade-offs. What then is the magical number? 93 . In most cases the trade-off is between resources and opportunities.STRATEGIC CHOICE A strategic choice seeks to determine the alternative courses of action available before top managers to achieve its strategic intent.
SELECTIVITY IS THE KEY The role of a top manager is not to solve a problem. if addressed. managers need to ask the right questions. nor is to a define a problem for others to solve. will help the firm achieve its intent. For an optimal choice the following four issues need to be resolved – Is the strategy clearly identifiable? Is it consistent with the resources of the firm? Will it be able to exploit the opportunities in full? Is it in tune with the values and beliefs of the firm? 94 . The key task before a top manager is to identify the right problems. To identify the right problems. They must choose problems which will lead to the right kind of opportunities.
business houses in India.e.BUSINESS GROUP . Resource sharing. embassies). . formal and informal ties. BRC). Their origins can be traced back to market imperfections existing in an economy (MRTP Laws. keiretsus in Japan. 95 Succession planning is critical to continuity. Licenses & Quotas. High degree of centralized control (GEO. Proximity to the corridors of power (i. chaebols in Korea. Managing Agency). Their roots can be traced to a single family or clan and share broad similarities.DEFINITION A business group is known by various names in various countries – guanxique in China.
RESOURCE SHARING ACROSS FIRMS Parent Company Firm 1 Firm 5 Firm 3 Firm 2 Firm 4 96 .
STRATEGIC CHOICE – MACRO TIMING Recession (Stability) Prosperity (Diversificatio n) Depression (Divestmen t) Recovery (Intensification ) 97 .
Divestment Duration (Yrs) Inception Intensification 98 .STRATEGIC CHOICE – MICRO TIMING ReEngineering Growth (%) Maturity Stability Growth Diversification Decline .
99 . there are high costs associated with entry and exit. next only to choice of business. therefore.PORTFOLIO ANALYSIS Resource allocation across a portfolio of businesses is an important strategic choice. Why? Businesses are not about liquid assets. Rules of the game are different. Relatedness across resources are difficult to realize. sometimes impossible. Power and resources often goes hand in hand. 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.
BCG GROWTH MODEL Relative Market Share (%) Industry Growth (%) Low High High Low Stars Question Mark ? Cash Cow Dogs 100 .
market development.e. Tata-AIG). 101 . product development). TCS. but to larger extent than a question mark. These businesses are also net users of resources (Eg. provided the industry growth rate continues and the company is able to maintain its growth (i. and their risk profile is high (Eg. Tata Steel). diversification). which remains a big? These businesses are net users of resources. Tata Telecom. market penetration. Trent.BUSINESS ANALYSIS – TATA GROUP Question Marks – They have potentials in the long term. provided the company is able to build up on its market-share (i.e. Stars – They achievers in the near term.
Tata Motors. Indian Hotels. harvest. However. 102 . divest) as achieving a dominant position in these businesses is a difficult task. Tata Chemicals). stability).e. Groups prefer to dispose off such businesses (i. and the company dominates the industry ahead of competition (i. Tata Tea.BUSINESS ANALYSIS – TATA GROUP Cash Cow – These are matured businesses. Tata Pharma. Given that the growth potential in the business is low. cash cows may also need to invest provided the industry takes an upswing (Eg. Tata Press).e. and they lack on competencies to take on competition and are basically cash traps (Eg. Dogs – They are a drag on the group. they are generators of resources. Nelco.
factors are limited. Data may be prohibitive. HUL).LIMITATIONS It does not address the concerns of a business which is in the average category (usually the majority). Cash cows may actually need substantial investments to retain their market position (Eg. neither in high or low.e. 103 .BCG . Certain businesses in the low market share category may be the result of a conscious strategy (i. The terminologies used are somewhat prohibitive. The model does not provide specific solutions within a particular category. Armani). Cartier. Mercedes Benz. niche – Rolex.
-) 104 .GE .MATRIX Distinctive Capabilities Strong High Medium Weak Stability Industry Attractiveness Diversify (++) Intensify (+) Med Intensify(+) Stability Harvest (-) Low Stability Harvest (-) Divest (.
LITTLE Inception Dominant Strong Favourable Tenable Weak Growth Maturity Decline Improve Selective Niche Abandon Industry Life-Cycle Divest Harvest 105 Competitive Position Invest Consolidate Hold .ARTHUR’ D.
SHELL – DIRECTIONAL POLICY MATRIX Business Sector Prospects Attractive Average Unattractive Generate Cash Phased Withdrawal Distinctive Capabilities Strong Market Leadership Try Harder Double Or Quit Growth Average Custodial Weak Phased Expand Withdrawal Divest 106 .
BCG – Boston Consulting Group. SBU – A business unit which is strategically different from another and also shares a different SIC code.TERMINOLOGIES Harvest – It entails minimizing investments while trying to maximize short-run profits and cash flow with the intention to exit the business in the near future. Gap Analysis – It emphasizes what a firm wants to achieve. Portfolio – An organization is perceived as a portfolio of businesses. 107 . Disinvestment involves selling in phases. Divest – Selling a part or the entire business at one go.
BUSINESS STRATEGY & COMPETITION 108 .
building market-share.e. rent). and earning super-normal profits (i. Such resources or activities should be distinctive and sustainable over time. Competitive advantage is the back-bone of strategy. Competitive advantage refers to a firms resources or activities in which it is way ahead of competition.COMPETITIVE STRATEGY A competitive strategy deals with how a firm competes in a particular business or product-market segment. The principal focus is on meeting competition. The strength of a firm in a particular business usually stems from its competitive advantage. 109 .
identifying critical success factors. 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. developing competitive advantage (Porter). Resource Based View – Obsession with competence building. leveraging (Prahalad).BUSINESS STRATEGY FRAMEWORKS How to be distinctive and yet sustainable – Differentiation – Understanding of the dynamics of competition. preventing new entry and/or competition (Hax & Wilde). 110 . Delta Lock In – Two dominant players co-opt to selfreinforce and create or escalate an entry barrier.
The firm may retain the benefits of cost advantage by enjoying higher margins (Eg. Steep experience curve effects. preferential access to raw materials. backward integration. Sources of cost advantage are varied and depends on the structure of the industry – Economies of size. Locational or early entry advantage. 111 .PORTERS – COST LEADERSHIP Cost Leadership – It is a strategy that focuses on making a firm more competitive by producing its products more cheaply than its competitors. Ayur. Reliance) or may pass it to customers to increase market-share (Eg. Compress project duration through crashing. T-Series). Nirma. proprietary technology.
Sony. innovation and out of the box thinking. Feeling the pulse of the customer. Intel. Focus on brand loyalty. Successful product differentiation is often followed by premium pricing. undeterred attention to quality. Rayban).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. 112 . It selects one or more attributes that buyers perceive as important. Culture of experimentation. Creativity. avoiding brand dilution. Means of product differentiation are peculiar to each industry. and sufficient slack. (Eg.
Cartier. coupled with fear of structural erosion. 113 . Armani). A focuser seeks to achieve a competitive advantage in its target segment. Rolex. The target segment must have unusual needs or the delivery system catering to this segment must be unique. They are poorly served by mainstream players. though it may not possess an overall competitive advantage. Sub optimization alone may not be a source of superior performance. Maybach. Mont-Blanc.PORTERS NICHE OR FOCUS Focus / Niche – It is a variant strategy of cost leadership or product differentiation targeting a specific market or buyer sub-segment with the exclusion of others (Eg.
COMPETITIVE POSITIONS Competitive Advantage Cost Differentiation Product Differentiation Competitive Scope Broad Cost Leadership (Toyota) Product Differentiation (General Motors) Narrow Cost Focus (Hyundai) Differentiation Focus (Mercedes) 114 .
Tata Nano). Reducing cost does not always involve a sacrifice in differentiation. similarly differentiation may not always lead to rising costs (i. Firms focusing on a hybrid strategy typically aim at shifting the productivity frontier and recreating a new product-market segment altogether (Eg. jugaad or frugal engineering).e. Though cost leadership and differentiation are inconsistent.HYBRID STRATEGY A hybrid strategy is the simultaneous pursuit of cost leadership and differentiation. and usually outperforms a stand alone generic strategy. 115 . in a hyper competitive context the two strategies need not be mutually exclusive.
It will have a competitive disadvantage vis-à-vis a clearly positioned generic player. unless such a player is capable of discovering a profitable segment.STUCK IN THE MIDDLE A firm that engages in a hybrid strategy and fails to achieve a competitive advantage because it was ill conceived will be . leading to what is called – straddling. It tries to compete through every means.stuck in the middle. but achieves none. Industry maturity will usually widen the gap. The positioning therefore gets – blurred. It is usually the result of a firm not willing to make trade offs. 116 .
117 . coupled with low penetration levels. leading to a blurred productivity frontier and steep learning curve. Eg. 3D imaging.EMERGING INDUSTRY Emerging Industry – An evolving industry characterized by . (Eg. Speech recognition software's. First-time buyers.radical environmental changes. Market segmentation not well defined. Nano technology. changing customer needs. It is characterized by – High level of technological uncertainty. ending in a differential cost economics. technological innovations. There is a lot of scope to define the rules of competition. Consumer behaviour pattern unstable and evolving.) Excessive turbulence in the dynamics of the environment. Artificial intelligence).
Government regulations in the form Eg. Retail and telecom. 118 . Consumer durables. Air Conditioning. Eg.GROWTH / FRAGMENTED INDUSTRY Growth Industry – An industry characterized by high growth potential in the long run and where no firm has a significant market share (an edge over another). because of lack of economies of size and scale. Diverse customer needs. leading to clear fragmentation. MRTP may also cause fragmentation. IT. Eg. Paints. Eg. Scope for players to change the rules of the game. High exit barriers because of huge investment in CAPEX. It is characterized by – Low entry barriers.
Limited scope for innovation .technological maturity. collaboration and co-option. 119 . because of economies of size and learning curve effects. Strong entry barriers. Cartel among existing players through collusion. Firms are rule takers in the segment as productivity frontier is well defined. well defined consumer behavioral patterns and imperfect competition leading to near monopoly. established industry dynamics.MATURED INDUSTRY Matured Industry – An industry characterized by saturation in growth rates. technological maturity. early entry and location advantages. distribution networks.
scooters. dot-matrix printers). Firms facing a declining phase are characterized by inertia and slow to react to environmental changes. 120 . and costly price wars. 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. Nature of competition extremely high. (Eg.DECLINING INDUSTRY Declining Industry – An industry which has outlived its utility due to the entry of close substitutes and or radical product innovations which results in a shift of the productivity frontier. backed by corporate espionage. with little or no signs of recovery.
mergers and acquisition. increasing scope. move beyond boundaries. strike alliances. strictly product differentiation and not standardization. process innovation. 121 . reengineer. Locate a defendable position. strictly cost differentiation. regenerate. focus more on product differentiation or even a hybrid one. aggressive building of distribution networks. Fragmented Industry – Identify. recreate new markets.COMPETITIVE STRATEGIES Emerging Industry – Set benchmarks. or else exit the segment. Declining Industry – Redesign. assess and overcome fragmentation. branding and promotion. premium pricing. Matured Industry – Sophisticated cost analysis.
patents. They are a standard in nature. positions based on resources which are unique and inimitable are far more sustainable even in the long term. However. A firms resources can be classified into – Tangible – These refer to real assets. and complex learning experiences in integrating and harmonizing technologies (distinctive capabilities) that play an important role in delivering competitive advantage through “causal ambiguity”.RESOURCE BASED VIEW Differentiation based on cost or products saturates and ceases to exist beyond the medium term. hence very rarely confer competitive advantage as can be easily acquired or replicated. brands. Intangible – These refer to goodwill. 122 .
but not necessarily. 123 . differentiation based on capabilities can be sustained even in the long run. Capabilities can be generic (i. can be leveraged across businesses) or specific to a particular business. Typically. Hence.e. They play a very critical role in shaping competitive advantage.CAPABILITIES & COPMPETENCIES These include a complex combinations of tangible and intangible resources that organizations use to convert inputs to outputs. they are woven around technologies. Therefore firms should concentrate on developing complex resources that forms the very basis of differentiation. There is a high degree of internal and external causal ambiguity involved in it.
COMPETITIVE ADVANTAGE 124 .
and results in well springs of new business development. It results in a distinct differentiation advantage or a cost advantage or hybrid as well. 125 . not absolute) to competition. A portfolio of competitive advantage comprises strategic advantage profile (SAP). competitive advantage subsequently becomes the back bone for a competitive strategy.COMPETITIVE ADVANTAGE A competitive advantage is a position of superiority relative (i. Success of a strategy critically depends on SAP. Strategy drives competitive advantage. It enlarges the scope of an organization.e.
Most successful organizations around the world have a well balanced SAP. In most cases SAP is hidden and dormant. Internal strategic fit between its strategy and dominant logics is essential for the top management to stretch and leverage SAP. 126 . In today's world of discontinuity. Identification of SAP is critical for and stretching and leveraging of resources. SAP changes from time to time.STRATEGIC ADVANTAGE PROFILE (SAP) Organizations have to systematically and continuously conduct exercises to identify its SAP.
VC pay-offs: better product availability. 127 .VALUE CHAIN ANALYSIS A value-chain segregates a firm into strategically relevant activities to understand its composite behaviour. Competitive advantage arises not from an individual activity but a stream of inter-related activities. Inventory Mgt to Logistics Mgt to Supply Chain Mgt (SCM). faster product launches. each of the players need to be efficient backed by sufficient coordination at the contact points (i. and enhanced customer tracking – higher market share. kaizen or internal customer). A VC is often compared with a relay team. Substantial cost reductions also follow.e. Today SCM is integrated with greening the environment as CSR practices.
THE VALUE CHAIN Support Infrastructure n gi ar M Human Resource Management Technology Development Procurement Out Logistics Mktg & Sales In Logistics Operations Primary Service M ar gi n 128 .
A learning organization helps create strategic fit. A high fit involving a complex chain of activities drives both competitive advantage and its sustainability. Fit is important because discrete activities result in negative synergy and can also be easily copied by competitors. Operational effectiveness is not strategy. – First order fit refers to simple consistency between each activity and the overall strategy. – Third order fit refers to optimization of effort.STRATEGIC FIT – THE PORTER WAY The sustainability of the value chain depends on the degree of fit between the activities. – Second order fit occurs when activities are reinforcing amongst them. 129 .
A core competence usually has its roots in technology. Core competence has a high degree of external and 130 internal causal ambiguity embedded in it. – Can be leveraged across businesses. It forms the very basis of competitive advantage. It should satisfy the following conditions – Contributes significantly to customer benefits. – Cannot be easily imitated or substituted. . – Can be sustained even in the long run. 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. but not necessarily.
A competitive advantage is sustainable in the shortmedium term. A competitive advantage may or may not lead to superior performance.CORE COMPETENCE A competitive advantage does not necessarily imply a core competence. Majority of the firms have competitive advantage. 131 . a core competence usually does. only global leaders possess a core competence. A competitive advantage manifests from a function. a core competence has its roots in a set of skills. a core competence is sustainable even in the long-term. a core competence always implies a competitive advantage.
132 . In fact there are no. A game is a contest involving two or more players.GAME THEORY The game theory was developed in 1944 by Oscar Morgenstern. 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. However. each of whom wants to win. the stringent assumptions of game theory and difficulty in ascertaining of pay-offs makes game theory application difficult in business. illustrations depicting a win-win situation. In a game (similar to a business) one players win is always another's loss. This is known as a zero-sum game.
BIASED AND UNBIASED GAME A game is said to be biased when one of the players have a disproportionate chance of winning. An unbiased game is one where both the players have equal chances of winning. Firm Y’s Strategy Use Radio Use Radio +2 +6 Use Newspaper +7 -4 133 Firm X’s Strategy Use Newspaper Firm X’s Pay-Off Matrix .
A saddle point is a situation where both the players are facing pure strategies.PURE STRATEGY GAME The strategy each player follows will always be the same regardless of the other players strategy. Firm Y’s Strategy Use Radio +3 +1 Use Newspaper +7 -2 134 Firm X’s Strategy Saddle Point Use Radio Use Newspaper Firm X’s Pay-Off Matrix .
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”. 135 .g.e. Yahoo Vs Microsoft). Repeated Games – In this situation the players interact repeatedly with each other sub-optimizing the outcome possibilities. Coke Vs Pepsi). However. This is usually through learning by “experience or observation” (i. collaboration or cooption. iteration) rather than through collusion (E. 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.
– 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.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. . – Building incentives for customer loyalty. 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.
While external strategic fit (strategy – environment) is relevant for strategy formulation. – Unlearning & learning of new skill sets. A high strategic fit (co alignment) is useful because it enables – – Appropriate and timely response. internal strategic fit (strategy – dominant logic) is critical to strategy implementation.IMPORTANCE OF STRATEGIC FIT Strategic fit has a central role to play in strategic management. – Changing the rules of the game. – Better strategic and operational control. 143 . – Resource commitment from top management. – Development of capabilities & competencies.
FORMULATION Vs IMPLEMENTATION Traditionally. emergent strategy vis-à-vis intended & realized). formulation & implementation can occur simultaneously. at the cost of sacrificing a lesser degree of control. In such a situation. Some of the key strategic learning's exists at the contact point between the organization and its customer. According to Mintzberg. 144 . learning levels are very low. In fact. effective strategies are better crafted when there is a subtle overlapping between the two (i. while control is very effective.e. strategy formulation and implementation has been perceived to be distinct & independent. learning levels are very high. In such a situation.
ROLE OF TOP MANAGEMENT To bring about change and to implement strategies successfully. transformational leaders go one step beyond – Design a well crafted and designed strategic intent of the organization. bring about transparency. He should be an agent of change. In contrast. A transactional leader is usually confined to allocating tasks & responsibilities and extracting performance. shift from compliance to commitment. companies depend more on transformational leaders than transactional leaders. Install a system of shared beliefs and values. Pragmatism is the ability to make things happen. 145 .
minimum requirement).e. Zero Based Budget – In this case the budget of a SBU has to be worked out right from the scratch. Performance Budget – SBU managers need to justify the distinctive resources in terms of the opportunity it is pursuing yields the highest possible pay-offs. 146 .RESOURCE ALLOCATION Resources allocation includes tangible resources (Eg. labour. brands. patents. skills) also includes complex resources like capabilities and competencies. The various methods of resource allocation includes Historical Budget – The budgets framed by HQ for a particular SBU keeping in mind past trends. machines) referred to as threshold resources (i. Intangible resources (Eg. land.
these capabilities are sustainable even in the medium to long term. Distinctive capabilities are complex set of skills woven around technologies. Distinctive capabilities helps in stretching and leveraging resources thereby overcoming two major constraints involved in strategy implementation – times & costs. Due to causal ambiguity (complexity). Moreover.CAPABILITIES & COMPETENCIES Technology and business are slowly becoming in – separable. 147 . Mobiles). Flat Screen Displays. convergence of multiple streams of technologies at the product – market level is becoming increasingly evident (Eg. though not necessarily in the case of emerging markets.
processes become people independent.STRATEGY & STRUCTURE It is a framework within which individual efforts are coordinated to bring synergy. 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. 148 . A firm in several related businesses usually employs a divisional structure. A firm in several unrelated businesses usually employs a SBU structure. The level of centralization and decentralization is decisive. Once the structure is in place.
Technology. or geographical locations. based on skills and competencies. Inputs . Finance). Divisional Structure – Units grouped together in terms of products. Output). Project / Matrix Structure – A formal but temporary framework initiated for the completion of a particular project/crisis. SBU Structure – Businesses segregated in terms of strategic dissimilarities (Eg. Virtual Structure – A boundary less or hollow organization. processes. 149 .TYPES OF STRUCTURES Functional Structure – Activities grouped together by a common function (Eg. with team members having dual line of control. Marketing. disbanded subsequently. Team Structure – An informal group formed for a crisis.
assuming responsibility. Environment & People – Economic and political conditions have a major bearing on structure coupled with the attitude and aspirations of the people in the organization.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. 150 . leading to a tall structure. Technology – With more and more convergence of technologies in business. It includes the desire for independence. facing challenges & crises. as span is broader.
Most firms undergo periods of strategic continuity rather than strategic discontinuity.INERTIA When a firm has been operating in a certain fashion for a long time. Changes in top management and unlearning helps overcome inertia. Top managers resist change. Inertia acts as an impediment in strategy implementation.e. Common sources of 151 inertia – complacency with past successes. . there is a tendency to continue along the same lines. irrespective whether it is from worse to good or good to worse. Inertia is a characteristic of a firm that endures status quo (i. co0ntinuity).
STRATEGY EVALUATION Strategy evaluation centers around assessment of strategic fit. certain authors propose misfit as a source of superior 152 performance. 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. 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. However.
STRATEGY CONTROL It is concerned with trafficking a strategy as it is being implemented. detecting changes in the external and internal environment and taking corrective action wherever necessary. 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.
checking every premise is costly as well as difficult. It involves assessing – strategic thrusts and milestones.STRATEGY CONTROL IMPLEMENTATION It involves steering the company towards its original growth trajectory & stated goals. However. Special Alert Control – It intends to uncover unanticipated information having critical impact 154 on strategies. It is open-ended as well as . Premise Control – Checking the validity of the assumptions on which a strategy was based. Implementation Control – It aims at assessing whether key activities are proceeding as per schedule.
difficult to translate into practice. Strategy intent not linked with goals and objectives – Lack of coordination at lower levels leading to negative synergy.BARRIERS TO STRATEGY EXECUTION Vision and strategy not actionable – Utopian ideas. “If you cannot . low strategic fit due to consultants intervention. Performance measures are defective – What to evaluate against? How to measure the 155 construct? As a saying goes. Strategy not linked to resource allocation & capabilities – Lacking commitment of top management.
the relative importance of each factor may vary over time and context. important or not they're all interdependent. Large or small. On top of that. Together these factors determine the way in which a corporation operates. to be sure of successful implementation of a strategy. 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. so if one fails to pay proper attention to one of them. 156 . 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.
and was taken up as a basic tool by the global management consultancy company McKinsey.BACKGROUND & ORIGIN The 7-S Framework was first mentioned in "The Art Of Japanese Management" by Richard Pascale and Anthony Athos in 1981. Since then it is known as their 7-S model and is extensively used by corporations worldwide to implement their strategies. At around the same time in the US Tom Peters and Robert Waterman were exploring what made a company excellent. The 7-S model was born at a meeting of these four authors in 1982. 157 . It appeared also in "In Search of Excellence" by Peters and Waterman. They had been investigating how Japanese industry had been so successful.
to reach identified & stated goals. Structure – The way in which the organization's units relate to each other in terms of their commonalities. Systems – The procedures. processes and routines that characterize how work should be done. Skills – An organizations capabilities and competencies. 158 . Staff – Human inter-relationships. formal & informal .THE 7’S Shared Values – It represents what the organization stands for and what the top management believes in. Strategy – Trade-offs for the allocation of a firms scarce resources. over time. Style – The way in which the top management influences the functioning of an organization.
STRATEGIC FIT Strategy Structure Shared Values Systems Skills Staff Style 1st Order Fit 2nd Order Fit 3rd Order Fit 159 .
While the American co’s focuses on the hard S’s. structure. their Japanese counterparts focus more on the soft S’s for their early success and sustainability.A CRITIC OF THE 7S MODEL While the hard S’s (strategy. the soft S’s (skill. systems) are comparatively easy to identify and influence. 160 . because most often they are culturally embedded and often neglected. Ineffective in case of a virtual company. shared values) are very malleable and comparatively more difficult to identify & influence. style. A choice of an alphabet often limits the scope and skews the interpretation of a model. staff. Consider the 4P’s of marketing or 3R’s of SCM. In contrast.
Low Take Overs 161 .STRATEGY IMPLEMENTATION ROUTES Strategic Fit .High Organic Growth Strategic Alliance Joint Venture Mergers & Acquisition Strategic Fit .
subsidized power). and markets.e.e. Long gestation leads to delayed market entry. It has complete control over inputs. soft loans. The entire infra-structural facilities are set up afresh having its own gestation and break-even. concessions are available for green-field projects. (Eg. green-field projects. tax holidays. Reliance Industries). i.ORGANIC GROWTH Here a firm builds up its facilities right from the scratch and continues to do so without any external participation. i. technologies. (Eg. Govt. . 162 Risk of cost and time overruns. SEZ’s. the entire value chain.
Alliances are usually in the areas of technologies or markets (Eg. Alliances are usually short-lived and disbanded once the purpose is achieved. . It has limited intervention power and usually lacks holistic commitment from the alliance partner.STRATEGIC ALLIANCE It involves a pro-active collaboration between two or more firms on a particular domain or function for mutual gain. 163 It is a form of competitive collaboration. There is no funding or equity participation from the alliance partner & both the firms continue to operate independently. Tata Motors & Fiat). It touches upon a limited aspects of a firms value chain.
leaving minimum scope of overlapping. Hero . It is a win-win situation for both the companies. Tata – AIG. . Degree and extent of management control must be clearly 164 laid down. (Eg. Selecting the right partner is critical for success. A comprehensive MOU is essential.Honda).JOINT VENTURES A joint venture involves an equivalent equity participation between two firms usually of similar strategic intent and comparable size to enter a particular market through a newly formed entity. Dominant logic of both the companies should be complimentary.
Coca Cola – Thums Up). Economies in scale leading to lowering of costs. Integration of assets and other financial resources. ITC Tribeni Tissues. with the individual firms ceasing to exist any more (Eg. . Integrated distribution channel leads to better market penetration and overall synergy. Revival of a sick-unit through better management practices is a major motive behind an acquisition 165 strategy. Acquisition is an outright purchase of a firm assets by another independent entity (Eg. Brooke Bond & Lipton).MERGERS & ACQUISITION It refers to the fusion of two or more firms into a single entity.
Integration of organization structure & cultures is difficult.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. Most countries have stringent laws that prevents hostile take over. Larger geo-graphical diversity. Consolidation in a fragmented industry. Inform SEBI / Stock Exchange after 5% stake is 166 acquired. Make a public offer of not less than . Tata Steel . often the new firm is “left alone”.Corus). Instant access to capacities and markets.
MANAGEMENT TOOLS IN STRATEGY 167 .
or better still create next practices Reengineering – Redesigning work processes right from the scratch. The past is ceasing to be an indication of the future. Some tools to ensure that – Benchmarking – Adopt certain best practices.WHY MANAGEMENT TOOLS? Change is becoming pertinent in the business environment. Balanced Scorecard – Tracking strategy 3600. 168 . every time. it is also a source of potential threat. Radical change is superseding incremental change. Change provides enormous opportunities. Companies therefore need to ensure competitive advantages doesn’t become competitive disadvantages. TQM – Doing the right thing the first time.
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
LIMITATIONS More and more companies benchmark. but it cannot be used as a strategic decision making tool. Benchmarking is useful for bringing about operational efficiency. It does not shifts the growth 175 trajectory of the industry as a whole. . While strategy is all about differentiation and not looking alike. Strategy is more of creating best practices rather than copying them.BENCHMARKING .e. the more similar they end up looking. Benchmarking merely reorients profits in the hands of few to profits in the hands in the hands of many (i. clustering). It can at best complement it.
DOS to Windows).e. Re-engineering involves complete reconstruction and overhauling of job descriptions from the scratch (i.e. for achieving performance improvement (E. The task demands a total change in organisational 176 culture and mindset.g.g. clean sheet). Windows 95 to 97). Re-engineering attempts to radically change an organizational products or process by challenging the basic assumptions surrounding it. process mapping) and eliminating or improving them (E. .RE-ENGINEERING Redesigning leads to identification of superfluous activities or product features (i.
REENGINEERING – KEY TENETS Ambition Focus Attitude Enabler Performance Large scale improvement by questioning basic assumptions about how work is done Micro Vs Macro Business Processes Vs Organisational Processes Starting right from the scratch Not historical More IT driven. than people driven Innovative Vs Traditional Customer centric Vs Organisational centric 177 .
BPR). . Business – It looks into markets. products. etc) and supports the organization for the present. structures.LEVELS Reengineering can be successfully leveraged at all levels of an organization with varying degree of results. 178 . It can be of the following types – Functional – It looks into the flow of operations (i. customers and suppliers and protects the organization from the future (i. processes.REENGINEERING .e.e. Strategic – It looks into the process of strategic planning. resource allocation and prepares the organization for the future through a reorientation of the entire strategic architecture.
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. While traditional manufacturing is a bottom-up approach. It generally acts as a threat to innovation. Indonesia). learning curve advantage. reverse engineering is a top-bottom approach. 179 . – High cost and time acts as a deterrent. Cheaper versions of Intel chips and mother-boards manufactured in Taiwan. – Causal Ambiguity. – Early entry advantages. protection can be had in the following ways – – Patenting. with an intention to copy it (Eg. However.
machine tools to convert ideas into a marketable product (i. Introduction – Launching the product in the market. Implementation – Developing of a prototype. nano-technology). Inaccurate assessment at this stage may lead to a failure of the entire project. cost and effort necessary for the purpose of reverse engineering.STAGES IN REVERSE ENGINEERING Awareness – Recognizing whether the product is found to be worth the time. Usually in such cases segmentation and pricing is different from the original innovator. Actualization – Obtaining and dismantling of the product to assess how it functions. 180 . designing facilities.e.
– Aesthetics – Appeal in design. – Reliability – Consistency in mileage. – Serviceability – Large no. Air bags. More and more companies are moving towards meeting implied rather than stated needs. It has eight dimensions (Eg.WHAT IS QUALITY? It involves the totality of a product or service in meeting certain stated or implied needs. – Perception – Customer notions. – Features – Anti-lock braking systems. – Conformance – Emission standards .Euro IV. of service stations. – Durability – 1980 manufactured cars still on road. 181 . Car) – – Performance – Mileage of 14 kms to a litre of fuel.
fix it in nature. .TOTAL QUALITY MANAGEMENT Objective – Management of quality ensures conformance to certain pre-set standards. TQM is a way of creating an organization culture committed to the continuous improvement of work processes – Deming. It is deeply embedded as an aspect of 182 organisational life & culture. which ensures good market standing. It had little impact on improving overall productivity. Management of quality was traditionally inspect it . zero defects. touching upon a limited aspect of a value chain.
183 .TQM – KEY TENETS Do it right. Kaizen – Make continuous improvement a way of life. 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. Empowerment – It takes place when employees are properly trained. provided with all relevant information and best possible tools. the first time – From reactively fixing error in products to proactively preventing errors from occurring at the first place (Juran).
TQM .e. It is based on the principles of MBO (i. enabling the firm to concentrate on core activities essential to customer satisfaction. saving precious top management time.STRATEGIES Outsourcing – It is the process of self-contracting services and operations which are routine and mundane. Quality Circles – It a small group of shop-floor employees who meet periodically to take decisions regarding operational problems and crises. equal participation). 184 . of units meet preset standards (Eg. 6-Sigma). SQC – It is a process used to determine how many units of a product should be inspected to calculate a probability that the total no.
.BALANCED SCORE CARD Some interesting comments . it’s bad execution... – In the majority of failures – we estimate 70% – the real problem isn’t (bad strategy) .. – Efficiency and effectiveness is passé... Source: Fortune Magazine Why CEO’s fail? 185 ....... – Less than 10% of strategies effectively formulated are effectively executed. strategy implementation has never been more important.
Focus more on causes.BSC .CONCEPTUALISATION A company’s performance depends on how it measures performance. Organizations need to move from financial to strategic performance. Most managers tend to rely on traditional measures of performance having its origin in finance as they are well tried and tested. 186 . 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. rather than effects. These measures worked well when organizational systems were simple and unidirectional and more importantly the environment was static.
The most critical element of a BSC is to measure these four dimensions.BSC – KAPLAN & NORTON (1992) A BSC helps a manager to track and communicate the different elements of company’s strategy. It has four dimensions – – How do customers see us? – What must we excel at? – Can we continue to improve and create value? – How do we look to shareholders? Firms more often have problems. and distinguish strategic problems from operational ones. because they have too many. 187 .
ageing schedule) % of key customer transactions Ranking of key customer accounts No.CUSTOMER PERSPECTIVE GOALS Products Supply Preference Relationship MEASURES Relative market share (%) % of sales from new Vs proprietary products Timely deliveries and service Customer credit analysis (i.e. of visits or calls made % of NPA’s 188 .
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 .
LEARNING PERSPECTIVE GOALS Technology Manufacturing Focus Timing MEASURES No. of new patents registered Time to develop next generation products Average and spread in operating cycle % of products that equal 2/3 sales No. of product innovations 190 .
FINANCIAL PERSPECTIVE GOALS Survival Success Prosper Divestment MEASURES Cash flows Growth in Sales and Profits EPS. Return on Investment Market Capitalization / PE ratio 191 .
STRATEGY MAPPING 192 .
IMPLEMENTATION 2 Translate strategy into operational terms 1 Mobilize change through effective leadership 5 STRATEGY Make strategy a continual process 3 Align the organization to the strategy 4 Make strategy everyone’s job 193 .BSC .
Modern managers should be poised to ask the right questions.e. As a result. Focus on cause not effects. they don’t know . Seek excellence. Shift from control to strategy (i. It helps translating strategy into practice (i. .BSC .e. sharing of vision).what they don’t know. doing right things instead of doing things right). 194 performance will automatically follow. The BSC brings together the different elements of a company’s strategy at a glance.ADVANTAGES Most often top managers face information overload.
EFFICIENCY Vs EFFECTIVENESS Ineffective Effective Inefficient Goes out of Business quickly Survives Efficient Dies Slowly Thrives 195 .
Porter 196 . .Michael E.EFFECTIVENESS + STRATEGY A company which is effective as well as strategic. but also sustains it. not only thrives.
CORPORATE RESTRUCTURING 197 .
” 198 . As Peter Drucker pointed out. Restructuring involves consciously driving significant changes in the way an organizations thinks and looks (Eg. firms use restructuring strategies.. Strategic variety may be caused by changes in the as external well as internal environment.. to survival of the most adaptable.. Strategic variety brings paradigm shift. from survival of the fittest . To adapt to the changing environment.CORPORATE RESTRUCTURING The only thing constant in today's business environment is change. Radical change brings about strategic variety. Tata Group).... “every organization must be prepared to abandon everything it does.
downsizing or rightsizing). they should strive to provide unimaginable value ahead of its time (Eg.e. Walkman. . Fax. Core Business – Company’s should introspect – What business are we in? Business evolved out of opportunism or myopia should be divested. and dividing the core businesses into SBU’s (i.e. etc). Instead. downscoping). Structural Changes – Conventional hierarchical structures should be disbanded in favour of more 199 flexible ones (i.RESTRUCTURING – BASIC TENETS Customer Focus – Restructuring ideally begins and ends with the customer. ATM. Company’s should go beyond just asking what he expects. Internal customers should also not be neglected.
Ratan Tata now drives the point the group means business.. 200 .. During the times of JRD..) Reliance dismantled their industrial embassies .. It is created and institutionalized by the top management..RESTRUCTURING – BASIC TENETS Cultural Changes – A culture represents the values and beliefs of the people about the organization...... Kumar Birla today is more dependent on professionals. started focusing on their capabilities. the Tatas were considered a benevolent and charitable organization... .) The Aditya Birla group typically relied on the “marwari” community for key management positions . Restructuring also requires cultural reorientation.
Communicating to the media about organization efforts to deliver quality products.” 201 . Use the reach of networking technologies. they tend to move away from the customer. Carry out PR campaigns.MOVING CLOSER TO THE CUSTOMER As companies evolve. Restructuring provides a platform to close this gap. “ … one reason our customers are satisfied is that we aren’t. Honda’s ad says. Getting feedback & addressing customer complaints. Publicizing welfare projects to demonstrate CSR. Organizing customer and supplier meets.
Tata – Corus) or hostile (Eg. It may include brands as well. horizontal.ASSET RESTRUCTURING Asset Restructuring – The asset composition of a firm undergoes a major change. or conglo-merate. Glaxo – Heinz). spin-off and equity carve. Mittal – Arcelor) and can take various forms. Asset Swaps – It entails divesting and acquisition simultaneously by two companies. it may be smooth (Eg. Hive Off – It involves siphoning of assets under control. Further spin-off can be classified as split-off and split-up. where the difference in valuation is settled off through cash or equity (Eg. 202 . It can have two forms. including its intangibles – Mergers – It may be vertical. Further.
the entire parent company loses its identity after being split into a number of subsidiaries. Tata Industries selling 20% stake to Jardine Matheson). Most of these practices are not in consonance with Indian laws. Reliance Ent).HIVE OFF Spin-Off – A spin off is the creation of a new entity. in which the equity is allotted amongst the existing shareholders on a pro-rata basis (Eg. 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. 203 . – Split-Off – In a split-off. – Split-Up – In a split-up.
repay long-term debts. but retained its engineering division. – Poor performance.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. 204 . In 1995. In 2005. Generic motives include – – Raise working capital. strategic misfit. Selling out in phases is called disinvestment (IPCL). A complete sell-out is known as divestment (TOMCO). L&T sold its cements division to Aditya Birla group. Parle sold its Thums Up brand to Coke for $40 million apprehending fierce competition.
Conversion – Replacing debt with equity or vice-versa or costlier with cheaper debt or cross currency debt. Wipro). involving 608 pence per share).CAPITAL RESTRUCTURING Capital Restructuring . 205 . It provides greater leverage as well as management control.The internal & external liability composition undergoes a major change – LBO – Acquiring control over a substantially larger company through borrowed funds (Eg. Tatas take-over of Corus for US $11.3 billion. Share Buyback – It is a process of cancellation of shares out of free reserves to the extent of 25% of paid-up capital (Eg.
120 cr Tata AIG – Rs.Rs. 1700 cr Trent – Rs. 230 cr Diversifications Tata Motors – Rs. 1439 cr 206 Tata Timken – Rs 120 cr Tata Telecom – Rs. 950 cr Merind .Rs. 99 cr Tata Power – Rs.BUSINESS RESTRUCTURING – TATAS Divestments Lakme – Rs. 256 cr ACC – Rs. 1860 cr . 1890 cr CMC – Rs. 150 cr VSNL – Rs. 1170 cr Goodlass Nerolac – Rs. 42 cr Voltas . 250 cr Tata Tetley – Rs.
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.ORGANIZATIONAL RESTRUCTURING Organizational structure and systems calls for a change when strategic variety is apparent. Turnaround is the primary motive. usually as a result external turbulence. Rightsizing – It is phasing of excess and redundant employees resulted out of faulty internal planning (SAIL). of a firm’s employees and sometimes in the no. of operating units. Downscoping – It involves reducing the business and/or geographical scope of a firm (Aditya Birla group). keeping the composition of business intact (Jet Airways). 207 .
e. as strategies are based on such beliefs and biases. the more difficult it becomes to uproot the paradigm (i. 208 . Dominant logic becomes deep-rooted in organizational contexts depending on the period it is in place (tenure of the CEO).e. inertia). Strategy change is unviable without a preceding change in its dominant logics. The dominant logic represents the perceptions and biases (i.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. thumb rules) of the top management.
FORCES AGAINST STRATEGIC CHANGE The problem with strategic change is that the whole burden typically rests on few people (i. 20% of the people carry out 80% of the changes).e. 209 . In most organizations. Successful transformation requires – incorporating employees fully into the process – leading from a different place so as to maintain employee involvement – instill mental disciplines that will enable employees to behave differently. the factor that stifled change & performance was – culture. Companies achieve real agility only when people at every level rise above the ordinary to face the challenges – revitalization or transformation.
Harness setbacks.SUCCESSFUL TRANSFORMATION Build an intricate understanding of the business model at all levels of the organization. Promote inventive accountability. never take no for an answer. Understand and deliver the quid pro quo. The best way is to alter the institutional point of view. process ownership. Create relentless discomfort with the status quo. it is not about winning but about learning. Encourage uncompromising straight talk. Questioning every basic action of the organization. Manage from the future. 210 .
211 .FORCE-FIELD ANALYSIS A force-field analysis provides an initial overview of change problems that needs to tackled. by identifying forces for and against change. also known as cultural-web. Culture and style of management are two main impediments in force-field analysis. It involves identifying – Aspects of current culture which needs to be reinforced. Identify and implement facilitators of cultural change. Aspects of current culture which needs to be overcome. that can be both enablers and blockages to change and restructuring. It involves diagnosing a change situation – systems & structures.
RESTRUCTURING .Term Loss of human capital Lower performance Higher performance Capital .OUTCOMES Alternatives Organizational Short .Term Reduced labour costs Reduced debt costs Emphasis on strategic control Business High debt costs Higher risk 212 Long .
In order to put back the company on the right track they are resort to – Denominator – It assumes that turnover cannot be increased. hence go in for downsizing. 213 . reverse engineering and regenerating. down-scoping or asset stripping. focuses on reengineering. Numerator – It assumes that turnover is not a barrier or constraint. the second one is a more viable strategy and sustainable option in the long run.NUMERATOR & DENOMINATOR MGT Most firms across emerging markets undergo strategic discontinuity and as a result are forced to restructure their businesses. While the first strategy produces results instantaneously.
TURNAROUND MANAGEMENT 214 .
.. . 215 (Govindarajan and Trimble.. January 1997). and that the thirty-two of the country’s largest business groups in 1969 are no longer among the top fifty today. – Only seven of the first fifty Indian business groups in 1947 were even in business by the turn of this century. still exist as on 2005. – Less than 10% of the Fortune 500 companies as first published in 1955.WHY TURN AROUND MANAGEMENT? Some interesting insights .... Source: Why do firms atrophy? (Business Today.
skills. and capabilities. Stage Theory).TURN AROUND MANAGEMENT A turnaround is said to occur when a firm perseveres through an existence threatening performance decline. 216 . While content focuses on endogenous and exogenous variables. ends the threat with a combination of strategies. As a sequence of events describing how things change and why they change (i. and achieves sustainable performance recovery. process focuses on – A logic to explain a causal relationship between intervening variables. A category of underlying principles and concepts. systems. Both content (what) and process (how) are equally important for a successful turnaround.e.
TURNAROUND INDICATORS Most firms atrophy simply because they fail to diagnose the indicators that acts as threat to organizational existence. Uncompetitive products or services. Substantial shifts in consumer preferences. unavailability or radical lowering of substitute costs or technological obsolescence. Low stakeholder confidence. 217 . Low employee morale leading to high employee attrition at all levels. especially in key positions. leading to lack of acceptability from distributors and customers. Rising input costs. Some indicators Continuous cash flow crises as a result of dwindling market-share and profits. suppliers and bankers.
Product redesigning or reengineering.TURNAROUND ILLUSION The first step to a successful turnaround is the basic acceptance of the fact that …. “all is not well”. be more customer centric. Common approaches adopted Change in key positions. Emphasis on advertising and market penetration. focus on power brands. consider extension. prune work-force. Extending work hours. Revamp product portfolio. Hence. 218 . which most top managers fail to appreciate. based on elasticity. Recalibrate prices.. they adopt surface level measures (disprin popping) which most often fail. liquidating dead assets.
TURNAROUND STAGE THEORY Stage 1 Decline Stage 2 Stage 3 Stage 4 Outcome Response Transition Performance Equilibrium Line Success Failure Indeterminate Nadir Time 219 .
220 . It has its origin in “environment led fit” that subscribes to the view that a firm has little control over external factors. It has its origin in “resource led stretch” and subscribes to the view that a firm has substantial power to override the context. Identification of the stimulus leads to the arrest of the downfall. It involves the identification of the theoretical perspectives that explains performance decline – K-Extinction – It suggests that macro economic and industry wide factors are responsible for decline. R-Extinction – It suggests that organization factors. primarily dwindling resources and capabilities are responsible for decline.DECLINE Decline is the first stage in the turnaround process.
new market initiatives. asset reduction.RESPONSE INITIATION Turnaround responses are typically categorized as operating or strategic. If the decline stems from structural shifts. Operating responses typically focuses on the way the firm conducts business and involves tactics geared towards – cost cutting and process redesigning (BPR). the response should be strategic. the response should be operational. If the underlying cause is internal efficiency. Strategic responses focus on changing or adjusting the business the firm is engaged in through long term moves such as – integration. diversification. The response must match the cause of the decline. 221 .
RESPONSE DICHOTOMY The response initiation is somewhat dichotomous and cannot be universally applicable. Scope – A diversified conglomerate may acquire a distressed business to turn it around and gain valuable synergies. Untangling this question brings into focus three events – Domain – Many of the strategic cures have limited applicability for an affiliated firm. Similarly new market initiatives is feasible only for multi-product firms. 222 . which may be unavailable to a focused firm. Contour – It is easier to reverse decline in the earlier stages through operational measures. when decline deepens shifts in strategic position becomes essential.
However.e. Empirical studies show that average time is 7. role model. participative management (i.7 years with a range of (4-16) years. Support from all the stake holders through resource commitment. transparency. The top management has a key role to play through empowerment. However. confidence building measures. lead – lag).TRANSITION Transition usually reflects the first signs of recovery.e. Sustenance is the key factor in this stage. consensus). substantial amount of time usually passes before results begin to show (i. Effective levers of transition. many a times early signs of recovery fades out. 223 .
Regaining lost market share and distributor confidence. Share price indications and media coverage. Cut off points must be unequivocal. 224 . Supplier and banker confidence. it should adopt a holistic approach. Commanding a premium in the market. Instead of focusing on financial parameters alone. Revival of key customers and new product launches.OUTCOME Outcome is said to be successful when a firm breaches the equilibrium performance level. Failure is an indication that initial momentum was not sustainable characterized by irreversibility.
COOPERATIVE STRATEGIES & ALLIANCES 225 .
226 . licensing. and globalization .COOPERATIVE STRATEGIES Cooperative strategies are a logical and timely response to changes in business dynamics. strategic alliance. consortia. the commitment and the involvement between the firms increases manifold. More and more companies worldwide are moving away from competition to co-option to leverage their resources and enhance bargaining power. Any cooperative strategy maybe between firms within the same country or cross border as well. supply-chain partnership. technology. It can assume any of the following forms – franchising. In the cooperative strategy continuum as firms move up the value order. or joint venture.
owners of the brand Monginis allows its franchisees to sell its confectionary products.FRANCHISING Franchising – It is a contractual agreement between two legally independent firms whereby the franchiser grants the right to the franchisee to sell the franchisor’s product or service or do business under its brand-name in a given location for a specified period of time for a consideration. Titan Inds. Switz Foods. It is an effective strategy to penetrate markets in a shortest possible time at a minimum cost. Branding is critical to franchising. owners of the brand Tanishq allows its franchisees to sell its jewellery products. 227 .
228 . HM manufacturing GM range of cars in India with a buy-back arrangement is a perfect example of CBU.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. Develop a product through its crude stage. refine processes and adopt necessary technologies (SKD). Become a systems integrator (CKD). as in Tata Indica. Different levels of licensing Manufacturing without embracing any technology (CBU).
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. Tata. It can be of the following types – Multipartner – Intends to share an underlying technology or asset. 229 . Coke – Pepsi). leverage upon size to preempt competition by escalating entry barriers (Eg. Hyundai).CONSORTIA Consortia – They are defined as large inter-locking relationships & cross holdings between businesses in a similar industry. enabling them to increase prices (Eg. Airbus – Boeing).
SUPPLY CHAIN PARTNERSHIP It is a pro-active & collaborative arrangement between supplier and customer aimed at achieving better control over the value chain (Eg. link their capabilities to create value for end users. It usually provides a platform to sort out differences between conceptualization and implementation to suit local market needs. otherwise it 230 becomes routine outsourcing. . Continuous sharing of knowledge is critical to the success of a supply chain partnership. Tata Motors – IDEA). Companies in different industries with different but complimentary skills.
learning organization. enhance credibility. enter newer markets. 231 .STRATEGIC ALLIANCE It is an short to medium term understanding between two or more firms to share knowledge and risk. Tata Motors – Fiat. effective R&D management. Reliance – Du Pont). instead of hurrying into a relationship. Despite their popularity (50-60)% of the alliances fail to accomplish their stated objectives. design next generation products. to gain knowledge and to obtain access to new markets (Eg. preempt competition. Partner selection is one of the critical success factors. Firm’s should undertake a long courtship with potential partners. Generic motives involved are .
Maruti). Coke – Pepsi). Whirlpool – Tide.TYPES Collusion – Tacit top management understanding to neutralize price wars (Eg. Complementary Equals – Two firms mutually promoting each others complimentary products (Eg. Bajaj – Castrol). Bootstrap – An alliance between a weak and a strong company with an intention to acquire it. Airbus – Boeing). 232 . Backward – An alliance (quasi or tapered) with a supplier of critical components seeking commitment (Eg. Alliances of the Weak – An alliance is entered into to preempt competition (Eg.STRATEGIC ALLIANCE .
233 . Cultural orientation has been found to have a profound effect on top management’s strategic orientation (Eg. Firms from developed markets seek access to markets and firms from emerging markets seeking access to technology. – Japan Vs US).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. Too much stress on financials & structure be avoided. Differences in level of economic development can produce differences in alliances motives.
PARTNER CHARACTERISTICS Complimentarity of Capabilities – The degree to which partners resources can be used in conjunction. Experience related to previous alliances. including ability to provide quality products and services. 234 . Willingness to share knowledge and skills. Managerial capabilities. Dominant Logic’s – Similarity in beliefs & biases. Unique Resources – Abilities or skills which cannot be easily duplicated. Intangible Assets – Move beyond the financials of the firm. Partner’s ability to acquire fresh skills.
incorporating clear signs of continuing independence for all partners. Changing within. operational & cultural integration. Selection & Courtship – It involves self analyzing.MANAGING ALLIANCES Alliances are more than just a deal. Learning to collaborate – strategic. understanding the chemistry. vows to include commitment to expand the relationship. Getting Engaged – It should incorporate a specific joint activity. partners should nurture it. Setting up the housekeeping. instead of focusing controlling the relationship. degree of compatibility. 235 . the value chain. differences not anticipated earlier.
. Conceptually. a joint venture is a selection among modes by which two or more firms can transact. separation is very 236 bitter.e. combining parts). There are substantial linkages in the value-chain. synergy) rather than mere exchange (i. It aims at creating new value (i.e. whilst the partners continue to operate independently.JOINT VENTURE A joint venture is a long term association between two equal partners to create an independent firm (SPV) by complementing their resources and capabilities to explore newer businesses or markets for achieving a shared vision. It lasts till the vision is reached.
Strategic Behaviour – Firms may override transaction costs. though more profitable alternative to other choices.JOINT VENTURE – GENERIC MOTIVES Transaction Cost – The situational characteristics best suited for a JV are high performance uncertainty. 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. The market fails as sellers are unwilling to reveal their technology and buyers are unwilling to purchase in the absence of inspection.
– Eg. – Eg. Endorsement from government authorities. Define future industry standards. Yamaha – Escorts. Renault – Nissan (Minivans – Cars). – Eg. Learning new technologies. Eli Lily – Ranbaxy. Maruti – Suzuki. TVS – Suzuki (4-Stroke Engines) Fill gaps in existing product lines. Sharing of resources.OTHER MOTIVES Entry into newer markets. Daimler – Chrysler (Premium Cars) 238 . – Eg. – Eg. – Eg. Essar – Hutch (Vodafone).
– Eg. LML – Piaggio Differences in size and resource base. Century .RISKS INVOLVED Incompatibility – Differences in cultural background. – Godrej – Procter & Gamble. Risk of brain (i. technology) drain. – Eg. – Maruti – Suzuki. Risk of over dependence.Enka. PAL – Fiat If the cost of continuing exceeds the exit costs? – Eg. Tata – Aditya Birla in Idea Cellular 239 . Modi – Telstra What after exit (parenting disadvantage)? – Eg.e.
240 . Flexibility – Sufficient space to breathe and adjust. Focus – Avoid strategic myopia. Objectives – Shared vision. Partner – Avoid duplication of skills and capabilities. Equality – Lack of dominance. Agreement – Clarity on operational control. respect.PRE-REQUISITES FOR SUCCESS Commitment – Mutual trust. time sharing. Culture – Reconcile gaps. Costs – Other modes of transaction becomes cheaper. Inertia – Differences in age and evolution patterns. Incompatibility – Performance expectations.
MERGERS & ACQUISITION 241 .
HLL – Tomco). 2002). SEBI Takeover Code.MERGERS & ACQUISITION A merger is a mutually beneficial consent between two or more firms (usually of similar size) to form a newly evolved entity by absolving their individual entities to preempt competition (Eg. however. Brooke Bond – Lipton). Mittal Arcelor). An acquisition is the purchase of a firm by a firm (of larger size. An acquisition is said be smooth if it is with the consent of the management (Eg. 242 .Daichi) and hostile if it is without the consent of the management (Eg. The larger objective is to leverage on size. reverses are also taking place through LBO) with a view to acquire conglomerate power and induce synergy (Eg. Ranbaxy . Most countries have stringent laws that prevents hostile takeovers (Eg.
Control – A special resolution of 75% of the share 243 holders approving the change of guard. . 2002 Promoter – A person who has a clear control of atleast 51% of the voting rights of the company and confidence of all the major stakeholders. Preferential – A preferential allottee ending up acquiring 5% stake also comes under its purview.SEBI TAKEOVER CODE.e. creeping acquisition). Acquirer – Someone (individual or firm) who picks up an atleast 5% stake without mandatory disclosure having an intention to wrest management control (i. Hike – An acquirer who has already picked up a 5% has to make a mandatory disclosure for every additional 1% stake that it acquires.
SEBI TAKEOVER CODE. Gujarat Ambuja – ACC). Disclosure – All acquirers have to inform the respective stock exchanges where it is listed and SEBI upon acquiring the basic limit and upon every incremental limit thereon. whichever is higher as an exit route (Eg. the SEBI can intervene and block share transfers if: the acquirer has ulterior motives (i. credentials or track record is at stake. and/or does not enjoy the confidence of the different stake holders.e. Grasim – L&T Cement. SEBI – In case of a hostile take over. 244 . 2002 Pricing – Acquirers will have to offer minority shareholders (at least 20%) the past 26 weeks or past 2 weeks average price. asset stripping).
Horizontal – It involves integration of two highly related businesses (Eg. The type of merger is depends on the degree of relatedness (strategic) between the two businesses. Vertical – It involves complimentarily (partially related) in terms of supply of inputs or marketing activities (Eg. Electrolux . usually opportunistic (Eg. ITC). Conglomerate – It involves integration of two distinctly unrelated businesses. 245 .Kelvinator). Godrej. 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.
Acquiring assets or capabilities (Eg. Avoiding risk of new product development.MERGERS & ACQUISITION . Coinsurance effect – Higher debt raising capability. Ranbaxy – Crosslands). Mittal – Arcelor). Access to newer segments (Eg. Overcoming entry barriers (Eg. Reduced gestation (i.e. Tax benefits (Eg. ITC Bhadrachalam). Ulterior motives – (Eg. quick access). Tata Steel – Corus).MOTIVES Increased market / conglomerate power. 246 . Global image (Eg. Reduction in risk. scale and scope. ICICI –ITC Classic). Asset Stripping – Shaw Wallace). Economies of size.
When Tata Steel started negotiations with Corus. Managing over-diversification. neglecting core business. Overvaluation is often as a result of an ego drive and substantially affects future returns. Top management overtly focused on due diligence exercise and negotiations. their initial offer was around 420 pence/share. while the ultimate acquisition was made at 607 pence/share). 247 . Merging of organisational structures. Overvaluation of buying firms (Eg.MERGERS & ACQUISITIONS PITFALLS Cultural differences (Eg. Managing size. Inability to achieve synergy. Tata – Corus).
Growth – This stage may witness parallel merger of two firms of similar size. Tata Steel – Corus). Decline – Horizontal mergers are undertaken to ensure survival. 248 . vertical to save transactions costs. Maturity – A larger firm acquires a smaller firm with an objective to achieve economies of scale and experience curve effects (Eg.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. Brooke Bond – Lipton). with an objective to reinforce its growth trajectory or to take on the might of a comparatively larger player (Eg. Kingfisher – Air Deccan).
Left alone syndrome. 249 . An acquisition just for the sake of it or reputation yields very little value in the long term. Strong differences may stifle plans and its execution. A common shared vision. A concern of respect and trust for the business of the acquired company. active top management intervention in phases.FRAMEWORK Positive contribution to the acquired company. Immediate attempts to super impose structure and culture may cause bottle necks. Blanket promotions across entities and confidence building exercises needs to be practiced.INTERNATIONAL M&A .
It will enable focus on customers and key people. Decide on the new hierarchy.BLUEPRINT Take the media into confidence.INTEGRATION . They can carry the message to the various stake holders. Decide upon management control systems. Redefine responsibilities and authority. Shift attention from business portfolio to people and processes. 250 Do not ignore the “people factor”. . Integrating work processes. Determine business strategy. promptly.
– Synergy – Potential value gain from combining operations (i. operational & financial). – Unstated reasons – Personal self interest and hubris. While under valuation may be a significant opportunity. Valuation decisions are arrived through a due diligence process when the prospective acquirer gets access to the books of accounts of acquiring company. 251 .M&A . – Market for corporate control. Financial motives – Undervaluation relative to true value.VALUATION The process of valuation is central to M&A.e. over valuation can become a curse. The process takes (6-12) months.
or from increased market power which increases sales and margins. Innovative product – Good distribution network). 252 . Synergy can be negative as well. – Conglomerate Synergy – Gains come when one firm complements the resources or capabilities of another (Eg. Sources of operational synergy – Horizontal Synergy – Gains come from economies of scale which reduces costs. – Vertical Synergy – Gains come from controlling the supplychain and savings in transaction costs. when the “fit” between the two entities is very poor.VALUING OPERATIONAL SYNERGY Synergy – It refers to the potential value gain where the whole is greater than the sum of the parts.
but availed after being merged with a profitable firm (Eg. Cash Slack – It reduces asymmetry between cash starved firms with deserving projects and cash cows with no investment opportunities. Hotmail). shareholders can accomplish the same at a much lesser cost. Tax Benefits – Tax benefits may accrue from tax entitlements and depreciation benefits unutilized by a loss making firm. ITC – Bhadrachalam Paper). and without paying take-over premiums. Synergy comes from projects which would not have been undertaken if the two firms stayed apart (Eg. 253 .VALUING FINANCIAL SYNERGY Diversification – Reduce variability in earnings by diversifying into unrelated industries. However.
higher leverage. It relates to the concept of diversification. – Default risk comes down and credit rating improves. the cash flow the merged firm will be less variable than the individual firms. – Coupon rates may also be negotiated at lower rates. hence better performance. This will induce higher debt capacity.VALUING FINANCIAL SYNERGY Co-Insurance Effect – If the cash flows of the two firms are less than perfectly correlated. The likelihood of default decreases when two firms' assets and liabilities are combined through a M&A compared to the likelihood of default in the individual companies. 254 . as risky debt is spread across the new firm's operations.
The value of wrestling control is inversely proportional to the perceived quality of that management. since a restructuring can lead to significant increase in value. 255 . – – Value of Control = Value of firm after restructuring Value of firm before restructuring. The value of control can be substantial for firms that are operating well below optimal value. Assessment of perceived quality is critical.VALUING CORPORATE CONTROL Premium of M&A are often justified to control the management of the firm. While value of corporate control is negligible for firms that are operating close to their optimal value.
256 .LEVERAGE BUYOUT (LBO) The basic difference between a take-over and a LBO is the high inherent leverage (i.e. sometimes in combination with the assets of the acquiring company. debt component) at the time of buyout and rapid changes in capital structure over time. It is a very costly and risky proposition. The assets of the acquired company are used as collateral for the borrowed capital. LBO facilitates a relatively smaller firm to bid for a comparatively larger firm in the bid for management control. Confidence of investment bankers and the international financial community is essential.
off-late many publicly traded firms have gone private keeping in mind the following – – The fear of LBO. However. A research study showed that 30% of the publicly listed firms reported above average returns after going private. – Increased information needs. – The need to satisfy analysts and shareholders. liquidity.TO GO PUBLIC OR NOT? However. 257 .access to financial markets. the advantages of going public includes . – Separation of ownership from management. The increased benefit showed in the following way – reduced costs and increased revenue. on-going valuation.
– Cash trapped company unable to utilize opportunities. which disappears once assets are liquidated and significant portion of debt is paid off. co-insurance effect). – Managers cannot be trusted to invest free cash flows wisely. 258 . – It is a temporary phenomenon. – Debts repaid off from increased value after successful restructuring and wresting management control.RATIONALE FOR HIGH LEVERAGE The high leverage in a LBO can be justified by – – If the target firm has too little debt (relative to its optimal capital structure). – Cost of debt coming down (i.e.
259 . A LBO has to pass two tests to be viable – – Restructuring to pay-off increased debt. Lack of sufficient cash flows to repay costly debts resulting in a possible debt trap.EFFECT OF HIGH LEVERAGE Increases the riskiness of dividend flows to shareholders by increasing the interest cost to debt holders. initial rise in leverage is anticipated. Any discounting has to reflect these changing cost of capital. leverage is expected to decrease over time. Therefore. As the firm liquidates / pledges assets and pays off debt. – Increase equity valuation.
e. Objectives – – Traditional route of filing prospectus and undergoing an IPO is costly. – Prevents dilution of equity.REVERSE MERGER Reverse Merger – The acquisition of a public company. – Facilitates better valuation and forthcoming offerings. shell company) by a private company. which has discontinued its operations (i. or costly. small in size but having a promising business. time-barred. 260 . – Automatic listing in major exchanges. – Tax shelter. allowing the private company to bypass the usually lengthy and complex process of going public.
– Takeover announcements reported 30% excess returns. and 35% during bullish periods. However. 261 .EFFECT OF TAKE-OVER ANNOUNCEMENT The shareholders of target firms are the clear winners. – Merger announcements reported 20% excess returns. takeover failures have only initial negative effects on stock prices. Initial anomaly in stock prices usually normalizes over a period of time (6-12) months. During bearish periods excess returns were 19%. Excess returns also vary across time periods. Most target firms are taken over within (6090) days.
and Netter. over time. 1983. Desai. 262 Jarrel. – However. – Most studies reported insignificant excess returns around take-over offers or merger announcements. Brickley. as stock markets become more and more perfect such anomalies would reduce Source: Jensen and Ruback. Bradley.EFFECT OF TAKE-OVER ANNOUNCEMENT The effect of take-over announcement on bidder firm’s stock prices are not clear cut. 1983. 1988 . – However. and Kim. in the event of take-over failure negative returns to the extent of 5% on bidder firm stock prices is reflected.
Asset Stripping – The targeted company hives off its key assets to another subsidiary. Poison Put – Premature retirement of bonds at attractive rates to pour surplus cash and make target investment unattractive.DEFENSIVE STRATEGIES Golden Parachute – An employment contract that compensates top managers for loss of jobs as a result of change in management control. 263 . Poison Pill – An offer to existing shareholders to buy shares at a substantial discount to increase their voting rights (Eg. so that nothing is left for the raider to strip off. Rights).
But often the White Knight turns a betrayer himself (Eg. Shapoorji Pallonji). Green Mail – The targeted company buys large blocks from holders either through premium or through pressure tactics (Eg. East India Hotels – Reliance Industries – ITC). thus thwarting the raider company’s attention. Gray Knight – The target company takes the help of friendly company to buy the shares of the raiding company. Pac Man – The target company makes a counter bid to take over the raider company. 264 .DEFENSIVE STRATEGIES White Knight – It is the placing of stocks to a cash rich investor and bargaining for protection in return.
COMPETING FOR THE FUTURE 265 .
Compaq overpowering IBM. Wal-Mart overpowering Sears. The reverse was true for the companies overpowering.GETTING OFF THE TREADMILL Canon overpowering Xerox. Hitachi overpowering Westinghouse. Honda overpowering GM. British Air overpowering Pan Am. Honda overpowering Volkswagen. Most companies were too preoccupied with the present than the future? 99% of the companies overpowered. What went wrong???? What were they doing with the present? What were they pre-occupied with? 266 . Nokia overpowering Motorola. were spending 99% of their precious time dealing with present.
Thus efficiency was grievously hurt. declining margins. decluttering. 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 . Not knowing when to stop. CEO’s brutally pick up the knife and ruthlessly carve away layers of corporate flab (delayering. most often they ended up cutting corporate muscle as well and became anorexic. falling market share).THE PAST OF COMPETITION Beyond Restructuring – When a competitiveness become inescapable problem (stagnant growth. downsizing).
S. On the contrary only 20% of Japanese managers believed that quality will be a source of competitive advantage of the future. 268 . but forging ahead in competition. The future is not about catching up with competition. but not of the future. A poll in circa 2000 revealed that 80% of the U. ensuring only survival of the present. However.THE PRESENT OF COMPETITION Beyond Reengineering – Numerator based managers (innovation) at least offers some hope. top managers believed that quality will be a source of competitive advantage of the future. incrementalism or nominal innovation has almost reached a plateau.
Transform the industry. 269 . they are not enough to get a company to the future. better. and regenerate its strategies (breaking its – managerial frames). faster.THE FUTURE OF COMPETITION Regenerating – Leaner. reinvent its industry. demographics and lifestyles. Creating the future requires industry foresight. don’t predict. It is based on deep insights into trends in technology. as important as these may be. Empower from bottom to top. not just the organization. aspirations and resources. Create a potential gap. It involves Dream about the company’s future. not the other way. Companies need to fundamentally reconcieve itself.
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 .
blue oceans). Create entirely new industries (i. hence do not fall sick in the first place. Successful companies have a complete grip over the industry.ABOUT THE TRANSFORMATION The future does not belong to those who take the industry for granted. Change in at least one fundamental way the rules of engagement in an industry. Therefore. 271 . It drives a hunger and a passion to transform.e. by converging technologies complex. It is about deliberately creating a strategic misfit. they do not need to restructure. Redraw the boundaries between industries.
Most successful revolutions (Gandhi to Mandela) rose from the dispossessed. Such a process is called institutionalization (from people centric to organisational centric). Transformational leaders merely lead the way. A revolution that is thrust upon from the top seldom sustains. The middle management plays a strong moderating role. More importantly. the revolution must start at the bottom and spread in all directions of the organization.ABOUT THE EMPOWERMENT Bring about a revolution (a paradigm shift) in the organization. 272 .
Toshiba – LCD. Get to the future first. What does it take to get to the future first? Understanding how competition for the future is different. An ability to energize the company. Companies need to strategize (think ahead of times).THE FUTURE OF STRATEGY A company must get to the future not only first but also for less. Apply the 40 – 30 – 20 principle. South West Airlines – LCC. without taking undue risk. A process for finding and gaining insight into tomorrows opportunities (Eg. Apple – iphone). 273 . It requires a lot of common sense and a little bit of out of the box thinking.
We are in the midst of a 3600 vacuum. greatness from mediocrity. The farther one can see in this endless space. as on their aspirations. is the ability to imagine in a different way what the future could be. What distinguishes a leader from a laggard. Companies of the future will be not based so much on the strength of their resources. but hundreds. 274 . As there is no one future. the farther it will be away from competition. 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.
THE EMERGING STRATEGY PARADIGM Not Only Reengineering Processes But Also Regenerating Strategy The Competitive Challenge Organizational Transformation Industry Transformation Competing for Market Share Competing for Opportunity Share Finding the Future Strategy as Learning Strategy as Positioning Strategy as Engineering Strategy as Unlearning Strategy as Dream Strategy as Architecture 275 .
THE EMERGING STRATEGY PARADIGM Not Only But Also Mobilising for the Future Strategic Fit Resource Allocation Strategic Misfit Resource Stretch & Leverage Getting to the Future First Existing Industry Structure Product Leadership Single Entity Product Hits & Timing Future Industry Structure Competency Leadership Dominant Coalitions / Co-option Market Learning & Preemption 276 .
Degree of Learning Unlearning Curve P2: Unlearning in previous period does not necessarily ensure learning in the current period.LEARNING TO FORGET P1: The degree of learning in current period is directly proportional to the degree of unlearning in the previous period. Learning Curve t1 t2 t3 Time t4 t5 277 .
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. 278 . It represents the collective learning's of an organization centering around diverse streams of technologies. Inimitable & Insubstitutable – A high degree causal ambiguity between these skills yield sustainable competitive advantage. Leverage – They are the gateways to future markets. It cannot be matched even by its closest competitors.
Most companies around the world do not possess one. Nike – designing. Intel – nano-electronics. Toshiba – flat screen displays. Toyota – lean manufacturing. Coca Cola – brand. Core competencies are the roots of the organization. Although a core competence may lose value over time.MORE ABOUT CORE COMPETENCE Sony – miniaturization. A core competency cannot be outsourced. Honda – engines. it gets more refined and valuable through use. it is deeply embedded in the heart of the organization. at the most three to four. Wal-Mart – logistics. 279 . Canon – imaging. SKF – antifriction and precision. leaders have one.
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 .
e. Korea. Chile) provide a different context (i. and high transaction costs.EMERGING MARKETS Emerging markets (India. high levels of market imperfection). institutional gaps. Emerging markets are characterised by infrastructural bottlenecks. strategies suited for the developed markets may not be appropriate for emerging markets. Therefore focused strategies based on core competence may not be suitable for emerging markets (Khanna & Palepu. Therefore. China. 288 . Diversified groups in operating in emerging markets therefore benefit from unrelated diversification. 1997).
PERFORMANCE (I) Diversity attempts to measure the degree and extent of diversification (Herfindahl. Concentric. Size & Scale. Entropy). subsequently negatively related across developed markets. Experience Strategic Fit Diversity Palich. Synergy.DIVERSITY . Optimum level of diversification Performance Diversity is initially positively related with performance. (2000) 289 . et al.
PERFORMANCE (II) Diversity is initially negatively related with performance. brand building Risk diversification. conglomerate power Threshold level of diversification Performance Diversity (Khanna & Palepu. subsequently positively related across emerging markets.DIVERSITY . 2001) 290 . Huge initial investment.
It should think globally. 291 . It should have a spread of assets.INTERNATIONAL IDENTITY MNC’s consciously engage in FDI in different parts of the globe to forge resource diversity as a distinct competitive advantage. It should have a spread of interest groups / stake holders. revenues and profits. HSBC). It should have a spread of manufacturing facilities. act locally (Eg. Characteristics – It should have a spread of affiliates or subsidiaries.
Group Scale . Risk Profile – It reflects the risk attitude of the top management (Eg. low power distance in developed markets and vice versa for emerging markets). 292 . high feminity index in developed markets and vice versa for emerging markets). low group scale in developed markets and vice versa for emerging markets).It reflects the relative role of team building (Eg.GLOBAL BUSINESS ENVIRONMENT Power Distance – It reflects the disparities in income and intellectual development (Eg. Feminity Index . low risk profile in developed markets and vice versa for emerging markets).It reflects the disparities in women in workforce (Eg.
high cultural adaptability in developed markets and vice versa for emerging markets). way of life. terrorism (9/11). time value.GLOBAL BUSINESS ENVIRONMENT Cultural Adaptability – It reflects the adaptive ability to a changing environment . FOREX reserves. interest rates. Country Risk – It reflects the political and economic risk (Eg. currency. customs. dress sense. 293 . flexibility (Eg.culture. code of conduct. credit rating. corruption. low country risk in developed markets and vice versa for emerging markets). attitude. inflation. political stability. judiciary) of doing business in a particular country (Eg.
Language Barriers – Developed country managers expect foreign partners to communicate in their languages. however. in most emerging markets use of an interpreter may be a standard protocol. 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. 294 . time-zones.GLOBAL BUSINESS ENVIRONMENT Time Sensitiveness – Developed country managers regard time as precious. High levels of ethnocentrism usually has a negative effect on business. Other factors – local celebrations.
copyrights. It also initiated provisions on anti-dumping. trademarks). In 1995 (Uruguay Round) GATT was renamed to WTO. The 2001 (Doha Round) focused on power blocks (NAFTA. BRIC). It a multi-lateral treaty with 143 (as on 2002) member countries to reduce tariff and non-tariff (quota) barriers. It focused largely on TRIPS (patents. ASEAN.GATT GATT was a bi-lateral treaty initiated between US and some member countries in 1947 to promote free trade. The 1999 (Seattle Round) saw a lot of protest amidst bringing agriculture under the purview of TRIPS. It also highlighted the nexus between US & WTO. 295 .
However. three countries joined in 2002 increasing it to fifteen members as of 2008. Euro).e. The Euro was significantly devalued against the Dollar till 2002. the Dollar still remains the most preferred currency globally.Pound). Sterling . 296 . The notable exception was Great Britain which still continues with its local currency (i. However with current recession in the US 2002 onwards.EURO – SINGLE CURRENCY In 1999 twelve member countries in Europe joined hands to move over to a single currency (i.e. the Euro slowly started outperforming the Dollar. primarily the OPEC countries.
Trade Block – It will strengthen the EU identity which would not have been possible otherwise. 297 . a multiple currency is preferable where the business cycles of member nations are different. Transparency – A single currency is transparent and competitive. Rate Uncertainty – A single currency eliminates the risk of competitive devaluations. However. but it may have spill-over effects.SINGLE Vs MULTIPLE CURRENCY Transaction Costs – Though the initial cost of introduction of a single currency is very complicated and costly. it helps avoiding transaction costs associated with a multiple currency.
Neo classical economists believe that foreign investment may in fact be a win-win game. It is short-medium term with comparatively low levels of commitment. It is long term with high levels of commitment.FII Vs FDI INVESTMENT Classical economists believed that foreign investment (in any form) is basically a zero sum game (i.e. – FDI (transfer of tangible resources) is slow but steady for the purpose of economic growth. the gain of one country is loss of another).e. – FII (transfer of intangible resources) is fast but may have strong repercussions (i. 298 . hot money).
customer awareness (microwaves). lifestyle (petroleum 299 outlets – departmental stores). usage (talk time). buying patterns (spread).culture (food habits). Pricing – It depends on the competitive structure (PLC – Kellogg's). technology (microchip). economic (middle class buying power). Distribution – It depends on the market characteristics (fragmented – concentrated). . promotion (surrogate advertising).INTERNATION MARKETING Product – The various attributes of a product may receive different degrees of emphasis depending on differences in .
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. Leverage – The leverage may vary across countries depending upon money and capital market conditions (Eg. equity is cheap in India). debt is cheap in US. . Accounting Norms – The accounting norms of one country (AS . Cost Structure – Companies in India need to investment in fixed costs due to poor infra-structure 300 compared to developed markets.India) may be different from that another trading country (US – GAAP or IRS).
skills are more important that cultural fit and vice-versa. double taxation. Recruitment – In local recruitment. social security. and cultural barriers (language) vis-à-vis emerging markets. Compensation – Differential pay packages exists because of differences in purchasing power. labour laws. technology (convergence. 301 . Training – It is a pre-requisite for international business to reduce language. shortened life cycles). in most cases it is not desirable nor practiced.INTERNATIONAL HR An uniform HR policy is idealistic to enable parity in performance appraisal. however.
Outsourcing – A company having a core competence may be the source of global outsourcing (Eg. Technology – The cost to be evaluated in terms of latest technology (Euro VI) vis-à-vis effective cost of appropriate technology (Euro II). Bosch spark plugs are used by car manufacturers worldwide).INTERNATIONAL OPERATIONS Location Incentives – FDI in emerging markets should explore options for SEZ’s to explore benefits (tax holidays. . reduce power costs) vis-à-vis infrastructural bottlenecks. SCM – Use of ERP to network the extended enterprise 302 across the globe.
CONTEMPORARY TOPICS 303 .
Innovations typically paves the way for more secured and improved lifestyle for consumers in general. innovation is the first attempt to carry it out in practice. 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 An invention is the first occurrence of an idea for a new product or process. While innovation typically adds value for organizations. it has destructive effects as well. 304 . Innovation is all about staying ahead of competition.
TYPES OF INNOVATION A key challenge is maintaining a balance between process and product innovations. process innovations are organizational driven. However. Process innovation usually follows product innovation. process innovation is necessary to sustain the competitive advantage of product innovation. 305 . Strategic innovation has the potential to change the rules of the game. While product innovations are typically customer driven. Tangible impact of product innovation on performance is significantly higher than process innovation.
306 . Telecom (CDMA Technology). Innovations are the back-bone of successful business models . a paradigm shift). Drug Development (Bio Chemicals). Medical Surgery (Lasik). about how an organization makes money (i.e.e. Processors (Pentium). Disruptive business models brings in a new frame of reference (i. putting an idea into practice). It leads to a shift in the price – performance envelope. Data Storage (Pen Drives).BUSINESS MODEL It is a simplified description and representation of a complex real world.
The key partners involved in the activities.NINE BUILDING BLOCKS Value proposition offered to the market. The cost structure resulting from the business model. The revenue streams generated by the activities. 307 . The key resources and capabilities required. The channels to reach out to the clients. The proposed relationships established with clients. The segment(s) of clients to be addressed. The key activities / processes necessary for execution.
BUSINESS MODEL FRAMEWORK 308 .
Investment Banking. innovative companies to carve out unique business models to fend off competition.REVENUE MODEL Positioning is just not sufficient. It involves – Product Visualization – Product Prototype – Product Test – Capacity – Pricing – Distribution. The revenue model described here are the means to generate revenues. With the rapid erosion of certain industries (IT. 309 . It is just one piece of the puzzle. Real Estate) companies need to untangle and understand the intricacies of their business model.
Provide reasonable incentives (not necessarily monetary). Allow the management sufficient slack to be future oriented. A favourable intellectual property (IP) climate. Promote the grape-vine. 310 . Promote the culture of experimentation. 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. Have a lean and a flat organization structure.
HOW TO PROTECT INNOVATION? Without adequate protection (external or otherwise) the effects of innovation does not translate to performance. In most emerging markets where the IP climate is not so favorable. 311 311 . The most preferred strategy of internal protection includes imbibing “causal ambiguity” in the production process to make reverse engineering difficult. Collusion with the judiciary is also another distinct possibility in emerging markets. however that possibility is slowly atrophying. companies are increasingly relying on internal protection to sustain innovation effects.
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. In fact the principles of corporate governance implies that managers go beyond in satisfying the stated and unstated needs of the multiple stakeholders. Corporate governance aims to reduce the principal-agent problem present in most professional managed organizations through appropriate forms of accountability and control mechanisms.
313 . However.AGENCY THEORY The root of Corporate Governance goes back to the Agency Theory. also known as the principal-agent problem or agency dilemma. shareholders can diversify their portfolio at a much lesser risk and cost. This exposes the shareholders to additional risks and higher costs. not present in portfolio diversifications. According to the agency theory top managers and shareholders interests are usually conflicting in nature and tend to pull in opposite directions. From the strategic point of view managers tend to diversify into unrelated businesses as it provides higher returns hence a more favourable appraisal.
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. the US government passed the Sarbanes – Oxley Act. SEBI Report – 2005. 2002 to restore public confidence in corporate governance. . various laws were enacted to ensure proper usage of these funds. defines corporate governance (headed by Kumar Mangalam Birla) as the acceptance by management of the inalienable rights of shareholders as the true owners of the corporation and of their own role as trustees on behalf of the 314 shareholders.
including the society at large. 315 . Role and responsibilities of the board: It deals with issues about an appropriate mix of executive and nonexecutive directors. 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.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.
. They should also implement systems to independently verify and safeguard the integrity of the company's financial reporting. 316 316 . assessment and mitigation of risks and retirement by rotation over a fixed period of time.GOVERNANCE PRINCIPLES Integrity and ethical behaviour: Organizations should develop a code of conduct for their top management that promotes ethical and responsible decision making. Independence of the entity's auditors: Identification. Disclosure and transparency: Disclosure of information should be timely and balanced to ensure that investors have clear access to data and facts.
Balance of power: The simplest balance of power is very common. discussed and resolved. a person benefitting from a decision should abstain from it. However. Regular board meetings allow potential problems to be identified. fire and compensate top management. with its legal authority to hire.GOVERNANCE STRATEGIES Monitoring by the board of directors: The board of directors. 317 . safeguards invested capital. they should provide no mechanism or scope for opportunistic behaviour. Remuneration: Performance-based remuneration is designed to relate some proportion of salary to individual performance.
and was responsive to investors' requests for information on governance issues. who had no management ties. undertook formal evaluation of its directors. McKinsey found that 80% of the respondents would pay a premium for wellgoverned companies. Egypt and Russia) to around 40% for Canadian & European companies. The size of the premium varied by market. from 10% for companies where the regulatory backdrop was least certain (those in Morocco.GOVERNANCE & PERFORMANCE In its “Global Investor Opinion Survey” of over 200 institutional investors in 2002. 318 . They defined a well-governed company as one that had mostly out-side directors.
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 basic premise is that firms cannot exist in vacuum. today economic institutions are considered as a major drivers of improvement in quality of life in general and therefore needs to include multiple stakeholders. Over a period of time. the short-term view of profit maximisation gave way to a more broader and mediumterm view wealth maximisation of the shareholders. Therefore. 319 . corporate philanthropy should be a part of every corporate mission. However.
“a healthy business cannot exist in a sick and impoverished society”. Therefore. CSR can be defined as. Therefore. However. giving a very important message that one cannot exist without the other. the debate on CRS still continues whether firms should detract its focus from its business? 320 .CORPORATE SOCIAL RESPONSIBILITY As Peter Drucker rightly pointed out that. in fact a large part of it is significantly overlapping. “an enterprises decisions and actions being taken for reasons at least partially beyond its immediate economic interests”. economic and social responsibilities cannot be mutually exclusive.
people are becoming increasingly aware of their right to a decent and healthy life. MRTP).GROWING CONCERN FOR CSR Awareness due to education: With growing literacy. Fear of government interference: Excessive quench for profits may lead to build up of adverse public opinion compelling the government to intervene (Eg. Public image: Entrepreneurs are increasingly relying on public image as a source of competitive advantage and a higher financial discounting. 321 . The role of media: The media and various consumer organizations have come up in protecting consumer rights and exposing mal-practices.
Cement .Paper packaging. Tata Steel – Life Line Express). 322 . eco efficiency. and extended producer responsibility (Eg. Health & Hygiene – Attending the health hazards due to wastes and by-products to employees and society in proximity (Eg.CSR STRATEGIES Green Supply Chain Management: It includes environmentally preferable purchasing. designing eco-friendly products. Literacy & Training Programs – (Eg. Aditya Birla Research Centre – LBS). Education. Exide – Product take back). Refrigerators – CFC.
across the world's billions of poor people having immense untapped buying power. 323 . They represent an enormous opportunity for companies who learn how to serve them. In turn companies by serving these markets. Strategic innovations leading to disruptive business models can show the way out. K. they're helping millions of the world's poorest people to escape poverty. Prahalad notes that future markets exist collectively.BOTTOM OF THE PYRAMID With the market across most developed markets including the US getting saturated. C.
BLUE OCEAN STRATEGY 324 .
TWO WORLDS 325 .MARKETSPACE .
WHAT IS RED OCEAN? Companies have long engaged in head-to-head competition in search of sustained. competing head on results in nothing but a bloody red ocean of rivals fighting over a shrinking profit pool. battled over market-share. and struggled for differentiation (cost or product). In today’s red oceans. They have fought for profits. Yet in today’s overcrowded industries. profitable growth. one companies gain is always at the 326 cost of another companies loss. where most industries are saturated. .
but by creating blue oceans of uncontested market space ripe for growth .WHAT IS BLUE OCEAN? Tomorrow’s leading companies will succeed not by battling in red oceans. It is only the frames of the . Such strategic moves are possible through the pursuit of product differentiation and low cost simultaneously. it will exist 327 in the future as well. It helps in creating powerful leaps in value for both the firm and its buyers. Blue Ocean’s have existed in the past. rendering rivals obsolete and unleashing new demand.
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 .
Technological advances have substantially 329 improved industrial productivity. Demand across developed markets reaching a plateau. Niche markets & monopoly havens are continuing to disappear. Population shrinkage across a no.BLUE OCEAN STRATEGY IMPERATIVES Prospects in most established market spaces – red oceans – are shrinking steadily. of European nations. As trade barriers between nations & regions fall. information imperfections atrophy instantly. .
the underlying technology was often already in existence. They are not necessarily about technology. managerial moves are. Company & industry are the wrong units of 330 strategic analysis. .CONCEPTUAL UNDERPINNINGS Blue oceans have existed in the past and will exist in the future as well. Incumbents often create blue oceans within the ambit of their core business. 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).
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 .
Sony Play Station: Redefining machine-human interface in entertainment and targeting an altogether new user base. 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. Citibank – Automated teller machines & credit 333 cards. .
All they need to do is change their managerial frames. 334 . greater than themselves. According to this view. Off late emerging views in strategy having its origin in (Organization Theory) led to a paradigm shift to what is called the – reconstructionist view. According to this view managers need not be constrained to act within the confines of their industry.WHAT THEN IS THE HANDICAP? Most of the traditional views in strategy having its origin in (Economic Theory) led to what is called the – structuralist paradigm. companies & managers are largely at the mercy of economic forces.
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