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Course Code: 611 & 612 Dr. Subir Sen – Faculty Member, IBS
E-Mail: email@example.com, 9830697368 1) Crafting & Executing Strategy – Thompson & Strickland. 2) Strategic Management – Pearce & Robinson. 3) Strategic Management – Fred. R. David. 4) Exploring Corporate Strategy – Johnson & Scholes. 5) Competitive Advantage – Michael E. Porter. 6) HBR – Articles & Case Studies.
STRATEGY - DEFINITION
Strategy is all about making trade-offs between what to do and more importantly what not to do; consciously choosing to differentiate. It reflects a congruence between external opportunities and internal capabilities. Types of strategies – Corporate Strategies – It is all about making choices across various businesses and allocating resources among them. Business Strategies – It is all about developing leveraging and sustaining competitive advantage. Functional Strategies – It is all about finding newer ways to perform existing processes, or 3 better still adopting new processes altogether.
STRATEGIC MANAGEMENT DEFINITION
Strategic management attempts to integrate the traditional management functions and align the organization as a whole with the broader environment to make resource allocations in a way to achieve the strategic intent of the organization. This alignment is called strategic fit. It serves as a road-map for the organization in its growth trajectory. It provides the direction – extent – pace – timing. It depends on the turbulence of the environment and the aggressiveness of the organization. It distinguishes the winners from the losers.
PILLARS OF STRATEGIC MANAGEMENT
Differentiation – Differentiation of key inputs and technologies helps a firm to consciously move away from homogeneous to heterogeneous markets enabling them to earn super-normal profits from normal profits. Integration – Whenever dealing with a complex task of managing a business (i.e. involving a no. of variables with cross linkages) it is in the interest of simplicity that the task be broken up in smaller components. However, for effective control, integration is essential. Alignment – Since differentiation is prone to replication, it is in the interest of the firm to differentiate continuously by aligning the resources with environmental opportunities.
STRATEGIC MANAGEMENT FRAMEWORK
Economic al Strategic Finance Fit Political Strategic Intent Fit Political Marketin g Manageme nt Social & Cultural
It provides broad guidelines. It is all about creativity and innovation. It is a holistic and integrated approach. It is long-term in nature. It is about adaptation and response to the same. 7 .STRATEGIC MANAGEMENT . It involves substantial resource outlay. It requires full commitment of the top management.FEATURES It forms the core activity of the top management. It is irreversible.
8 . It is rocket science. It involves nitty-gritty's. It is about forecasting.STRATEGIC MANAGEMENT – MYTHS It involves short-cuts. It is about a definite formula. It brings instant success. It about mere data and facts. It is fool-proof in nature. It attempts to minimize risk. It involves only the top management. It a bundle of techniques or even tricks.
scale and scope. To be insulated against environmental threats.STRATEGIC MANAGEMENT IMPERATIVES To be continuously alert. rather than reactive. To tap markets across boundaries. To assimilate change faster. 9 To develop core–competencies. To leverage size. To be future oriented. To generate large resource pool. To innovate. To gain expertise in technologies. again and again ……. To be proactive. .
In contrast.strategies. Even in today’s markets. obsession. In the ancient days battles were won not by virtue of size of the army or armory. but by virtue of their courage.ORIGIN The word strategy has its origin from the Greek word strategia meaning Military Commander. whose origin can be traced to some of the greatest battles fought in the ancient days. today's battles are fought over markets.STRATEGY . It is an old wine in a new bottle. In the ancient days battles were fought over land. battles fought on the market front are won by companies by virtue of their obsession & strategies. but with a lot a rigour and robustness. 10 . and more importantly .
11 .SOME PARALLELS Japan’s attack on Pearl Harbour – Strategy: Attack where it hurts the most. US attack of Morocco to capture Germany – Strategy: Pin-hole strategy – Wal-Mart challenging Sears by entering small towns. Allied Forces Vs Germany (WW-II) – Strategy: Forging alliances. – Toyota’s entry in the US. – Yahoo and Microsoft challenging Google. – Reliance’s entry into telecom. Napoleon’s attack on Russia – Strategy: Waiting for the right time. challenging GM and Ford.
12 .Industrial Revolution. 1910). a radical change in the business environment brings about discontinuity. The things happening around the firm when totally disconnected from the past leads to a paradigm shift. A paradigm is a dominant belief about how the business and its environment operates.EVOLUTION OF MANAGEMENT As Peter Drucker refers to it. – Mass Production Organization Size – Complicated Processes – Complex Structures Evolving of an emerging paradigm – survival of the fittest (Fayol & Taylor. The first major discontinuity in the history of global business environment was the .
13 . 1960). – Changes in the technology fore-front. The question of outperforming the benchmark became the new buzzword. push to pull).EVOLUTION OF STRATEGIC MANAGEMENT The second major discontinuity in the history of global economic environment – World War II. Survival of the most adaptable becomes a new management paradigm (Ansoff. Efficiency and effectiveness are no longer sufficient.e. – Homogeneous to heterogeneous products. – Global market place. performance across firms became differentiated. From uniform performance. – Affluence of the new customer (i.
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 .
– 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.APPROACHES TO STRATEGY Analytical Approach – Igor H. Learning always begin on a clean sheet of paper. 15 . – Biases and prejudices has a very little role to play in strategic choices pursued by managers. Ansoff (1960) – Strategy can be segregated into certain mutually exclusive and inter-related components aimed at managing the growth of an organization. – It is primarily the top management’s prerogative.
16 . – Organization structure will precede and cause changes in strategy. – The top managers then decide on the type of organization structure & systems to be in place. Once the control systems are in place. The organization initially decides which industry to enter. Successful organizations align authority and responsibility of various departments in way to reach overall objectives. – Management control systems has a dominating role in influencing firm performance. everything else follows.APPROACHES TO STRATEGY Design Approach – Alfred Chandler (1970) – Structure follows strategy. who will be the top managers. how it will compete.
Porter (1980) – Choose a consumer segment and position your product accordingly. competitors. 17 .APPROACHES TO STRATEGY Positioning Approach – Michael E. substitutes. customer. – The organization will outperform the industry where environmental forces are weak and vice-versa. – A firms performance is inversely related with the bargaining power of environmental forces to which it is exposed. new entrant. – The environmental forces comprises of – supplier. – An organization is seldom in a position to influence the larger business environment.
but exploiting the resource differences among them. They are complex resources and undermines a firms competitive advantage.APPROACHES TO STRATEGY Core Competence – C. 18 . Prahalad (1990) – The key to superior performance is not doing the same as other organizations. – It enables a firm to deliver unimaginable value ahead of time. K. – Core competencies are a set of skills that are unique and can be leveraged. 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 .
you cannot reach there. 21 .STRATEGIC INTENT If you cannot see the future. A strategic intent is a statement of purpose of existence. It is the cornerstone of an organizations strategic architecture reflecting its desired future state or its aspirations. It implies a significant stretch. It provides a sense of direction and destiny. It involves an obsession to be the best or outperform the best. It’s a philosophy that distinguishes it from its competitors. A substantial gap between its resources and aspirations. A gap that consciously manages between stagnation and atrophy.
STRATEGIC INTENT .HIERARCHY Integrativ e m Do an in Visio n Mission Dominant Objective s Goal s Plans Lo g ic Single Specifi c Man y 22 t .
To put it more simply. strategic variety) is apparent. when radical changes in the internal and external environment (i. Dominant logic changes. 23 . 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. It is core to the strategic intent of the firm.DOMINANT LOGIC A dominant logic can be defined as the way in which the top management team conceptualizes its various businesses and make critical resource allocation decisions.e.
– It represents the company’s audacious. – It stands for the unchanging core values of the company. 24 . It provides an unity of purpose amidst diversity of personal goals.VISION It is a dream (not a forecast) about what the company wants to become in the foreseeable future. It ensures that the company does not wander off into unrelated zones or fall into an activity trap. It is a combination of three basic elements – – An organizations fundamental reason for existence. beyond just making money. It enables the top management to remain focused. but achievable aspirations.
clear. Clarity – Vividly descriptive image of what the company wants to be known for in the future. In Reliance when a new project becomes operational top managers hand over charge to the SBU heads and move on to a new project. not an utopian dream. 25 .VISION . Sharing – The company across all hierarchies should have faith in it. Brevity – It should be short. and memorizable. Empathy – It should reflect the company’s beliefs to which it is sensitive.CHARACTERISTICS Reliance – Where growth is a way of life. Reachable – It should be within a reasonable target in the known future.
It gives enlightment. 26 . It facilitates development of skills & capabilities. It gives the impression of a forward-looking organisation. To prevent the fall in a activity trap. It makes strategic alignment easier.ADVANTAGES To stay focused on the right track.VISION . It lends integrity and genuineness. It fosters risk taking and experimentation. It provides a holistic picture. It gives a shared platform.
27 . It is intuitive for managers to conceive their business in terms of the customer needs they are serving – What business are we in? – Which customer needs are we serving? It should be broad based and relevant to all stake-holders. It serves as a road map to reach the vision. It enables the firm to define its business landscape and identify its competitive forces. A broad mission statement helps in fending competitors. its reason for existence.MISSION Mission defines the space that a business wants to create for itself in a competitive terrain. Although the purpose may change over time.
Some other examples – We do not offer shoes. …………………. – We do not offer insurance. though some may seem unrelated in nature. – We do not offer steel. All the businesses of the company are strongly integrated with their main business. We offer comfort. ………………….MISSION – SOME IDEAS Reliance – We are in the business of integration. We offer strength. …………………. We offer security. We offer solutions. 28 . – We do not offer software's. ………………….
– It lends direction – time frame in the medium term. It provides a quantitative feel to an abstract proposition.GOALS & OBJECTIVES Reliance – We want to become a Rs. – It helps identifying key success factors. – It keeps the mid management pre-occupied. – It prevents deviation.100K crore company by the year 2005. – It is based on Management by Objectives (MBO). It is an end result (quantifiable) something a firm aims and tries to reach in a time bound frame. – It adds legitimacy and motivation. 29 . – It provides a benchmark for evaluation.
– Acquire a market share of indomitable position. 30 . The details of the plan Reliance Telecom adopted were – Backward integrate process technologies. coordinating appropriate technologies. It is specific to a particular business. – Use price-elasticity to break market barriers. – Leverage economies of size and scale. It is the process of garnering necessary inputs. – Compress project times. and gaining access to desired markets to achieve the desired goals and objectives.PLANS Reliance – Desire to invest 25K crore in telecom business by circa 2010.
equilibrium is maintained.STRATEGIC DRIFT Due to top management commitment. In such a context. This tendency to restore continuity is known as inertia (resistance to change). Historical studies have shown that most organizations tend to continue with their existing strategies. radical change may lead to disequilibrium. However. This state of affairs is known as strategic drift. strategies lose touch with the emerging realities. When changes in the environment is incremental. 31 . past strategies tend to have a bearing on future strategies. It often leads to an organizational crisis.
STRATEGIC DRIFT FRAMEWORK Environmental Change Degree of change Strategic Change Radical Change Incremental Change State of Flux Continuity Stage of Transformation Strategic Drift Stage of Atrophy Time 32 .
Organizational politics involves intentional acts of influence to enhance or protect the self-interest of individuals or groups over organizational goals. – Creating a favourable image. – Developing a platform of support. Some instances of organizational politics – Formation of powerful groups or coteries. – Using covert tactics to pursue self interests.ORGANIZATIONAL POLITICS Strategic drift often leads to organizational politics. – Distorting information to gain mileage. 33 . – Hiding vulnerability. – Creating obligations of reciprocity.
– Persons responsible for strategy conceptualization and implementation are34 divergent. . – The environment context has changed. – Influential stake-holders back out. Other causes – – The plans are unworkable and utopian. Usually there is wide gap between the two when organizational politics is evident. A realized strategy is what the top management actually translates into practice.INTENDED & REALISED STRATEGIES An intended strategy is an expression of interest of a desired strategic direction.
Strategy formulation and implementation are linked together in a continuous improvement cycle. this is not to be treated as “muddling”. Learning is an integral part of logical incrementalism. but as a defensible response to the complexities of a large organization that mitigate against publicizing goals.LOGICAL INCREMENTALISM According to the incrementalism approach (contrary to integrated approach) practitioners simply do not arrive at goals and announce them in crafted and well defined packages. They simply unfold the particulars of the sub-system in stages. However. but the master scheme of the rational comprehensive scheme is not apparent. 35 .
Adaptation – As implementation progresses. Leveraging Crisis – A sudden crisis or an opportunity should be used as a trigger to facilitate acceptance and implementation of change. 36 . Agent of Change – Formal ratification of a change plan through MBO.IMPLEMENTING INCREMENTALISM General Concern – A vaguely felt awareness of an issue or opportunity. The broader objective should serve the overall interest of the organization. Macro Broadcasting – The broad idea is floated without details to invite pros and cons leading to finer refinements.
It creates blinders. Dominant logic’s are very rigid and sticky and prone to inertia. Tampering with surface level factors often leads to atrophy. 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. . As it brings 37 with it a different dominant logic.
A learning organization must continuously focus on unlearning as well. – Informal Networks – Emerging of new ideas. – Experimentation – Fosters a culture of risk taking.LEARNING ORGANIZATION A learning organization is capable of continual regeneration from knowledge. – Constructive Bargaining – Agree to disagree. It helps prevent a strategic drift from occurring at the first place. experience. 38 . and skills that fosters experimentation and questioning and challenge around a shared purpose. – Organisational Slack – Enough free space. Factors that fosters a learning organization – Pluralistic – An environment where different and even conflicting ideas are welcome.
ENVIRONMENTAL CONDITIONS Dynamic Scenario Planning Learning Organization Static Forecasting Decentralization Simple Complex 39 .
ANALYZING BUSINESS ENVIRONMENT 40 .
It is based on the assumption of radical change. It is based on the assumption of incremental change. It is pro-active in nature.e. 41 . It is reactive in nature. Competitive advantage provides the surest way to fulfill the strategic gap. Strategic gap basically points towards a vacuum of where the organisation wants to be and where it is. gap analysis).PLANNING & STRATEGIC PLANNING Formal planning is a function of extrapolating the past. Strategic planning is a function of discounting the future. It points to a position of superiority with relation to competition. It requires a quantum leap (i.
42 . Environmental factors can be external as well as internal to the organization. The segments of the environment a top manager scans selectively depends upon his dominant logics. The world is flat. and influences that affect an organizations way of doing things. not guided by any boundaries. Environmental scanning is very important component of strategic planning.ENVIRONMENTAL SCANNING The environment is defined as the aggregate of conditions. A manager has to continuously scan the environment to ensure alignment of the strategies with the radically changing environment. resources and ideas move unhindered. It is exploratory in nature. events.
It is important not only to identify the structural drivers of change. It is particularly important that PESTEL be used to look at the future impact of environmental factors. which may be different from the past impact. Understanding the composite effect is critical. It is not intended to be used as an exhaustive list.PESTEL PESTEL attempts to provide a broad framework on how the broader environmental forces affects an organization and influences the way it practices strategy. for which a holistic picture is required. 43 . but also to analyze the complex linkages across them.
FDI Inflows. 44 . Savings & Investment. Government Attitude. Subsidies & Protection. Language Barriers.PESTEL FRAMEWORK Political – Government Stability. Social Values. Economic Cycles. Inflation & Interest Rates. Capital Market & Forex Reserves. Licensing & Quotas. Economic Model. Monsoon & Food Grains Reserves. Literacy Levels. Central – State Co-alignment. Fiscal Deficit. Economic – GDP. Income & Age Distribution. Social – Population Diversity. Religious Sentiments. Currency Stability. Infra-Structural Investments.
Technological Convergence.PESTEL FRAMEWORK Technological – Innovation. Product Safety & Health Hazards. Direct & Indirect Taxes. Waste Disposal & Emissions. Pollution Control Laws. Extended Producer Responsibility. Research & Development. Non-Fossil & Alternative Fuels. Environmentally Preferable Purchasing. Environmental – Global Warming & CSR. Obsolescence Rate. Consumer Protection Laws. ERP. Patents. 45 . Employment Laws. Carbon Credits. Patent Laws. Legal – Monopolies Legislation. Product Design.
Curtailment of PSU’s. MRTP Liberalization. Abolition of import licenses. Dismantling price controls. 46 . Banking Sector Reforms. Rupee convertibility. Encouraging exports.VRS.ECONOMIC LIBERALISATION New Industrial Policy (NIP) – Liberalizing industrial licensing. Structural Adjustments – Phasing out subsidies. Exit Policy. Economic Reforms – Fiscal & Monetary Reforms. Capital Market Reforms. New Trade Policy (NTP) – Lowering import tariffs. PSU Disinvestments. Encouraging FDI. FERA Liberalization.
DISCONTINUITY Destabilization due to entrepreneurial freedom – Cocoon of protection disappears – Diversification spree – Existing notions of size shaken – Industry structures change radically – Economic Darwinism .Survival of the fittest MNC Onslaught – Enhancing stakes – Power Equation – Joint Ventures – Technological Alliances – Take-over threat. Mergers & Acquisitions 47 .
DISCONTINUITY Hyper Competition – MNC’s . Consumerism Challenges on the technology front – Competencies become technology based – Investment in R&D become inescapable 48 .Globalization – Cheap Imports & Dumping – Push to Pull Marketing Buyers exacting demands – Shortage to surplus – Price competition – Life-style changes – Stress on quality.
DISCONTINUITY Compulsion to find export markets – Identifying competitive advantage – Technological gap – Global presence – Depreciating currency – Exports Corporate vulnerability – It is no longer business as usual – Capital inadequacy – Lack of product clout and brand power – One product syndrome – Loss of monopoly 49 .
PORTER Threat of New Entrants Bargainin g power of Suppliers Competition from Existing Players Bargainin gBargainin power g of power of Suppliers Customer s Threat of Substitutes 50 .FIVE FORCES MODEL .
incremental or otherwise. 51 . It depicts the attractiveness of an industry (i.e. The five forces have strong cross-linkages. the forces are subject to changes. but also used to understand how they can be countered and overcome. It should not only be used to understand the forces. profit potential) per se.FIVE FORCES MODEL ASSUMPTIONS The model is to be used at the SBU level and not at the industry level. The model should not be used as a snapshot in time. It is even wiser to apply the same at the product – market level.
High switching costs. Learning curve advantages. Government policy. Scope for backward integration. Low customer switching costs. Access to distribution channels. Unimportance of product quality. Resource profile & fear of retaliation. 52 . Low margins & stagnancy. Capital requirements. Undifferentiated product. Product differentiation through proprietary technology or brand power. Presence of substitutes or unorganized sector. Low relative importance of the segment.PORTERS FIVE FORCES ANALYSIS Threat to Entry – Economies of size and scale. Industry stagnation. Threat of Customers – Buyer concentration and volumes.
Diversity of players. Intermittent overcapacity. Jockeying for position – Fragmented market. Scope for forward integration. Piracy and counterfeits. Differentiated inputs. Industry stagnancy.PORTERS FIVE FORCES ANALYSIS Threat of Suppliers – Supplier monopoly. High exit barriers. Buyer’s propensity to substitute. Produced by industries earning high profits. 53 . Product perishability. Lack of substitute inputs. Threat of Substitutes – Improvement in price -performance trade-off. Low level of differentiation. Unorganised sector. High customer switching costs. Low relative importance of the segment.
Resource Profile – It highlights the capabilities (generic) or competencies (business specific) of the firm. Tata). dominant or related diversified or unrelated diversified businesses (Infosys. 54 . Business Scope – The intention whether the firm wants to be in a single. Inertia – Excessive commitment to past strategies prevents firms from tapping emerging opportunities. Reliance).FIRM ENVIRONMENT Size and Scale of Operations – It is a very important component of competitiveness in today's global context (Bharti – MTN. Cohesiveness – Degree of bonding existing across affiliated firms.
it can price its products more competitively. 55 . However. Matured firms will always be positioned advantageously on the ECurve than new entrants. With lower costs.EXPERIENCE CURVE The cost of performing an activity declines on per-unit basis as a firm becomes more efficient. The E-Curve thus enables organisations to build entry barriers. leverage it as a competitive advantage. Experience curve has strong linkages with performance. an E-Curve can prove to be futile during discontinuity. and with lower prices it can increase its sales volume. which further reduces costs. 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 .
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 .EXPERIENCE CURVE .
. Suppliers.VULNERABILITY ANALYSIS . Press Clippings & Interviews. It is one of the earliest models in environmental scanning. Customers. Websites. 59 Analysts. Case Studies – Structured Questionnaires.SWOT The framework was originally conceptualized by Kenneth Andrews in 1970. A SWOT audit involves – Company Records – Annual Reports. Interviews. It helps an organisation to capitalize on the opportunities by maximizing its strengths and neutralizing the threats minimizing the weaknesses. Observation. Acronym for Strengths – Weaknesses – Opportunities – Threats. Business Intelligence – Bankers. Competitors.
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 .
Toyota. Reddy’s. SBI. Large resource pool – Eg. Strong after sales & service network – Eg. Sony. Siemens. Ranbaxy. Excellent penetration – Eg. Engineering Skills – Eg. Volkswagen. Infosys. Strong R&D base – Eg. Aditya Birla. Good credit rating – Eg. 61 . Dr. Infosys. Motivated employees & cordial industrial relations – Eg. ITC. Caterpillar. Tata. High quality products – Eg. Economies of scale – Eg. Biocon. Honda. Tata Steel. HUL. Reliance. Reliance.SOURCES OF STRENGTH Strong brand identity – Eg.
K. Single product syndrome – Eg. Ballarpur Inds. Group . SAIL. Excessive diversification – Eg. Inertia – Eg. Lack of product / brand clout – Eg. K. B. Procter & Gamble. Excess manpower – Eg. Organizational Politics – Eg. Modi Group.SOURCES OF WEAKNESSES Outdated technology – Eg. Strategic myopia – Eg. Nirma. Hindustan Motors. CESC. Bijoligrill. Tatas. J.Raymond. CMC (Tata Group) 62 . Inefficient top management – Eg. Narrow business scope – Eg. Lacking experimentation culture – Eg.
VRS. Growing population – Eg. Globalization – Eg. Maruti. Retailing. Market driven Interest rates – Eg. Free pricing – Eg. Sugar.Tata Motors. Fertilizers. Collaborations & Joint Ventures – Bharti & WalMart. Insurance. Capital market reforms – Eg. Life style changes – Eg. ECB’s. Abolishing MRTP – Eg. Exit Policy – Eg.SOURCES OF OPPORTUNITIES Delicensing of Industries – Eg. Abolishing CCI. Middle-class buying power. GDR’s. Telecom. 63 . Market driven Pricing – Eg. Sugar. Banking. Fertilizer.
Group disintegration – Eg.Social activism – Eg. Land acquisition . Nationalisation – Eg. Dumping from China. Economic recession – Eg. Singur SEZ. Satyam. Lack of Corporate Governance – Eg. Import relaxation – Eg. (1985–1990). Hostile take-over – Eg. Tata Steel.SOURCES OF THREATS Political instability – Eg. 11/9. Earth Quake. Terrorist attacks – Eg. (2008). 26/11. Bajoria – Bombay Dyeing. Natural disaster – Eg. Foreign Direct Investment (FDI) – Eg. Onida. Tsunami. Reliance. 64 .
ETOP Acronym for Environment – Threat – Opportunity – Profile. Assess the extent of impact of the factors. Delphi's technique. 65 . scenario analysis). Strategic responses (including adaptation) to opportunities and threats is critical for survival and success. It represents a summary picture of the external environmental factors and their likely impact on the organization. Holistic view – Prepare a complete overall picture. Stages in ETOP analysis – List the aspects of the environment that has a bearing on the organization.e. time series. Forecasting – Predict the future (i.
Some key findings on major performance drivers that explains 75% deviations in performance – Product quality and relative market share. selectively. An organization can draw upon the experience of its peers in similar situations. . 66 Vertical integration is a powerful strategy. High investment intensity acts as a drag.PROFIT IMPACT OF MARKET STRATEGY PIMS is a database model developed by GE and later extended by HBS to examine the impact of a wide range of strategy variables on business performance. Relative attractiveness of the market. It is also a form of assessing vulnerability through longitudinal analysis.
As every organization is unique in its own way. Authenticity of data is of prime importance – Contexts drawn across one organization may not be applicable to another. – Contexts may vary across countries.PIMS .LIMITATIONS The analysis is based on historical data and it does not take care of future challenges. Managers should be particularly cautious while referring to such data during times of discontinuity as it makes past patterns futile. . when radical changes in the economy takes place. therefore 67 validity may be a question. – Contexts may vary over time.
It enables the top management to draw focus. KSF helps organizations spot early opportunities and convert them into value adding business propositions. It involves a three-stage process – Identify KSF – What does it take to be successful in a business? Drawing KSF – What should be the organizations response to the same? Benchmarking KSF – How do we evaluate organization success on this factor? 68 .KEY SUCCESS FACTORS (KSF) KSF relates to identification and putting concentrated effort on a particular activity or process which forms the very basis of competitive advantage.
IDENTIFYING ALTERNATIVE STRATEGIES 69 .
It determines the locus a firm encounters with internal and external environment. A corporate strategy identifies and fixes the strategic gap it proposes to fill. dominant. It reflects the customer needs it intends to satisfy. unrelated) and geographical scope (local. It provides broad direction to the groups vision and mission. 70 . It indicates the quality of growth an organization is looking for. related.GRAND STRATEGY It is concerned with the overall business scope (single. global) of a firm and deals with choices of allocating resources across them. national.CORPORATE .
CORPORATE STRATEGY MATRIX Corporate Strategy Stability Stability Growth Growth Combination Diversification Divestment Intensification Market Penetration Related Vertical Market Development Product Development Unrelated Horizontal 71 .
The scale and scope of present operations remains almost intact. – To stop for a while and assess past records. 72 . – Why disturb the existing equilibrium set up? – Limited resource position. Even during adverse times firms need to adopt a strategy to sustain current performance levels. – The firm may not be willing to take additional risk associated with new projects. Hindustan Motors). (Eg. The reasons for stability strategy – – Lack of attractive opportunities. Stability however. erosion of capabilities. does not relate to do-nothing (Eg. Citibank).STABILITY It involves maintaining status-quo or growing in a slow and selective manner.
GROWTH .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 .
Nirma. Market penetration can be achieved by – increasing sales to current customers. – Suitable for industries where scope for technological breakthrough is limited. Britannia). within a well defined market segment. – The company carries a risk of product obsolescence. Ujjala.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. (Eg. convert competitors customers. – Helps firms which are not comfortable with unfamiliar terrain. 74 . direct non-users to users.
carpets. upholstery. – Immense customer reach & flexible advertising. tyres. fabrics.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. – Moves across geographical boundaries.…… or Teflon: aircraft technologies to cutlery to paints or Raytheon Corp – Microwaves: radars to kitchen appliances). socks & stockings. 75 . (Eg. – Unconventional and flexible distribution channels. – Stretches product life cycles. Du Pont – Nylon: parachutes. – Creativity and innovation – thinking out of the box.
serviceability. reliability. – Leverage on customer and brand loyalty. – Substitutes that serve the same needs (Eg. conformance.PRODUCT DEVELOPMENT It is a strategy where a firm tries to achieve growth through a radical new product (Eg. Refills) 76 . aesthetics. – Leveraging through – innovation.Strolleys). – Deliverable through – redesigning or reengineering. perception. features. – Areas of product improvement – performance. Microsoft: DOS to Windows) or a substantial improved version (incremental) of an existing product to repeatedly enter the same market (Eg. durability. Close Up: Fluoride – Gel toothpaste or VIP .
Why do firms diversify in the Indian context? – Shift the growth trajectory or opportunistic.e.DIVERSIFICATION It marks the entry of a firm into newer markets with new products. the new business is distinct from the existing business in terms of – inputs – technologies – markets. industrial embassies). dominance).e. – Conglomerate or market power (i. – Risk reduction. – High transaction costs and institutional gaps. – Permits: quotas. licenses (i. 77 . thereby creating a new business. From the traditional point of view. From the modern point of view they are strategically dissimilar. – Internal capital market.
either of which is equally likely to prevail. while the coffee business would register a return of 30%.HOW DIVERSIFICATION REDUCES RISK? Consider a hypothetical planet. in which a given year is either under hot or cold wave. ice-cream business would register a return of 10%. the ice-cream business would register a return of 30%. What would be your ideal diversification strategy through optimization? 78 . If on the other hand. Let us assume that there are two businesses constituting the entire market – coffee and icecream. If the hot wave dominates the planet. cold wave dominates the planet. 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.
Reliance). Quasi-integration . Maruti – Sona Steering). Ranbaxy. and out-sources the noncore activities (Eg. Usually the firm concentrates on its core activities. 85 . Dr.A firm produces part of its own requirements and buys the rest from outside suppliers with a variable degree of ownership and control.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 .QUASI & TAPERED INTEGRATION Full Integration .A firm gets most of its requirements from one or more outside suppliers that is under its partial control through value chain partnerships (Eg. Reddy’s).
A CASE OF TAPERED INTEGRATION Partial Ownershi p Transmission Engine Design Electricals Steering 86 Seats & Carpets Windscreen Ordinary Components Zero Ownership Very Critical Component s Full Ownership Critical Component s .
Drawbacks of unrelated diversification – – Cost of failure (i.e. 87 . lack of knowledge of competitive forces).e. – Cost of ignorance (i. lack of strategic intent.e. – Cost of neglect (i. myopia). and are also strategically dissimilar. Firms usually engage in conglomerate diversification when emerging opportunities are very attractive and offers potential growth opportunities. – Cost of dysynergy (i. synergies pulling in opposite directions).CONGLOMERATE DIVERSIFICATION It relates to entry of firms into businesses which are distinct in terms of – inputs – technologies – markets. core business).e.
CONGLOMERATE DIVERSIFICATION Paper & Packaging Edible Oils Tobacco Hotels Food & Confectionary 88 .
89 . Tata Press). ACC) in full to an independent entity.DIVESTMENT Divestment is a defensive strategy involving the sale of entire stake (Eg. Tatas sale of Goodlass Nerolac. Tata Pharma. Glaxo’s “Glucon-D” to Heinz). where a company simply exits because the business no longer contribute to or fit its dominant logic. It taken into account when performance is disappointing (i. It is may also be a pro-active strategy. reactive) and survival is at stake and the firm does not have resources to fend off competitive forces. It may also involve a SBU (Eg.e. L&TCement Division to Aditya Birla Group) technically known as divestiture or a product (Eg. (Eg. In strategy there is no scope for sentimentality with divestment.
(Eg. (Eg.DIVESTMENT . However. the Companies Act. 90 . Hive-Off – A hive off is the creation of a new entity followed by transfer of assets. where 100% of the assets (including intangibles) are valued and paid for. Tatas buy-out of Corus for US $ 11. involving 608 pence per share). 1956 does not permit this mode. Sale of Diamond Beverages to Coca-Cola for US $ 40 million).3 billion. Leveraged Buy-Out (LBO) – Here the company’s shareholders are bought out through a negotiated deal using borrowed funds. where the equity is allotted amongst the existing shareholders on a pro-rata basis.ROUTES Outright Sale – Popularly known as the asset route.
91 .e. joint ventures). because every business has its own unique external and internal environment. and divestment strategies applied simultaneously or sequentially for a portfolio of businesses. A combination strategy can be implemented through green-field projects (i. mergers and acquisition.COMBINATION STRATEGY It is a mixture of stability. developing facilities right from the scratch) or through brown-field projects (i.e. It is usually pursued by a business group with diverse interests across multiple industries. There can be no ideal strategy for every business. growth.
STRATEGY CHOICE & PORTFOLIO ANALYSIS 92 .
In most cases the trade-off is between resources and opportunities. What then is the magical number? 93 .STRATEGIC CHOICE A strategic choice seeks to determine the alternative courses of action available before top managers to achieve its strategic intent. Dominant logic enables top managers to selectively scan the environment and make trade-offs. 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.
They must choose problems which will lead to the right kind of opportunities. 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 .SELECTIVITY IS THE KEY The role of a top manager is not to solve a problem. if addressed. To identify the right problems. nor is to a define a problem for others to solve. The key task before a top manager is to identify the right problems. will help the firm achieve its intent. managers need to ask the right questions.
Licenses & Quotas. . 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. chaebols in Korea. 95 Succession planning is critical to continuity. Proximity to the corridors of power (i. keiretsus in Japan. Their origins can be traced back to market imperfections existing in an economy (MRTP Laws. Managing Agency). Resource sharing. BRC). embassies).e. formal and informal ties.BUSINESS GROUP . business houses in India. High degree of centralized control (GEO.
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 . Rules of the game are different. there are high costs associated with entry and exit.PORTFOLIO ANALYSIS Resource allocation across a portfolio of businesses is an important strategic choice. sometimes impossible. next only to choice of business. therefore. Power and resources often goes hand in hand. Why? Businesses are not about liquid assets. Investing in emerging businesses may not actually be so simple as it appears to be. Redeployment of resources upsets the established power bases of a group. Relatedness across resources are difficult to realize.
BCG GROWTH MODEL Relative Market Share (%) Industry Growth (%) Low High High Low Stars Question Mark ? Cash Cow Dogs 100 .
product development). which remains a big? These businesses are net users of resources. 101 . but to larger extent than a question mark. Tata Steel). diversification). Tata-AIG). Tata Telecom. and their risk profile is high (Eg. Trent.BUSINESS ANALYSIS – TATA GROUP Question Marks – They have potentials in the long term. Stars – They achievers in the near term. These businesses are also net users of resources (Eg. market penetration. market development. provided the industry growth rate continues and the company is able to maintain its growth (i. provided the company is able to build up on its market-share (i. TCS.e.e.
Tata Pharma. they are generators of resources. 102 .e. Dogs – They are a drag on the group. divest) as achieving a dominant position in these businesses is a difficult task. stability). Tata Press). cash cows may also need to invest provided the industry takes an upswing (Eg. Groups prefer to dispose off such businesses (i. Nelco. and they lack on competencies to take on competition and are basically cash traps (Eg. and the company dominates the industry ahead of competition (i.BUSINESS ANALYSIS – TATA GROUP Cash Cow – These are matured businesses. Tata Chemicals).e. Tata Motors. harvest. However. Tata Tea. Given that the growth potential in the business is low. Indian Hotels.
factors are limited. The terminologies used are somewhat prohibitive. Cash cows may actually need substantial investments to retain their market position (Eg. niche – Rolex. HUL).LIMITATIONS It does not address the concerns of a business which is in the average category (usually the majority). 103 . Data may be prohibitive. Cartier.BCG . Armani). Mercedes Benz. neither in high or low. Certain businesses in the low market share category may be the result of a conscious strategy (i.e. The model does not provide specific solutions within a particular category.
GE .-) 104 .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 .
Gap Analysis – It emphasizes what a firm wants to achieve. Divest – Selling a part or the entire business at one go. Disinvestment involves selling in phases. Portfolio – An organization is perceived as a portfolio of businesses. 107 . 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. BCG – Boston Consulting Group.
BUSINESS STRATEGY & COMPETITION 108 .
rent). Competitive advantage is the back-bone of strategy. 109 . and earning super-normal profits (i.e. The strength of a firm in a particular business usually stems from its competitive advantage. The principal focus is on meeting competition. Competitive advantage refers to a firms resources or activities in which it is way ahead of competition. Such resources or activities should be distinctive and sustainable over time.COMPETITIVE STRATEGY A competitive strategy deals with how a firm competes in a particular business or product-market segment. building market-share.
Delta Lock In – Two dominant players co-opt to selfreinforce and create or escalate an entry barrier. developing competitive advantage (Porter). identifying critical success factors. Blue Ocean – Consciously moving away from overcrowded industries to uncharted territories and making competition irrelevant (Kim & Mauborgne). preventing new entry and/or competition (Hax & Wilde). leveraging (Prahalad). involving harmonizing and integrating multiple streams of technologies. Resource Based View – Obsession with competence building.BUSINESS STRATEGY FRAMEWORKS How to be distinctive and yet sustainable – Differentiation – Understanding of the dynamics of competition. 110 .
The firm may retain the benefits of cost advantage by enjoying higher margins (Eg.PORTERS – COST LEADERSHIP Cost Leadership – It is a strategy that focuses on making a firm more competitive by producing its products more cheaply than its competitors. Compress project duration through crashing. 111 . proprietary technology. Ayur. Locational or early entry advantage. backward integration. preferential access to raw materials. Nirma. Sources of cost advantage are varied and depends on the structure of the industry – Economies of size. T-Series). Reliance) or may pass it to customers to increase market-share (Eg. Steep experience curve effects.
Sony. innovation and out of the box thinking. Creativity. (Eg. Intel. 112 . and sufficient slack. undeterred attention to quality. Rayban). Feeling the pulse of the customer. Successful product differentiation is often followed by premium pricing. Focus on brand loyalty. Culture of experimentation. Means of product differentiation are peculiar to each industry. It selects one or more attributes that buyers perceive as important. avoiding brand dilution.PORTERS – PRODUCT DIFFERENTIATION Product Differentiation – It is a strategy that attempts to provide products or services that are differentiated from competitive products in terms of its value proposition and uniqueness.
though it may not possess an overall competitive advantage. They are poorly served by mainstream players. Cartier. 113 . 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. Armani). The target segment must have unusual needs or the delivery system catering to this segment must be unique. Maybach. Rolex. Sub optimization alone may not be a source of superior performance. coupled with fear of structural erosion. A focuser seeks to achieve a competitive advantage in its target segment.
COMPETITIVE POSITIONS Competitive Advantage Cost Differentiation Product Differentiation Competitive Scope Broad Cost Leadership (Toyota) Product Differentiation (General Motors) Narrow Cost Focus (Hyundai) Differentiation Focus (Mercedes) 114 .
Reducing cost does not always involve a sacrifice in differentiation. in a hyper competitive context the two strategies need not be mutually exclusive.HYBRID STRATEGY A hybrid strategy is the simultaneous pursuit of cost leadership and differentiation. and usually outperforms a stand alone generic strategy. Though cost leadership and differentiation are inconsistent. similarly differentiation may not always lead to rising costs (i. jugaad or frugal engineering). Firms focusing on a hybrid strategy typically aim at shifting the productivity frontier and recreating a new product-market segment altogether (Eg. Tata Nano).e. 115 .
It tries to compete through every means. It is usually the result of a firm not willing to make trade offs.stuck in the middle. The positioning therefore gets – blurred. leading to what is called – straddling. Industry maturity will usually widen the gap. unless such a player is capable of discovering a profitable segment. It will have a competitive disadvantage vis-à-vis a clearly positioned generic player. but achieves none.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 . 116 .
117 . There is a lot of scope to define the rules of competition. Market segmentation not well defined. Nano technology.EMERGING INDUSTRY Emerging Industry – An evolving industry characterized by .radical environmental changes.) Excessive turbulence in the dynamics of the environment. ending in a differential cost economics. First-time buyers. Speech recognition software's. 3D imaging. Artificial intelligence). It is characterized by – High level of technological uncertainty. Eg. (Eg. Consumer behaviour pattern unstable and evolving. leading to a blurred productivity frontier and steep learning curve. technological innovations. coupled with low penetration levels. changing customer needs.
It is characterized by – Low entry barriers. Consumer durables. Eg. Eg. IT. MRTP may also cause fragmentation. 118 . Diverse customer needs.GROWTH / FRAGMENTED INDUSTRY Growth Industry – An industry characterized by high growth potential in the long run and where no firm has a significant market share (an edge over another). Paints. Government regulations in the form Eg. Scope for players to change the rules of the game. because of lack of economies of size and scale. Retail and telecom. leading to clear fragmentation. Eg. High exit barriers because of huge investment in CAPEX. Air Conditioning.
technological maturity. collaboration and co-option. early entry and location advantages. distribution networks. Firms are rule takers in the segment as productivity frontier is well defined. Limited scope for innovation . Cartel among existing players through collusion.technological maturity. 119 . well defined consumer behavioral patterns and imperfect competition leading to near monopoly. established industry dynamics. Strong entry barriers. because of economies of size and learning curve effects.MATURED INDUSTRY Matured Industry – An industry characterized by saturation in growth rates.
Exit barriers are extremely high because of limited prospective buyers. Typewriters. 120 .DECLINING INDUSTRY Declining Industry – An industry which has outlived its utility due to the entry of close substitutes and or radical product innovations which results in a shift of the productivity frontier. (Eg. dot-matrix printers). Nature of competition extremely high. Learning abilities have been stunted and firms adverse to investment in R&D and make fresh investments. and costly price wars. backed by corporate espionage. with little or no signs of recovery. Firms facing a declining phase are characterized by inertia and slow to react to environmental changes. scooters.
recreate new markets. reengineer. Locate a defendable position. strictly cost differentiation. mergers and acquisition. Fragmented Industry – Identify. aggressive building of distribution networks. or else exit the segment. process innovation. increasing scope. strike alliances. focus more on product differentiation or even a hybrid one. move beyond boundaries. Matured Industry – Sophisticated cost analysis.COMPETITIVE STRATEGIES Emerging Industry – Set benchmarks. Declining Industry – Redesign. strictly product differentiation and not standardization. 121 . premium pricing. branding and promotion. regenerate. assess and overcome fragmentation.
positions based on resources which are unique and inimitable are far more sustainable even in the long term. and complex learning experiences in integrating and harmonizing technologies (distinctive capabilities) that play an important role in delivering competitive advantage through “causal ambiguity”. patents. However. 122 . A firms resources can be classified into – Tangible – These refer to real assets. Intangible – These refer to goodwill. hence very rarely confer competitive advantage as can be easily acquired or replicated. brands.RESOURCE BASED VIEW Differentiation based on cost or products saturates and ceases to exist beyond the medium term. They are a standard in nature.
Therefore firms should concentrate on developing complex resources that forms the very basis of differentiation. differentiation based on capabilities can be sustained even in the long run.CAPABILITIES & COPMPETENCIES These include a complex combinations of tangible and intangible resources that organizations use to convert inputs to outputs.e. but not necessarily. they are woven around technologies. Capabilities can be generic (i. There is a high degree of internal and external causal ambiguity involved in it. 123 . They play a very critical role in shaping competitive advantage. can be leveraged across businesses) or specific to a particular business. Hence. Typically.
COMPETITIVE ADVANTAGE 124 .
not absolute) to competition. It enlarges the scope of an organization. A portfolio of competitive advantage comprises strategic advantage profile (SAP).COMPETITIVE ADVANTAGE A competitive advantage is a position of superiority relative (i.e. competitive advantage subsequently becomes the back bone for a competitive strategy. Strategy drives competitive advantage. Success of a strategy critically depends on SAP. and results in well springs of new business development. 125 . It results in a distinct differentiation advantage or a cost advantage or hybrid as well.
Most successful organizations around the world have a well balanced SAP. Identification of SAP is critical for and stretching and leveraging of resources.STRATEGIC ADVANTAGE PROFILE (SAP) Organizations have to systematically and continuously conduct exercises to identify its SAP. 126 . In today's world of discontinuity. 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. SAP changes from time to time.
VC pay-offs: better product availability. faster product launches. each of the players need to be efficient backed by sufficient coordination at the contact points (i. Competitive advantage arises not from an individual activity but a stream of inter-related activities.VALUE CHAIN ANALYSIS A value-chain segregates a firm into strategically relevant activities to understand its composite behaviour.e. A VC is often compared with a relay team. Inventory Mgt to Logistics Mgt to Supply Chain Mgt (SCM). 127 . kaizen or internal customer). and enhanced customer tracking – higher market share. Substantial cost reductions also follow. 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 .
– Second order fit occurs when activities are reinforcing amongst them. A high fit involving a complex chain of activities drives both competitive advantage and its sustainability.STRATEGIC FIT – THE PORTER WAY The sustainability of the value chain depends on the degree of fit between the activities. – First order fit refers to simple consistency between each activity and the overall strategy. Fit is important because discrete activities result in negative synergy and can also be easily copied by competitors. 129 . – Third order fit refers to optimization of effort. A learning organization helps create strategic fit. Operational effectiveness is not strategy.
CORE COMPETENCE A core competence represents the collective learning's of an organization around diverse streams of technologies. . It should satisfy the following conditions – Contributes significantly to customer benefits. Core competence has a high degree of external and 130 internal causal ambiguity embedded in it. These skills results in distinctive activities and processes. It forms the very basis of competitive advantage. A core competence usually has its roots in technology. – Can be sustained even in the long run. – Cannot be easily imitated or substituted. – Can be leveraged across businesses. but not necessarily.
only global leaders possess a core competence. a core competence is sustainable even in the long-term. Majority of the firms have competitive advantage. A competitive advantage may or may not lead to superior performance. A competitive advantage is sustainable in the shortmedium term. a core competence always implies a competitive advantage. a core competence usually does.CORE COMPETENCE A competitive advantage does not necessarily imply a core competence. a core competence has its roots in a set of skills. 131 . A competitive advantage manifests from a function.
GAME THEORY The game theory was developed in 1944 by Oscar Morgenstern. each of whom wants to win. In fact there are no. illustrations depicting a win-win situation. This is known as a zero-sum game. A game is a contest involving two or more players. 132 . Here the magnitude of gain offsets the magnitude of loss equally. the stringent assumptions of game theory and difficulty in ascertaining of pay-offs makes game theory application difficult in business. Subsequent work on game theory by John Nash led him to win the Nobel prize in 1994. In a game (similar to a business) one players win is always another's loss. However.
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 . An unbiased game is one where both the players have equal chances of winning.BIASED AND UNBIASED GAME A game is said to be biased when one of the players have a disproportionate chance of winning.
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 . 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.
Repeated Games – In this situation the players interact repeatedly with each other sub-optimizing the outcome possibilities. Yahoo Vs Microsoft). iteration) rather than through collusion (E. Coke Vs Pepsi).e. It represents the classical “prisoner’s dilemma”.TYPES OF GAMES Simultaneous Games – This is a situation where the players have an option to choose to cooperate or not through collusion. collaboration or cooption.g. This is usually through learning by “experience or observation” (i. 135 . 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. However.
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. – Building incentives for customer loyalty. but 136 players do not always behave rationally.CHANGING THE RULES OF THE GAME In a situation where a player is unable to compete with the existing rules of the game may attempt to change the rules of the game altogether. – Making pricing more transparent. It results in a shift in the productivity frontier. . Game theory relies on the principle of rationality.
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.
– Development of capabilities & competencies. – Better strategic and operational control. – Resource commitment from top management. A high strategic fit (co alignment) is useful because it enables – – Appropriate and timely response.IMPORTANCE OF STRATEGIC FIT Strategic fit has a central role to play in strategic management. internal strategic fit (strategy – dominant logic) is critical to strategy implementation. – Unlearning & learning of new skill sets. 143 . – Changing the rules of the game. While external strategic fit (strategy – environment) is relevant for strategy formulation.
e. effective strategies are better crafted when there is a subtle overlapping between the two (i. learning levels are very high. formulation & implementation can occur simultaneously. In such a situation. while control is very effective. 144 . learning levels are very low. In fact. strategy formulation and implementation has been perceived to be distinct & independent. In such a situation. at the cost of sacrificing a lesser degree of control. emergent strategy vis-à-vis intended & realized).FORMULATION Vs IMPLEMENTATION Traditionally. Some of the key strategic learning's exists at the contact point between the organization and its customer. According to Mintzberg.
companies depend more on transformational leaders than transactional leaders.ROLE OF TOP MANAGEMENT To bring about change and to implement strategies successfully. He should be an agent of change. bring about transparency. In contrast. Pragmatism is the ability to make things happen. 145 . Install a system of shared beliefs and values. shift from compliance to commitment. transformational leaders go one step beyond – Design a well crafted and designed strategic intent of the organization. A transactional leader is usually confined to allocating tasks & responsibilities and extracting performance.
skills) also includes complex resources like capabilities and competencies.RESOURCE ALLOCATION Resources allocation includes tangible resources (Eg.e. 146 . The various methods of resource allocation includes Historical Budget – The budgets framed by HQ for a particular SBU keeping in mind past trends. land. Intangible resources (Eg. patents. brands. machines) referred to as threshold resources (i. Zero Based Budget – In this case the budget of a SBU has to be worked out right from the scratch. minimum requirement). Performance Budget – SBU managers need to justify the distinctive resources in terms of the opportunity it is pursuing yields the highest possible pay-offs. labour.
Due to causal ambiguity (complexity). Mobiles). Distinctive capabilities helps in stretching and leveraging resources thereby overcoming two major constraints involved in strategy implementation – times & costs.CAPABILITIES & COMPETENCIES Technology and business are slowly becoming in – separable. Distinctive capabilities are complex set of skills woven around technologies. Flat Screen Displays. Moreover. these capabilities are sustainable even in the medium to long term. though not necessarily in the case of emerging markets. convergence of multiple streams of technologies at the product – market level is becoming increasingly evident (Eg. 147 .
processes become people independent. An appropriate organization structure & adequate control systems are essential to implement strategies and achieve stated goals. A single product or a dominant business firm usually employs a functional structure. Once the structure is in place.STRATEGY & STRUCTURE It is a framework within which individual efforts are coordinated to bring synergy. 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.
149 .Technology. Team Structure – An informal group formed for a crisis. Marketing. disbanded subsequently. processes. Inputs .TYPES OF STRUCTURES Functional Structure – Activities grouped together by a common function (Eg. Finance). based on skills and competencies. Output). SBU Structure – Businesses segregated in terms of strategic dissimilarities (Eg. Divisional Structure – Units grouped together in terms of products. or geographical locations. Project / Matrix Structure – A formal but temporary framework initiated for the completion of a particular project/crisis. Virtual Structure – A boundary less or hollow organization. with team members having dual line of control.
150 . 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. It includes the desire for independence. structures are becoming flatter and more simpler. assuming responsibility. Technology – With more and more convergence of technologies in business. facing challenges & crises. leading to a tall structure. as span is broader.
irrespective whether it is from worse to good or good to worse. Inertia is a characteristic of a firm that endures status quo (i.e. co0ntinuity).INERTIA When a firm has been operating in a certain fashion for a long time. . Common sources of 151 inertia – complacency with past successes. Top managers resist change. Most firms undergo periods of strategic continuity rather than strategic discontinuity. there is a tendency to continue along the same lines. Inertia acts as an impediment in strategy implementation. Changes in top management and unlearning helps overcome inertia.
STRATEGY EVALUATION Strategy evaluation centers around assessment of strategic fit. certain authors propose misfit as a source of superior 152 performance. firms should move beyond financial performance to strategic performance as organization systems are becoming complex. However. Since the internal and external environment is in a state of continuous flux. To prevent deviation of fit. strategies need to be evaluated on an ongoing basis to prevent deviations of fit. Deviation of fit is detrimental to performance and may lead to strategic failure. .
It attempts to answer the following questions – Is the strategic intent appropriate to the changing context? Are the organizations capabilities still holding good. . detecting changes in the external and internal environment and taking corrective action wherever necessary.STRATEGY CONTROL It is concerned with trafficking a strategy as it is being implemented. competitive advantages becoming disadvantages? Has the company acquired any new competency? Has the company been able to overcome the 153 environmental threats.
It involves assessing – strategic thrusts and milestones. It is open-ended as well as .STRATEGY CONTROL IMPLEMENTATION It involves steering the company towards its original growth trajectory & stated goals. Special Alert Control – It intends to uncover unanticipated information having critical impact 154 on strategies. Premise Control – Checking the validity of the assumptions on which a strategy was based. checking every premise is costly as well as difficult. However. Implementation Control – It aims at assessing whether key activities are proceeding as per schedule.
Strategy intent not linked with goals and objectives – Lack of coordination at lower levels leading to negative synergy. low strategic fit due to consultants intervention. Performance measures are defective – What to evaluate against? How to measure the 155 construct? As a saying goes. “If you cannot . Strategy not linked to resource allocation & capabilities – Lacking commitment of top management.BARRIERS TO STRATEGY EXECUTION Vision and strategy not actionable – Utopian ideas. difficult to translate into practice.
Together these factors determine the way in which a corporation operates. On top of that. to be sure of successful implementation of a strategy.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. 156 . important or not they're all interdependent. 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. Large or small. the relative importance of each factor may vary over time and context. this may effect all others as well. so if one fails to pay proper attention to one of them.
The 7-S model was born at a meeting of these four authors in 1982. It appeared also in "In Search of Excellence" by Peters and Waterman. They had been investigating how Japanese industry had been so successful. At around the same time in the US Tom Peters and Robert Waterman were exploring what made a company excellent.BACKGROUND & ORIGIN The 7-S Framework was first mentioned in "The Art Of Japanese Management" by Richard Pascale and Anthony Athos in 1981. 157 . Since then it is known as their 7-S model and is extensively used by corporations worldwide to implement their strategies. and was taken up as a basic tool by the global management consultancy company McKinsey.
Systems – The procedures. 158 . Structure – The way in which the organization's units relate to each other in terms of their commonalities.THE 7’S Shared Values – It represents what the organization stands for and what the top management believes in. Staff – Human inter-relationships. Skills – An organizations capabilities and competencies. formal & informal . to reach identified & stated goals. processes and routines that characterize how work should be done. 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 .
Ineffective in case of a virtual company. In contrast. the soft S’s (skill. A choice of an alphabet often limits the scope and skews the interpretation of a model. Consider the 4P’s of marketing or 3R’s of SCM. staff. systems) are comparatively easy to identify and influence. structure.A CRITIC OF THE 7S MODEL While the hard S’s (strategy. because most often they are culturally embedded and often neglected. style. While the American co’s focuses on the hard S’s. shared values) are very malleable and comparatively more difficult to identify & influence. 160 . their Japanese counterparts focus more on the soft S’s for their early success and sustainability.
STRATEGY IMPLEMENTATION ROUTES Strategic Fit .High Organic Growth Strategic Alliance Joint Venture Mergers & Acquisition Strategic Fit .Low Take Overs 161 .
soft loans. concessions are available for green-field projects. technologies. the entire value chain. and markets. (Eg. SEZ’s.e. tax holidays.e. 162 Risk of cost and time overruns. i. It has complete control over inputs. subsidized power). . Govt. green-field projects. (Eg. Long gestation leads to delayed market entry. The entire infra-structural facilities are set up afresh having its own gestation and break-even. i. Reliance Industries).ORGANIC GROWTH Here a firm builds up its facilities right from the scratch and continues to do so without any external participation.
It touches upon a limited aspects of a firms value chain. 163 It is a form of competitive collaboration.STRATEGIC ALLIANCE It involves a pro-active collaboration between two or more firms on a particular domain or function for mutual gain. There is no funding or equity participation from the alliance partner & both the firms continue to operate independently. Tata Motors & Fiat). 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. Alliances are usually in the areas of technologies or markets (Eg. .
Honda). Selecting the right partner is critical for success. A comprehensive MOU is essential. Tata – AIG. Hero . . leaving minimum scope of overlapping. Degree and extent of management control must be clearly 164 laid down. (Eg.JOINT VENTURES A joint venture involves an equivalent equity participation between two firms usually of similar strategic intent and comparable size to enter a particular market through a newly formed entity. It is a win-win situation for both the companies. Dominant logic of both the companies should be complimentary.
with the individual firms ceasing to exist any more (Eg. Brooke Bond & Lipton). Integrated distribution channel leads to better market penetration and overall synergy. Integration of assets and other financial resources. Coca Cola – Thums Up).MERGERS & ACQUISITION It refers to the fusion of two or more firms into a single entity. Acquisition is an outright purchase of a firm assets by another independent entity (Eg. . Economies in scale leading to lowering of costs. Revival of a sick-unit through better management practices is a major motive behind an acquisition 165 strategy. ITC Tribeni Tissues.
Larger geo-graphical diversity. Instant access to capacities and markets. often the new firm is “left alone”. Consolidation in a fragmented industry. Make a public offer of not less than . Most countries have stringent laws that prevents hostile take over. Inform SEBI / Stock Exchange after 5% stake is 166 acquired. Integration of organization structure & cultures is difficult.Corus). Tata Steel .TAKE OVERS It refers to the acquisition of significant management control by buying out majority stake in a firm through due diligence or hostility (Eg.
MANAGEMENT TOOLS IN STRATEGY 167 .
Some tools to ensure that – Benchmarking – Adopt certain best practices.WHY MANAGEMENT TOOLS? Change is becoming pertinent in the business environment. it is also a source of potential threat. 168 . Companies therefore need to ensure competitive advantages doesn’t become competitive disadvantages. The past is ceasing to be an indication of the future. Change provides enormous opportunities. TQM – Doing the right thing the first time. every time. Balanced Scorecard – Tracking strategy 3600. or better still create next practices Reengineering – Redesigning work processes right from the scratch. Radical change is superseding incremental change.
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
It does not shifts the growth 175 trajectory of the industry as a whole. Benchmarking is useful for bringing about operational efficiency.LIMITATIONS More and more companies benchmark. Benchmarking merely reorients profits in the hands of few to profits in the hands in the hands of many (i.BENCHMARKING . While strategy is all about differentiation and not looking alike. clustering).e. but it cannot be used as a strategic decision making tool. the more similar they end up looking. It can at best complement it. . Strategy is more of creating best practices rather than copying them.
DOS to Windows). Windows 95 to 97).e. clean sheet). Re-engineering attempts to radically change an organizational products or process by challenging the basic assumptions surrounding it.g. Re-engineering involves complete reconstruction and overhauling of job descriptions from the scratch (i. The task demands a total change in organisational 176 culture and mindset.RE-ENGINEERING Redesigning leads to identification of superfluous activities or product features (i. process mapping) and eliminating or improving them (E. for achieving performance improvement (E. .g.e.
than people driven Innovative Vs Traditional Customer centric Vs Organisational centric 177 .REENGINEERING – KEY TENETS Ambition Focus Attitude Enabler Performance Large scale improvement by questioning basic assumptions about how work is done Micro Vs Macro Business Processes Vs Organisational Processes Starting right from the scratch Not historical More IT driven.
etc) and supports the organization for the present. resource allocation and prepares the organization for the future through a reorientation of the entire strategic architecture.e. BPR). Strategic – It looks into the process of strategic planning.REENGINEERING .e. structures. It can be of the following types – Functional – It looks into the flow of operations (i. products. . Business – It looks into markets. 178 . customers and suppliers and protects the organization from the future (i. processes.LEVELS Reengineering can be successfully leveraged at all levels of an organization with varying degree of results.
179 . – Early entry advantages. While traditional manufacturing is a bottom-up approach. – Causal Ambiguity. protection can be had in the following ways – – Patenting.REVERSE ENGINEERING It is a process by which a product is dismantled and analyzed in order to understand how the product was designed and manufactured. Indonesia). However. reverse engineering is a top-bottom approach. Cheaper versions of Intel chips and mother-boards manufactured in Taiwan. – High cost and time acts as a deterrent. with an intention to copy it (Eg. learning curve advantage. It generally acts as a threat to innovation.
Actualization – Obtaining and dismantling of the product to assess how it functions. machine tools to convert ideas into a marketable product (i. 180 . nano-technology). designing facilities. Inaccurate assessment at this stage may lead to a failure of the entire project. Introduction – Launching the product in the market.STAGES IN REVERSE ENGINEERING Awareness – Recognizing whether the product is found to be worth the time. cost and effort necessary for the purpose of reverse engineering. Implementation – Developing of a prototype.e. Usually in such cases segmentation and pricing is different from the original innovator.
– Conformance – Emission standards . – Serviceability – Large no. – Reliability – Consistency in mileage. 181 . Air bags. – Durability – 1980 manufactured cars still on road.Euro IV.WHAT IS QUALITY? It involves the totality of a product or service in meeting certain stated or implied needs. – Aesthetics – Appeal in design. Car) – – Performance – Mileage of 14 kms to a litre of fuel. – Features – Anti-lock braking systems. More and more companies are moving towards meeting implied rather than stated needs. – Perception – Customer notions. of service stations. It has eight dimensions (Eg.
It is deeply embedded as an aspect of 182 organisational life & culture. It had little impact on improving overall productivity.TOTAL QUALITY MANAGEMENT Objective – Management of quality ensures conformance to certain pre-set standards.fix it in nature. touching upon a limited aspect of a value chain. . which ensures good market standing. Management of quality was traditionally inspect it . TQM is a way of creating an organization culture committed to the continuous improvement of work processes – Deming. zero defects.
Looking at quality as an endless journey. 183 . not a final destination. fully involved in decision-making and fairly rewarded for results. Be customer centric – Generate the concept of internal customer (Ishikawa). Kaizen – Make continuous improvement a way of life. Empowerment – It takes place when employees are properly trained.TQM – KEY TENETS Do it right. 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).
6-Sigma). saving precious top management time. 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. equal participation). Quality Circles – It a small group of shop-floor employees who meet periodically to take decisions regarding operational problems and crises. enabling the firm to concentrate on core activities essential to customer satisfaction.STRATEGIES Outsourcing – It is the process of self-contracting services and operations which are routine and mundane. 184 . It is based on the principles of MBO (i.e. of units meet preset standards (Eg.TQM .
.. – Less than 10% of strategies effectively formulated are effectively executed. it’s bad execution.. – Efficiency and effectiveness is passé... – In the majority of failures – we estimate 70% – the real problem isn’t (bad strategy) .... Source: Fortune Magazine Why CEO’s fail? 185 . strategy implementation has never been more important...BALANCED SCORE CARD Some interesting comments ...
BSC . rather than effects. These measures worked well when organizational systems were simple and unidirectional and more importantly the environment was static. 186 .CONCEPTUALISATION A company’s performance depends on how it measures performance. Most managers tend to rely on traditional measures of performance having its origin in finance as they are well tried and tested. Organizations need to move from financial to strategic performance. In today’s context when organizational systems have become complex and multi-directional we need to have a holistic view of performance to cut the lag effects. Focus more on causes.
It has four dimensions – – How do customers see us? – What must we excel at? – Can we continue to improve and create value? – How do we look to shareholders? Firms more often have problems. The most critical element of a BSC is to measure these four dimensions. 187 . and distinguish strategic problems from operational ones. because they have too many.BSC – KAPLAN & NORTON (1992) A BSC helps a manager to track and communicate the different elements of company’s strategy.
CUSTOMER PERSPECTIVE GOALS Products Supply Preference Relationship MEASURES Relative market share (%) % of sales from new Vs proprietary products Timely deliveries and service Customer credit analysis (i. of visits or calls made % of NPA’s 188 .e. ageing schedule) % of key customer transactions Ranking of key customer accounts No.
of new product launches Vs competition Product pricing Vs competition 189 . of times covered in media No.BUSINESS PERSPECTIVE GOALS Skills Excellence Exposure Introduction MEASURES New capabilities and competencies Implementation & gestation period Bank and supplier credit limits & PLR Unit Costs / Conversion Ratio / Defect Ratio No.
of product innovations 190 . of new patents registered Time to develop next generation products Average and spread in operating cycle % of products that equal 2/3 sales No.LEARNING PERSPECTIVE GOALS Technology Manufacturing Focus Timing MEASURES No.
Return on Investment Market Capitalization / PE ratio 191 .FINANCIAL PERSPECTIVE GOALS Survival Success Prosper Divestment MEASURES Cash flows Growth in Sales and Profits EPS.
STRATEGY MAPPING 192 .
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 .
they don’t know . It helps translating strategy into practice (i. The BSC brings together the different elements of a company’s strategy at a glance. Shift from control to strategy (i. . Seek excellence.BSC .e. doing right things instead of doing things right).e. Modern managers should be poised to ask the right questions. As a result.ADVANTAGES Most often top managers face information overload.what they don’t know. 194 performance will automatically follow. Focus on cause not effects. sharing of vision).
EFFICIENCY Vs EFFECTIVENESS Ineffective Effective Inefficient Goes out of Business quickly Survives Efficient Dies Slowly Thrives 195 .
EFFECTIVENESS + STRATEGY A company which is effective as well as strategic. Porter 196 . not only thrives. but also sustains it.Michael E. .
CORPORATE RESTRUCTURING 197 .
firms use restructuring strategies.. To adapt to the changing environment. from survival of the fittest . Restructuring involves consciously driving significant changes in the way an organizations thinks and looks (Eg.CORPORATE RESTRUCTURING The only thing constant in today's business environment is change.. Radical change brings about strategic variety. As Peter Drucker pointed out. Tata Group). to survival of the most adaptable. “every organization must be prepared to abandon everything it does...” 198 .. Strategic variety may be caused by changes in the as external well as internal environment. Strategic variety brings paradigm shift..
Company’s should go beyond just asking what he expects. Fax. Structural Changes – Conventional hierarchical structures should be disbanded in favour of more 199 flexible ones (i. Walkman. etc). ATM.e. downscoping). . they should strive to provide unimaginable value ahead of its time (Eg.e. Internal customers should also not be neglected. Instead. Core Business – Company’s should introspect – What business are we in? Business evolved out of opportunism or myopia should be divested.RESTRUCTURING – BASIC TENETS Customer Focus – Restructuring ideally begins and ends with the customer. downsizing or rightsizing). and dividing the core businesses into SBU’s (i.
. Kumar Birla today is more dependent on professionals. During the times of JRD... It is created and institutionalized by the top management. Restructuring also requires cultural reorientation. Ratan Tata now drives the point the group means business.. started focusing on their capabilities..RESTRUCTURING – BASIC TENETS Cultural Changes – A culture represents the values and beliefs of the people about the organization.) Reliance dismantled their industrial embassies .... the Tatas were considered a benevolent and charitable organization.....) The Aditya Birla group typically relied on the “marwari” community for key management positions . 200 . .
Getting feedback & addressing customer complaints. Honda’s ad says. Use the reach of networking technologies. “ … one reason our customers are satisfied is that we aren’t. Publicizing welfare projects to demonstrate CSR.MOVING CLOSER TO THE CUSTOMER As companies evolve. Organizing customer and supplier meets. they tend to move away from the customer.” 201 . Communicating to the media about organization efforts to deliver quality products. Carry out PR campaigns. Restructuring provides a platform to close this gap.
Tata – Corus) or hostile (Eg. Hive Off – It involves siphoning of assets under control. where the difference in valuation is settled off through cash or equity (Eg. It may include brands as well. including its intangibles – Mergers – It may be vertical. spin-off and equity carve. or conglo-merate. Further. horizontal. Mittal – Arcelor) and can take various forms. Glaxo – Heinz). 202 . Asset Swaps – It entails divesting and acquisition simultaneously by two companies. It can have two forms. it may be smooth (Eg. Further spin-off can be classified as split-off and split-up.ASSET RESTRUCTURING Asset Restructuring – The asset composition of a firm undergoes a major change.
HIVE OFF Spin-Off – A spin off is the creation of a new entity. Most of these practices are not in consonance with Indian laws. Tata Industries selling 20% stake to Jardine Matheson). – Split-Off – In a split-off. the entire parent company loses its identity after being split into a number of subsidiaries. the existing shareholders receive equity in the subsidiary in exchange for the stocks of the parent company. 203 . Reliance Ent). in which the equity is allotted amongst the existing shareholders on a pro-rata basis (Eg. – Split-Up – In a split-up. Equity Carve – It involves selling a minority stake to a third party while retaining control (Eg.
In 1995. L&T sold its cements division to Aditya Birla group. 204 . repay long-term debts. Generic motives include – – Raise working capital.DIVESTITURE It involves the sale of a brand or a division of a company to a third party. Selling out in phases is called disinvestment (IPCL). A complete sell-out is known as divestment (TOMCO). Parle sold its Thums Up brand to Coke for $40 million apprehending fierce competition. strategic misfit. In 2005. but retained its engineering division. for a specified market or in general with full management control. – Poor performance.
Share Buyback – It is a process of cancellation of shares out of free reserves to the extent of 25% of paid-up capital (Eg. It provides greater leverage as well as management control. Wipro).3 billion. involving 608 pence per share). 205 . Conversion – Replacing debt with equity or vice-versa or costlier with cheaper debt or cross currency debt.CAPITAL RESTRUCTURING Capital Restructuring .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.
1439 cr 206 Tata Timken – Rs 120 cr Tata Telecom – Rs.Rs. 1890 cr CMC – Rs. 230 cr Diversifications Tata Motors – Rs. 1700 cr Trent – Rs. 99 cr Tata Power – Rs.Rs.BUSINESS RESTRUCTURING – TATAS Divestments Lakme – Rs. 150 cr VSNL – Rs. 42 cr Voltas . 250 cr Tata Tetley – Rs. 256 cr ACC – Rs. 1860 cr . 1170 cr Goodlass Nerolac – Rs. 950 cr Merind . 120 cr Tata AIG – Rs.
It can be carried out in the following ways – Downsizing – It is a systematic one-time reduction in the no. of a firm’s employees and sometimes in the no. Survival is the primary motive. keeping the composition of business intact (Jet Airways). usually as a result external turbulence. Turnaround is the primary motive. 207 .ORGANIZATIONAL RESTRUCTURING Organizational structure and systems calls for a change when strategic variety is apparent. Rightsizing – It is phasing of excess and redundant employees resulted out of faulty internal planning (SAIL). of operating units. Downscoping – It involves reducing the business and/or geographical scope of a firm (Aditya Birla group).
e. The dominant logic represents the perceptions and biases (i. The longer the period. thumb rules) of the top management. Dominant logic becomes deep-rooted in organizational contexts depending on the period it is in place (tenure of the CEO).STRATEGIC CHANGE One of the most difficult components of organization restructuring is the mindset of the top management represented through its dominant logic and its shared values reflected in cultural orientation. the more difficult it becomes to uproot the paradigm (i. as strategies are based on such beliefs and biases.e. Strategy change is unviable without a preceding change in its dominant logics. 208 . inertia).
In most organizations. the factor that stifled change & performance was – culture. 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. 20% of the people carry out 80% of the changes).FORCES AGAINST STRATEGIC CHANGE The problem with strategic change is that the whole burden typically rests on few people (i. Companies achieve real agility only when people at every level rise above the ordinary to face the challenges – revitalization or transformation. 209 .e.
Create relentless discomfort with the status quo. process ownership. The best way is to alter the institutional point of view. Manage from the future. Questioning every basic action of the organization. Harness setbacks. Promote inventive accountability. Encourage uncompromising straight talk. it is not about winning but about learning. never take no for an answer. 210 . Understand and deliver the quid pro quo.SUCCESSFUL TRANSFORMATION Build an intricate understanding of the business model at all levels of the organization.
Aspects of current culture which needs to be overcome. It involves diagnosing a change situation – systems & structures. 211 . that can be both enablers and blockages to change and restructuring. by identifying forces for and against change.FORCE-FIELD ANALYSIS A force-field analysis provides an initial overview of change problems that needs to tackled. also known as cultural-web. Identify and implement facilitators of cultural change. 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.
RESTRUCTURING .Term Loss of human capital Lower performance Higher performance Capital .Term Reduced labour costs Reduced debt costs Emphasis on strategic control Business High debt costs Higher risk 212 Long .OUTCOMES Alternatives Organizational Short .
hence go in for downsizing. In order to put back the company on the right track they are resort to – Denominator – It assumes that turnover cannot be increased. the second one is a more viable strategy and sustainable option in the long run. While the first strategy produces results instantaneously. Numerator – It assumes that turnover is not a barrier or constraint. reverse engineering and regenerating.NUMERATOR & DENOMINATOR MGT Most firms across emerging markets undergo strategic discontinuity and as a result are forced to restructure their businesses. down-scoping or asset stripping. 213 . focuses on reengineering.
TURNAROUND MANAGEMENT 214 .
. 215 (Govindarajan and Trimble. – Only seven of the first fifty Indian business groups in 1947 were even in business by the turn of this century.. – Less than 10% of the Fortune 500 companies as first published in 1955. still exist as on 2005. . January 1997)... and that the thirty-two of the country’s largest business groups in 1969 are no longer among the top fifty today... Source: Why do firms atrophy? (Business Today.WHY TURN AROUND MANAGEMENT? Some interesting insights .
A category of underlying principles and concepts. systems.TURN AROUND MANAGEMENT A turnaround is said to occur when a firm perseveres through an existence threatening performance decline. skills. and achieves sustainable performance recovery. As a sequence of events describing how things change and why they change (i. Both content (what) and process (how) are equally important for a successful turnaround. 216 . process focuses on – A logic to explain a causal relationship between intervening variables. and capabilities. Stage Theory). While content focuses on endogenous and exogenous variables. ends the threat with a combination of strategies.e.
leading to lack of acceptability from distributors and customers.TURNAROUND INDICATORS Most firms atrophy simply because they fail to diagnose the indicators that acts as threat to organizational existence. Low stakeholder confidence. unavailability or radical lowering of substitute costs or technological obsolescence. Substantial shifts in consumer preferences. 217 . Rising input costs. Some indicators Continuous cash flow crises as a result of dwindling market-share and profits. suppliers and bankers. Uncompetitive products or services. especially in key positions. Low employee morale leading to high employee attrition at all levels.
they adopt surface level measures (disprin popping) which most often fail. 218 . which most top managers fail to appreciate. Revamp product portfolio. Common approaches adopted Change in key positions. Hence. based on elasticity. consider extension. prune work-force. liquidating dead assets. Emphasis on advertising and market penetration. “all is not well”. Product redesigning or reengineering. focus on power brands.. be more customer centric. Extending work hours.TURNAROUND ILLUSION The first step to a successful turnaround is the basic acceptance of the fact that …. Recalibrate prices.
TURNAROUND STAGE THEORY Stage 1 Decline Stage 2 Stage 3 Stage 4 Outcome Response Transition Performance Equilibrium Line Success Failure Indeterminate Nadir Time 219 .
It has its origin in “environment led fit” that subscribes to the view that a firm has little control over external factors. R-Extinction – It suggests that organization factors. It has its origin in “resource led stretch” and subscribes to the view that a firm has substantial power to override the context.DECLINE Decline is the first stage in the turnaround process. 220 . primarily dwindling resources and capabilities are responsible for decline. 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.
diversification. the response should be strategic. Strategic responses focus on changing or adjusting the business the firm is engaged in through long term moves such as – integration. If the underlying cause is internal efficiency. asset reduction. new market initiatives. The response must match the cause of the decline. the response should be operational.RESPONSE INITIATION Turnaround responses are typically categorized as operating or strategic. Operating responses typically focuses on the way the firm conducts business and involves tactics geared towards – cost cutting and process redesigning (BPR). If the decline stems from structural shifts. 221 .
when decline deepens shifts in strategic position becomes essential. 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. 222 . Similarly new market initiatives is feasible only for multi-product firms. Contour – It is easier to reverse decline in the earlier stages through operational measures.RESPONSE DICHOTOMY The response initiation is somewhat dichotomous and cannot be universally applicable. which may be unavailable to a focused firm.
substantial amount of time usually passes before results begin to show (i.7 years with a range of (4-16) years. The top management has a key role to play through empowerment. 223 . Sustenance is the key factor in this stage. transparency. Effective levers of transition.e. confidence building measures.TRANSITION Transition usually reflects the first signs of recovery. Support from all the stake holders through resource commitment. However. consensus). Empirical studies show that average time is 7. lead – lag). role model. However. many a times early signs of recovery fades out.e. participative management (i.
Commanding a premium in the market. Supplier and banker confidence. Failure is an indication that initial momentum was not sustainable characterized by irreversibility. Instead of focusing on financial parameters alone.OUTCOME Outcome is said to be successful when a firm breaches the equilibrium performance level. Cut off points must be unequivocal. Share price indications and media coverage. Regaining lost market share and distributor confidence. it should adopt a holistic approach. 224 . Revival of key customers and new product launches.
COOPERATIVE STRATEGIES & ALLIANCES 225 .
In the cooperative strategy continuum as firms move up the value order. supply-chain partnership. or joint venture. technology. More and more companies worldwide are moving away from competition to co-option to leverage their resources and enhance bargaining power. and globalization . licensing.COOPERATIVE STRATEGIES Cooperative strategies are a logical and timely response to changes in business dynamics. strategic alliance. Any cooperative strategy maybe between firms within the same country or cross border as well. It can assume any of the following forms – franchising. the commitment and the involvement between the firms increases manifold. consortia. 226 .
Branding is critical to franchising. Titan Inds. 227 .FRANCHISING Franchising – It is a contractual agreement between two legally independent firms whereby the franchiser grants the right to the franchisee to sell the franchisor’s product or service or do business under its brand-name in a given location for a specified period of time for a consideration. It is an effective strategy to penetrate markets in a shortest possible time at a minimum cost. owners of the brand Monginis allows its franchisees to sell its confectionary products. owners of the brand Tanishq allows its franchisees to sell its jewellery products. Switz Foods.
HM manufacturing GM range of cars in India with a buy-back arrangement is a perfect example of CBU. refine processes and adopt necessary technologies (SKD). as in Tata Indica. Become a systems integrator (CKD).LICENSING Licensing – It is a contractual agreement between two legally independent firms whereby the licensor grants the right to the licensee to manufacture the licensor’s product and do business under its brand-name in a given location for a specified period of time for a consideration. Different levels of licensing Manufacturing without embracing any technology (CBU). Develop a product through its crude stage. 228 .
Cross Holdings – A maze of equity holdings through centralised control to ensure earnings stability & threshold resources for critical mass (Eg. 229 . Collusion – Few firms in a matured industry collude to reduce industry output below the equilibrium level. Hyundai).CONSORTIA Consortia – They are defined as large inter-locking relationships & cross holdings between businesses in a similar industry. Airbus – Boeing). Coke – Pepsi). leverage upon size to preempt competition by escalating entry barriers (Eg. Tata. It can be of the following types – Multipartner – Intends to share an underlying technology or asset. enabling them to increase prices (Eg.
. Continuous sharing of knowledge is critical to the success of a supply chain partnership. Tata Motors – IDEA). link their capabilities to create value for end users. otherwise it 230 becomes routine outsourcing. It usually provides a platform to sort out differences between conceptualization and implementation to suit local market needs.SUPPLY CHAIN PARTNERSHIP It is a pro-active & collaborative arrangement between supplier and customer aimed at achieving better control over the value chain (Eg. Companies in different industries with different but complimentary skills.
Reliance – Du Pont). enter newer markets. enhance credibility. Firm’s should undertake a long courtship with potential partners. Despite their popularity (50-60)% of the alliances fail to accomplish their stated objectives. Partner selection is one of the critical success factors.learning organization. effective R&D management. Tata Motors – Fiat. Generic motives involved are . 231 .STRATEGIC ALLIANCE It is an short to medium term understanding between two or more firms to share knowledge and risk. to gain knowledge and to obtain access to new markets (Eg. instead of hurrying into a relationship. design next generation products. preempt competition.
Complementary Equals – Two firms mutually promoting each others complimentary products (Eg. 232 . Bootstrap – An alliance between a weak and a strong company with an intention to acquire it. Coke – Pepsi).STRATEGIC ALLIANCE . Maruti). Alliances of the Weak – An alliance is entered into to preempt competition (Eg. Airbus – Boeing). Whirlpool – Tide.TYPES Collusion – Tacit top management understanding to neutralize price wars (Eg. Bajaj – Castrol). Backward – An alliance (quasi or tapered) with a supplier of critical components seeking commitment (Eg.
Firms from developed markets seek access to markets and firms from emerging markets seeking access to technology. Cultural orientation has been found to have a profound effect on top management’s strategic orientation (Eg. 233 . Too much stress on financials & structure be avoided. Differences in level of economic development can produce differences in alliances motives. – 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.
Willingness to share knowledge and skills. Unique Resources – Abilities or skills which cannot be easily duplicated. Experience related to previous alliances. Partner’s ability to acquire fresh skills. including ability to provide quality products and services. 234 . Dominant Logic’s – Similarity in beliefs & biases. Intangible Assets – Move beyond the financials of the firm. Managerial capabilities.PARTNER CHARACTERISTICS Complimentarity of Capabilities – The degree to which partners resources can be used in conjunction.
incorporating clear signs of continuing independence for all partners. Selection & Courtship – It involves self analyzing. vows to include commitment to expand the relationship. partners should nurture it. Getting Engaged – It should incorporate a specific joint activity. differences not anticipated earlier. 235 . degree of compatibility. understanding the chemistry. operational & cultural integration. the value chain. instead of focusing controlling the relationship. Learning to collaborate – strategic. Setting up the housekeeping.MANAGING ALLIANCES Alliances are more than just a deal. Changing within.
e. combining parts). separation is very 236 bitter. synergy) rather than mere exchange (i. a joint venture is a selection among modes by which two or more firms can transact. Conceptually. There are substantial linkages in the value-chain. 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.
The market fails as sellers are unwilling to reveal their technology and buyers are unwilling to purchase in the absence of inspection.JOINT VENTURE – GENERIC MOTIVES Transaction Cost – The situational characteristics best suited for a JV are high performance uncertainty. Strategic Behaviour – Firms may override transaction costs. though more profitable alternative to other choices. Organizational Learning – It is a means through which a firm learns or seeks to retain their capabilities. It may also be linked to deterring entry or eroding competitors position. 237 . in addition to a high degree of asset specificity.
OTHER MOTIVES Entry into newer markets. – Eg. Yamaha – Escorts. Daimler – Chrysler (Premium Cars) 238 . Endorsement from government authorities. Maruti – Suzuki. – Eg. Renault – Nissan (Minivans – Cars). Essar – Hutch (Vodafone). – Eg. Define future industry standards. Eli Lily – Ranbaxy. – Eg. – Eg. – Eg. TVS – Suzuki (4-Stroke Engines) Fill gaps in existing product lines. Sharing of resources. Learning new technologies.
Enka. Century . Risk of over dependence. – Godrej – Procter & Gamble. – Maruti – Suzuki. – Eg.e. Risk of brain (i. Tata – Aditya Birla in Idea Cellular 239 . Modi – Telstra What after exit (parenting disadvantage)? – Eg. LML – Piaggio Differences in size and resource base. PAL – Fiat If the cost of continuing exceeds the exit costs? – Eg. technology) drain. – Eg.RISKS INVOLVED Incompatibility – Differences in cultural background.
Flexibility – Sufficient space to breathe and adjust. Incompatibility – Performance expectations. 240 . Agreement – Clarity on operational control. Objectives – Shared vision. Inertia – Differences in age and evolution patterns. Culture – Reconcile gaps. Partner – Avoid duplication of skills and capabilities. Focus – Avoid strategic myopia.PRE-REQUISITES FOR SUCCESS Commitment – Mutual trust. respect. Costs – Other modes of transaction becomes cheaper. Equality – Lack of dominance. time sharing.
MERGERS & ACQUISITION 241 .
HLL – Tomco). Ranbaxy .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.Daichi) and hostile if it is without the consent of the management (Eg. 2002). 242 . Brooke Bond – Lipton). Most countries have stringent laws that prevents hostile takeovers (Eg. reverses are also taking place through LBO) with a view to acquire conglomerate power and induce synergy (Eg. however. Mittal Arcelor). SEBI Takeover Code. An acquisition is said be smooth if it is with the consent of the management (Eg. The larger objective is to leverage on size. An acquisition is the purchase of a firm by a firm (of larger size.
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.SEBI TAKEOVER CODE. Hike – An acquirer who has already picked up a 5% has to make a mandatory disclosure for every additional 1% stake that it acquires. Control – A special resolution of 75% of the share 243 holders approving the change of guard.e. Preferential – A preferential allottee ending up acquiring 5% stake also comes under its purview. 2002 Promoter – A person who has a clear control of atleast 51% of the voting rights of the company and confidence of all the major stakeholders. .
Grasim – L&T Cement. SEBI – In case of a hostile take over. 244 . the SEBI can intervene and block share transfers if: the acquirer has ulterior motives (i.SEBI TAKEOVER CODE. asset stripping). Disclosure – All acquirers have to inform the respective stock exchanges where it is listed and SEBI upon acquiring the basic limit and upon every incremental limit thereon. and/or does not enjoy the confidence of the different stake holders. credentials or track record is at stake. 2002 Pricing – Acquirers will have to offer minority shareholders (at least 20%) the past 26 weeks or past 2 weeks average price.e. Gujarat Ambuja – ACC). whichever is higher as an exit route (Eg.
Vertical – It involves complimentarily (partially related) in terms of supply of inputs or marketing activities (Eg. usually opportunistic (Eg.Kelvinator). Conglomerate – It involves integration of two distinctly unrelated businesses. The type of merger is depends on the degree of relatedness (strategic) between the two businesses. Horizontal – It involves integration of two highly related businesses (Eg. ITC). Electrolux . Godrej. Reliance). 245 .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.
quick access). Avoiding risk of new product development. Ranbaxy – Crosslands).MOTIVES Increased market / conglomerate power. scale and scope. Coinsurance effect – Higher debt raising capability. ICICI –ITC Classic). Access to newer segments (Eg. Acquiring assets or capabilities (Eg. Asset Stripping – Shaw Wallace).e. Reduction in risk. Ulterior motives – (Eg. Global image (Eg.MERGERS & ACQUISITION . Reduced gestation (i. ITC Bhadrachalam). Tata Steel – Corus). Overcoming entry barriers (Eg. Economies of size. Mittal – Arcelor). Tax benefits (Eg. 246 .
Top management overtly focused on due diligence exercise and negotiations. while the ultimate acquisition was made at 607 pence/share). Overvaluation of buying firms (Eg. Merging of organisational structures.MERGERS & ACQUISITIONS PITFALLS Cultural differences (Eg. Tata – Corus). their initial offer was around 420 pence/share. Managing over-diversification. Managing size. 247 . Inability to achieve synergy. When Tata Steel started negotiations with Corus. neglecting core business. Overvaluation is often as a result of an ego drive and substantially affects future returns.
Growth – This stage may witness parallel merger of two firms of similar size. Brooke Bond – Lipton).MERGER TYPE & PLC Introduction – A larger firm may acquire a newly formed entity with an objective to preempt new competition or acquire its license (Eg. Decline – Horizontal mergers are undertaken to ensure survival. Tata Steel – Corus). with an objective to reinforce its growth trajectory or to take on the might of a comparatively larger player (Eg. Kingfisher – Air Deccan). 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. 248 .
Left alone syndrome. An acquisition just for the sake of it or reputation yields very little value in the long term. Immediate attempts to super impose structure and culture may cause bottle necks. 249 . active top management intervention in phases.INTERNATIONAL M&A . A concern of respect and trust for the business of the acquired company.FRAMEWORK Positive contribution to the acquired company. Blanket promotions across entities and confidence building exercises needs to be practiced. A common shared vision. Strong differences may stifle plans and its execution.
Decide on the new hierarchy.BLUEPRINT Take the media into confidence. . promptly. Determine business strategy. Redefine responsibilities and authority.INTEGRATION . They can carry the message to the various stake holders. Integrating work processes. Shift attention from business portfolio to people and processes. 250 Do not ignore the “people factor”. It will enable focus on customers and key people. Decide upon management control systems.
operational & financial). 251 . Financial motives – Undervaluation relative to true value. – Synergy – Potential value gain from combining operations (i.VALUATION The process of valuation is central to M&A. Valuation decisions are arrived through a due diligence process when the prospective acquirer gets access to the books of accounts of acquiring company.e. The process takes (6-12) months. over valuation can become a curse. – Market for corporate control.M&A . While under valuation may be a significant opportunity. – Unstated reasons – Personal self interest and hubris.
Synergy can be negative as well. Innovative product – Good distribution network). or from increased market power which increases sales and margins.VALUING OPERATIONAL SYNERGY Synergy – It refers to the potential value gain where the whole is greater than the sum of the parts. Sources of operational synergy – Horizontal Synergy – Gains come from economies of scale which reduces costs. when the “fit” between the two entities is very poor. – Vertical Synergy – Gains come from controlling the supplychain and savings in transaction costs. – Conglomerate Synergy – Gains come when one firm complements the resources or capabilities of another (Eg. 252 .
Cash Slack – It reduces asymmetry between cash starved firms with deserving projects and cash cows with no investment opportunities. ITC – Bhadrachalam Paper). Hotmail). However. shareholders can accomplish the same at a much lesser cost. and without paying take-over premiums. but availed after being merged with a profitable firm (Eg. 253 .VALUING FINANCIAL SYNERGY Diversification – Reduce variability in earnings by diversifying into unrelated industries. Tax Benefits – Tax benefits may accrue from tax entitlements and depreciation benefits unutilized by a loss making firm. Synergy comes from projects which would not have been undertaken if the two firms stayed apart (Eg.
higher leverage. This will induce higher debt capacity. The likelihood of default decreases when two firms' assets and liabilities are combined through a M&A compared to the likelihood of default in the individual companies. 254 . the cash flow the merged firm will be less variable than the individual firms. – Coupon rates may also be negotiated at lower rates.VALUING FINANCIAL SYNERGY Co-Insurance Effect – If the cash flows of the two firms are less than perfectly correlated. – Default risk comes down and credit rating improves. as risky debt is spread across the new firm's operations. It relates to the concept of diversification. hence better performance.
– – Value of Control = Value of firm after restructuring Value of firm before restructuring. 255 . since a restructuring can lead to significant increase in value. The value of wrestling control is inversely proportional to the perceived quality of that management. Assessment of perceived quality is critical. The value of control can be substantial for firms that are operating well below optimal value. While value of corporate control is negligible for firms that are operating close to their optimal value.VALUING CORPORATE CONTROL Premium of M&A are often justified to control the management of the firm.
Confidence of investment bankers and the international financial community is essential. debt component) at the time of buyout and rapid changes in capital structure over time. sometimes in combination with the assets of the acquiring company. The assets of the acquired company are used as collateral for the borrowed capital.LEVERAGE BUYOUT (LBO) The basic difference between a take-over and a LBO is the high inherent leverage (i. LBO facilitates a relatively smaller firm to bid for a comparatively larger firm in the bid for management control. 256 . It is a very costly and risky proposition.e.
– Separation of ownership from management. – The need to satisfy analysts and shareholders. The increased benefit showed in the following way – reduced costs and increased revenue. 257 . A research study showed that 30% of the publicly listed firms reported above average returns after going private.TO GO PUBLIC OR NOT? However. liquidity. However. on-going valuation. – Increased information needs.access to financial markets. the advantages of going public includes . off-late many publicly traded firms have gone private keeping in mind the following – – The fear of LBO.
co-insurance effect).RATIONALE FOR HIGH LEVERAGE The high leverage in a LBO can be justified by – – If the target firm has too little debt (relative to its optimal capital structure). – Cost of debt coming down (i. 258 . – It is a temporary phenomenon. – Cash trapped company unable to utilize opportunities. – Debts repaid off from increased value after successful restructuring and wresting management control.e. – Managers cannot be trusted to invest free cash flows wisely. which disappears once assets are liquidated and significant portion of debt is paid off.
initial rise in leverage is anticipated. Any discounting has to reflect these changing cost of capital.EFFECT OF HIGH LEVERAGE Increases the riskiness of dividend flows to shareholders by increasing the interest cost to debt holders. Lack of sufficient cash flows to repay costly debts resulting in a possible debt trap. Therefore. As the firm liquidates / pledges assets and pays off debt. leverage is expected to decrease over time. 259 . A LBO has to pass two tests to be viable – – Restructuring to pay-off increased debt. – Increase equity valuation.
small in size but having a promising business. Objectives – – Traditional route of filing prospectus and undergoing an IPO is costly.REVERSE MERGER Reverse Merger – The acquisition of a public company. – Prevents dilution of equity. which has discontinued its operations (i. shell company) by a private company. – Automatic listing in major exchanges. – Facilitates better valuation and forthcoming offerings. allowing the private company to bypass the usually lengthy and complex process of going public. or costly. time-barred. – Tax shelter. 260 .e.
EFFECT OF TAKE-OVER ANNOUNCEMENT The shareholders of target firms are the clear winners. and 35% during bullish periods. Excess returns also vary across time periods. takeover failures have only initial negative effects on stock prices. – Merger announcements reported 20% excess returns. Initial anomaly in stock prices usually normalizes over a period of time (6-12) months. 261 . However. – Takeover announcements reported 30% excess returns. Most target firms are taken over within (6090) days. During bearish periods excess returns were 19%.
1988 . – However. – However. 262 Jarrel. as stock markets become more and more perfect such anomalies would reduce Source: Jensen and Ruback. over time. – Most studies reported insignificant excess returns around take-over offers or merger announcements. 1983. Brickley.EFFECT OF TAKE-OVER ANNOUNCEMENT The effect of take-over announcement on bidder firm’s stock prices are not clear cut. 1983. and Kim. Bradley. and Netter. in the event of take-over failure negative returns to the extent of 5% on bidder firm stock prices is reflected. Desai.
so that nothing is left for the raider to strip off. 263 . 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. Rights). Poison Pill – An offer to existing shareholders to buy shares at a substantial discount to increase their voting rights (Eg.
DEFENSIVE STRATEGIES White Knight – It is the placing of stocks to a cash rich investor and bargaining for protection in return. 264 . Gray Knight – The target company takes the help of friendly company to buy the shares of the raiding company. But often the White Knight turns a betrayer himself (Eg. Pac Man – The target company makes a counter bid to take over the raider company. Green Mail – The targeted company buys large blocks from holders either through premium or through pressure tactics (Eg. thus thwarting the raider company’s attention. Shapoorji Pallonji). East India Hotels – Reliance Industries – ITC).
COMPETING FOR THE FUTURE 265 .
Compaq overpowering IBM. Nokia overpowering Motorola. Wal-Mart overpowering Sears. were spending 99% of their precious time dealing with present. British Air overpowering Pan Am.GETTING OFF THE TREADMILL Canon overpowering Xerox. Hitachi overpowering Westinghouse. What went wrong???? What were they doing with the present? What were they pre-occupied with? 266 . Honda overpowering Volkswagen. The reverse was true for the companies overpowering. Honda overpowering GM. Most companies were too preoccupied with the present than the future? 99% of the companies overpowered.
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 . downsizing). Not knowing when to stop. most often they ended up cutting corporate muscle as well and became anorexic. decluttering. falling market share). declining margins. CEO’s brutally pick up the knife and ruthlessly carve away layers of corporate flab (delayering.THE PAST OF COMPETITION Beyond Restructuring – When a competitiveness become inescapable problem (stagnant growth. Thus efficiency was grievously hurt.
On the contrary only 20% of Japanese managers believed that quality will be a source of competitive advantage of the future. but forging ahead in competition. However. incrementalism or nominal innovation has almost reached a plateau.S. top managers believed that quality will be a source of competitive advantage of the future. The future is not about catching up with competition.THE PRESENT OF COMPETITION Beyond Reengineering – Numerator based managers (innovation) at least offers some hope. but not of the future. 268 . A poll in circa 2000 revealed that 80% of the U. ensuring only survival of the present.
It is based on deep insights into trends in technology. reinvent its industry. Companies need to fundamentally reconcieve itself. Transform the industry. Create a potential gap. It involves Dream about the company’s future. 269 . Creating the future requires industry foresight. demographics and lifestyles. don’t predict. Empower from bottom to top. aspirations and resources. not just the organization. not the other way. faster. as important as these may be. better.THE FUTURE OF COMPETITION Regenerating – Leaner. and regenerate its strategies (breaking its – managerial frames). they are not enough to get a company to the future.
ABOUT THE DREAM Which customers will you be serving? What will the potential customer look like? Who will be your future competitors? What will be the basis of your competitive advantage? Where would your margins come from? What will be your future competencies? Which end product markets would you cater? 270 .
It is about deliberately creating a strategic misfit. blue oceans). they do not need to restructure. Therefore. hence do not fall sick in the first place. Successful companies have a complete grip over the industry. Redraw the boundaries between industries. 271 .e.ABOUT THE TRANSFORMATION The future does not belong to those who take the industry for granted. It drives a hunger and a passion to transform. Create entirely new industries (i. by converging technologies complex. Change in at least one fundamental way the rules of engagement in an industry.
Transformational leaders merely lead the way. Such a process is called institutionalization (from people centric to organisational centric). A revolution that is thrust upon from the top seldom sustains. the revolution must start at the bottom and spread in all directions of the organization. Most successful revolutions (Gandhi to Mandela) rose from the dispossessed. 272 . The middle management plays a strong moderating role. More importantly.ABOUT THE EMPOWERMENT Bring about a revolution (a paradigm shift) in the organization.
Toshiba – LCD. What does it take to get to the future first? Understanding how competition for the future is different. 273 . It requires a lot of common sense and a little bit of out of the box thinking. Apply the 40 – 30 – 20 principle. A process for finding and gaining insight into tomorrows opportunities (Eg. without taking undue risk. South West Airlines – LCC. An ability to energize the company. Apple – iphone).THE FUTURE OF STRATEGY A company must get to the future not only first but also for less. Get to the future first. Companies need to strategize (think ahead of times).
What distinguishes a leader from a laggard. 274 . is the ability to imagine in a different way what the future could be. We are in the midst of a 3600 vacuum. but hundreds. Companies of the future will be not based so much on the strength of their resources. The farther one can see in this endless space. greatness from mediocrity.HOW DOES THE FUTURE LOOK LIKE? There is no rule which says that for every leader there will be a follower. the farther it will be away from competition. As there is no one future. each point in space represents a unique business opportunity. as on their aspirations.
THE EMERGING STRATEGY PARADIGM Not Only Reengineering Processes But Also Regenerating Strategy The Competitive Challenge Organizational Transformation Industry Transformation Competing for Market Share Competing for Opportunity Share Finding the Future Strategy as Learning Strategy as Positioning Strategy as Engineering Strategy as Unlearning Strategy as Dream Strategy as Architecture 275 .
THE EMERGING STRATEGY PARADIGM Not Only But Also Mobilising for the Future Strategic Fit Resource Allocation Strategic Misfit Resource Stretch & Leverage Getting to the Future First Existing Industry Structure Product Leadership Single Entity Product Hits & Timing Future Industry Structure Competency Leadership Dominant Coalitions / Co-option Market Learning & Preemption 276 .
Degree of Learning Unlearning Curve P2: Unlearning in previous period does not necessarily ensure learning in the current period.LEARNING 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. Leverage – They are the gateways to future markets. It is characterized by the following – Unique – It provides unimaginable customer value ahead of its times. It cannot be matched even by its closest competitors. 278 . Inimitable & Insubstitutable – A high degree causal ambiguity between these skills yield sustainable competitive advantage. It represents the collective learning's of an organization centering around diverse streams of technologies.
MORE ABOUT CORE COMPETENCE Sony – miniaturization. A core competency cannot be outsourced. Nike – designing. leaders have one. Toyota – lean manufacturing. Wal-Mart – logistics. Although a core competence may lose value over time. it gets more refined and valuable through use. Honda – engines. 279 . Most companies around the world do not possess one. SKF – antifriction and precision. Toshiba – flat screen displays. Intel – nano-electronics. it is deeply embedded in the heart of the organization. Core competencies are the roots of the organization. Coca Cola – brand. Canon – imaging. at the most three to four.
ROOTS OF COMPETITIVENESS End Products 1 2 3 4 5 6 7 8 9 10 Core Businesses Core Business 1 Core Business 2 Core Business 3 Core Business 4 Core Product 2 Core Products Core Competencies Core Product 1 Competence 1 Competence 2 Competence 3 Competence 4 280 .
RESOURCE STRETCH & LEVERAGE
Initial resource position is a very poor indicator of future performance. It leads to atrophy and stagnation. Successful companies consciously create a potential gap between aspirations and resources. Resource crunch is a common factor among firms that faces a wealthy rival, and outperforms them. Leveraging what a company already has, rather than allocating it is a more creative response to scarcity. – By concentrating existing resources. – By accumulating existing resources. – By complementing existing resources. – By conserving existing resources. – By recovering existing resources.
Concentrating – It involves effectively directing portfolio of resources on key strategic goals in which individual efforts converge over time. It is a balance between individual mediocrity and collective brilliance. It is achieved through – Converging – Redirecting multiple diverging (i.e. fragmented) short term goals into one long term goal. It is then resources can be stretched over time. Focusing – Making trade-offs and preventing dilution of resources at a particular point of time. Targeting – Focusing on the right innovations that are likely to have the biggest impact on customer value.
Accumulating – Using existing reservoir of resources to build new resources. Each and every individual is a rich & potential source of learning, discover better ways of doing things. It is achieved through Mining – Extracting learning experiences from existing body of each additional experience (i.e. success or failure). It is an attitude that can be acquired, but never learnt. It leads to a substantial jump in the experience curve. Borrowing – Utilizing resources outside the firm through licensing, alliances, joint ventures. A firms absorptive capacity is as important as its inventive capacity.
Complementing – Using resources of one type with another that aligns smoothly to create higher order value. In a way it produces an accelerating effect on each individual resource. It is achieved through – Blending – Interweaving discrete capabilities to create world class technologies (GM – Honda) through integration and imagination. Different functional skills can also be blended to create a world class end products (Yamaha – Keyboard). Balancing – An ability to exploit excellence in one area is never imperiled by mediocrity in another (GE acquiring the CT scanning rights from EMI because of its inadequate market reach).
Conserving – Sustaining competencies over time through frequent usage. Resources are never abandoned; they are always preserved for future use. Recycling – Increasing the velocity of use of a competencies over time. As a result core competencies can be leveraged across an array of products (Sony - Betamax). It includes brand extensions as well. Co-Opting – Enticing resources of potential competitors to exercise influence in an industry (Fujitsu – IBM). Shielding – It involves identifying competitors blind spots and then attacking without having the fear of retaliation.
Recovering - It is the process of reducing the elapsed time between investing in resources and the recovery of those resources in the form of revenues via the market. Speeding – Prior to the 1980’s Detroit’s majors took an average of 8 years to develop an entirely new model; the Japanese reduced it to less than 4.5 years, with major new variants in 2 years. This envisaged Japanese players in giving customers more opportunities to switch allegiance and loyalty (Toyota). Protecting – It uses competitors strength to one’s own advantage, by deflecting it, rather than absorbing it as practiced in Judo.
INTERNATIONAL BUSINESS ENVIRONMENT 287 .
strategies suited for the developed markets may not be appropriate for emerging markets. Chile) provide a different context (i.e. and high transaction costs. China. institutional gaps. Therefore focused strategies based on core competence may not be suitable for emerging markets (Khanna & Palepu. Therefore. high levels of market imperfection). 1997). Emerging markets are characterised by infrastructural bottlenecks. Korea.EMERGING MARKETS Emerging markets (India. Diversified groups in operating in emerging markets therefore benefit from unrelated diversification. 288 .
Entropy). et al.DIVERSITY .PERFORMANCE (I) Diversity attempts to measure the degree and extent of diversification (Herfindahl. Size & Scale. (2000) 289 . Synergy. subsequently negatively related across developed markets. Experience Strategic Fit Diversity Palich. Optimum level of diversification Performance Diversity is initially positively related with performance. Concentric.
conglomerate power Threshold level of diversification Performance Diversity (Khanna & Palepu. subsequently positively related across emerging markets.DIVERSITY .PERFORMANCE (II) Diversity is initially negatively related with performance. Huge initial investment. 2001) 290 . brand building Risk diversification.
It should have a spread of interest groups / stake holders. It should have a spread of manufacturing facilities. revenues and profits. act locally (Eg. Characteristics – It should have a spread of affiliates or subsidiaries. HSBC). It should have a spread of assets. It should think globally.INTERNATIONAL IDENTITY MNC’s consciously engage in FDI in different parts of the globe to forge resource diversity as a distinct competitive advantage. 291 .
high feminity index in developed markets and vice versa for emerging markets). Feminity Index .GLOBAL BUSINESS ENVIRONMENT Power Distance – It reflects the disparities in income and intellectual development (Eg. low group scale in developed markets and vice versa for emerging markets). low power distance in developed markets and vice versa for emerging markets). 292 .It reflects the disparities in women in workforce (Eg. low risk profile in developed markets and vice versa for emerging markets). Risk Profile – It reflects the risk attitude of the top management (Eg.It reflects the relative role of team building (Eg. Group Scale .
inflation. Country Risk – It reflects the political and economic risk (Eg. 293 . corruption. interest rates. high cultural adaptability in developed markets and vice versa for emerging markets). attitude.culture. political stability. time value. judiciary) of doing business in a particular country (Eg. currency. credit rating. flexibility (Eg.GLOBAL BUSINESS ENVIRONMENT Cultural Adaptability – It reflects the adaptive ability to a changing environment . code of conduct. FOREX reserves. dress sense. low country risk in developed markets and vice versa for emerging markets). customs. way of life. terrorism (9/11).
High levels of ethnocentrism usually has a negative effect on business. 294 . however. in most emerging markets use of an interpreter may be a standard protocol. Ethnocentrism – Developed country managers tend to regard their own culture as superior. in most emerging markets meetings are delayed and lasts unusually long. time-zones. and vice-versa. Language Barriers – Developed country managers expect foreign partners to communicate in their languages. Other factors – local celebrations.GLOBAL BUSINESS ENVIRONMENT Time Sensitiveness – Developed country managers regard time as precious.
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. The 2001 (Doha Round) focused on power blocks (NAFTA. It also highlighted the nexus between US & WTO. 295 . It a multi-lateral treaty with 143 (as on 2002) member countries to reduce tariff and non-tariff (quota) barriers. copyrights. In 1995 (Uruguay Round) GATT was renamed to WTO. BRIC). It focused largely on TRIPS (patents. It also initiated provisions on anti-dumping. trademarks).
the Euro slowly started outperforming the Dollar. three countries joined in 2002 increasing it to fifteen members as of 2008. The notable exception was Great Britain which still continues with its local currency (i. Euro). the Dollar still remains the most preferred currency globally. 296 .e. However with current recession in the US 2002 onwards.e. Sterling . The Euro was significantly devalued against the Dollar till 2002.Pound). primarily the OPEC countries. However.EURO – SINGLE CURRENCY In 1999 twelve member countries in Europe joined hands to move over to a single currency (i.
297 . a multiple currency is preferable where the business cycles of member nations are different. but it may have spill-over effects.SINGLE Vs MULTIPLE CURRENCY Transaction Costs – Though the initial cost of introduction of a single currency is very complicated and costly. However. Rate Uncertainty – A single currency eliminates the risk of competitive devaluations. it helps avoiding transaction costs associated with a multiple currency. Transparency – A single currency is transparent and competitive. Trade Block – It will strengthen the EU identity which would not have been possible otherwise.
hot money). – FII (transfer of intangible resources) is fast but may have strong repercussions (i. 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. 298 . It is short-medium term with comparatively low levels of commitment. Neo classical economists believe that foreign investment may in fact be a win-win game.e.e. the gain of one country is loss of another). – FDI (transfer of tangible resources) is slow but steady for the purpose of economic growth.
lifestyle (petroleum 299 outlets – departmental stores). . Distribution – It depends on the market characteristics (fragmented – concentrated).INTERNATION MARKETING Product – The various attributes of a product may receive different degrees of emphasis depending on differences in . customer awareness (microwaves). Pricing – It depends on the competitive structure (PLC – Kellogg's). economic (middle class buying power).culture (food habits). promotion (surrogate advertising). buying patterns (spread). usage (talk time). technology (microchip).
Accounting Norms – The accounting norms of one country (AS . debt is cheap in US.INTERNATION FINANCE Currency Risk – Many Indian IT companies (Rs) having business in US (Dollar) are asking for quotes in (Euro) or are shifting bases out of US to avoid risk of devaluation of Dollar. Cost Structure – Companies in India need to investment in fixed costs due to poor infra-structure 300 compared to developed markets.India) may be different from that another trading country (US – GAAP or IRS). equity is cheap in India). Leverage – The leverage may vary across countries depending upon money and capital market conditions (Eg. .
INTERNATIONAL HR An uniform HR policy is idealistic to enable parity in performance appraisal. double taxation. Training – It is a pre-requisite for international business to reduce language. labour laws. and cultural barriers (language) vis-à-vis emerging markets. skills are more important that cultural fit and vice-versa. in most cases it is not desirable nor practiced. shortened life cycles). technology (convergence. however. Recruitment – In local recruitment. Compensation – Differential pay packages exists because of differences in purchasing power. social security. 301 .
Outsourcing – A company having a core competence may be the source of global outsourcing (Eg. . 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. Technology – The cost to be evaluated in terms of latest technology (Euro VI) vis-à-vis effective cost of appropriate technology (Euro II). reduce power costs) vis-à-vis infrastructural bottlenecks. SCM – Use of ERP to network the extended enterprise 302 across the globe.
CONTEMPORARY TOPICS 303 .
Innovation is the most preferred strategy today to maintain competitive advantage in the present turbulent business environment. 304 . it has destructive effects as well. innovation is the first attempt to carry it out in practice. Innovations typically paves the way for more secured and improved lifestyle for consumers in general. Innovation is all about staying ahead of competition.INNOVATION An invention is the first occurrence of an idea for a new product or process. but has inherent risks involved as well. While innovation typically adds value for organizations.
Tangible impact of product innovation on performance is significantly higher than process innovation. process innovations are organizational driven. process innovation is necessary to sustain the competitive advantage of product innovation. 305 .TYPES OF INNOVATION A key challenge is maintaining a balance between process and product innovations. While product innovations are typically customer driven. Process innovation usually follows product innovation. Strategic innovation has the potential to change the rules of the game. However.
Data Storage (Pen Drives). Medical Surgery (Lasik). Disruptive business models brings in a new frame of reference (i. It leads to a shift in the price – performance envelope. 306 . a paradigm shift). Telecom (CDMA Technology). Drug Development (Bio Chemicals).e. about how an organization makes money (i.BUSINESS MODEL It is a simplified description and representation of a complex real world. putting an idea into practice). Processors (Pentium). Innovations are the back-bone of successful business models .e.
The revenue streams generated by the activities. The cost structure resulting from the business model. The key activities / processes necessary for execution. The channels to reach out to the clients. The proposed relationships established with clients. The key resources and capabilities required.NINE BUILDING BLOCKS Value proposition offered to the market. The segment(s) of clients to be addressed. The key partners involved in the activities. 307 .
BUSINESS MODEL FRAMEWORK 308 .
innovative companies to carve out unique business models to fend off competition. It is just one piece of the puzzle. The revenue model described here are the means to generate revenues. Real Estate) companies need to untangle and understand the intricacies of their business model.REVENUE MODEL Positioning is just not sufficient. Investment Banking. With the rapid erosion of certain industries (IT. It involves – Product Visualization – Product Prototype – Product Test – Capacity – Pricing – Distribution. 309 .
HOW TO MAKE INNOVATIVE CO’S Innovative company’s are a matter of culture and aspirations rather than tangible resources. Allow the management sufficient slack to be future oriented. 310 . Promote the culture of experimentation. Have a lean and a flat organization structure. A favourable intellectual property (IP) climate. Allow the workforce idiosyncrasies for their errors. Promote the grape-vine. Provide reasonable incentives (not necessarily monetary).
Collusion with the judiciary is also another distinct possibility in emerging markets. 311 311 . The most preferred strategy of internal protection includes imbibing “causal ambiguity” in the production process to make reverse engineering difficult. companies are increasingly relying on internal protection to sustain innovation effects. however that possibility is slowly atrophying.HOW TO PROTECT INNOVATION? Without adequate protection (external or otherwise) the effects of innovation does not translate to performance. In most emerging markets where the IP climate is not so favorable.
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.
shareholders can diversify their portfolio at a much lesser risk and cost. 313 . not present in portfolio diversifications. However.AGENCY THEORY The root of Corporate Governance goes back to the Agency Theory. This exposes the shareholders to additional risks and higher costs. From the strategic point of view managers tend to diversify into unrelated businesses as it provides higher returns hence a more favourable appraisal. According to the agency theory top managers and shareholders interests are usually conflicting in nature and tend to pull in opposite directions. also known as the principal-agent problem or agency dilemma.
ORIGIN & CONTEXT Since the early 20th century since a large part of public funds were held by publicly traded firms in the US. 2002 to restore public confidence in corporate governance. 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. the US government passed the Sarbanes – Oxley Act. SEBI Report – 2005. After the Enron downfall.
Interests of other stakeholders: Recognize the legal and other obligations of all legitimate stakeholders. Role and responsibilities of the board: It deals with issues about an appropriate mix of executive and nonexecutive directors. including the society at large. The key roles of chairperson and CEO should not be held by the same person and their offices be clearly separated.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. 315 .
GOVERNANCE PRINCIPLES Integrity and ethical behaviour: Organizations should develop a code of conduct for their top management that promotes ethical and responsible decision making. Disclosure and transparency: Disclosure of information should be timely and balanced to ensure that investors have clear access to data and facts.. 316 316 . assessment and mitigation of risks and retirement by rotation over a fixed period of time. They should also implement systems to independently verify and safeguard the integrity of the company's financial reporting. Independence of the entity's auditors: Identification.
Balance of power: The simplest balance of power is very common. with its legal authority to hire. a person benefitting from a decision should abstain from it. safeguards invested capital.GOVERNANCE STRATEGIES Monitoring by the board of directors: The board of directors. they should provide no mechanism or scope for opportunistic behaviour. However. fire and compensate top management. Remuneration: Performance-based remuneration is designed to relate some proportion of salary to individual performance. 317 . Regular board meetings allow potential problems to be identified. discussed and resolved.
They defined a well-governed company as one that had mostly out-side directors. who had no management ties.GOVERNANCE & PERFORMANCE In its “Global Investor Opinion Survey” of over 200 institutional investors in 2002. McKinsey found that 80% of the respondents would pay a premium for wellgoverned companies. The size of the premium varied by market. Egypt and Russia) to around 40% for Canadian & European companies. undertook formal evaluation of its directors. and was responsive to investors' requests for information on governance issues. 318 . from 10% for companies where the regulatory backdrop was least certain (those in Morocco.
319 . today economic institutions are considered as a major drivers of improvement in quality of life in general and therefore needs to include multiple stakeholders. Over a period of time. Therefore. However. the short-term view of profit maximisation gave way to a more broader and mediumterm view wealth maximisation of the shareholders. The basic premise is that firms cannot exist in vacuum.SHAREHODER – STAKE HOLDER THEORY Till the early part of the 20th the basic objective of modern organizations was to provide goods and services for public consumption for profit maximisation. corporate philanthropy should be a part of every corporate mission.
Therefore. Therefore. CSR can be defined as. However. “an enterprises decisions and actions being taken for reasons at least partially beyond its immediate economic interests”.CORPORATE SOCIAL RESPONSIBILITY As Peter Drucker rightly pointed out that. in fact a large part of it is significantly overlapping. giving a very important message that one cannot exist without the other. “a healthy business cannot exist in a sick and impoverished society”. the debate on CRS still continues whether firms should detract its focus from its business? 320 . economic and social responsibilities cannot be mutually exclusive.
The role of media: The media and various consumer organizations have come up in protecting consumer rights and exposing mal-practices.GROWING CONCERN FOR CSR Awareness due to education: With growing literacy. MRTP). Public image: Entrepreneurs are increasingly relying on public image as a source of competitive advantage and a higher financial discounting. 321 . people are becoming increasingly aware of their right to a decent and healthy life. Fear of government interference: Excessive quench for profits may lead to build up of adverse public opinion compelling the government to intervene (Eg.
Refrigerators – CFC.Paper packaging. Education.CSR STRATEGIES Green Supply Chain Management: It includes environmentally preferable purchasing. Cement . Literacy & Training Programs – (Eg. Tata Steel – Life Line Express). Health & Hygiene – Attending the health hazards due to wastes and by-products to employees and society in proximity (Eg. eco efficiency. Aditya Birla Research Centre – LBS). 322 . designing eco-friendly products. Exide – Product take back). and extended producer responsibility (Eg.
In turn companies by serving these markets. C. K. They represent an enormous opportunity for companies who learn how to serve them. Prahalad notes that future markets exist collectively. across the world's billions of poor people having immense untapped buying power.BOTTOM OF THE PYRAMID With the market across most developed markets including the US getting saturated. Strategic innovations leading to disruptive business models can show the way out. 323 . they're helping millions of the world's poorest people to escape poverty.
BLUE OCEAN STRATEGY 324 .
MARKETSPACE .TWO WORLDS 325 .
battled over market-share. Yet in today’s overcrowded industries.WHAT IS RED OCEAN? Companies have long engaged in head-to-head competition in search of sustained. . They have fought for profits. competing head on results in nothing but a bloody red ocean of rivals fighting over a shrinking profit pool. one companies gain is always at the 326 cost of another companies loss. where most industries are saturated. In today’s red oceans. profitable growth. and struggled for differentiation (cost or product).
but by creating blue oceans of uncontested market space ripe for growth . it will exist 327 in the future as well. Blue Ocean’s have existed in the past.WHAT IS BLUE OCEAN? Tomorrow’s leading companies will succeed not by battling in red oceans. rendering rivals obsolete and unleashing new demand. Such strategic moves are possible through the pursuit of product differentiation and low cost simultaneously. It helps in creating powerful leaps in value for both the firm and its buyers. It is only the frames of the .
RED OCEAN Vs BLUE OCEAN Compete in existing markets Compete in uncontested markets Beat the competition Exploit existing demand Make the competition irrelevant Create and capture demand Make the value-cost trade off Break the value-cost trade off Demand is the limiting factor Supply is the limiting factor 328 .
BLUE OCEAN STRATEGY IMPERATIVES Prospects in most established market spaces – red oceans – are shrinking steadily. Demand across developed markets reaching a plateau. Technological advances have substantially 329 improved industrial productivity. Population shrinkage across a no. information imperfections atrophy instantly. As trade barriers between nations & regions fall. Niche markets & monopoly havens are continuing to disappear. . of European nations.
the underlying technology was often already in existence.CONCEPTUAL UNDERPINNINGS Blue oceans have existed in the past and will exist in the future as well. History indicates that blue oceans exist in three basic industries – automobiles (how people get to work) – computers (what people use at work) – entertainment (what people do after work). managerial moves are. They are not necessarily about technology. Company & industry are the wrong units of 330 strategic analysis. Incumbents often create blue oceans within the ambit of their core business. .
IMPLEMENTATION Reduce Which factors to be reduced below the industry standard Eliminate Which of the industry factors that the industry takes for granted should be eliminated Create VI Which factors should be created that the industry has not offered Raise Which of the factors should be raised above the industry’s standard 331 .BLUE OCEAN .
IMPLEMENTATION SEQUENCE Buyer Utility (1) Is there exceptional buyer utility in your business idea? Price (2) Is your price easily accessible to the mass of buyers? Blue Ocean Strategy Adoption (4) What are the adoption hurdles in actualizing your business idea? Are you addressing them up front? Cost (3) Can you attain your cost target to profit at your strategic price? 332 .
Citibank – Automated teller machines & credit 333 cards. Sony Play Station: Redefining machine-human interface in entertainment and targeting an altogether new user base. .SOME GLARING EXAMPLES In the last century authors Kim and Mauborgne have documented the creation of more than 150 blue ocean creations across 30 industries – Virgin Atlantic: Fractional jet ownership or travel to space. Southwest Airlines: Pioneering the concept of LCC.
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. greater than themselves. 334 . All they need to do is change their managerial frames. According to this view.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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