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Course Code: 611 & 612 Dr. Subir Sen – Faculty Member, IBS
E-Mail: firstname.lastname@example.org, 9830697368 1) Crafting & Executing Strategy – Thompson & Strickland. 2) Strategic Management – Pearce & Robinson. 3) Strategic Management – Fred. R. David. 4) Exploring Corporate Strategy – Johnson & Scholes. 5) Competitive Advantage – Michael E. Porter. 6) HBR – Articles & Case Studies.
STRATEGY - DEFINITION
Strategy is all about making trade-offs between what to do and more importantly what not to do; consciously choosing to differentiate. It reflects a congruence between external opportunities and internal capabilities. Types of strategies – Corporate Strategies – It is all about making choices across various businesses and allocating resources among them. Business Strategies – It is all about developing leveraging and sustaining competitive advantage. Functional Strategies – It is all about finding newer ways to perform existing processes, or 3 better still adopting new processes altogether.
STRATEGIC MANAGEMENT DEFINITION
Strategic management attempts to integrate the traditional management functions and align the organization as a whole with the broader environment to make resource allocations in a way to achieve the strategic intent of the organization. This alignment is called strategic fit. It serves as a road-map for the organization in its growth trajectory. It provides the direction – extent – pace – timing. It depends on the turbulence of the environment and the aggressiveness of the organization. It distinguishes the winners from the losers.
PILLARS OF STRATEGIC MANAGEMENT
Differentiation – Differentiation of key inputs and technologies helps a firm to consciously move away from homogeneous to heterogeneous markets enabling them to earn super-normal profits from normal profits. Integration – Whenever dealing with a complex task of managing a business (i.e. involving a no. of variables with cross linkages) it is in the interest of simplicity that the task be broken up in smaller components. However, for effective control, integration is essential. Alignment – Since differentiation is prone to replication, it is in the interest of the firm to differentiate continuously by aligning the resources with environmental opportunities.
STRATEGIC MANAGEMENT FRAMEWORK
Economic al Strategic Finance Fit Political Strategic Intent Fit Political Marketin g Manageme nt Social & Cultural
It is about adaptation and response to the same. 7 .STRATEGIC MANAGEMENT . It provides broad guidelines. It is irreversible.FEATURES It forms the core activity of the top management. It is a holistic and integrated approach. It involves substantial resource outlay. It requires full commitment of the top management. It is long-term in nature. It is all about creativity and innovation.
It is about a definite formula. It a bundle of techniques or even tricks. It involves only the top management. It is fool-proof in nature. It involves nitty-gritty's. 8 . It attempts to minimize risk. It is about forecasting. It is rocket science.STRATEGIC MANAGEMENT – MYTHS It involves short-cuts. It brings instant success. It about mere data and facts.
again and again ……. To leverage size. To be proactive. To tap markets across boundaries. To assimilate change faster. To gain expertise in technologies. To generate large resource pool.STRATEGIC MANAGEMENT IMPERATIVES To be continuously alert. To be future oriented. . scale and scope. To innovate. 9 To develop core–competencies. rather than reactive. To be insulated against environmental threats.
today's battles are fought over markets. In the ancient days battles were fought over land.strategies. but by virtue of their courage. battles fought on the market front are won by companies by virtue of their obsession & strategies. Even in today’s markets. It is an old wine in a new bottle.STRATEGY . In contrast. obsession. 10 . but with a lot a rigour and robustness. whose origin can be traced to some of the greatest battles fought in the ancient days. In the ancient days battles were won not by virtue of size of the army or armory.ORIGIN The word strategy has its origin from the Greek word strategia meaning Military Commander. and more importantly .
Napoleon’s attack on Russia – Strategy: Waiting for the right time. – Reliance’s entry into telecom. Allied Forces Vs Germany (WW-II) – Strategy: Forging alliances. – Yahoo and Microsoft challenging Google. 11 . challenging GM and Ford. – Toyota’s entry in the US. US attack of Morocco to capture Germany – Strategy: Pin-hole strategy – Wal-Mart challenging Sears by entering small towns.SOME PARALLELS Japan’s attack on Pearl Harbour – Strategy: Attack where it hurts the most.
1910). 12 .Industrial Revolution. A paradigm is a dominant belief about how the business and its environment operates. The things happening around the firm when totally disconnected from the past leads to a paradigm shift. The first major discontinuity in the history of global business environment was the .EVOLUTION OF MANAGEMENT As Peter Drucker refers to it. a radical change in the business environment brings about discontinuity. – Mass Production Organization Size – Complicated Processes – Complex Structures Evolving of an emerging paradigm – survival of the fittest (Fayol & Taylor.
– Affluence of the new customer (i. – Changes in the technology fore-front. 13 . The question of outperforming the benchmark became the new buzzword. performance across firms became differentiated. 1960). – Global market place.EVOLUTION OF STRATEGIC MANAGEMENT The second major discontinuity in the history of global economic environment – World War II. push to pull). – Homogeneous to heterogeneous products.e. From uniform performance. Survival of the most adaptable becomes a new management paradigm (Ansoff. Efficiency and effectiveness are no longer sufficient.
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 .
Learning always begin on a clean sheet of paper. – The choice of strategy is primarily concerned with external ones rather than internal ones.APPROACHES TO STRATEGY Analytical Approach – Igor H. – The choice of product-market mix is based on conscious evaluation of risk – return factors. 15 . Ansoff (1960) – Strategy can be segregated into certain mutually exclusive and inter-related components aimed at managing the growth of an organization. – Biases and prejudices has a very little role to play in strategic choices pursued by managers. – It is primarily the top management’s prerogative.
APPROACHES TO STRATEGY Design Approach – Alfred Chandler (1970) – Structure follows strategy. Once the control systems are in place. 16 . everything else follows. how it will compete. The organization initially decides which industry to enter. who will be the top managers. Successful organizations align authority and responsibility of various departments in way to reach overall objectives. – The top managers then decide on the type of organization structure & systems to be in place. – Organization structure will precede and cause changes in strategy. – Management control systems has a dominating role in influencing firm performance.
APPROACHES TO STRATEGY Positioning Approach – Michael E. – An organization is seldom in a position to influence the larger business environment. customer. Porter (1980) – Choose a consumer segment and position your product accordingly. 17 . competitors. substitutes. – A firms performance is inversely related with the bargaining power of environmental forces to which it is exposed. – The environmental forces comprises of – supplier. – The organization will outperform the industry where environmental forces are weak and vice-versa. new entrant.
but exploiting the resource differences among them. – It enables a firm to deliver unimaginable value ahead of time. Prahalad (1990) – The key to superior performance is not doing the same as other organizations. 18 . – Organizations can significantly alter the way an industry functions. They are complex resources and undermines a firms competitive advantage. – Core competencies are a set of skills that are unique and can be leveraged. locating in most attractive industries and pursuing the same strategy. K.APPROACHES TO STRATEGY Core Competence – C.
STRATEGIC MANAGEMENT PROCESS Strategic Intent Strategic Planning Strategic Gap – Environmental Scanning – Internal Appraisal of the Firm Strategy Formulation – Corporate Strategy – Business Strategy Strategic Choices – Functional Strategy Strategy Implementation Strategy Performance Strategy Evaluation & Control 19 .
TOP MANAGEMENT PERSPECTIVE 20 .
A 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 involves an obsession to be the best or outperform the best. It implies a significant stretch. It’s a philosophy that distinguishes it from its competitors. A gap that consciously manages between stagnation and atrophy.STRATEGIC INTENT If you cannot see the future. A substantial gap between its resources and aspirations. 21 . It provides a sense of direction and destiny. you cannot reach there.
HIERARCHY Integrativ e m Do an in Visio n Mission Dominant Objective s Goal s Plans Lo g ic Single Specifi c Man y 22 t .STRATEGIC INTENT .
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. 23 . It is core to the strategic intent of the firm. when radical changes in the internal and external environment (i. Dominant logic changes.e. strategic variety) is apparent. it can be perceived as a set of working rules (similar to thumb rules) that enables the top management to decide what can be done and more importantly what cannot be done. To put it more simply.
VISION It is a dream (not a forecast) about what the company wants to become in the foreseeable future. It enables the top management to remain focused. It provides an unity of purpose amidst diversity of personal goals. 24 . It ensures that the company does not wander off into unrelated zones or fall into an activity trap. – It represents the company’s audacious. beyond just making money. It is a combination of three basic elements – – An organizations fundamental reason for existence. but achievable aspirations. – It stands for the unchanging core values of the company.
25 . In Reliance when a new project becomes operational top managers hand over charge to the SBU heads and move on to a new project. Clarity – Vividly descriptive image of what the company wants to be known for in the future. Empathy – It should reflect the company’s beliefs to which it is sensitive. and memorizable. Reachable – It should be within a reasonable target in the known future. clear.VISION . Sharing – The company across all hierarchies should have faith in it. Brevity – It should be short. not an utopian dream.CHARACTERISTICS Reliance – Where growth is a way of life.
ADVANTAGES To stay focused on the right track. It lends integrity and genuineness. It fosters risk taking and experimentation. To prevent the fall in a activity trap. 26 .VISION . It provides a holistic picture. It facilitates development of skills & capabilities. It gives a shared platform. It gives enlightment. It gives the impression of a forward-looking organisation. It makes strategic alignment easier.
MISSION Mission defines the space that a business wants to create for itself in a competitive terrain. It serves as a road map to reach the vision. its reason for existence. A broad mission statement helps in fending competitors. 27 . Although the purpose may change over time. 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 enables the firm to define its business landscape and identify its competitive forces.
We offer comfort. …………………. ………………….MISSION – SOME IDEAS Reliance – We are in the business of integration. We offer strength. Some other examples – We do not offer shoes. though some may seem unrelated in nature. All the businesses of the company are strongly integrated with their main business. – We do not offer insurance. We offer solutions. – We do not offer software's. …………………. 28 . …………………. – We do not offer steel. We offer security.
– It is based on Management by Objectives (MBO). – It helps identifying key success factors. – It lends direction – time frame in the medium term. – It keeps the mid management pre-occupied. – It provides a benchmark for evaluation. It is an end result (quantifiable) something a firm aims and tries to reach in a time bound frame. – It adds legitimacy and motivation. – It prevents deviation.100K crore company by the year 2005. It provides a quantitative feel to an abstract proposition.GOALS & OBJECTIVES Reliance – We want to become a Rs. 29 .
It is specific to a particular business. coordinating appropriate technologies. – Acquire a market share of indomitable position. It is the process of garnering necessary inputs. and gaining access to desired markets to achieve the desired goals and objectives. 30 . – Use price-elasticity to break market barriers.PLANS Reliance – Desire to invest 25K crore in telecom business by circa 2010. – Compress project times. The details of the plan Reliance Telecom adopted were – Backward integrate process technologies. – Leverage economies of size and scale.
equilibrium is maintained. This state of affairs is known as strategic drift. 31 . When changes in the environment is incremental. radical change may lead to disequilibrium. strategies lose touch with the emerging realities. 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. In such a context. It often leads to an organizational crisis. past strategies tend to have a bearing on future strategies.STRATEGIC DRIFT Due to top management commitment. However.
STRATEGIC DRIFT FRAMEWORK Environmental Change Degree of change Strategic Change Radical Change Incremental Change State of Flux Continuity Stage of Transformation Strategic Drift Stage of Atrophy Time 32 .
– Developing a platform of support. – Using covert tactics to pursue self interests. – Hiding vulnerability. 33 . Organizational politics involves intentional acts of influence to enhance or protect the self-interest of individuals or groups over organizational goals. Some instances of organizational politics – Formation of powerful groups or coteries.ORGANIZATIONAL POLITICS Strategic drift often leads to organizational politics. – Creating a favourable image. – Creating obligations of reciprocity. – Distorting information to gain mileage.
.INTENDED & REALISED STRATEGIES An intended strategy is an expression of interest of a desired strategic direction. Other causes – – The plans are unworkable and utopian. A realized strategy is what the top management actually translates into practice. – The environment context has changed. – Persons responsible for strategy conceptualization and implementation are34 divergent. Usually there is wide gap between the two when organizational politics is evident. – Influential stake-holders back out.
but the master scheme of the rational comprehensive scheme is not apparent. but as a defensible response to the complexities of a large organization that mitigate against publicizing goals. 35 . this is not to be treated as “muddling”. Learning is an integral part of logical incrementalism.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. Strategy formulation and implementation are linked together in a continuous improvement cycle.
Adaptation – As implementation progresses. The broader objective should serve the overall interest of the organization. Agent of Change – Formal ratification of a change plan through MBO. 36 .IMPLEMENTING INCREMENTALISM General Concern – A vaguely felt awareness of an issue or opportunity. Macro Broadcasting – The broad idea is floated without details to invite pros and cons leading to finer refinements. Leveraging Crisis – A sudden crisis or an opportunity should be used as a trigger to facilitate acceptance and implementation of change.
Strategic transformation becomes smooth through a change in top leadership. As it brings 37 with it a different dominant logic. Dominant logic’s are very rigid and sticky and prone to inertia. Dominant logic’s are the cornerstones of change when strategic transformation is apparent.STRATEGIC TRANSFORMATION Strategic transformation (a complete overhauling of the strategic architecture) becomes inevitable whenever a strategic drift takes place. . It creates blinders. Tampering with surface level factors often leads to atrophy.
– Constructive Bargaining – Agree to disagree.LEARNING ORGANIZATION A learning organization is capable of continual regeneration from knowledge. – Organisational Slack – Enough free space. A learning organization must continuously focus on unlearning as well. experience. Factors that fosters a learning organization – Pluralistic – An environment where different and even conflicting ideas are welcome. – Experimentation – Fosters a culture of risk taking. It helps prevent a strategic drift from occurring at the first place. and skills that fosters experimentation and questioning and challenge around a shared purpose. 38 . – Informal Networks – Emerging of new ideas.
ENVIRONMENTAL CONDITIONS Dynamic Scenario Planning Learning Organization Static Forecasting Decentralization Simple Complex 39 .
ANALYZING BUSINESS ENVIRONMENT 40 .
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. It is based on the assumption of incremental change.e. gap analysis). It points to a position of superiority with relation to competition. It requires a quantum leap (i. It is pro-active in nature. Strategic planning is a function of discounting the future. 41 . It is reactive in nature.PLANNING & STRATEGIC PLANNING Formal planning is a function of extrapolating the past. It is based on the assumption of radical change.
A manager has to continuously scan the environment to ensure alignment of the strategies with the radically changing environment. not guided by any boundaries.ENVIRONMENTAL SCANNING The environment is defined as the aggregate of conditions. The world is flat. It is exploratory in nature. events. Environmental factors can be external as well as internal to the organization. resources and ideas move unhindered. 42 . and influences that affect an organizations way of doing things. Environmental scanning is very important component of strategic planning. The segments of the environment a top manager scans selectively depends upon his dominant logics.
It is particularly important that PESTEL be used to look at the future impact of environmental factors.PESTEL PESTEL attempts to provide a broad framework on how the broader environmental forces affects an organization and influences the way it practices strategy. but also to analyze the complex linkages across them. It is not intended to be used as an exhaustive list. 43 . It is important not only to identify the structural drivers of change. Understanding the composite effect is critical. for which a holistic picture is required. which may be different from the past impact.
PESTEL FRAMEWORK Political – Government Stability. Religious Sentiments. Monsoon & Food Grains Reserves. Capital Market & Forex Reserves. Government Attitude. Infra-Structural Investments. Language Barriers. Social Values. Savings & Investment. Inflation & Interest Rates. Literacy Levels. Central – State Co-alignment. Economic Model. Economic Cycles. FDI Inflows. Income & Age Distribution. Subsidies & Protection. Social – Population Diversity. Fiscal Deficit. Economic – GDP. Licensing & Quotas. Currency Stability. 44 .
Carbon Credits. Consumer Protection Laws. 45 . Legal – Monopolies Legislation. Pollution Control Laws. Research & Development. Environmental – Global Warming & CSR. Direct & Indirect Taxes. Patents. Obsolescence Rate. Patent Laws. Product Safety & Health Hazards. Extended Producer Responsibility. Environmentally Preferable Purchasing. Product Design. Non-Fossil & Alternative Fuels. Waste Disposal & Emissions.PESTEL FRAMEWORK Technological – Innovation. Employment Laws. ERP. Technological Convergence.
VRS. Capital Market Reforms. Economic Reforms – Fiscal & Monetary Reforms. Encouraging FDI. Abolition of import licenses. Dismantling price controls.ECONOMIC LIBERALISATION New Industrial Policy (NIP) – Liberalizing industrial licensing. Structural Adjustments – Phasing out subsidies. 46 . Rupee convertibility. Exit Policy. Encouraging exports. PSU Disinvestments. Banking Sector Reforms. FERA Liberalization. Curtailment of PSU’s. New Trade Policy (NTP) – Lowering import tariffs. MRTP Liberalization.
Mergers & Acquisitions 47 .Survival of the fittest MNC Onslaught – Enhancing stakes – Power Equation – Joint Ventures – Technological Alliances – Take-over threat.DISCONTINUITY Destabilization due to entrepreneurial freedom – Cocoon of protection disappears – Diversification spree – Existing notions of size shaken – Industry structures change radically – Economic Darwinism .
DISCONTINUITY Hyper Competition – MNC’s .Globalization – Cheap Imports & Dumping – Push to Pull Marketing Buyers exacting demands – Shortage to surplus – Price competition – Life-style changes – Stress on quality. Consumerism Challenges on the technology front – Competencies become technology based – Investment in R&D become inescapable 48 .
DISCONTINUITY Compulsion to find export markets – Identifying competitive advantage – Technological gap – Global presence – Depreciating currency – Exports Corporate vulnerability – It is no longer business as usual – Capital inadequacy – Lack of product clout and brand power – One product syndrome – Loss of monopoly 49 .
FIVE FORCES MODEL .PORTER Threat of New Entrants Bargainin g power of Suppliers Competition from Existing Players Bargainin gBargainin power g of power of Suppliers Customer s Threat of Substitutes 50 .
FIVE FORCES MODEL ASSUMPTIONS The model is to be used at the SBU level and not at the industry level.e. profit potential) per se. It depicts the attractiveness of an industry (i. The five forces have strong cross-linkages. but also used to understand how they can be countered and overcome. The model should not be used as a snapshot in time. 51 . It should not only be used to understand the forces. incremental or otherwise. the forces are subject to changes. It is even wiser to apply the same at the product – market level.
Low relative importance of the segment. Unimportance of product quality. High switching costs. Undifferentiated product.PORTERS FIVE FORCES ANALYSIS Threat to Entry – Economies of size and scale. Access to distribution channels. Low margins & stagnancy. Capital requirements. Product differentiation through proprietary technology or brand power. Low customer switching costs. Scope for backward integration. Government policy. Learning curve advantages. Presence of substitutes or unorganized sector. Resource profile & fear of retaliation. Industry stagnation. 52 . Threat of Customers – Buyer concentration and volumes.
High exit barriers. Unorganised sector. Lack of substitute inputs.PORTERS FIVE FORCES ANALYSIS Threat of Suppliers – Supplier monopoly. High customer switching costs. Produced by industries earning high profits. 53 . Threat of Substitutes – Improvement in price -performance trade-off. Industry stagnancy. Low relative importance of the segment. Differentiated inputs. Piracy and counterfeits. Product perishability. Diversity of players. Scope for forward integration. Jockeying for position – Fragmented market. Buyer’s propensity to substitute. Intermittent overcapacity. Low level of differentiation.
Reliance). Resource Profile – It highlights the capabilities (generic) or competencies (business specific) of the firm. 54 . dominant or related diversified or unrelated diversified businesses (Infosys. Inertia – Excessive commitment to past strategies prevents firms from tapping emerging opportunities.FIRM ENVIRONMENT Size and Scale of Operations – It is a very important component of competitiveness in today's global context (Bharti – MTN. Cohesiveness – Degree of bonding existing across affiliated firms. Tata). Business Scope – The intention whether the firm wants to be in a single.
The E-Curve thus enables organisations to build entry barriers. experience teaches better and more effective way of doing things.EXPERIENCE CURVE The cost of performing an activity declines on per-unit basis as a firm becomes more efficient. it can price its products more competitively. However. and with lower prices it can increase its sales volume. 55 . Experience curve has strong linkages with performance. an E-Curve can prove to be futile during discontinuity. Matured firms will always be positioned advantageously on the ECurve than new entrants. With lower costs. leverage it as a competitive advantage. which further reduces costs.
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 .
It is one of the earliest models in environmental scanning. 59 Analysts. It helps an organisation to capitalize on the opportunities by maximizing its strengths and neutralizing the threats minimizing the weaknesses. . Press Clippings & Interviews. Interviews. Business Intelligence – Bankers. Acronym for Strengths – Weaknesses – Opportunities – Threats. Case Studies – Structured Questionnaires. Competitors. A SWOT audit involves – Company Records – Annual Reports.VULNERABILITY ANALYSIS . Customers. Observation.SWOT The framework was originally conceptualized by Kenneth Andrews in 1970. Suppliers. Websites.
FRAMEWORK Opportunities Nullify weaknesses which prevents you from exploiting opportunities Leverage strengths to make use of opportunities Weaknesses Minimize weaknesses which prevents you from countering threats Strengths Threats Utilise strengths to counter threats (?) 60 .SWOT ANALYSIS .
Tata Steel. Siemens. Biocon. Infosys. Reliance. Engineering Skills – Eg. Motivated employees & cordial industrial relations – Eg. Strong R&D base – Eg. Good credit rating – Eg. Dr. Large resource pool – Eg.SOURCES OF STRENGTH Strong brand identity – Eg. Caterpillar. Excellent penetration – Eg. Ranbaxy. Economies of scale – Eg. HUL. Honda. Strong after sales & service network – Eg. Aditya Birla. High quality products – Eg. Reddy’s. Sony. Tata. 61 . Volkswagen. SBI. Toyota. ITC. Reliance. Infosys.
Inefficient top management – Eg. Modi Group. Lack of product / brand clout – Eg. Inertia – Eg.Raymond. J. Excess manpower – Eg. K. Nirma. K. Group . Organizational Politics – Eg. Strategic myopia – Eg. CMC (Tata Group) 62 . Lacking experimentation culture – Eg. Excessive diversification – Eg. CESC. Narrow business scope – Eg.SOURCES OF WEAKNESSES Outdated technology – Eg. Ballarpur Inds. Bijoligrill. SAIL. B. Hindustan Motors. Procter & Gamble. Single product syndrome – Eg. Tatas.
Abolishing MRTP – Eg. Fertilizers. Banking. Collaborations & Joint Ventures – Bharti & WalMart. Growing population – Eg. VRS. Fertilizer. Abolishing CCI. Maruti. GDR’s. Insurance. Capital market reforms – Eg. Life style changes – Eg. Sugar. Exit Policy – Eg. Market driven Interest rates – Eg.SOURCES OF OPPORTUNITIES Delicensing of Industries – Eg. ECB’s.Tata Motors. Market driven Pricing – Eg. Telecom. 63 . Retailing. Middle-class buying power. Sugar. Globalization – Eg. Free pricing – Eg.
Land acquisition . Bajoria – Bombay Dyeing.SOURCES OF THREATS Political instability – Eg. 11/9. Onida. Terrorist attacks – Eg. Tata Steel. Singur SEZ. Nationalisation – Eg. Reliance. Import relaxation – Eg.Social activism – Eg. Earth Quake. Group disintegration – Eg. Tsunami. Lack of Corporate Governance – Eg. (1985–1990). 64 . Natural disaster – Eg. (2008). Satyam. Economic recession – Eg. Foreign Direct Investment (FDI) – Eg. Dumping from China. Hostile take-over – Eg. 26/11.
Delphi's technique. Holistic view – Prepare a complete overall picture. Stages in ETOP analysis – List the aspects of the environment that has a bearing on the organization. scenario analysis). time series. Strategic responses (including adaptation) to opportunities and threats is critical for survival and success.e. 65 .ETOP Acronym for Environment – Threat – Opportunity – Profile. Assess the extent of impact of the factors. Forecasting – Predict the future (i. It represents a summary picture of the external environmental factors and their likely impact on the organization.
PROFIT IMPACT OF MARKET STRATEGY PIMS is a database model developed by GE and later extended by HBS to examine the impact of a wide range of strategy variables on business performance. An organization can draw upon the experience of its peers in similar situations. . selectively. 66 Vertical integration is a powerful strategy. Some key findings on major performance drivers that explains 75% deviations in performance – Product quality and relative market share. High investment intensity acts as a drag. It is also a form of assessing vulnerability through longitudinal analysis. Relative attractiveness of the market.
therefore 67 validity may be a question. when radical changes in the economy takes place.PIMS . . Authenticity of data is of prime importance – Contexts drawn across one organization may not be applicable to another. – Contexts may vary over time. As every organization is unique in its own way. – Contexts may vary across countries.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.
KSF helps organizations spot early opportunities and convert them into value adding business propositions.KEY SUCCESS FACTORS (KSF) KSF relates to identification and putting concentrated effort on a particular activity or process which forms the very basis of competitive advantage. It involves a three-stage process – Identify KSF – What does it take to be successful in a business? Drawing KSF – What should be the organizations response to the same? Benchmarking KSF – How do we evaluate organization success on this factor? 68 . It enables the top management to draw focus.
IDENTIFYING ALTERNATIVE STRATEGIES 69 .
national.GRAND STRATEGY It is concerned with the overall business scope (single.CORPORATE . It determines the locus a firm encounters with internal and external environment. global) of a firm and deals with choices of allocating resources across them. 70 . related. unrelated) and geographical scope (local. dominant. A corporate strategy identifies and fixes the strategic gap it proposes to fill. It provides broad direction to the groups vision and mission. It reflects the customer needs it intends to satisfy. It indicates the quality of growth an organization is looking for.
CORPORATE STRATEGY MATRIX Corporate Strategy Stability Stability Growth Growth Combination Diversification Divestment Intensification Market Penetration Related Vertical Market Development Product Development Unrelated Horizontal 71 .
Citibank). does not relate to do-nothing (Eg. – Why disturb the existing equilibrium set up? – Limited resource position.STABILITY It involves maintaining status-quo or growing in a slow and selective manner. Hindustan Motors). – The firm may not be willing to take additional risk associated with new projects. The reasons for stability strategy – – Lack of attractive opportunities. 72 . – To stop for a while and assess past records. Stability however. The scale and scope of present operations remains almost intact. Even during adverse times firms need to adopt a strategy to sustain current performance levels. erosion of capabilities. (Eg.
GROWTH . 73 .ANSOFF’S MODEL New Product Existing Product Existing Market Market Penetration (+) Product Development (++) New Market Market Development (++) Diversificatio n (+++) Note: (+) indicates degree of growth and risk involved.
– Helps firms which are not comfortable with unfamiliar terrain.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. Ujjala. – The company carries a risk of product obsolescence. – Suitable for industries where scope for technological breakthrough is limited. Market penetration can be achieved by – increasing sales to current customers. Britannia). 74 . direct non-users to users. (Eg. convert competitors customers. within a well defined market segment. – Elongated product life-cycle. Nirma.
tyres. socks & stockings. upholstery. fabrics. – Immense customer reach & flexible advertising. (Eg. 75 . carpets. – Moves across geographical boundaries. Du Pont – Nylon: parachutes. – Unconventional and flexible distribution channels.…… or Teflon: aircraft technologies to cutlery to paints or Raytheon Corp – Microwaves: radars to kitchen appliances). – Creativity and innovation – thinking out of the box. – Stretches product life cycles.MARKET DEVELOPMENT It is a strategy where a firm tries to achieve growth by finding new uses of existing products or its close variants and tap a new potential customer base altogether.
aesthetics. – Areas of product improvement – performance. perception. reliability. features.Strolleys). durability. conformance. Refills) 76 . Microsoft: DOS to Windows) or a substantial improved version (incremental) of an existing product to repeatedly enter the same market (Eg. serviceability. – Leverage on customer and brand loyalty. Close Up: Fluoride – Gel toothpaste or VIP . – Deliverable through – redesigning or reengineering. – Substitutes that serve the same needs (Eg.PRODUCT DEVELOPMENT It is a strategy where a firm tries to achieve growth through a radical new product (Eg. – Leveraging through – innovation.
From the modern point of view they are strategically dissimilar. From the traditional point of view. dominance). – Internal capital market.DIVERSIFICATION It marks the entry of a firm into newer markets with new products. Why do firms diversify in the Indian context? – Shift the growth trajectory or opportunistic. – Risk reduction.e. the new business is distinct from the existing business in terms of – inputs – technologies – markets. – Permits: quotas. 77 . – High transaction costs and institutional gaps.e. licenses (i. thereby creating a new business. industrial embassies). – Conglomerate or market power (i.
Let us assume that there are two businesses constituting the entire market – coffee and icecream. cold wave dominates the planet. in which a given year is either under hot or cold wave. while the coffee business would register a return of 30%. What would be your ideal diversification strategy through optimization? 78 . If the hot wave dominates the planet. either of which is equally likely to prevail.HOW DIVERSIFICATION REDUCES RISK? Consider a hypothetical planet. the ice-cream business would register a return of 30%. If on the other hand. while the coffee business would register a return of 10%. ice-cream business would register a return of 10%.
If we diversified in either of the two businesses, our expected return will be 20%, with a possible risk of 10%. If, we split our investment between the two businesses in equal proportion, half of our investment will earn a return of 30%, while the other half would earn 10%, so our expected return would still be 20%. But in the second instance there is no possibility of deviation of returns (i.e. risk). Diversification results in 20% expected return with zero risk, whereas investing in individual businesses was yielding an expected return of 20% with a risk factor of 10%. The pivotal point is that the two businesses are negatively correlated. 79
It takes place when a company increases the breadth of a firms business or geographical scope by getting into product – market segments which compliments its existing businesses (Eg. Reliance). Alternatively, existing business may recreate new businesses, which are distinct, but supplements its existing business (Eg. Bajaj – scooters to motorcycles, Dove – soaps to shampoo). – It results in increased market power. – Leveraging existing capabilities. – Resources can be shared for mutual benefit. – Reduces economic risk (i.e. business cycles). – Enables brand or product line extension.
It increases the depth of its business scope either in a backward business process or in a forward one. Backward integration occurs when the company starts manufacturing its inputs or catalysts. In forward integration a firm moves into marketing of its products and services. Advantages of backward integration – – Cost competitiveness – entry barrier. – Better operational control – timely supplies, quality control, coordination – JIT, savings in indirect taxes. Disadvantages of backward integration – – It may spark of a chain reaction - contagion effect. – Long gestation & break even - investment in CAPEX.
Oil & Gas exploration Naptha-cracking Acetic Acid Paraxylene (PX)
Purified tetra-pthalic acid
Polyester Filament Polyester Staple Fibre (PSF) Yarn (PFY) Textiles 83
DIVERSIFICATION SUCCESS ?
While diversifying into new businesses, the scope of relatedness or unrelatedness should not be judged from the traditional static view, but from the modern dynamic view which incorporates strategic factors like capabilities and dominant logic. Countermanding reasons – Potential to reap economies of scope across SBU’s that can share the same strategic asset. Potential to use an existing capability to help improve the quality of a strategic asset in another business. Potential to use an existing capability to create a new strategic asset in another business. Potential to expand the existing pool of capabilities. Dominant logic ensures timely & appropriate response.
Maruti – Sona Steering). Ranbaxy. Reliance). Dr.Where one firm has full ownership and control over all the stages of a value-chain in the manufacturing of a product (Eg. Quasi-integration . and out-sources the noncore activities (Eg.QUASI & TAPERED INTEGRATION Full Integration . Tapered integration .A firm produces part of its own requirements and buys the rest from outside suppliers with a variable degree of ownership and control.A firm gets most of its requirements from one or more outside suppliers that is under its partial control through value chain partnerships (Eg. Usually the firm concentrates on its core activities. 85 . 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 .
lack of strategic intent.e. 87 . synergies pulling in opposite directions). – Cost of neglect (i.e. Firms usually engage in conglomerate diversification when emerging opportunities are very attractive and offers potential growth opportunities. and are also strategically dissimilar. myopia).e. – Cost of dysynergy (i.CONGLOMERATE DIVERSIFICATION It relates to entry of firms into businesses which are distinct in terms of – inputs – technologies – markets. lack of knowledge of competitive forces).e. – Cost of ignorance (i. core business). Drawbacks of unrelated diversification – – Cost of failure (i.
CONGLOMERATE DIVERSIFICATION Paper & Packaging Edible Oils Tobacco Hotels Food & Confectionary 88 .
reactive) and survival is at stake and the firm does not have resources to fend off competitive forces. ACC) in full to an independent entity. In strategy there is no scope for sentimentality with divestment.DIVESTMENT Divestment is a defensive strategy involving the sale of entire stake (Eg.e. (Eg. where a company simply exits because the business no longer contribute to or fit its dominant logic. Tatas sale of Goodlass Nerolac. It taken into account when performance is disappointing (i. Tata Press). It may also involve a SBU (Eg. L&TCement Division to Aditya Birla Group) technically known as divestiture or a product (Eg. It is may also be a pro-active strategy. 89 . Glaxo’s “Glucon-D” to Heinz). Tata Pharma.
1956 does not permit this mode. where 100% of the assets (including intangibles) are valued and paid for. Hive-Off – A hive off is the creation of a new entity followed by transfer of assets.DIVESTMENT . involving 608 pence per share). where the equity is allotted amongst the existing shareholders on a pro-rata basis. Sale of Diamond Beverages to Coca-Cola for US $ 40 million). (Eg. 90 .ROUTES Outright Sale – Popularly known as the asset route. Tatas buy-out of Corus for US $ 11. Leveraged Buy-Out (LBO) – Here the company’s shareholders are bought out through a negotiated deal using borrowed funds. the Companies Act. However. (Eg.3 billion.
COMBINATION STRATEGY It is a mixture of stability. growth. developing facilities right from the scratch) or through brown-field projects (i. There can be no ideal strategy for every business. 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. 91 . mergers and acquisition. It is usually pursued by a business group with diverse interests across multiple industries.e. A combination strategy can be implemented through green-field projects (i.e.
STRATEGY CHOICE & PORTFOLIO ANALYSIS 92 .
It attempts to answer the following questions – How effective has the existing strategy been? How effective will that strategy be in the future? What will be the effectiveness of alternative strategies? It is impossible for a manager to assess all the alternatives. In most cases the trade-off is between resources and opportunities. Dominant logic enables top managers to selectively scan the environment and make trade-offs. 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.
will help the firm achieve its intent.SELECTIVITY IS THE KEY The role of a top manager is not to solve a problem. managers need to ask the right questions. For an optimal choice the following four issues need to be resolved – Is the strategy clearly identifiable? Is it consistent with the resources of the firm? Will it be able to exploit the opportunities in full? Is it in tune with the values and beliefs of the firm? 94 . The key task before a top manager is to identify the right problems. if addressed. To identify the right problems. They must choose problems which will lead to the right kind of opportunities. nor is to a define a problem for others to solve.
Proximity to the corridors of power (i. Licenses & Quotas. Their origins can be traced back to market imperfections existing in an economy (MRTP Laws. chaebols in Korea. keiretsus in Japan. Their roots can be traced to a single family or clan and share broad similarities.BUSINESS GROUP . BRC).DEFINITION A business group is known by various names in various countries – guanxique in China. 95 Succession planning is critical to continuity. Managing Agency). formal and informal ties. .e. Resource sharing. business houses in India. embassies). 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 .
STRATEGIC CHOICE – MICRO TIMING ReEngineering Growth (%) Maturity Stability Growth Diversification Decline .Divestment Duration (Yrs) Inception Intensification 98 .
PORTFOLIO ANALYSIS Resource allocation across a portfolio of businesses is an important strategic choice. Relatedness across resources are difficult to realize. therefore. Redeployment of resources upsets the established power bases of a group. sometimes impossible. Investing in emerging businesses may not actually be so simple as it appears to be. Why? Businesses are not about liquid assets. there are high costs associated with entry and exit. Power and resources often goes hand in hand. Rules of the game are different. next only to choice of business. 99 .
BCG GROWTH MODEL Relative Market Share (%) Industry Growth (%) Low High High Low Stars Question Mark ? Cash Cow Dogs 100 .
Tata Telecom. diversification). product development).e. but to larger extent than a question mark. Tata-AIG). Tata Steel).e. market penetration. provided the industry growth rate continues and the company is able to maintain its growth (i. Stars – They achievers in the near term. market development. 101 . These businesses are also net users of resources (Eg. TCS.BUSINESS ANALYSIS – TATA GROUP Question Marks – They have potentials in the long term. Trent. provided the company is able to build up on its market-share (i. which remains a big? These businesses are net users of resources. and their risk profile is high (Eg.
Nelco. divest) as achieving a dominant position in these businesses is a difficult task. Given that the growth potential in the business is low. However. cash cows may also need to invest provided the industry takes an upswing (Eg. Dogs – They are a drag on the group. and the company dominates the industry ahead of competition (i. Tata Press). Groups prefer to dispose off such businesses (i.BUSINESS ANALYSIS – TATA GROUP Cash Cow – These are matured businesses. and they lack on competencies to take on competition and are basically cash traps (Eg. they are generators of resources. stability). harvest.e. Tata Pharma. 102 . Tata Tea. Indian Hotels. Tata Motors.e. Tata Chemicals).
BCG . Data may be prohibitive.LIMITATIONS It does not address the concerns of a business which is in the average category (usually the majority).e. Cash cows may actually need substantial investments to retain their market position (Eg. niche – Rolex. 103 . factors are limited. Armani). Cartier. Mercedes Benz. Certain businesses in the low market share category may be the result of a conscious strategy (i. The terminologies used are somewhat prohibitive. HUL). The model does not provide specific solutions within a particular category. neither in high or low.
GE .MATRIX Distinctive Capabilities Strong High Medium Weak Stability Industry Attractiveness Diversify (++) Intensify (+) Med Intensify(+) Stability Harvest (-) Low Stability Harvest (-) Divest (.-) 104 .
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 .
SBU – A business unit which is strategically different from another and also shares a different SIC code. Disinvestment involves selling in phases. 107 . BCG – Boston Consulting Group. Gap Analysis – It emphasizes what a firm wants to achieve. Portfolio – An organization is perceived as a portfolio of businesses. Divest – Selling a part or the entire business at one go.TERMINOLOGIES Harvest – It entails minimizing investments while trying to maximize short-run profits and cash flow with the intention to exit the business in the near future.
BUSINESS STRATEGY & COMPETITION 108 .
The principal focus is on meeting competition. Competitive advantage refers to a firms resources or activities in which it is way ahead of competition.COMPETITIVE STRATEGY A competitive strategy deals with how a firm competes in a particular business or product-market segment. The strength of a firm in a particular business usually stems from its competitive advantage. Competitive advantage is the back-bone of strategy.e. Such resources or activities should be distinctive and sustainable over time. building market-share. rent). and earning super-normal profits (i. 109 .
110 . preventing new entry and/or competition (Hax & Wilde). leveraging (Prahalad). Delta Lock In – Two dominant players co-opt to selfreinforce and create or escalate an entry barrier. Blue Ocean – Consciously moving away from overcrowded industries to uncharted territories and making competition irrelevant (Kim & Mauborgne). identifying critical success factors. Resource Based View – Obsession with competence building. involving harmonizing and integrating multiple streams of technologies. developing competitive advantage (Porter).BUSINESS STRATEGY FRAMEWORKS How to be distinctive and yet sustainable – Differentiation – Understanding of the dynamics of competition.
Reliance) or may pass it to customers to increase market-share (Eg. Ayur. Nirma. T-Series). Sources of cost advantage are varied and depends on the structure of the industry – Economies of size. backward integration. Steep experience curve effects. preferential access to raw materials. Compress project duration through crashing. The firm may retain the benefits of cost advantage by enjoying higher margins (Eg. 111 . Locational or early entry advantage.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. proprietary technology.
Successful product differentiation is often followed by premium pricing. Focus on brand loyalty. Feeling the pulse of the customer. innovation and out of the box thinking. 112 .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. Intel. undeterred attention to quality. avoiding brand dilution. Culture of experimentation. and sufficient slack. Rayban). Creativity. Sony. It selects one or more attributes that buyers perceive as important. (Eg. Means of product differentiation are peculiar to each industry.
Rolex. Maybach.PORTERS NICHE OR FOCUS Focus / Niche – It is a variant strategy of cost leadership or product differentiation targeting a specific market or buyer sub-segment with the exclusion of others (Eg. though it may not possess an overall competitive advantage. Armani). They are poorly served by mainstream players. 113 . coupled with fear of structural erosion. The target segment must have unusual needs or the delivery system catering to this segment must be unique. Mont-Blanc. Sub optimization alone may not be a source of superior performance. A focuser seeks to achieve a competitive advantage in its target segment. Cartier.
COMPETITIVE POSITIONS Competitive Advantage Cost Differentiation Product Differentiation Competitive Scope Broad Cost Leadership (Toyota) Product Differentiation (General Motors) Narrow Cost Focus (Hyundai) Differentiation Focus (Mercedes) 114 .
115 . and usually outperforms a stand alone generic strategy. Though cost leadership and differentiation are inconsistent. in a hyper competitive context the two strategies need not be mutually exclusive. Tata Nano).e. Firms focusing on a hybrid strategy typically aim at shifting the productivity frontier and recreating a new product-market segment altogether (Eg. similarly differentiation may not always lead to rising costs (i. Reducing cost does not always involve a sacrifice in differentiation. jugaad or frugal engineering).HYBRID STRATEGY A hybrid strategy is the simultaneous pursuit of cost leadership and differentiation.
stuck in the middle. unless such a player is capable of discovering a profitable segment. The positioning therefore gets – blurred. It will have a competitive disadvantage vis-à-vis a clearly positioned generic player. It is usually the result of a firm not willing to make trade offs. leading to what is called – straddling. 116 . It tries to compete through every means. but achieves none. Industry maturity will usually widen the gap.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 .
Eg. Consumer behaviour pattern unstable and evolving. 3D imaging. leading to a blurred productivity frontier and steep learning curve.EMERGING INDUSTRY Emerging Industry – An evolving industry characterized by . ending in a differential cost economics.radical environmental changes. Market segmentation not well defined. Speech recognition software's.) Excessive turbulence in the dynamics of the environment. changing customer needs. coupled with low penetration levels. Artificial intelligence). technological innovations. There is a lot of scope to define the rules of competition. Nano technology. It is characterized by – High level of technological uncertainty. (Eg. 117 . First-time buyers.
Government regulations in the form Eg. Paints. Eg. Retail and telecom. 118 . Eg. It is characterized by – Low entry barriers. Scope for players to change the rules of the game. Diverse customer needs. because of lack of economies of size and scale. Air Conditioning. IT.GROWTH / FRAGMENTED INDUSTRY Growth Industry – An industry characterized by high growth potential in the long run and where no firm has a significant market share (an edge over another). leading to clear fragmentation. Eg. Consumer durables. MRTP may also cause fragmentation. High exit barriers because of huge investment in CAPEX.
Strong entry barriers. established industry dynamics. Cartel among existing players through collusion. Firms are rule takers in the segment as productivity frontier is well defined.technological maturity. Limited scope for innovation . technological maturity. well defined consumer behavioral patterns and imperfect competition leading to near monopoly. 119 .MATURED INDUSTRY Matured Industry – An industry characterized by saturation in growth rates. distribution networks. early entry and location advantages. because of economies of size and learning curve effects. collaboration and co-option.
with little or no signs of recovery. dot-matrix printers). Exit barriers are extremely high because of limited prospective buyers.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. Typewriters. (Eg. and costly price wars. Learning abilities have been stunted and firms adverse to investment in R&D and make fresh investments. 120 . backed by corporate espionage. scooters. Nature of competition extremely high. Firms facing a declining phase are characterized by inertia and slow to react to environmental changes.
Fragmented Industry – Identify. focus more on product differentiation or even a hybrid one. Locate a defendable position. assess and overcome fragmentation. premium pricing.COMPETITIVE STRATEGIES Emerging Industry – Set benchmarks. process innovation. reengineer. or else exit the segment. strike alliances. aggressive building of distribution networks. mergers and acquisition. recreate new markets. Declining Industry – Redesign. strictly cost differentiation. branding and promotion. Matured Industry – Sophisticated cost analysis. strictly product differentiation and not standardization. 121 . regenerate. move beyond boundaries. increasing scope.
brands. and complex learning experiences in integrating and harmonizing technologies (distinctive capabilities) that play an important role in delivering competitive advantage through “causal ambiguity”. However. They are a standard in nature.RESOURCE BASED VIEW Differentiation based on cost or products saturates and ceases to exist beyond the medium term. 122 . hence very rarely confer competitive advantage as can be easily acquired or replicated. patents. positions based on resources which are unique and inimitable are far more sustainable even in the long term. Intangible – These refer to goodwill. A firms resources can be classified into – Tangible – These refer to real assets.
they are woven around technologies. There is a high degree of internal and external causal ambiguity involved in it. Capabilities can be generic (i. differentiation based on capabilities can be sustained even in the long run. Hence. Therefore firms should concentrate on developing complex resources that forms the very basis of differentiation. can be leveraged across businesses) or specific to a particular business.e. They play a very critical role in shaping competitive advantage. Typically. 123 . but not necessarily.CAPABILITIES & COPMPETENCIES These include a complex combinations of tangible and intangible resources that organizations use to convert inputs to outputs.
COMPETITIVE ADVANTAGE 124 .
and results in well springs of new business development.e.COMPETITIVE ADVANTAGE A competitive advantage is a position of superiority relative (i. not absolute) to competition. Strategy drives competitive advantage. A portfolio of competitive advantage comprises strategic advantage profile (SAP). competitive advantage subsequently becomes the back bone for a competitive strategy. 125 . It enlarges the scope of an organization. Success of a strategy critically depends on SAP. It results in a distinct differentiation advantage or a cost advantage or hybrid as well.
Identification of SAP is critical for and stretching and leveraging of resources. SAP changes from time to time. 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.STRATEGIC ADVANTAGE PROFILE (SAP) Organizations have to systematically and continuously conduct exercises to identify its SAP. In today's world of discontinuity. 126 . Most successful organizations around the world have a well balanced SAP.
VALUE CHAIN ANALYSIS A value-chain segregates a firm into strategically relevant activities to understand its composite behaviour. each of the players need to be efficient backed by sufficient coordination at the contact points (i. VC pay-offs: better product availability. Today SCM is integrated with greening the environment as CSR practices. Substantial cost reductions also follow. faster product launches. A VC is often compared with a relay team. Inventory Mgt to Logistics Mgt to Supply Chain Mgt (SCM). kaizen or internal customer). Competitive advantage arises not from an individual activity but a stream of inter-related activities. 127 . and enhanced customer tracking – higher market share.e.
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 .
– First order fit refers to simple consistency between each activity and the overall strategy. A learning organization helps create strategic fit. 129 . Operational effectiveness is not strategy. – Third order fit refers to optimization of effort.STRATEGIC FIT – THE PORTER WAY The sustainability of the value chain depends on the degree of fit between the activities. – Second order fit occurs when activities are reinforcing amongst them. Fit is important because discrete activities result in negative synergy and can also be easily copied by competitors. A high fit involving a complex chain of activities drives both competitive advantage and its sustainability.
but not necessarily. . A core competence usually has its roots in technology.CORE COMPETENCE A core competence represents the collective learning's of an organization around diverse streams of technologies. – Cannot be easily imitated or substituted. It should satisfy the following conditions – Contributes significantly to customer benefits. It forms the very basis of competitive advantage. Core competence has a high degree of external and 130 internal causal ambiguity embedded in it. These skills results in distinctive activities and processes. – Can be sustained even in the long run. – Can be leveraged across businesses.
a core competence always implies a competitive advantage.CORE COMPETENCE A competitive advantage does not necessarily imply a core competence. only global leaders possess a core competence. A competitive advantage may or may not lead to superior performance. a core competence has its roots in a set of skills. Majority of the firms have competitive advantage. a core competence usually does. 131 . a core competence is sustainable even in the long-term. A competitive advantage is sustainable in the shortmedium term. A competitive advantage manifests from a function.
In fact there are no. This is known as a zero-sum game. A game is a contest involving two or more players. Subsequent work on game theory by John Nash led him to win the Nobel prize in 1994. illustrations depicting a win-win situation. However. 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. each of whom wants to win.GAME THEORY The game theory was developed in 1944 by Oscar Morgenstern. 132 . In a game (similar to a business) one players win is always another's loss.
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.
A saddle point is a situation where both the players are facing pure strategies. Firm Y’s Strategy Use Radio +3 +1 Use Newspaper +7 -2 134 Firm X’s Strategy Saddle Point Use Radio Use Newspaper Firm X’s Pay-Off Matrix .PURE STRATEGY GAME The strategy each player follows will always be the same regardless of the other players strategy.
collaboration or cooption. It represents the classical “prisoner’s dilemma”. However.TYPES OF GAMES Simultaneous Games – This is a situation where the players have an option to choose to cooperate or not through collusion.g. This is usually through learning by “experience or observation” (i.e. Repeated Games – In this situation the players interact repeatedly with each other sub-optimizing the outcome possibilities. 135 . iteration) rather than through collusion (E. Coke Vs Pepsi). Yahoo Vs Microsoft). 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.
– Building incentives for customer loyalty.CHANGING THE RULES OF THE GAME In a situation where a player is unable to compete with the existing rules of the game may attempt to change the rules of the game altogether. . It results in a shift in the productivity frontier. In a market dominated by price-based differentiation one may attempt to change the rules of the game by/when – – Bases of differentiation dependent on clear identification of what customer wants or value. Game theory relies on the principle of rationality. but 136 players do not always behave rationally. – Making pricing more transparent.
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.
– Resource commitment from top management. – Development of capabilities & competencies. A high strategic fit (co alignment) is useful because it enables – – Appropriate and timely response. 143 . – Better strategic and operational control. internal strategic fit (strategy – dominant logic) is critical to strategy implementation. While external strategic fit (strategy – environment) is relevant for strategy formulation. – Changing the rules of the game.IMPORTANCE OF STRATEGIC FIT Strategic fit has a central role to play in strategic management. – Unlearning & learning of new skill sets.
emergent strategy vis-à-vis intended & realized). learning levels are very low. while control is very effective. learning levels are very high.e.FORMULATION Vs IMPLEMENTATION Traditionally. In such a situation. Some of the key strategic learning's exists at the contact point between the organization and its customer. effective strategies are better crafted when there is a subtle overlapping between the two (i. In such a situation. In fact. strategy formulation and implementation has been perceived to be distinct & independent. formulation & implementation can occur simultaneously. at the cost of sacrificing a lesser degree of control. 144 . According to Mintzberg.
bring about transparency. Pragmatism is the ability to make things happen. Install a system of shared beliefs and values. 145 . In contrast. transformational leaders go one step beyond – Design a well crafted and designed strategic intent of the organization. He should be an agent of change. shift from compliance to commitment. A transactional leader is usually confined to allocating tasks & responsibilities and extracting performance.ROLE OF TOP MANAGEMENT To bring about change and to implement strategies successfully. companies depend more on transformational leaders than transactional leaders.
RESOURCE ALLOCATION Resources allocation includes tangible resources (Eg. skills) also includes complex resources like capabilities and competencies. 146 .e. brands. labour. Performance Budget – SBU managers need to justify the distinctive resources in terms of the opportunity it is pursuing yields the highest possible pay-offs. land. The various methods of resource allocation includes Historical Budget – The budgets framed by HQ for a particular SBU keeping in mind past trends. patents. Intangible resources (Eg. Zero Based Budget – In this case the budget of a SBU has to be worked out right from the scratch. machines) referred to as threshold resources (i. minimum requirement).
these capabilities are sustainable even in the medium to long term. Distinctive capabilities helps in stretching and leveraging resources thereby overcoming two major constraints involved in strategy implementation – times & costs. Moreover. 147 . Due to causal ambiguity (complexity). convergence of multiple streams of technologies at the product – market level is becoming increasingly evident (Eg. Flat Screen Displays. Mobiles). Distinctive capabilities are complex set of skills woven around technologies.CAPABILITIES & COMPETENCIES Technology and business are slowly becoming in – separable. though not necessarily in the case of emerging markets.
Once the structure is in place. processes become people independent. A firm in several unrelated businesses usually employs a SBU structure. A single product or a dominant business firm usually employs a functional structure.STRATEGY & STRUCTURE It is a framework within which individual efforts are coordinated to bring synergy. An appropriate organization structure & adequate control systems are essential to implement strategies and achieve stated goals. The level of centralization and decentralization is decisive. A firm in several related businesses usually employs a divisional structure. 148 .
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. or geographical locations. Inputs . disbanded subsequently. based on skills and competencies. SBU Structure – Businesses segregated in terms of strategic dissimilarities (Eg. processes. with team members having dual line of control. Marketing.Technology. Team Structure – An informal group formed for a crisis. 149 .TYPES OF STRUCTURES Functional Structure – Activities grouped together by a common function (Eg. Output). Divisional Structure – Units grouped together in terms of products. Finance).
structures are becoming flatter and more simpler. It includes the desire for independence. Environment & People – Economic and political conditions have a major bearing on structure coupled with the attitude and aspirations of the people in the organization. leading to a tall structure.FACTORS INFLUENCING STRUCTURE Size – As an organizations size increases there is more specialization and differentiation leading to the top management moving away from operational issues and control. assuming responsibility. as span is broader. Technology – With more and more convergence of technologies in business. 150 . facing challenges & crises.
INERTIA When a firm has been operating in a certain fashion for a long time.e. Changes in top management and unlearning helps overcome inertia. Most firms undergo periods of strategic continuity rather than strategic discontinuity. Common sources of 151 inertia – complacency with past successes. irrespective whether it is from worse to good or good to worse. Inertia is a characteristic of a firm that endures status quo (i. Top managers resist change. Inertia acts as an impediment in strategy implementation. there is a tendency to continue along the same lines. co0ntinuity). .
However. To prevent deviation of fit. Since the internal and external environment is in a state of continuous flux. firms should move beyond financial performance to strategic performance as organization systems are becoming complex. strategies need to be evaluated on an ongoing basis to prevent deviations of fit. . Deviation of fit is detrimental to performance and may lead to strategic failure. certain authors propose misfit as a source of superior 152 performance.STRATEGY EVALUATION Strategy evaluation centers around assessment of strategic fit.
detecting changes in the external and internal environment and taking corrective action wherever necessary. . competitive advantages becoming disadvantages? Has the company acquired any new competency? Has the company been able to overcome the 153 environmental threats. It attempts to answer the following questions – Is the strategic intent appropriate to the changing context? Are the organizations capabilities still holding good.STRATEGY CONTROL It is concerned with trafficking a strategy as it is being implemented.
It involves assessing – strategic thrusts and milestones.STRATEGY CONTROL IMPLEMENTATION It involves steering the company towards its original growth trajectory & stated goals. It is open-ended as well as . Implementation Control – It aims at assessing whether key activities are proceeding as per schedule. However. Special Alert Control – It intends to uncover unanticipated information having critical impact 154 on strategies. checking every premise is costly as well as difficult. Premise Control – Checking the validity of the assumptions on which a strategy was based.
Performance measures are defective – What to evaluate against? How to measure the 155 construct? As a saying goes. “If you cannot . difficult to translate into practice.BARRIERS TO STRATEGY EXECUTION Vision and strategy not actionable – Utopian ideas. 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. Strategy not linked to resource allocation & capabilities – Lacking commitment of top management.
On top of that. so if one fails to pay proper attention to one of them. Large or small. this may effect all others as well.7S FRAMEWORK OF Mc KINSEY The 7-S Framework of McKinsey is a management model that describes 7 factors to organize a company in an holistic and effective way. important or not they're all interdependent. Together these factors determine the way in which a corporation operates. Managers should take into account all seven of these factors. the relative importance of each factor may vary over time and context. Today it is considered one of the most powerful tools for strategy implementation determining success or failure. 156 . to be sure of successful implementation of a strategy.
It appeared also in "In Search of Excellence" by Peters and Waterman. The 7-S model was born at a meeting of these four authors in 1982.BACKGROUND & ORIGIN The 7-S Framework was first mentioned in "The Art Of Japanese Management" by Richard Pascale and Anthony Athos in 1981. At around the same time in the US Tom Peters and Robert Waterman were exploring what made a company excellent. Since then it is known as their 7-S model and is extensively used by corporations worldwide to implement their strategies. 157 . and was taken up as a basic tool by the global management consultancy company McKinsey. They had been investigating how Japanese industry had been so successful.
formal & informal . 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. over time. Strategy – Trade-offs for the allocation of a firms scarce resources. to reach identified & stated goals. processes and routines that characterize how work should be done. Staff – Human inter-relationships. Systems – The procedures. Style – The way in which the top management influences the functioning of an organization. 158 . Skills – An organizations capabilities and competencies.
STRATEGIC FIT Strategy Structure Shared Values Systems Skills Staff Style 1st Order Fit 2nd Order Fit 3rd Order Fit 159 .
Consider the 4P’s of marketing or 3R’s of SCM. Ineffective in case of a virtual company. their Japanese counterparts focus more on the soft S’s for their early success and sustainability. A choice of an alphabet often limits the scope and skews the interpretation of a model. While the American co’s focuses on the hard S’s. because most often they are culturally embedded and often neglected. the soft S’s (skill. structure. shared values) are very malleable and comparatively more difficult to identify & influence. In contrast. 160 . systems) are comparatively easy to identify and influence.A CRITIC OF THE 7S MODEL While the hard S’s (strategy. staff. style.
Low Take Overs 161 .STRATEGY IMPLEMENTATION ROUTES Strategic Fit .High Organic Growth Strategic Alliance Joint Venture Mergers & Acquisition Strategic Fit .
The entire infra-structural facilities are set up afresh having its own gestation and break-even. SEZ’s. tax holidays. and markets. Long gestation leads to delayed market entry. soft loans. . concessions are available for green-field projects.e. the entire value chain. i. subsidized power).ORGANIC GROWTH Here a firm builds up its facilities right from the scratch and continues to do so without any external participation. It has complete control over inputs.e. Reliance Industries). technologies. green-field projects. Govt. 162 Risk of cost and time overruns. i. (Eg. (Eg.
It has limited intervention power and usually lacks holistic commitment from the alliance partner. Tata Motors & Fiat). Alliances are usually in the areas of technologies or markets (Eg. It touches upon a limited aspects of a firms value chain. Alliances are usually short-lived and disbanded once the purpose is achieved. 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.
(Eg. A comprehensive MOU is essential. Dominant logic of both the companies should be complimentary.Honda).JOINT VENTURES A joint venture involves an equivalent equity participation between two firms usually of similar strategic intent and comparable size to enter a particular market through a newly formed entity. Tata – AIG. Hero . Selecting the right partner is critical for success. Degree and extent of management control must be clearly 164 laid down. . It is a win-win situation for both the companies. leaving minimum scope of overlapping.
ITC Tribeni Tissues. Economies in scale leading to lowering of costs. Acquisition is an outright purchase of a firm assets by another independent entity (Eg. . with the individual firms ceasing to exist any more (Eg. Brooke Bond & Lipton).MERGERS & ACQUISITION It refers to the fusion of two or more firms into a single entity. Revival of a sick-unit through better management practices is a major motive behind an acquisition 165 strategy. Integrated distribution channel leads to better market penetration and overall synergy. Coca Cola – Thums Up). Integration of assets and other financial resources.
Instant access to capacities and markets. Most countries have stringent laws that prevents hostile take over. often the new firm is “left alone”. Consolidation in a fragmented industry.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. Inform SEBI / Stock Exchange after 5% stake is 166 acquired. Integration of organization structure & cultures is difficult. Make a public offer of not less than .Corus). Tata Steel . Larger geo-graphical diversity.
MANAGEMENT TOOLS IN STRATEGY 167 .
Some tools to ensure that – Benchmarking – Adopt certain best practices. Radical change is superseding incremental change. or better still create next practices Reengineering – Redesigning work processes right from the scratch.WHY MANAGEMENT TOOLS? Change is becoming pertinent in the business environment. Balanced Scorecard – Tracking strategy 3600. it is also a source of potential threat. every time. TQM – Doing the right thing the first time. The past is ceasing to be an indication of the future. Companies therefore need to ensure competitive advantages doesn’t become competitive disadvantages. Change provides enormous opportunities. 168 .
A best practice is defined as an activity performed by a company in a particular domain or function which distinguishes it from others and making them world-class. These exemplary practices involves the stakeholders of the company and helps achieve its strategic intent. Best practices centers around looking at a different way to satisfy various stakeholders. Benchmarking involves the identification, understanding and adapting of certain best practices and implementing them to enhance performance. Firms are moving towards next practices as best practices make firms look more and more homogeneous.
SOME BEST PRACTICES
Dell: Customized configuration of computers. Caterpillar: 48 hours delivery anywhere in the world. Citi Bank : Priority banking services. Maruti: Certified “true value” pre-owned cars. Microsoft: ESOP to employees. Infosys: Customized work-stations. TCS: Referencing potential new recruits. ITC: Shareholders factory visit. AmEx: Outsourcing data warehousing mining. MARG: Set-top box to study viewing patterns. Honda: CEO’s visit to dealers.
TYPES OF BENCHMARKING
Functional – Used by companies to improve a particular management activity. Eg. Motorola learnt delivery scheduling from Domino’s. Process – Improving specific key processes and operations from experiences in similar businesses. Eg. Ford adopting assembly lay-out plan of Toyota. Competitive – It involves assessing the sources of competitive advantage and imitating them. Eg. Samsung leveraging miniaturization skills of Sony. Strategic – It involves assessing business models and replicating them in a different market. Eg. Reliance replicating AT&T business model.
HOW TO BENCHMARK?
Phase 1: Planning – What to benchmark? Whom to benchmark? – Identify key performance indicators & Data source. Phase 2: Analysis – Assessment of performance gaps. – Predict future performance levels. Phase 3: Integration – Communicate findings and gain acceptance. – Establish functional goals and its implementation. Phase 4: Action – Implement and monitor progress. – Measure results against stakeholder wants and needs. – Recalibrate or outperform benchmarks.
WHOM TO BENCHMARK?
Selecting the benchmarking partner is critical to solving the problem. Firms should generally avoid selecting the industry leader, because it may not always adopt the best practices for every process or activity. Benchmarking partners may also be from different industries. Types – – Internal – It involves benchmarking against its own branches, divisions, SBU’s. Proximity to data and cooperation is taken care of automatically. – External – It involves benchmarking against firms that succeeded on account of their best practices. It may also involve benchmarking against world-class firms. Friction may arise due to presence in competing industries.
BENCHMARKING - ADVANTAGES
Finding better ways of meeting stakeholder needs. Organizational learning comes from internal as well as external sources. Establishing goals based on formal assessment of external conditions. Defining effective measure of indicators, facilitate comparison, adopt from other organizations. Ensuring a continuous learning organization. Reducing competitive disadvantage. Organizational turnaround, especially effective in case of a wide strategic drift when differentiation strategies fail to work. 174
Benchmarking is useful for bringing about operational efficiency. . Strategy is more of creating best practices rather than copying them. the more similar they end up looking. While strategy is all about differentiation and not looking alike. It can at best complement it. It does not shifts the growth 175 trajectory of the industry as a whole.e. Benchmarking merely reorients profits in the hands of few to profits in the hands in the hands of many (i. clustering). but it cannot be used as a strategic decision making tool.LIMITATIONS More and more companies benchmark.BENCHMARKING .
RE-ENGINEERING Redesigning leads to identification of superfluous activities or product features (i.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. Windows 95 to 97). clean sheet). for achieving performance improvement (E. .e.g. process mapping) and eliminating or improving them (E. DOS to Windows).e. Re-engineering attempts to radically change an organizational products or process by challenging the basic assumptions surrounding it.
REENGINEERING – KEY TENETS Ambition Focus Attitude Enabler Performance Large scale improvement by questioning basic assumptions about how work is done Micro Vs Macro Business Processes Vs Organisational Processes Starting right from the scratch Not historical More IT driven. than people driven Innovative Vs Traditional Customer centric Vs Organisational centric 177 .
Business – It looks into markets. structures. processes.e. 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. BPR). It can be of the following types – Functional – It looks into the flow of operations (i. Strategic – It looks into the process of strategic planning. products. 178 . customers and suppliers and protects the organization from the future (i.e. .REENGINEERING .LEVELS Reengineering can be successfully leveraged at all levels of an organization with varying degree of results.
However.REVERSE ENGINEERING It is a process by which a product is dismantled and analyzed in order to understand how the product was designed and manufactured. It generally acts as a threat to innovation. Indonesia). Cheaper versions of Intel chips and mother-boards manufactured in Taiwan. – Early entry advantages. 179 . learning curve advantage. While traditional manufacturing is a bottom-up approach. – Causal Ambiguity. with an intention to copy it (Eg. reverse engineering is a top-bottom approach. – High cost and time acts as a deterrent. protection can be had in the following ways – – Patenting.
Actualization – Obtaining and dismantling of the product to assess how it functions. Inaccurate assessment at this stage may lead to a failure of the entire project. Implementation – Developing of a prototype.e. 180 . cost and effort necessary for the purpose of reverse engineering. designing facilities. nano-technology).STAGES IN REVERSE ENGINEERING Awareness – Recognizing whether the product is found to be worth the time. machine tools to convert ideas into a marketable product (i. Introduction – Launching the product in the market. Usually in such cases segmentation and pricing is different from the original innovator.
Air bags. It has eight dimensions (Eg. – Durability – 1980 manufactured cars still on road. of service stations. – Aesthetics – Appeal in design.Euro IV. – Reliability – Consistency in mileage. Car) – – Performance – Mileage of 14 kms to a litre of fuel. – Perception – Customer notions.WHAT IS QUALITY? It involves the totality of a product or service in meeting certain stated or implied needs. – Conformance – Emission standards . More and more companies are moving towards meeting implied rather than stated needs. 181 . – Serviceability – Large no. – Features – Anti-lock braking systems.
TOTAL QUALITY MANAGEMENT Objective – Management of quality ensures conformance to certain pre-set standards. . TQM is a way of creating an organization culture committed to the continuous improvement of work processes – Deming. Management of quality was traditionally inspect it .fix it in nature. touching upon a limited aspect of a value chain. zero defects. which ensures good market standing. It is deeply embedded as an aspect of 182 organisational life & culture. It had little impact on improving overall productivity.
Looking at quality as an endless journey. 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). fully involved in decision-making and fairly rewarded for results. Be customer centric – Generate the concept of internal customer (Ishikawa). Empowerment – It takes place when employees are properly trained. not a final destination. Kaizen – Make continuous improvement a way of life.TQM – KEY TENETS Do it right. 183 .
TQM . 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. saving precious top management time. enabling the firm to concentrate on core activities essential to customer satisfaction. equal participation).STRATEGIES Outsourcing – It is the process of self-contracting services and operations which are routine and mundane.e. of units meet preset standards (Eg. Quality Circles – It a small group of shop-floor employees who meet periodically to take decisions regarding operational problems and crises. 6-Sigma). 184 . It is based on the principles of MBO (i.
Source: Fortune Magazine Why CEO’s fail? 185 .....BALANCED SCORE CARD Some interesting comments ... it’s bad execution. – Less than 10% of strategies effectively formulated are effectively executed. – Efficiency and effectiveness is passé..... – In the majority of failures – we estimate 70% – the real problem isn’t (bad strategy) ... strategy implementation has never been more important.
Organizations need to move from financial to strategic performance. These measures worked well when organizational systems were simple and unidirectional and more importantly the environment was static. 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. 186 . rather than effects.CONCEPTUALISATION A company’s performance depends on how it measures performance.BSC . Most managers tend to rely on traditional measures of performance having its origin in finance as they are well tried and tested. Focus more on causes.
BSC – KAPLAN & NORTON (1992) A BSC helps a manager to track and communicate the different elements of company’s strategy. 187 . The most critical element of a BSC is to measure these four dimensions. 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. because they have too many. and distinguish strategic problems from operational ones.
e. of visits or calls made % of NPA’s 188 . ageing schedule) % of key customer transactions Ranking of key customer accounts No.CUSTOMER PERSPECTIVE GOALS Products Supply Preference Relationship MEASURES Relative market share (%) % of sales from new Vs proprietary products Timely deliveries and service Customer credit analysis (i.
BUSINESS PERSPECTIVE GOALS Skills Excellence Exposure Introduction MEASURES New capabilities and competencies Implementation & gestation period Bank and supplier credit limits & PLR Unit Costs / Conversion Ratio / Defect Ratio No. of new product launches Vs competition Product pricing Vs competition 189 . of times covered in media No.
of 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. of product innovations 190 .
FINANCIAL PERSPECTIVE GOALS Survival Success Prosper Divestment MEASURES Cash flows Growth in Sales and Profits EPS. Return on Investment Market Capitalization / PE ratio 191 .
STRATEGY MAPPING 192 .
BSC .IMPLEMENTATION 2 Translate strategy into operational terms 1 Mobilize change through effective leadership 5 STRATEGY Make strategy a continual process 3 Align the organization to the strategy 4 Make strategy everyone’s job 193 .
Modern managers should be poised to ask the right questions. Seek excellence. .e. sharing of vision). doing right things instead of doing things right).what they don’t know. 194 performance will automatically follow.e. Focus on cause not effects. they don’t know .ADVANTAGES Most often top managers face information overload. The BSC brings together the different elements of a company’s strategy at a glance. It helps translating strategy into practice (i. As a result. Shift from control to strategy (i.BSC .
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.Michael E. not only thrives. but also sustains it. Porter 196 . .
CORPORATE RESTRUCTURING 197 .
“every organization must be prepared to abandon everything it does. 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.. from survival of the fittest . firms use restructuring strategies. As Peter Drucker pointed out.. Strategic variety may be caused by changes in the as external well as internal environment. Radical change brings about strategic variety.. Tata Group). to survival of the most adaptable...” 198 . Strategic variety brings paradigm shift. To adapt to the changing environment.
Company’s should go beyond just asking what he expects. Core Business – Company’s should introspect – What business are we in? Business evolved out of opportunism or myopia should be divested. etc). Walkman.e.e. downsizing or rightsizing). Structural Changes – Conventional hierarchical structures should be disbanded in favour of more 199 flexible ones (i.RESTRUCTURING – BASIC TENETS Customer Focus – Restructuring ideally begins and ends with the customer. they should strive to provide unimaginable value ahead of its time (Eg. ATM. . Instead. Internal customers should also not be neglected. and dividing the core businesses into SBU’s (i. Fax. downscoping).
the Tatas were considered a benevolent and charitable organization... Ratan Tata now drives the point the group means business.. It is created and institutionalized by the top management..) Reliance dismantled their industrial embassies .. Restructuring also requires cultural reorientation...) The Aditya Birla group typically relied on the “marwari” community for key management positions . 200 . Kumar Birla today is more dependent on professionals.. . started focusing on their capabilities....RESTRUCTURING – BASIC TENETS Cultural Changes – A culture represents the values and beliefs of the people about the organization.. During the times of JRD.
Communicating to the media about organization efforts to deliver quality products. Honda’s ad says.” 201 . Getting feedback & addressing customer complaints. “ … one reason our customers are satisfied is that we aren’t. Use the reach of networking technologies.MOVING CLOSER TO THE CUSTOMER As companies evolve. Publicizing welfare projects to demonstrate CSR. Restructuring provides a platform to close this gap. Carry out PR campaigns. Organizing customer and supplier meets. they tend to move away from the customer.
it may be smooth (Eg. 202 . Further. Further spin-off can be classified as split-off and split-up. Asset Swaps – It entails divesting and acquisition simultaneously by two companies.ASSET RESTRUCTURING Asset Restructuring – The asset composition of a firm undergoes a major change. It may include brands as well. horizontal. or conglo-merate. Hive Off – It involves siphoning of assets under control. including its intangibles – Mergers – It may be vertical. Glaxo – Heinz). spin-off and equity carve. where the difference in valuation is settled off through cash or equity (Eg. Tata – Corus) or hostile (Eg. Mittal – Arcelor) and can take various forms. It can have two forms.
203 . – Split-Up – In a split-up. Tata Industries selling 20% stake to Jardine Matheson). Equity Carve – It involves selling a minority stake to a third party while retaining control (Eg. Most of these practices are not in consonance with Indian laws. Reliance Ent). the entire parent company loses its identity after being split into a number of subsidiaries.HIVE OFF Spin-Off – A spin off is the creation of a new entity. the existing shareholders receive equity in the subsidiary in exchange for the stocks of the parent company. – Split-Off – In a split-off. in which the equity is allotted amongst the existing shareholders on a pro-rata basis (Eg.
strategic misfit. – Poor performance.DIVESTITURE It involves the sale of a brand or a division of a company to a third party. Parle sold its Thums Up brand to Coke for $40 million apprehending fierce competition. In 1995. A complete sell-out is known as divestment (TOMCO). In 2005. L&T sold its cements division to Aditya Birla group. but retained its engineering division. for a specified market or in general with full management control. repay long-term debts. Selling out in phases is called disinvestment (IPCL). Generic motives include – – Raise working capital. 204 .
The internal & external liability composition undergoes a major change – LBO – Acquiring control over a substantially larger company through borrowed funds (Eg. Wipro). It provides greater leverage as well as management control. 205 . Conversion – Replacing debt with equity or vice-versa or costlier with cheaper debt or cross currency debt.CAPITAL RESTRUCTURING Capital Restructuring .3 billion. involving 608 pence per share). Tatas take-over of Corus for US $11. Share Buyback – It is a process of cancellation of shares out of free reserves to the extent of 25% of paid-up capital (Eg.
120 cr Tata AIG – Rs. 250 cr Tata Tetley – Rs.Rs. 1700 cr Trent – Rs. 256 cr ACC – Rs. 950 cr Merind . 1890 cr CMC – Rs. 1439 cr 206 Tata Timken – Rs 120 cr Tata Telecom – Rs. 42 cr Voltas . 150 cr VSNL – Rs. 1860 cr .BUSINESS RESTRUCTURING – TATAS Divestments Lakme – Rs. 230 cr Diversifications Tata Motors – Rs. 1170 cr Goodlass Nerolac – Rs. 99 cr Tata Power – Rs.Rs.
Downscoping – It involves reducing the business and/or geographical scope of a firm (Aditya Birla group). of operating units. 207 . It can be carried out in the following ways – Downsizing – It is a systematic one-time reduction in the no. Turnaround is the primary motive. keeping the composition of business intact (Jet Airways).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). usually as a result external turbulence. of a firm’s employees and sometimes in the no. Survival is the primary motive.
STRATEGIC CHANGE One of the most difficult components of organization restructuring is the mindset of the top management represented through its dominant logic and its shared values reflected in cultural orientation. The dominant logic represents the perceptions and biases (i. 208 . as strategies are based on such beliefs and biases.e. Strategy change is unviable without a preceding change in its dominant logics. inertia). Dominant logic becomes deep-rooted in organizational contexts depending on the period it is in place (tenure of the CEO). thumb rules) of the top management.e. The longer the period. the more difficult it becomes to uproot the paradigm (i.
e. the factor that stifled change & performance was – culture. 209 . Companies achieve real agility only when people at every level rise above the ordinary to face the challenges – revitalization or transformation. 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.FORCES AGAINST STRATEGIC CHANGE The problem with strategic change is that the whole burden typically rests on few people (i. In most organizations. 20% of the people carry out 80% of the changes).
never take no for an answer. Harness setbacks. Promote inventive accountability. Manage from the future. Understand and deliver the quid pro quo. it is not about winning but about learning. The best way is to alter the institutional point of view. Encourage uncompromising straight talk. Questioning every basic action of the organization.SUCCESSFUL TRANSFORMATION Build an intricate understanding of the business model at all levels of the organization. 210 . Create relentless discomfort with the status quo. process ownership.
It involves identifying – Aspects of current culture which needs to be reinforced. also known as cultural-web. by identifying forces for and against change. Identify and implement facilitators of cultural change. that can be both enablers and blockages to change and restructuring. Culture and style of management are two main impediments in force-field analysis. Aspects of current culture which needs to be overcome.FORCE-FIELD ANALYSIS A force-field analysis provides an initial overview of change problems that needs to tackled. It involves diagnosing a change situation – systems & structures. 211 .
Term Loss of human capital Lower performance Higher performance Capital .RESTRUCTURING .OUTCOMES Alternatives Organizational Short .Term Reduced labour costs Reduced debt costs Emphasis on strategic control Business High debt costs Higher risk 212 Long .
NUMERATOR & DENOMINATOR MGT Most firms across emerging markets undergo strategic discontinuity and as a result are forced to restructure their businesses. While the first strategy produces results instantaneously. down-scoping or asset stripping. focuses on reengineering. In order to put back the company on the right track they are resort to – Denominator – It assumes that turnover cannot be increased. Numerator – It assumes that turnover is not a barrier or constraint. reverse engineering and regenerating. the second one is a more viable strategy and sustainable option in the long run. hence go in for downsizing. 213 .
TURNAROUND MANAGEMENT 214 .
... January 1997).WHY TURN AROUND MANAGEMENT? Some interesting insights . still exist as on 2005.. 215 (Govindarajan and Trimble. . and that the thirty-two of the country’s largest business groups in 1969 are no longer among the top fifty today. – Less than 10% of the Fortune 500 companies as first published in 1955... Source: Why do firms atrophy? (Business Today. – Only seven of the first fifty Indian business groups in 1947 were even in business by the turn of this century.
While content focuses on endogenous and exogenous variables. A category of underlying principles and concepts.e. Both content (what) and process (how) are equally important for a successful turnaround. As a sequence of events describing how things change and why they change (i. and achieves sustainable performance recovery.TURN AROUND MANAGEMENT A turnaround is said to occur when a firm perseveres through an existence threatening performance decline. 216 . and capabilities. ends the threat with a combination of strategies. systems. skills. process focuses on – A logic to explain a causal relationship between intervening variables. Stage Theory).
especially in key positions. Some indicators Continuous cash flow crises as a result of dwindling market-share and profits. unavailability or radical lowering of substitute costs or technological obsolescence. Substantial shifts in consumer preferences. 217 .TURNAROUND INDICATORS Most firms atrophy simply because they fail to diagnose the indicators that acts as threat to organizational existence. suppliers and bankers. Low stakeholder confidence. Rising input costs. Low employee morale leading to high employee attrition at all levels. leading to lack of acceptability from distributors and customers. Uncompetitive products or services.
Product redesigning or reengineering. focus on power brands. Extending work hours. liquidating dead assets. be more customer centric. Hence.TURNAROUND ILLUSION The first step to a successful turnaround is the basic acceptance of the fact that …. Common approaches adopted Change in key positions. Revamp product portfolio. which most top managers fail to appreciate. 218 . consider extension. Emphasis on advertising and market penetration. prune work-force. based on elasticity. Recalibrate prices. “all is not well”.. they adopt surface level measures (disprin popping) which most often fail.
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. 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. It has its origin in “resource led stretch” and subscribes to the view that a firm has substantial power to override the context. primarily dwindling resources and capabilities are responsible for decline. R-Extinction – It suggests that organization factors.DECLINE Decline is the first stage in the turnaround process. 220 .
the response should be operational. If the decline stems from structural shifts. asset reduction. the response should be strategic. new market initiatives. Operating responses typically focuses on the way the firm conducts business and involves tactics geared towards – cost cutting and process redesigning (BPR). 221 . Strategic responses focus on changing or adjusting the business the firm is engaged in through long term moves such as – integration.RESPONSE INITIATION Turnaround responses are typically categorized as operating or strategic. The response must match the cause of the decline. diversification. If the underlying cause is internal efficiency.
Similarly new market initiatives is feasible only for multi-product firms. Contour – It is easier to reverse decline in the earlier stages through operational measures. Scope – A diversified conglomerate may acquire a distressed business to turn it around and gain valuable synergies.RESPONSE DICHOTOMY The response initiation is somewhat dichotomous and cannot be universally applicable. which may be unavailable to a focused firm. Untangling this question brings into focus three events – Domain – Many of the strategic cures have limited applicability for an affiliated firm. when decline deepens shifts in strategic position becomes essential. 222 .
e.7 years with a range of (4-16) years. many a times early signs of recovery fades out. participative management (i.e. role model. The top management has a key role to play through empowerment. confidence building measures. 223 . consensus). Sustenance is the key factor in this stage. transparency. However. Effective levers of transition. substantial amount of time usually passes before results begin to show (i. Support from all the stake holders through resource commitment.TRANSITION Transition usually reflects the first signs of recovery. However. lead – lag). Empirical studies show that average time is 7.
Cut off points must be unequivocal. Supplier and banker confidence. Share price indications and media coverage. Failure is an indication that initial momentum was not sustainable characterized by irreversibility. Revival of key customers and new product launches. it should adopt a holistic approach.OUTCOME Outcome is said to be successful when a firm breaches the equilibrium performance level. Regaining lost market share and distributor confidence. Instead of focusing on financial parameters alone. 224 . Commanding a premium in the market.
COOPERATIVE STRATEGIES & ALLIANCES 225 .
COOPERATIVE STRATEGIES Cooperative strategies are a logical and timely response to changes in business dynamics. 226 . and globalization . It can assume any of the following forms – franchising. strategic alliance. technology. licensing. or joint venture. the commitment and the involvement between the firms increases manifold. In the cooperative strategy continuum as firms move up the value order. consortia. supply-chain partnership. More and more companies worldwide are moving away from competition to co-option to leverage their resources and enhance bargaining power. Any cooperative strategy maybe between firms within the same country or cross border as well.
owners of the brand Monginis allows its franchisees to sell its confectionary products. 227 . Titan Inds. Branding is critical to franchising. owners of the brand Tanishq allows its franchisees to sell its jewellery products.FRANCHISING Franchising – It is a contractual agreement between two legally independent firms whereby the franchiser grants the right to the franchisee to sell the franchisor’s product or service or do business under its brand-name in a given location for a specified period of time for a consideration. It is an effective strategy to penetrate markets in a shortest possible time at a minimum cost. Switz Foods.
as in Tata Indica. Become a systems integrator (CKD). Different levels of licensing Manufacturing without embracing any technology (CBU). refine processes and adopt necessary technologies (SKD).LICENSING Licensing – It is a contractual agreement between two legally independent firms whereby the licensor grants the right to the licensee to manufacture the licensor’s product and do business under its brand-name in a given location for a specified period of time for a consideration. HM manufacturing GM range of cars in India with a buy-back arrangement is a perfect example of CBU. Develop a product through its crude stage. 228 .
Coke – Pepsi). Airbus – Boeing). 229 .CONSORTIA Consortia – They are defined as large inter-locking relationships & cross holdings between businesses in a similar industry. Cross Holdings – A maze of equity holdings through centralised control to ensure earnings stability & threshold resources for critical mass (Eg. Tata. It can be of the following types – Multipartner – Intends to share an underlying technology or asset. enabling them to increase prices (Eg. Hyundai). Collusion – Few firms in a matured industry collude to reduce industry output below the equilibrium level. leverage upon size to preempt competition by escalating entry barriers (Eg.
otherwise it 230 becomes routine outsourcing. It usually provides a platform to sort out differences between conceptualization and implementation to suit local market needs. . Companies in different industries with different but complimentary skills. Continuous sharing of knowledge is critical to the success of a supply chain partnership.SUPPLY CHAIN PARTNERSHIP It is a pro-active & collaborative arrangement between supplier and customer aimed at achieving better control over the value chain (Eg. link their capabilities to create value for end users. Tata Motors – IDEA).
231 . enter newer markets. design next generation products. Tata Motors – Fiat. preempt competition. effective R&D management. Despite their popularity (50-60)% of the alliances fail to accomplish their stated objectives. instead of hurrying into a relationship.learning organization. Reliance – Du Pont). enhance credibility. Firm’s should undertake a long courtship with potential partners. Generic motives involved are . Partner selection is one of the critical success factors. to gain knowledge and to obtain access to new markets (Eg.STRATEGIC ALLIANCE It is an short to medium term understanding between two or more firms to share knowledge and risk.
STRATEGIC ALLIANCE . Alliances of the Weak – An alliance is entered into to preempt competition (Eg. Bootstrap – An alliance between a weak and a strong company with an intention to acquire it. Whirlpool – Tide. Complementary Equals – Two firms mutually promoting each others complimentary products (Eg. Coke – Pepsi). Backward – An alliance (quasi or tapered) with a supplier of critical components seeking commitment (Eg.TYPES Collusion – Tacit top management understanding to neutralize price wars (Eg. Airbus – Boeing). Maruti). 232 . Bajaj – Castrol).
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. Differences in level of economic development can produce differences in alliances motives. – Japan Vs US). Firms from developed markets seek access to markets and firms from emerging markets seeking access to technology. Too much stress on financials & structure be avoided. Cultural orientation has been found to have a profound effect on top management’s strategic orientation (Eg. 233 .
Partner’s ability to acquire fresh skills. Intangible Assets – Move beyond the financials of the firm. 234 . including ability to provide quality products and services.PARTNER CHARACTERISTICS Complimentarity of Capabilities – The degree to which partners resources can be used in conjunction. Willingness to share knowledge and skills. Unique Resources – Abilities or skills which cannot be easily duplicated. Managerial capabilities. Experience related to previous alliances. Dominant Logic’s – Similarity in beliefs & biases.
understanding the chemistry. 235 . degree of compatibility. vows to include commitment to expand the relationship. Selection & Courtship – It involves self analyzing. partners should nurture it.MANAGING ALLIANCES Alliances are more than just a deal. the value chain. differences not anticipated earlier. Getting Engaged – It should incorporate a specific joint activity. Learning to collaborate – strategic. Setting up the housekeeping. incorporating clear signs of continuing independence for all partners. operational & cultural integration. Changing within. instead of focusing controlling the relationship.
a joint venture is a selection among modes by which two or more firms can transact. .e. It aims at creating new value (i. There are substantial linkages in the value-chain. It lasts till the vision is reached. separation is very 236 bitter. combining parts). synergy) rather than mere exchange (i.e. whilst the partners continue to operate independently. Conceptually.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.
though more profitable alternative to other choices. Strategic Behaviour – Firms may override transaction costs.JOINT VENTURE – GENERIC MOTIVES Transaction Cost – The situational characteristics best suited for a JV are high performance uncertainty. 237 . in addition to a high degree of asset specificity. 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. The market fails as sellers are unwilling to reveal their technology and buyers are unwilling to purchase in the absence of inspection.
Eli Lily – Ranbaxy. Essar – Hutch (Vodafone). – Eg. Yamaha – Escorts. – Eg. Renault – Nissan (Minivans – Cars). Learning new technologies. Define future industry standards.OTHER MOTIVES Entry into newer markets. TVS – Suzuki (4-Stroke Engines) Fill gaps in existing product lines. Sharing of resources. Maruti – Suzuki. – Eg. Endorsement from government authorities. – Eg. Daimler – Chrysler (Premium Cars) 238 . – Eg. – Eg.
PAL – Fiat If the cost of continuing exceeds the exit costs? – Eg. Century . – Eg. Risk of over dependence. Tata – Aditya Birla in Idea Cellular 239 . – Godrej – Procter & Gamble. LML – Piaggio Differences in size and resource base.Enka. – Eg.RISKS INVOLVED Incompatibility – Differences in cultural background.e. Modi – Telstra What after exit (parenting disadvantage)? – Eg. technology) drain. Risk of brain (i. – Maruti – Suzuki.
PRE-REQUISITES FOR SUCCESS Commitment – Mutual trust. Costs – Other modes of transaction becomes cheaper. Partner – Avoid duplication of skills and capabilities. Incompatibility – Performance expectations. Culture – Reconcile gaps. Equality – Lack of dominance. 240 . Focus – Avoid strategic myopia. time sharing. Objectives – Shared vision. Flexibility – Sufficient space to breathe and adjust. respect. Inertia – Differences in age and evolution patterns. Agreement – Clarity on operational control.
MERGERS & ACQUISITION 241 .
Mittal Arcelor).MERGERS & ACQUISITION A merger is a mutually beneficial consent between two or more firms (usually of similar size) to form a newly evolved entity by absolving their individual entities to preempt competition (Eg. reverses are also taking place through LBO) with a view to acquire conglomerate power and induce synergy (Eg. SEBI Takeover Code. 242 . An acquisition is said be smooth if it is with the consent of the management (Eg. 2002). Most countries have stringent laws that prevents hostile takeovers (Eg. however.Daichi) and hostile if it is without the consent of the management (Eg. The larger objective is to leverage on size. HLL – Tomco). Ranbaxy . An acquisition is the purchase of a firm by a firm (of larger size. Brooke Bond – Lipton).
Acquirer – Someone (individual or firm) who picks up an atleast 5% stake without mandatory disclosure having an intention to wrest management control (i. 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.SEBI TAKEOVER CODE. Control – A special resolution of 75% of the share 243 holders approving the change of guard.e. Hike – An acquirer who has already picked up a 5% has to make a mandatory disclosure for every additional 1% stake that it acquires. . creeping acquisition).
244 .e. credentials or track record is at stake. 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. Gujarat Ambuja – ACC). asset stripping). Grasim – L&T Cement.SEBI TAKEOVER CODE. and/or does not enjoy the confidence of the different stake holders. the SEBI can intervene and block share transfers if: the acquirer has ulterior motives (i. 2002 Pricing – Acquirers will have to offer minority shareholders (at least 20%) the past 26 weeks or past 2 weeks average price. SEBI – In case of a hostile take over. whichever is higher as an exit route (Eg.
Vertical – It involves complimentarily (partially related) in terms of supply of inputs or marketing activities (Eg. 245 . Horizontal – It involves integration of two highly related businesses (Eg. Godrej. usually opportunistic (Eg. The type of merger is depends on the degree of relatedness (strategic) between the two businesses. Reliance).TYPES OF MERGERS A business is an activity that involves procuring of desired inputs to transform it to an output by using appropriate technologies and thereby creating value for its stake holders in the process. Conglomerate – It involves integration of two distinctly unrelated businesses.Kelvinator). Electrolux . ITC).
quick access). ICICI –ITC Classic). Acquiring assets or capabilities (Eg. ITC Bhadrachalam). Tata Steel – Corus). Ulterior motives – (Eg. Economies of size.e. Access to newer segments (Eg. Overcoming entry barriers (Eg.MOTIVES Increased market / conglomerate power. Coinsurance effect – Higher debt raising capability. Tax benefits (Eg. scale and scope. Reduction in risk. Avoiding risk of new product development. Global image (Eg.MERGERS & ACQUISITION . Asset Stripping – Shaw Wallace). Reduced gestation (i. 246 . Ranbaxy – Crosslands). Mittal – Arcelor).
Managing over-diversification. Overvaluation of buying firms (Eg. their initial offer was around 420 pence/share. neglecting core business. Tata – Corus). Managing size. Top management overtly focused on due diligence exercise and negotiations.MERGERS & ACQUISITIONS PITFALLS Cultural differences (Eg. When Tata Steel started negotiations with Corus. Overvaluation is often as a result of an ego drive and substantially affects future returns. Inability to achieve synergy. Merging of organisational structures. 247 . while the ultimate acquisition was made at 607 pence/share).
Maturity – A larger firm acquires a smaller firm with an objective to achieve economies of scale and experience curve effects (Eg. with an objective to reinforce its growth trajectory or to take on the might of a comparatively larger player (Eg. Brooke Bond – Lipton). Kingfisher – Air Deccan). 248 . Tata Steel – Corus).MERGER TYPE & PLC Introduction – A larger firm may acquire a newly formed entity with an objective to preempt new competition or acquire its license (Eg. Decline – Horizontal mergers are undertaken to ensure survival. vertical to save transactions costs. Growth – This stage may witness parallel merger of two firms of similar size.
Strong differences may stifle plans and its execution. An acquisition just for the sake of it or reputation yields very little value in the long term. 249 .FRAMEWORK Positive contribution to the acquired company. A common shared vision. Blanket promotions across entities and confidence building exercises needs to be practiced.INTERNATIONAL M&A . Immediate attempts to super impose structure and culture may cause bottle necks. A concern of respect and trust for the business of the acquired company. active top management intervention in phases. Left alone syndrome.
Redefine responsibilities and authority. They can carry the message to the various stake holders. promptly.INTEGRATION . Determine business strategy. Decide upon management control systems. Shift attention from business portfolio to people and processes. Integrating work processes. It will enable focus on customers and key people. . Decide on the new hierarchy.BLUEPRINT Take the media into confidence. 250 Do not ignore the “people factor”.
over valuation can become a curse. – Unstated reasons – Personal self interest and hubris. – Market for corporate control.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. Financial motives – Undervaluation relative to true value.e.M&A . – Synergy – Potential value gain from combining operations (i. The process takes (6-12) months. operational & financial). While under valuation may be a significant opportunity. 251 .
when the “fit” between the two entities is very poor. 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. – Conglomerate Synergy – Gains come when one firm complements the resources or capabilities of another (Eg. 252 . Synergy can be negative as well. – Vertical Synergy – Gains come from controlling the supplychain and savings in transaction costs. Innovative product – Good distribution network). Sources of operational synergy – Horizontal Synergy – Gains come from economies of scale which reduces costs.
but availed after being merged with a profitable firm (Eg. and without paying take-over premiums. Tax Benefits – Tax benefits may accrue from tax entitlements and depreciation benefits unutilized by a loss making firm. shareholders can accomplish the same at a much lesser cost. Hotmail). 253 . ITC – Bhadrachalam Paper). Synergy comes from projects which would not have been undertaken if the two firms stayed apart (Eg. However. Cash Slack – It reduces asymmetry between cash starved firms with deserving projects and cash cows with no investment opportunities.VALUING FINANCIAL SYNERGY Diversification – Reduce variability in earnings by diversifying into unrelated industries.
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. This will induce higher debt capacity. – Coupon rates may also be negotiated at lower rates. – 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. the cash flow the merged firm will be less variable than the individual firms. 254 .VALUING FINANCIAL SYNERGY Co-Insurance Effect – If the cash flows of the two firms are less than perfectly correlated. higher leverage.
The value of wrestling control is inversely proportional to the perceived quality of that management. 255 . – – Value of Control = Value of firm after restructuring Value of firm before restructuring. The value of control can be substantial for firms that are operating well below optimal value. While value of corporate control is negligible for firms that are operating close to their optimal value. Assessment of perceived quality is critical. since a restructuring can lead to significant increase in value.VALUING CORPORATE CONTROL Premium of M&A are often justified to control the management of the firm.
Confidence of investment bankers and the international financial community is essential. sometimes in combination with the assets of the acquiring company. debt component) at the time of buyout and rapid changes in capital structure over time. 256 . It is a very costly and risky proposition. 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.e. LBO facilitates a relatively smaller firm to bid for a comparatively larger firm in the bid for management control.
However.TO GO PUBLIC OR NOT? However. 257 . the advantages of going public includes . – The need to satisfy analysts and shareholders. off-late many publicly traded firms have gone private keeping in mind the following – – The fear of LBO. liquidity. A research study showed that 30% of the publicly listed firms reported above average returns after going private. The increased benefit showed in the following way – reduced costs and increased revenue. on-going valuation. – Increased information needs.access to financial markets. – Separation of ownership from management.
– Managers cannot be trusted to invest free cash flows wisely. 258 .e. – It is a temporary phenomenon.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). – Debts repaid off from increased value after successful restructuring and wresting management control. – Cash trapped company unable to utilize opportunities. which disappears once assets are liquidated and significant portion of debt is paid off. co-insurance effect). – Cost of debt coming down (i.
– Increase equity valuation. Any discounting has to reflect these changing cost of capital. 259 . initial rise in leverage is anticipated. Lack of sufficient cash flows to repay costly debts resulting in a possible debt trap.EFFECT OF HIGH LEVERAGE Increases the riskiness of dividend flows to shareholders by increasing the interest cost to debt holders. Therefore. leverage is expected to decrease over time. As the firm liquidates / pledges assets and pays off debt. A LBO has to pass two tests to be viable – – Restructuring to pay-off increased debt.
– Prevents dilution of equity. – Facilitates better valuation and forthcoming offerings. 260 . shell company) by a private company. – Tax shelter. small in size but having a promising business. or costly. – Automatic listing in major exchanges. allowing the private company to bypass the usually lengthy and complex process of going public. which has discontinued its operations (i.REVERSE MERGER Reverse Merger – The acquisition of a public company.e. Objectives – – Traditional route of filing prospectus and undergoing an IPO is costly. time-barred.
takeover failures have only initial negative effects on stock prices. – Merger announcements reported 20% excess returns.EFFECT OF TAKE-OVER ANNOUNCEMENT The shareholders of target firms are the clear winners. Initial anomaly in stock prices usually normalizes over a period of time (6-12) months. However. Most target firms are taken over within (6090) days. Excess returns also vary across time periods. 261 . and 35% during bullish periods. During bearish periods excess returns were 19%. – Takeover announcements reported 30% excess returns.
and Netter. – Most studies reported insignificant excess returns around take-over offers or merger announcements. Brickley.EFFECT OF TAKE-OVER ANNOUNCEMENT The effect of take-over announcement on bidder firm’s stock prices are not clear cut. – However. and Kim. 1983. in the event of take-over failure negative returns to the extent of 5% on bidder firm stock prices is reflected. Bradley. over time. 1988 . 262 Jarrel. Desai. – However. 1983. as stock markets become more and more perfect such anomalies would reduce Source: Jensen and Ruback.
Poison Pill – An offer to existing shareholders to buy shares at a substantial discount to increase their voting rights (Eg. Asset Stripping – The targeted company hives off its key assets to another subsidiary. so that nothing is left for the raider to strip off. 263 . Rights). 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.
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. Gray Knight – The target company takes the help of friendly company to buy the shares of the raiding company. Shapoorji Pallonji). 264 .DEFENSIVE STRATEGIES White Knight – It is the placing of stocks to a cash rich investor and bargaining for protection in return. thus thwarting the raider company’s attention. East India Hotels – Reliance Industries – ITC). But often the White Knight turns a betrayer himself (Eg.
COMPETING FOR THE FUTURE 265 .
What went wrong???? What were they doing with the present? What were they pre-occupied with? 266 . The reverse was true for the companies overpowering. British Air overpowering Pan Am. were spending 99% of their precious time dealing with present. Hitachi overpowering Westinghouse. Most companies were too preoccupied with the present than the future? 99% of the companies overpowered. Honda overpowering GM.GETTING OFF THE TREADMILL Canon overpowering Xerox. Wal-Mart overpowering Sears. Honda overpowering Volkswagen. Compaq overpowering IBM. Nokia overpowering Motorola.
downsizing). declining margins. decluttering. 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. falling market share). Thus efficiency was grievously hurt. Not knowing when to stop. most often they ended up cutting corporate muscle as well and became anorexic. 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 .
S. top managers believed that quality will be a source of competitive advantage of the future. On the contrary only 20% of Japanese managers believed that quality will be a source of competitive advantage of the future. incrementalism or nominal innovation has almost reached a plateau. ensuring only survival of the present. 268 . The future is not about catching up with competition.THE PRESENT OF COMPETITION Beyond Reengineering – Numerator based managers (innovation) at least offers some hope. However. but forging ahead in competition. but not of the future. A poll in circa 2000 revealed that 80% of the U.
269 . don’t predict. aspirations and resources. reinvent its industry. they are not enough to get a company to the future. Companies need to fundamentally reconcieve itself. Transform the industry. Empower from bottom to top. It involves Dream about the company’s future. better. demographics and lifestyles. Creating the future requires industry foresight. Create a potential gap. It is based on deep insights into trends in technology. as important as these may be.THE FUTURE OF COMPETITION Regenerating – Leaner. not the other way. not just the organization. and regenerate its strategies (breaking its – managerial frames). faster.
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 .
Successful companies have a complete grip over the industry. Change in at least one fundamental way the rules of engagement in an industry. It is about deliberately creating a strategic misfit. Create entirely new industries (i.e. It drives a hunger and a passion to transform. by converging technologies complex. hence do not fall sick in the first place. 271 . Redraw the boundaries between industries.ABOUT THE TRANSFORMATION The future does not belong to those who take the industry for granted. they do not need to restructure. Therefore. blue oceans).
the revolution must start at the bottom and spread in all directions of the organization. More importantly. A revolution that is thrust upon from the top seldom sustains. The middle management plays a strong moderating role. Most successful revolutions (Gandhi to Mandela) rose from the dispossessed.ABOUT THE EMPOWERMENT Bring about a revolution (a paradigm shift) in the organization. Transformational leaders merely lead the way. Such a process is called institutionalization (from people centric to organisational centric). 272 .
South West Airlines – LCC. 273 .THE FUTURE OF STRATEGY A company must get to the future not only first but also for less. What does it take to get to the future first? Understanding how competition for the future is different. Apply the 40 – 30 – 20 principle. Companies need to strategize (think ahead of times). without taking undue risk. A process for finding and gaining insight into tomorrows opportunities (Eg. It requires a lot of common sense and a little bit of out of the box thinking. Toshiba – LCD. Apple – iphone). Get to the future first. An ability to energize the company.
What distinguishes a leader from a laggard. The farther one can see in this endless space. As there is no one future. is the ability to imagine in a different way what the future could be. Companies of the future will be not based so much on the strength of their resources.HOW DOES THE FUTURE LOOK LIKE? There is no rule which says that for every leader there will be a follower. each point in space represents a unique business opportunity. greatness from mediocrity. as on their aspirations. but hundreds. We are in the midst of a 3600 vacuum. the farther it will be away from competition. 274 .
THE EMERGING STRATEGY PARADIGM Not Only Reengineering Processes But Also Regenerating Strategy The Competitive Challenge Organizational Transformation Industry Transformation Competing for Market Share Competing for Opportunity Share Finding the Future Strategy as Learning Strategy as Positioning Strategy as Engineering Strategy as Unlearning Strategy as Dream Strategy as Architecture 275 .
THE EMERGING STRATEGY PARADIGM Not Only But Also Mobilising for the Future Strategic Fit Resource Allocation Strategic Misfit Resource Stretch & Leverage Getting to the Future First Existing Industry Structure Product Leadership Single Entity Product Hits & Timing Future Industry Structure Competency Leadership Dominant Coalitions / Co-option Market Learning & Preemption 276 .
LEARNING TO FORGET P1: The degree of learning in current period is directly proportional to the degree of unlearning in the previous period. Degree of Learning Unlearning Curve P2: Unlearning in previous period does not necessarily ensure learning in the current period. Learning Curve t1 t2 t3 Time t4 t5 277 .
Leverage – They are the gateways to future markets. It represents the collective learning's of an organization centering around diverse streams of technologies. Inimitable & Insubstitutable – A high degree causal ambiguity between these skills yield sustainable competitive advantage.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. 278 . 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.
Toshiba – flat screen displays. Nike – designing. it gets more refined and valuable through use. Wal-Mart – logistics. Canon – imaging. Toyota – lean manufacturing. Intel – nano-electronics. A core competency cannot be outsourced. Core competencies are the roots of the organization. 279 . leaders have one. Although a core competence may lose value over time. SKF – antifriction and precision. Coca Cola – brand. it is deeply embedded in the heart of the organization. at the most three to four. Honda – engines.MORE ABOUT CORE COMPETENCE Sony – miniaturization. Most companies around the world do not possess one.
ROOTS OF COMPETITIVENESS End Products 1 2 3 4 5 6 7 8 9 10 Core Businesses Core Business 1 Core Business 2 Core Business 3 Core Business 4 Core Product 2 Core Products Core Competencies Core Product 1 Competence 1 Competence 2 Competence 3 Competence 4 280 .
RESOURCE STRETCH & LEVERAGE
Initial resource position is a very poor indicator of future performance. It leads to atrophy and stagnation. Successful companies consciously create a potential gap between aspirations and resources. Resource crunch is a common factor among firms that faces a wealthy rival, and outperforms them. Leveraging what a company already has, rather than allocating it is a more creative response to scarcity. – By concentrating existing resources. – By accumulating existing resources. – By complementing existing resources. – By conserving existing resources. – By recovering existing resources.
Concentrating – It involves effectively directing portfolio of resources on key strategic goals in which individual efforts converge over time. It is a balance between individual mediocrity and collective brilliance. It is achieved through – Converging – Redirecting multiple diverging (i.e. fragmented) short term goals into one long term goal. It is then resources can be stretched over time. Focusing – Making trade-offs and preventing dilution of resources at a particular point of time. Targeting – Focusing on the right innovations that are likely to have the biggest impact on customer value.
Accumulating – Using existing reservoir of resources to build new resources. Each and every individual is a rich & potential source of learning, discover better ways of doing things. It is achieved through Mining – Extracting learning experiences from existing body of each additional experience (i.e. success or failure). It is an attitude that can be acquired, but never learnt. It leads to a substantial jump in the experience curve. Borrowing – Utilizing resources outside the firm through licensing, alliances, joint ventures. A firms absorptive capacity is as important as its inventive capacity.
Complementing – Using resources of one type with another that aligns smoothly to create higher order value. In a way it produces an accelerating effect on each individual resource. It is achieved through – Blending – Interweaving discrete capabilities to create world class technologies (GM – Honda) through integration and imagination. Different functional skills can also be blended to create a world class end products (Yamaha – Keyboard). Balancing – An ability to exploit excellence in one area is never imperiled by mediocrity in another (GE acquiring the CT scanning rights from EMI because of its inadequate market reach).
Conserving – Sustaining competencies over time through frequent usage. Resources are never abandoned; they are always preserved for future use. Recycling – Increasing the velocity of use of a competencies over time. As a result core competencies can be leveraged across an array of products (Sony - Betamax). It includes brand extensions as well. Co-Opting – Enticing resources of potential competitors to exercise influence in an industry (Fujitsu – IBM). Shielding – It involves identifying competitors blind spots and then attacking without having the fear of retaliation.
Recovering - It is the process of reducing the elapsed time between investing in resources and the recovery of those resources in the form of revenues via the market. Speeding – Prior to the 1980’s Detroit’s majors took an average of 8 years to develop an entirely new model; the Japanese reduced it to less than 4.5 years, with major new variants in 2 years. This envisaged Japanese players in giving customers more opportunities to switch allegiance and loyalty (Toyota). Protecting – It uses competitors strength to one’s own advantage, by deflecting it, rather than absorbing it as practiced in Judo.
INTERNATIONAL BUSINESS ENVIRONMENT 287 .
China.EMERGING MARKETS Emerging markets (India.e. Therefore. high levels of market imperfection). Korea. 288 . institutional gaps. Therefore focused strategies based on core competence may not be suitable for emerging markets (Khanna & Palepu. 1997). strategies suited for the developed markets may not be appropriate for emerging markets. Diversified groups in operating in emerging markets therefore benefit from unrelated diversification. Emerging markets are characterised by infrastructural bottlenecks. Chile) provide a different context (i. and high transaction costs.
Optimum level of diversification Performance Diversity is initially positively related with performance. Synergy. et al. Concentric. Entropy). Size & Scale. subsequently negatively related across developed markets.DIVERSITY .PERFORMANCE (I) Diversity attempts to measure the degree and extent of diversification (Herfindahl. (2000) 289 . Experience Strategic Fit Diversity Palich.
DIVERSITY .PERFORMANCE (II) Diversity is initially negatively related with performance. conglomerate power Threshold level of diversification Performance Diversity (Khanna & Palepu. Huge initial investment. brand building Risk diversification. 2001) 290 . subsequently positively related across emerging markets.
291 . It should have a spread of manufacturing facilities. revenues and profits. HSBC). It should have a spread of interest groups / stake holders. It should think globally. Characteristics – It should have a spread of affiliates or subsidiaries.INTERNATIONAL IDENTITY MNC’s consciously engage in FDI in different parts of the globe to forge resource diversity as a distinct competitive advantage. It should have a spread of assets. act locally (Eg.
Feminity Index . Risk Profile – It reflects the risk attitude of the top management (Eg. Group Scale .It reflects the disparities in women in workforce (Eg. 292 .GLOBAL BUSINESS ENVIRONMENT Power Distance – It reflects the disparities in income and intellectual development (Eg. high feminity index in developed markets and vice versa for emerging markets).It reflects the relative role of team building (Eg. low group scale in developed markets and vice versa for emerging markets). low risk profile in developed markets and vice versa for emerging markets). low power distance in developed markets and vice versa for emerging markets).
Country Risk – It reflects the political and economic risk (Eg. currency. dress sense. 293 . high cultural adaptability in developed markets and vice versa for emerging markets). interest rates. way of life. code of conduct. time value. corruption.culture. low country risk in developed markets and vice versa for emerging markets). terrorism (9/11). judiciary) of doing business in a particular country (Eg. credit rating. customs. political stability. flexibility (Eg. inflation.GLOBAL BUSINESS ENVIRONMENT Cultural Adaptability – It reflects the adaptive ability to a changing environment . attitude. FOREX reserves.
Ethnocentrism – Developed country managers tend to regard their own culture as superior. Other factors – local celebrations. in most emerging markets use of an interpreter may be a standard protocol. and vice-versa. in most emerging markets meetings are delayed and lasts unusually long. however. High levels of ethnocentrism usually has a negative effect on business.GLOBAL BUSINESS ENVIRONMENT Time Sensitiveness – Developed country managers regard time as precious. Language Barriers – Developed country managers expect foreign partners to communicate in their languages. time-zones. 294 .
It also initiated provisions on anti-dumping. copyrights. It also highlighted the nexus between US & WTO.GATT GATT was a bi-lateral treaty initiated between US and some member countries in 1947 to promote free trade. trademarks). ASEAN. The 2001 (Doha Round) focused on power blocks (NAFTA. 295 . The 1999 (Seattle Round) saw a lot of protest amidst bringing agriculture under the purview of TRIPS. BRIC). It a multi-lateral treaty with 143 (as on 2002) member countries to reduce tariff and non-tariff (quota) barriers. In 1995 (Uruguay Round) GATT was renamed to WTO. It focused largely on TRIPS (patents.
The Euro was significantly devalued against the Dollar till 2002. the Dollar still remains the most preferred currency globally. However. Euro).Pound).e. The notable exception was Great Britain which still continues with its local currency (i. 296 . However with current recession in the US 2002 onwards. primarily the OPEC countries. Sterling . the Euro slowly started outperforming the Dollar.EURO – SINGLE CURRENCY In 1999 twelve member countries in Europe joined hands to move over to a single currency (i. three countries joined in 2002 increasing it to fifteen members as of 2008.e.
but it may have spill-over effects. Transparency – A single currency is transparent and competitive. Trade Block – It will strengthen the EU identity which would not have been possible otherwise. However. 297 . Rate Uncertainty – A single currency eliminates the risk of competitive devaluations.SINGLE Vs MULTIPLE CURRENCY Transaction Costs – Though the initial cost of introduction of a single currency is very complicated and costly. it helps avoiding transaction costs associated with a multiple currency. a multiple currency is preferable where the business cycles of member nations are different.
– FDI (transfer of tangible resources) is slow but steady for the purpose of economic growth. 298 .e. the gain of one country is loss of another). It is long term with high levels of commitment. hot money).e.FII Vs FDI INVESTMENT Classical economists believed that foreign investment (in any form) is basically a zero sum game (i. 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. – FII (transfer of intangible resources) is fast but may have strong repercussions (i.
culture (food habits). Pricing – It depends on the competitive structure (PLC – Kellogg's). technology (microchip). promotion (surrogate advertising). buying patterns (spread). . lifestyle (petroleum 299 outlets – departmental stores). customer awareness (microwaves). economic (middle class buying power). Distribution – It depends on the market characteristics (fragmented – concentrated). usage (talk time).INTERNATION MARKETING Product – The various attributes of a product may receive different degrees of emphasis depending on differences in .
equity is cheap in India). debt is cheap in US. Accounting Norms – The accounting norms of one country (AS .INTERNATION FINANCE Currency Risk – Many Indian IT companies (Rs) having business in US (Dollar) are asking for quotes in (Euro) or are shifting bases out of US to avoid risk of devaluation of Dollar.India) may be different from that another trading country (US – GAAP or IRS). Cost Structure – Companies in India need to investment in fixed costs due to poor infra-structure 300 compared to developed markets. . Leverage – The leverage may vary across countries depending upon money and capital market conditions (Eg.
technology (convergence. shortened life cycles). and cultural barriers (language) vis-à-vis emerging markets. however. 301 . Recruitment – In local recruitment. skills are more important that cultural fit and vice-versa. double taxation. social security. Training – It is a pre-requisite for international business to reduce language. in most cases it is not desirable nor practiced. labour laws. Compensation – Differential pay packages exists because of differences in purchasing power.INTERNATIONAL HR An uniform HR policy is idealistic to enable parity in performance appraisal.
Technology – The cost to be evaluated in terms of latest technology (Euro VI) vis-à-vis effective cost of appropriate technology (Euro II).INTERNATIONAL OPERATIONS Location Incentives – FDI in emerging markets should explore options for SEZ’s to explore benefits (tax holidays. . Bosch spark plugs are used by car manufacturers worldwide). reduce power costs) vis-à-vis infrastructural bottlenecks. SCM – Use of ERP to network the extended enterprise 302 across the globe. Outsourcing – A company having a core competence may be the source of global outsourcing (Eg.
CONTEMPORARY TOPICS 303 .
Innovation is the most preferred strategy today to maintain competitive advantage in the present turbulent business environment. but has inherent risks involved as well. 304 . Innovation is all about staying ahead of competition.INNOVATION An invention is the first occurrence of an idea for a new product or process. innovation is the first attempt to carry it out in practice. While innovation typically adds value for organizations. it has destructive effects as well. Innovations typically paves the way for more secured and improved lifestyle for consumers in general.
Strategic innovation has the potential to change the rules of the game. process innovation is necessary to sustain the competitive advantage of product innovation.TYPES OF INNOVATION A key challenge is maintaining a balance between process and product innovations. process innovations are organizational driven. Process innovation usually follows product innovation. While product innovations are typically customer driven. However. 305 . Tangible impact of product innovation on performance is significantly higher than process innovation.
It leads to a shift in the price – performance envelope.BUSINESS MODEL It is a simplified description and representation of a complex real world. Medical Surgery (Lasik). Drug Development (Bio Chemicals). Telecom (CDMA Technology). Innovations are the back-bone of successful business models . 306 . putting an idea into practice). a paradigm shift). Processors (Pentium).e. about how an organization makes money (i.e. Data Storage (Pen Drives). Disruptive business models brings in a new frame of reference (i.
The proposed relationships established with clients. 307 . The channels to reach out to the clients. The cost structure resulting from the business model. The key activities / processes necessary for execution. The segment(s) of clients to be addressed.NINE BUILDING BLOCKS Value proposition offered to the market. The key partners involved in the activities. The revenue streams generated by the activities. The key resources and capabilities required.
BUSINESS MODEL FRAMEWORK 308 .
The revenue model described here are the means to generate revenues. It involves – Product Visualization – Product Prototype – Product Test – Capacity – Pricing – Distribution. Investment Banking. It is just one piece of the puzzle. innovative companies to carve out unique business models to fend off competition. 309 . With the rapid erosion of certain industries (IT. Real Estate) companies need to untangle and understand the intricacies of their business model.REVENUE MODEL Positioning is just not sufficient.
310 .HOW TO MAKE INNOVATIVE CO’S Innovative company’s are a matter of culture and aspirations rather than tangible resources. Promote the culture of experimentation. A favourable intellectual property (IP) climate. Allow the workforce idiosyncrasies for their errors. Promote the grape-vine. Provide reasonable incentives (not necessarily monetary). Allow the management sufficient slack to be future oriented. Have a lean and a flat organization structure.
The most preferred strategy of internal protection includes imbibing “causal ambiguity” in the production process to make reverse engineering difficult.HOW TO PROTECT INNOVATION? Without adequate protection (external or otherwise) the effects of innovation does not translate to performance. companies are increasingly relying on internal protection to sustain innovation effects. In most emerging markets where the IP climate is not so favorable. however that possibility is slowly atrophying. 311 311 . Collusion with the judiciary is also another distinct possibility in emerging markets.
Corporate governance aims to reduce the principal-agent problem present in most professional managed organizations through appropriate forms of accountability and control mechanisms. 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.
313 . From the strategic point of view managers tend to diversify into unrelated businesses as it provides higher returns hence a more favourable appraisal. also known as the principal-agent problem or agency dilemma. shareholders can diversify their portfolio at a much lesser risk and cost. not present in portfolio diversifications. According to the agency theory top managers and shareholders interests are usually conflicting in nature and tend to pull in opposite directions. However.AGENCY THEORY The root of Corporate Governance goes back to the Agency Theory. This exposes the shareholders to additional risks and higher costs.
various laws were enacted to ensure proper usage of these funds.ORIGIN & CONTEXT Since the early 20th century since a large part of public funds were held by publicly traded firms in the US. SEBI Report – 2005. 2002 to restore public confidence in corporate governance. . defines corporate governance (headed by Kumar Mangalam Birla) as the acceptance by management of the inalienable rights of shareholders as the true owners of the corporation and of their own role as trustees on behalf of the 314 shareholders. the US government passed the Sarbanes – Oxley Act. After the Enron downfall.
Interests of other stakeholders: Recognize the legal and other obligations of all legitimate stakeholders. 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. 315 .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. Role and responsibilities of the board: It deals with issues about an appropriate mix of executive and nonexecutive directors.
316 316 .GOVERNANCE PRINCIPLES Integrity and ethical behaviour: Organizations should develop a code of conduct for their top management that promotes ethical and responsible decision making. assessment and mitigation of risks and retirement by rotation over a fixed period of time. Independence of the entity's auditors: Identification. Disclosure and transparency: Disclosure of information should be timely and balanced to ensure that investors have clear access to data and facts.. They should also implement systems to independently verify and safeguard the integrity of the company's financial reporting.
with its legal authority to hire. discussed and resolved.GOVERNANCE STRATEGIES Monitoring by the board of directors: The board of directors. Regular board meetings allow potential problems to be identified. Balance of power: The simplest balance of power is very common. a person benefitting from a decision should abstain from it. Remuneration: Performance-based remuneration is designed to relate some proportion of salary to individual performance. 317 . they should provide no mechanism or scope for opportunistic behaviour. safeguards invested capital. fire and compensate top management. However.
and was responsive to investors' requests for information on governance issues. from 10% for companies where the regulatory backdrop was least certain (those in Morocco. Egypt and Russia) to around 40% for Canadian & European companies. 318 . The size of the premium varied by market. who had no management ties. McKinsey found that 80% of the respondents would pay a premium for wellgoverned companies. undertook formal evaluation of its directors. They defined a well-governed company as one that had mostly out-side directors.GOVERNANCE & PERFORMANCE In its “Global Investor Opinion Survey” of over 200 institutional investors in 2002.
Therefore. The basic premise is that firms cannot exist in vacuum. However. 319 . corporate philanthropy should be a part of every corporate mission. Over a period of time. today economic institutions are considered as a major drivers of improvement in quality of life in general and therefore needs to include multiple stakeholders.SHAREHODER – STAKE HOLDER THEORY Till the early part of the 20th the basic objective of modern organizations was to provide goods and services for public consumption for profit maximisation. the short-term view of profit maximisation gave way to a more broader and mediumterm view wealth maximisation of the shareholders.
the debate on CRS still continues whether firms should detract its focus from its business? 320 . economic and social responsibilities cannot be mutually exclusive. Therefore. CSR can be defined as. giving a very important message that one cannot exist without the other. Therefore.CORPORATE SOCIAL RESPONSIBILITY As Peter Drucker rightly pointed out that. “a healthy business cannot exist in a sick and impoverished society”. However. in fact a large part of it is significantly overlapping. “an enterprises decisions and actions being taken for reasons at least partially beyond its immediate economic interests”.
GROWING CONCERN FOR CSR Awareness due to education: With growing literacy. Fear of government interference: Excessive quench for profits may lead to build up of adverse public opinion compelling the government to intervene (Eg. The role of media: The media and various consumer organizations have come up in protecting consumer rights and exposing mal-practices. 321 . Public image: Entrepreneurs are increasingly relying on public image as a source of competitive advantage and a higher financial discounting. MRTP). people are becoming increasingly aware of their right to a decent and healthy life.
322 . Cement . and extended producer responsibility (Eg. Refrigerators – CFC. Exide – Product take back). eco efficiency. designing eco-friendly products. Education. Tata Steel – Life Line Express). Health & Hygiene – Attending the health hazards due to wastes and by-products to employees and society in proximity (Eg.CSR STRATEGIES Green Supply Chain Management: It includes environmentally preferable purchasing. Literacy & Training Programs – (Eg.Paper packaging. Aditya Birla Research Centre – LBS).
C. Prahalad notes that future markets exist collectively. Strategic innovations leading to disruptive business models can show the way out. In turn companies by serving these markets. across the world's billions of poor people having immense untapped buying power. K. they're helping millions of the world's poorest people to escape poverty. They represent an enormous opportunity for companies who learn how to serve them. 323 .BOTTOM OF THE PYRAMID With the market across most developed markets including the US getting saturated.
BLUE OCEAN STRATEGY 324 .
MARKETSPACE .TWO WORLDS 325 .
competing head on results in nothing but a bloody red ocean of rivals fighting over a shrinking profit pool. Yet in today’s overcrowded industries. and struggled for differentiation (cost or product). battled over market-share. where most industries are saturated. one companies gain is always at the 326 cost of another companies loss. profitable growth. In today’s red oceans. They have fought for profits. .WHAT IS RED OCEAN? Companies have long engaged in head-to-head competition in search of sustained.
It helps in creating powerful leaps in value for both the firm and its buyers. It is only the frames of the . it will exist 327 in the future as well. but by creating blue oceans of uncontested market space ripe for growth . Blue Ocean’s have existed in the past.WHAT IS BLUE OCEAN? Tomorrow’s leading companies will succeed not by battling in red oceans. Such strategic moves are possible through the pursuit of product differentiation and low cost simultaneously. rendering rivals obsolete and unleashing new demand.
RED OCEAN Vs BLUE OCEAN Compete in existing markets Compete in uncontested markets Beat the competition Exploit existing demand Make the competition irrelevant Create and capture demand Make the value-cost trade off Break the value-cost trade off Demand is the limiting factor Supply is the limiting factor 328 .
. Population shrinkage across a no. of European nations. Niche markets & monopoly havens are continuing to disappear. information imperfections atrophy instantly. Technological advances have substantially 329 improved industrial productivity. Demand across developed markets reaching a plateau.BLUE OCEAN STRATEGY IMPERATIVES Prospects in most established market spaces – red oceans – are shrinking steadily. As trade barriers between nations & regions fall.
. managerial moves are. History indicates that blue oceans exist in three basic industries – automobiles (how people get to work) – computers (what people use at work) – entertainment (what people do after work). the underlying technology was often already in existence. Company & industry are the wrong units of 330 strategic analysis.CONCEPTUAL UNDERPINNINGS Blue oceans have existed in the past and will exist in the future as well. They are not necessarily about technology. 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.SOME GLARING EXAMPLES In the last century authors Kim and Mauborgne have documented the creation of more than 150 blue ocean creations across 30 industries – Virgin Atlantic: Fractional jet ownership or travel to space. Sony Play Station: Redefining machine-human interface in entertainment and targeting an altogether new user base. Southwest Airlines: Pioneering the concept of LCC.
All they need to do is change their managerial frames. companies & managers are largely at the mercy of economic forces.WHAT THEN IS THE HANDICAP? Most of the traditional views in strategy having its origin in (Economic Theory) led to what is called the – structuralist paradigm. greater than themselves. According to this view managers need not be constrained to act within the confines of their industry. 334 . According to this view. Off late emerging views in strategy having its origin in (Organization Theory) led to a paradigm shift to what is called the – reconstructionist view.
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