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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 a holistic and integrated approach. It is about adaptation and response to the same.FEATURES It forms the core activity of the top management. It involves substantial resource outlay. 7 . It is long-term in nature. It provides broad guidelines. It is all about creativity and innovation. It requires full commitment of the top management.STRATEGIC MANAGEMENT . It is irreversible.
It is about forecasting. It attempts to minimize risk. It about mere data and facts. It involves only the top management. It is fool-proof in nature. 8 . It involves nitty-gritty's. It brings instant success. It is rocket science. It a bundle of techniques or even tricks. It is about a definite formula.STRATEGIC MANAGEMENT – MYTHS It involves short-cuts.
rather than reactive. To tap markets across boundaries. again and again ……. To assimilate change faster. . To gain expertise in technologies. To be proactive.STRATEGIC MANAGEMENT IMPERATIVES To be continuously alert. To leverage size. To be future oriented. To innovate. scale and scope. To be insulated against environmental threats. 9 To develop core–competencies. To generate large resource pool.
and more importantly . but with a lot a rigour and robustness.ORIGIN The word strategy has its origin from the Greek word strategia meaning Military Commander. but by virtue of their courage. obsession. In the ancient days battles were won not by virtue of size of the army or armory. today's battles are fought over markets. whose origin can be traced to some of the greatest battles fought in the ancient days. In contrast. 10 . battles fought on the market front are won by companies by virtue of their obsession & strategies. In the ancient days battles were fought over land.STRATEGY . Even in today’s markets. It is an old wine in a new bottle.strategies.
Allied Forces Vs Germany (WW-II) – Strategy: Forging alliances. Napoleon’s attack on Russia – Strategy: Waiting for the right time.SOME PARALLELS Japan’s attack on Pearl Harbour – Strategy: Attack where it hurts the most. – Toyota’s entry in the US. challenging GM and Ford. – Yahoo and Microsoft challenging Google. – Reliance’s entry into telecom. US attack of Morocco to capture Germany – Strategy: Pin-hole strategy – Wal-Mart challenging Sears by entering small towns. 11 .
1910).Industrial Revolution. a radical change in the business environment brings about discontinuity. 12 . The first major discontinuity in the history of global business environment was the . – Mass Production Organization Size – Complicated Processes – Complex Structures Evolving of an emerging paradigm – survival of the fittest (Fayol & Taylor. The things happening around the firm when totally disconnected from the past leads to a paradigm shift. A paradigm is a dominant belief about how the business and its environment operates.EVOLUTION OF MANAGEMENT As Peter Drucker refers to it.
e. – Changes in the technology fore-front. Survival of the most adaptable becomes a new management paradigm (Ansoff. Efficiency and effectiveness are no longer sufficient. – Affluence of the new customer (i. From uniform performance. 1960). performance across firms became differentiated. – Homogeneous to heterogeneous products. – Global market place. push to pull). The question of outperforming the benchmark became the new buzzword.EVOLUTION OF STRATEGIC MANAGEMENT The second major discontinuity in the history of global economic environment – World War II. 13 .
ENVIRONMENTAL CHANGE Phase IV: Horizon of Scenarios 2 1 Phase I: Extrapolation of the past 1 3 1990 onwards 1 2 1 3 1A 1B 2A Prior to 1950 Phase II: Discrete Scenarios Phase III: Range of Scenarios 1970 to 1990 2 2B 1950 to 1970 14 .
– The choice of strategy is primarily concerned with external ones rather than internal ones. – It is primarily the top management’s prerogative. 15 . – Biases and prejudices has a very little role to play in strategic choices pursued by managers. – The choice of product-market mix is based on conscious evaluation of risk – return factors. Learning always begin on a clean sheet of paper. Ansoff (1960) – Strategy can be segregated into certain mutually exclusive and inter-related components aimed at managing the growth of an organization.APPROACHES TO STRATEGY Analytical Approach – Igor H.
Once the control systems are in place. everything else follows. – The top managers then decide on the type of organization structure & systems to be in place. – Management control systems has a dominating role in influencing firm performance. who will be the top managers. Successful organizations align authority and responsibility of various departments in way to reach overall objectives.APPROACHES TO STRATEGY Design Approach – Alfred Chandler (1970) – Structure follows strategy. 16 . – Organization structure will precede and cause changes in strategy. how it will compete. The organization initially decides which industry to enter.
APPROACHES TO STRATEGY Positioning Approach – Michael E. – An organization is seldom in a position to influence the larger business environment. substitutes. – A firms performance is inversely related with the bargaining power of environmental forces to which it is exposed. Porter (1980) – Choose a consumer segment and position your product accordingly. new entrant. 17 . competitors. customer. – The environmental forces comprises of – supplier. – The organization will outperform the industry where environmental forces are weak and vice-versa.
– Organizations can significantly alter the way an industry functions. 18 . but exploiting the resource differences among them. They are complex resources and undermines a firms competitive advantage. Prahalad (1990) – The key to superior performance is not doing the same as other organizations. K. – It enables a firm to deliver unimaginable value ahead of time. locating in most attractive industries and pursuing the same strategy.APPROACHES TO STRATEGY Core Competence – C. – Core competencies are a set of skills that are unique and can be leveraged.
STRATEGIC MANAGEMENT PROCESS Strategic Intent Strategic Planning Strategic Gap – Environmental Scanning – Internal Appraisal of the Firm Strategy Formulation – Corporate Strategy – Business Strategy Strategic Choices – Functional Strategy Strategy Implementation Strategy Performance Strategy Evaluation & Control 19 .
TOP MANAGEMENT PERSPECTIVE 20 .
It implies a significant stretch.STRATEGIC INTENT If you cannot see the future. It is the cornerstone of an organizations strategic architecture reflecting its desired future state or its aspirations. 21 . A gap that consciously manages between stagnation and atrophy. you cannot reach there. It’s a philosophy that distinguishes it from its competitors. A substantial gap between its resources and aspirations. It involves an obsession to be the best or outperform the best. It provides a sense of direction and destiny. A strategic intent is a statement of purpose of existence.
STRATEGIC INTENT .HIERARCHY Integrativ e m Do an in Visio n Mission Dominant Objective s Goal s Plans Lo g ic Single Specifi c Man y 22 t .
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.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 . To put it more simply. It is core to the strategic intent of the firm. when radical changes in the internal and external environment (i.
– It represents the company’s audacious. 24 . It provides an unity of purpose amidst diversity of personal goals. but achievable aspirations.VISION It is a dream (not a forecast) about what the company wants to become in the foreseeable future. It is a combination of three basic elements – – An organizations fundamental reason for existence. beyond just making money. It enables the top management to remain focused. – It stands for the unchanging core values of the company. It ensures that the company does not wander off into unrelated zones or fall into an activity trap.
and memorizable. Brevity – It should be short. Clarity – Vividly descriptive image of what the company wants to be known for in the future.CHARACTERISTICS Reliance – Where growth is a way of life. 25 . Empathy – It should reflect the company’s beliefs to which it is sensitive. Reachable – It should be within a reasonable target in the known future.VISION . clear. Sharing – The company across all hierarchies should have faith in it. In Reliance when a new project becomes operational top managers hand over charge to the SBU heads and move on to a new project. not an utopian dream.
It fosters risk taking and experimentation.ADVANTAGES To stay focused on the right track. It gives a shared platform.VISION . It facilitates development of skills & capabilities. 26 . It lends integrity and genuineness. It provides a holistic picture. It makes strategic alignment easier. It gives enlightment. It gives the impression of a forward-looking organisation. To prevent the fall in a activity trap.
27 . It is intuitive for managers to conceive their business in terms of the customer needs they are serving – What business are we in? – Which customer needs are we serving? It should be broad based and relevant to all stake-holders. its reason for existence. Although the purpose may change over time.MISSION Mission defines the space that a business wants to create for itself in a competitive terrain. It enables the firm to define its business landscape and identify its competitive forces. It serves as a road map to reach the vision. A broad mission statement helps in fending competitors.
…………………. We offer solutions. …………………. …………………. – We do not offer steel. We offer strength. We offer security. ………………….MISSION – SOME IDEAS Reliance – We are in the business of integration. Some other examples – We do not offer shoes. 28 . We offer comfort. – We do not offer insurance. All the businesses of the company are strongly integrated with their main business. though some may seem unrelated in nature. – We do not offer software's.
It is an end result (quantifiable) something a firm aims and tries to reach in a time bound frame. – It is based on Management by Objectives (MBO). – It prevents deviation. It provides a quantitative feel to an abstract proposition. – It provides a benchmark for evaluation. – It helps identifying key success factors. 29 . – It adds legitimacy and motivation. – It lends direction – time frame in the medium term.100K crore company by the year 2005.GOALS & OBJECTIVES Reliance – We want to become a Rs. – It keeps the mid management pre-occupied.
It is the process of garnering necessary inputs. 30 . The details of the plan Reliance Telecom adopted were – Backward integrate process technologies. – Leverage economies of size and scale. and gaining access to desired markets to achieve the desired goals and objectives.PLANS Reliance – Desire to invest 25K crore in telecom business by circa 2010. – Compress project times. coordinating appropriate technologies. – Acquire a market share of indomitable position. It is specific to a particular business. – Use price-elasticity to break market barriers.
radical change may lead to disequilibrium. When changes in the environment is incremental. In such a context. equilibrium is maintained.STRATEGIC DRIFT Due to top management commitment. 31 . This state of affairs is known as strategic drift. past strategies tend to have a bearing on future strategies. This tendency to restore continuity is known as inertia (resistance to change). It often leads to an organizational crisis. However. strategies lose touch with the emerging realities. Historical studies have shown that most organizations tend to continue with their existing strategies.
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 .
Some instances of organizational politics – Formation of powerful groups or coteries. 33 . Organizational politics involves intentional acts of influence to enhance or protect the self-interest of individuals or groups over organizational goals.ORGANIZATIONAL POLITICS Strategic drift often leads to organizational politics. – Using covert tactics to pursue self interests. – Developing a platform of support. – Distorting information to gain mileage. – Creating obligations of reciprocity. – Creating a favourable image. – Hiding vulnerability.
– The environment context has changed. Usually there is wide gap between the two when organizational politics is evident. – Persons responsible for strategy conceptualization and implementation are34 divergent. – Influential stake-holders back out. .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.
but the master scheme of the rational comprehensive scheme is not apparent. They simply unfold the particulars of the sub-system in stages. but as a defensible response to the complexities of a large organization that mitigate against publicizing goals.LOGICAL INCREMENTALISM According to the incrementalism approach (contrary to integrated approach) practitioners simply do not arrive at goals and announce them in crafted and well defined packages. 35 . Learning is an integral part of logical incrementalism. this is not to be treated as “muddling”. Strategy formulation and implementation are linked together in a continuous improvement cycle. However.
IMPLEMENTING INCREMENTALISM General Concern – A vaguely felt awareness of an issue or opportunity. 36 . Leveraging Crisis – A sudden crisis or an opportunity should be used as a trigger to facilitate acceptance and implementation of change. 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. Macro Broadcasting – The broad idea is floated without details to invite pros and cons leading to finer refinements.
As it brings 37 with it a different dominant logic. Strategic transformation becomes smooth through a change in top leadership. Tampering with surface level factors often leads to atrophy. Dominant logic’s are very rigid and sticky and prone to inertia.STRATEGIC TRANSFORMATION Strategic transformation (a complete overhauling of the strategic architecture) becomes inevitable whenever a strategic drift takes place. Dominant logic’s are the cornerstones of change when strategic transformation is apparent. . It creates blinders.
and skills that fosters experimentation and questioning and challenge around a shared purpose. – Informal Networks – Emerging of new ideas.LEARNING ORGANIZATION A learning organization is capable of continual regeneration from knowledge. – Constructive Bargaining – Agree to disagree. 38 . Factors that fosters a learning organization – Pluralistic – An environment where different and even conflicting ideas are welcome. – Experimentation – Fosters a culture of risk taking. A learning organization must continuously focus on unlearning as well. – Organisational Slack – Enough free space. It helps prevent a strategic drift from occurring at the first place. experience.
ENVIRONMENTAL CONDITIONS Dynamic Scenario Planning Learning Organization Static Forecasting Decentralization Simple Complex 39 .
ANALYZING BUSINESS ENVIRONMENT 40 .
41 . Competitive advantage provides the surest way to fulfill the strategic gap.e. It is based on the assumption of incremental change. gap analysis). It is pro-active in nature.PLANNING & STRATEGIC PLANNING Formal planning is a function of extrapolating the past. It points to a position of superiority with relation to competition. It is based on the assumption of radical change. Strategic planning is a function of discounting the future. It is reactive in nature. It requires a quantum leap (i. Strategic gap basically points towards a vacuum of where the organisation wants to be and where it is.
The world is flat. and influences that affect an organizations way of doing things. events. not guided by any boundaries. It is exploratory in nature. resources and ideas move unhindered. 42 . The segments of the environment a top manager scans selectively depends upon his dominant logics.ENVIRONMENTAL SCANNING The environment is defined as the aggregate of conditions. Environmental scanning is very important component of strategic planning. A manager has to continuously scan the environment to ensure alignment of the strategies with the radically changing environment. Environmental factors can be external as well as internal to the organization.
It is not intended to be used as an exhaustive list. for which a holistic picture is required. It is particularly important that PESTEL be used to look at the future impact of environmental factors. It is important not only to identify the structural drivers of change. which may be different from the past impact. 43 . but also to analyze the complex linkages across them. Understanding the composite effect is critical.PESTEL PESTEL attempts to provide a broad framework on how the broader environmental forces affects an organization and influences the way it practices strategy.
Subsidies & Protection. Government Attitude. Income & Age Distribution. Currency Stability. 44 . Fiscal Deficit.PESTEL FRAMEWORK Political – Government Stability. Religious Sentiments. Social Values. Licensing & Quotas. Language Barriers. Literacy Levels. Inflation & Interest Rates. Infra-Structural Investments. Economic Cycles. FDI Inflows. Savings & Investment. Capital Market & Forex Reserves. Social – Population Diversity. Economic – GDP. Central – State Co-alignment. Economic Model. Monsoon & Food Grains Reserves.
Legal – Monopolies Legislation. Technological Convergence. Product Safety & Health Hazards. Obsolescence Rate. Direct & Indirect Taxes. Environmental – Global Warming & CSR. Carbon Credits. Patents. Waste Disposal & Emissions. Product Design. Consumer Protection Laws. Non-Fossil & Alternative Fuels. Pollution Control Laws. Employment Laws. 45 . Extended Producer Responsibility. Patent Laws. Research & Development. ERP. Environmentally Preferable Purchasing.PESTEL FRAMEWORK Technological – Innovation.
Abolition of import licenses. Banking Sector Reforms. Dismantling price controls. MRTP Liberalization. 46 . Encouraging FDI. Exit Policy. Curtailment of PSU’s. FERA Liberalization. New Trade Policy (NTP) – Lowering import tariffs. Encouraging exports. Structural Adjustments – Phasing out subsidies. Economic Reforms – Fiscal & Monetary Reforms.VRS. PSU Disinvestments.ECONOMIC LIBERALISATION New Industrial Policy (NIP) – Liberalizing industrial licensing. Rupee convertibility. Capital Market Reforms.
DISCONTINUITY Destabilization due to entrepreneurial freedom – Cocoon of protection disappears – Diversification spree – Existing notions of size shaken – Industry structures change radically – Economic Darwinism .Survival of the fittest MNC Onslaught – Enhancing stakes – Power Equation – Joint Ventures – Technological Alliances – Take-over threat. Mergers & Acquisitions 47 .
Consumerism Challenges on the technology front – Competencies become technology based – Investment in R&D become inescapable 48 .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.
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 .
but also used to understand how they can be countered and overcome. profit potential) per se. incremental or otherwise. It depicts the attractiveness of an industry (i. The model should not be used as a snapshot in time.e.FIVE FORCES MODEL ASSUMPTIONS The model is to be used at the SBU level and not at the industry level. It is even wiser to apply the same at the product – market level. 51 . the forces are subject to changes. The five forces have strong cross-linkages. It should not only be used to understand the forces.
High switching costs. Low margins & stagnancy. Low customer switching costs. Learning curve advantages. Capital requirements. Resource profile & fear of retaliation. Scope for backward integration. 52 . Threat of Customers – Buyer concentration and volumes. Low relative importance of the segment. Undifferentiated product. Presence of substitutes or unorganized sector. Unimportance of product quality.PORTERS FIVE FORCES ANALYSIS Threat to Entry – Economies of size and scale. Product differentiation through proprietary technology or brand power. Access to distribution channels. Government policy. Industry stagnation.
Threat of Substitutes – Improvement in price -performance trade-off. Unorganised sector. Differentiated inputs. Produced by industries earning high profits.PORTERS FIVE FORCES ANALYSIS Threat of Suppliers – Supplier monopoly. Intermittent overcapacity. Buyer’s propensity to substitute. Jockeying for position – Fragmented market. High exit barriers. Lack of substitute inputs. Industry stagnancy. Scope for forward integration. High customer switching costs. Diversity of players. Low relative importance of the segment. 53 . Low level of differentiation. Piracy and counterfeits. Product perishability.
Tata). Business Scope – The intention whether the firm wants to be in a single.FIRM ENVIRONMENT Size and Scale of Operations – It is a very important component of competitiveness in today's global context (Bharti – MTN. Inertia – Excessive commitment to past strategies prevents firms from tapping emerging opportunities. 54 . Cohesiveness – Degree of bonding existing across affiliated firms. dominant or related diversified or unrelated diversified businesses (Infosys. Resource Profile – It highlights the capabilities (generic) or competencies (business specific) of the firm. Reliance).
However. The E-Curve thus enables organisations to build entry barriers.EXPERIENCE CURVE The cost of performing an activity declines on per-unit basis as a firm becomes more efficient. experience teaches better and more effective way of doing things. it can price its products more competitively. leverage it as a competitive advantage. Matured firms will always be positioned advantageously on the ECurve than new entrants. an E-Curve can prove to be futile during discontinuity. and with lower prices it can increase its sales volume. which further reduces costs. 55 . Experience curve has strong linkages with performance. With lower 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 .
EXPERIENCE CURVE .TRADITIONAL VIEW Efficiency = Lower Costs 2 3 1 Experience = Efficiency Lower Costs = Higher Sales Entry Barrier = Better Performance 4 6 5 Higher Sales = Lower Costs Lower Costs = Entry Barrier 57 .
STRATEGIC VIEW Inertia = Limited Growth Experience = Inertia 2 3 1 Limited Growth = Diversification Strategic Failure = Poor Performance 6 5 4 Diversification = New Experience New Experience ≠ Old Experience 58 .EXPERIENCE CURVE .
Observation. Press Clippings & Interviews. Interviews. A SWOT audit involves – Company Records – Annual Reports. Websites.VULNERABILITY ANALYSIS . Business Intelligence – Bankers. Case Studies – Structured Questionnaires. .SWOT The framework was originally conceptualized by Kenneth Andrews in 1970. Suppliers. Acronym for Strengths – Weaknesses – Opportunities – Threats. Competitors. It helps an organisation to capitalize on the opportunities by maximizing its strengths and neutralizing the threats minimizing the weaknesses. It is one of the earliest models in environmental scanning. Customers. 59 Analysts.
SWOT ANALYSIS .FRAMEWORK Opportunities Nullify weaknesses which prevents you from exploiting opportunities Leverage strengths to make use of opportunities Weaknesses Minimize weaknesses which prevents you from countering threats Strengths Threats Utilise strengths to counter threats (?) 60 .
61 . Infosys. Dr.SOURCES OF STRENGTH Strong brand identity – Eg. Reliance. Aditya Birla. Strong R&D base – Eg. Motivated employees & cordial industrial relations – Eg. Infosys. Economies of scale – Eg. Volkswagen. ITC. Toyota. Excellent penetration – Eg. Reddy’s. High quality products – Eg. Sony. Caterpillar. Ranbaxy. Good credit rating – Eg. Large resource pool – Eg. Strong after sales & service network – Eg. Siemens. Biocon. Tata. HUL. SBI. Tata Steel. Honda. Reliance. Engineering Skills – Eg.
Organizational Politics – Eg. Inefficient top management – Eg. Ballarpur Inds. K. Lacking experimentation culture – Eg. CESC. Procter & Gamble. B. Strategic myopia – Eg. SAIL. Excessive diversification – Eg. Group . Single product syndrome – Eg. Inertia – Eg. Modi Group. Excess manpower – Eg. J. Hindustan Motors.SOURCES OF WEAKNESSES Outdated technology – Eg. Nirma. Bijoligrill. K. Lack of product / brand clout – Eg.Raymond. Narrow business scope – Eg. CMC (Tata Group) 62 . Tatas.
63 . Life style changes – Eg. Globalization – Eg. Insurance.SOURCES OF OPPORTUNITIES Delicensing of Industries – Eg. Collaborations & Joint Ventures – Bharti & WalMart. Abolishing MRTP – Eg. Banking. Exit Policy – Eg. Telecom. Middle-class buying power. Market driven Pricing – Eg. Growing population – Eg. Market driven Interest rates – Eg. Capital market reforms – Eg. Free pricing – Eg. Abolishing CCI. Fertilizers. Maruti. VRS. ECB’s. Retailing. Fertilizer. Sugar. GDR’s.Tata Motors. Sugar.
Onida. Economic recession – Eg.Social activism – Eg. (2008). Land acquisition . 64 . Dumping from China. (1985–1990). Earth Quake. Bajoria – Bombay Dyeing. Import relaxation – Eg. 26/11. Lack of Corporate Governance – Eg. Natural disaster – Eg. Group disintegration – Eg. Reliance. Foreign Direct Investment (FDI) – Eg. Tata Steel. 11/9.SOURCES OF THREATS Political instability – Eg. Singur SEZ. Hostile take-over – Eg. Nationalisation – Eg. Terrorist attacks – Eg. Satyam. Tsunami.
Assess the extent of impact of the factors. time series. Holistic view – Prepare a complete overall picture. Delphi's technique.e. 65 . Stages in ETOP analysis – List the aspects of the environment that has a bearing on the organization. Strategic responses (including adaptation) to opportunities and threats is critical for survival and success. Forecasting – Predict the future (i. scenario analysis). It represents a summary picture of the external environmental factors and their likely impact on the organization.ETOP Acronym for Environment – Threat – Opportunity – Profile.
High investment intensity acts as a drag. . An organization can draw upon the experience of its peers in similar situations. It is also a form of assessing vulnerability through longitudinal analysis. 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.PROFIT IMPACT OF MARKET STRATEGY PIMS is a database model developed by GE and later extended by HBS to examine the impact of a wide range of strategy variables on business performance. Relative attractiveness of the market.
therefore 67 validity may be a question.PIMS . As every organization is unique in its own way. – Contexts may vary over time. . Authenticity of data is of prime importance – Contexts drawn across one organization may not be applicable to another. – Contexts may vary across countries. when radical changes in the economy takes place. Managers should be particularly cautious while referring to such data during times of discontinuity as it makes past patterns futile.LIMITATIONS The analysis is based on historical data and it does not take care of future challenges.
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. 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.
IDENTIFYING ALTERNATIVE STRATEGIES 69 .
unrelated) and geographical scope (local.CORPORATE .GRAND STRATEGY It is concerned with the overall business scope (single. It provides broad direction to the groups vision and mission. 70 . A corporate strategy identifies and fixes the strategic gap it proposes to fill. dominant. It indicates the quality of growth an organization is looking for. It reflects the customer needs it intends to satisfy. global) of a firm and deals with choices of allocating resources across them. national. It determines the locus a firm encounters with internal and external environment. related.
CORPORATE STRATEGY MATRIX Corporate Strategy Stability Stability Growth Growth Combination Diversification Divestment Intensification Market Penetration Related Vertical Market Development Product Development Unrelated Horizontal 71 .
erosion of capabilities. Even during adverse times firms need to adopt a strategy to sustain current performance levels. – To stop for a while and assess past records. Hindustan Motors). The scale and scope of present operations remains almost intact. does not relate to do-nothing (Eg.STABILITY It involves maintaining status-quo or growing in a slow and selective manner. The reasons for stability strategy – – Lack of attractive opportunities. Stability however. Citibank). 72 . – The firm may not be willing to take additional risk associated with new projects. (Eg. – Why disturb the existing equilibrium set up? – Limited resource position.
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.GROWTH . 73 .
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. 74 . – The company carries a risk of product obsolescence. within a well defined market segment. direct non-users to users. – Elongated product life-cycle. convert competitors customers. (Eg. – Suitable for industries where scope for technological breakthrough is limited. Britannia). Nirma. Market penetration can be achieved by – increasing sales to current customers. – Helps firms which are not comfortable with unfamiliar terrain. Ujjala.
upholstery. Du Pont – Nylon: parachutes. – Unconventional and flexible distribution channels. tyres.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. socks & stockings. 75 .…… or Teflon: aircraft technologies to cutlery to paints or Raytheon Corp – Microwaves: radars to kitchen appliances). – Immense customer reach & flexible advertising. (Eg. – Moves across geographical boundaries. carpets. fabrics. – Creativity and innovation – thinking out of the box. – Stretches product life cycles.
serviceability. reliability. – Deliverable through – redesigning or reengineering. – Substitutes that serve the same needs (Eg. Microsoft: DOS to Windows) or a substantial improved version (incremental) of an existing product to repeatedly enter the same market (Eg. conformance. durability. perception. – Areas of product improvement – performance.Strolleys).PRODUCT DEVELOPMENT It is a strategy where a firm tries to achieve growth through a radical new product (Eg. features. Refills) 76 . – Leverage on customer and brand loyalty. aesthetics. Close Up: Fluoride – Gel toothpaste or VIP . – Leveraging through – innovation.
licenses (i. the new business is distinct from the existing business in terms of – inputs – technologies – markets. dominance). – High transaction costs and institutional gaps. – Conglomerate or market power (i. – Permits: quotas. thereby creating a new business.DIVERSIFICATION It marks the entry of a firm into newer markets with new products. 77 . Why do firms diversify in the Indian context? – Shift the growth trajectory or opportunistic.e. – Risk reduction.e. From the traditional point of view. industrial embassies). – Internal capital market. From the modern point of view they are strategically dissimilar.
in which a given year is either under hot or cold wave.HOW DIVERSIFICATION REDUCES RISK? Consider a hypothetical planet. ice-cream business would register a return of 10%. while the coffee business would register a return of 30%. If the hot wave dominates the planet. the ice-cream business would register a return of 30%. cold wave dominates the planet. What would be your ideal diversification strategy through optimization? 78 . If on the other hand. Let us assume that there are two businesses constituting the entire market – coffee and icecream. while the coffee business would register a return of 10%. either of which is equally likely to prevail.
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.
and out-sources the noncore activities (Eg. Reddy’s).Where one firm has full ownership and control over all the stages of a value-chain in the manufacturing of a product (Eg.A firm gets most of its requirements from one or more outside suppliers that is under its partial control through value chain partnerships (Eg. Maruti – Sona Steering).QUASI & TAPERED INTEGRATION Full Integration . Reliance).A firm produces part of its own requirements and buys the rest from outside suppliers with a variable degree of ownership and control. Ranbaxy. Dr. Tapered integration . Quasi-integration . Usually the firm concentrates on its core activities. 85 .
A CASE OF TAPERED INTEGRATION Partial Ownershi p Transmission Engine Design Electricals Steering 86 Seats & Carpets Windscreen Ordinary Components Zero Ownership Very Critical Component s Full Ownership Critical Component s .
e.CONGLOMERATE DIVERSIFICATION It relates to entry of firms into businesses which are distinct in terms of – inputs – technologies – markets. and are also strategically dissimilar. 87 .e. myopia). Firms usually engage in conglomerate diversification when emerging opportunities are very attractive and offers potential growth opportunities. lack of knowledge of competitive forces). Drawbacks of unrelated diversification – – Cost of failure (i. core business). lack of strategic intent. synergies pulling in opposite directions). – Cost of ignorance (i.e.e. – Cost of neglect (i. – Cost of dysynergy (i.
CONGLOMERATE DIVERSIFICATION Paper & Packaging Edible Oils Tobacco Hotels Food & Confectionary 88 .
In strategy there is no scope for sentimentality with divestment. L&TCement Division to Aditya Birla Group) technically known as divestiture or a product (Eg. It is may also be a pro-active strategy. ACC) in full to an independent entity.e. where a company simply exits because the business no longer contribute to or fit its dominant logic. It may also involve a SBU (Eg.DIVESTMENT Divestment is a defensive strategy involving the sale of entire stake (Eg. (Eg. It taken into account when performance is disappointing (i. Glaxo’s “Glucon-D” to Heinz). Tatas sale of Goodlass Nerolac. Tata Press). 89 . Tata Pharma. reactive) and survival is at stake and the firm does not have resources to fend off competitive forces.
However. 90 . 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. involving 608 pence per share). Leveraged Buy-Out (LBO) – Here the company’s shareholders are bought out through a negotiated deal using borrowed funds. Sale of Diamond Beverages to Coca-Cola for US $ 40 million). 1956 does not permit this mode.DIVESTMENT . (Eg. where the equity is allotted amongst the existing shareholders on a pro-rata basis. Tatas buy-out of Corus for US $ 11.3 billion. (Eg. the Companies Act.ROUTES Outright Sale – Popularly known as the asset route.
developing facilities right from the scratch) or through brown-field projects (i. A combination strategy can be implemented through green-field projects (i. There can be no ideal strategy for every business. mergers and acquisition. joint ventures). growth. because every business has its own unique external and internal environment.COMBINATION STRATEGY It is a mixture of stability.e. It is usually pursued by a business group with diverse interests across multiple industries. and divestment strategies applied simultaneously or sequentially for a portfolio of businesses. 91 .e.
STRATEGY CHOICE & PORTFOLIO ANALYSIS 92 .
What then is the magical number? 93 . Dominant logic enables top managers to selectively scan the environment and make trade-offs.STRATEGIC CHOICE A strategic choice seeks to determine the alternative courses of action available before top managers to achieve its strategic intent. It attempts to answer the following questions – How effective has the existing strategy been? How effective will that strategy be in the future? What will be the effectiveness of alternative strategies? It is impossible for a manager to assess all the alternatives. In most cases the trade-off is between resources and opportunities.
They must choose problems which will lead to the right kind of opportunities. nor is to a define a problem for others to solve. managers need to ask the right questions. will help the firm achieve its intent. For an optimal choice the following four issues need to be resolved – Is the strategy clearly identifiable? Is it consistent with the resources of the firm? Will it be able to exploit the opportunities in full? Is it in tune with the values and beliefs of the firm? 94 . To identify the right problems. The key task before a top manager is to identify the right problems. if addressed.SELECTIVITY IS THE KEY The role of a top manager is not to solve a problem.
Proximity to the corridors of power (i. Their roots can be traced to a single family or clan and share broad similarities. .e. Managing Agency). 95 Succession planning is critical to continuity. chaebols in Korea.BUSINESS GROUP .DEFINITION A business group is known by various names in various countries – guanxique in China. BRC). embassies). business houses in India. keiretsus in Japan. formal and informal ties. High degree of centralized control (GEO. Licenses & Quotas. Resource sharing. Their origins can be traced back to market imperfections existing in an economy (MRTP Laws.
RESOURCE SHARING ACROSS FIRMS Parent Company Firm 1 Firm 5 Firm 3 Firm 2 Firm 4 96 .
STRATEGIC CHOICE – MACRO TIMING Recession (Stability) Prosperity (Diversificatio n) Depression (Divestmen t) Recovery (Intensification ) 97 .
Divestment Duration (Yrs) Inception Intensification 98 .STRATEGIC CHOICE – MICRO TIMING ReEngineering Growth (%) Maturity Stability Growth Diversification Decline .
Investing in emerging businesses may not actually be so simple as it appears to be.PORTFOLIO ANALYSIS Resource allocation across a portfolio of businesses is an important strategic choice. 99 . Power and resources often goes hand in hand. next only to choice of business. Why? Businesses are not about liquid assets. there are high costs associated with entry and exit. Redeployment of resources upsets the established power bases of a group. therefore. Rules of the game are different. Relatedness across resources are difficult to realize. sometimes impossible.
BCG GROWTH MODEL Relative Market Share (%) Industry Growth (%) Low High High Low Stars Question Mark ? Cash Cow Dogs 100 .
which remains a big? These businesses are net users of resources.e. provided the company is able to build up on its market-share (i. Stars – They achievers in the near term. market penetration. but to larger extent than a question mark. product development). provided the industry growth rate continues and the company is able to maintain its growth (i.BUSINESS ANALYSIS – TATA GROUP Question Marks – They have potentials in the long term. market development. diversification). Tata Steel). TCS. These businesses are also net users of resources (Eg. and their risk profile is high (Eg. Trent. 101 .e. Tata-AIG). Tata Telecom.
e. However. cash cows may also need to invest provided the industry takes an upswing (Eg. Tata Tea.BUSINESS ANALYSIS – TATA GROUP Cash Cow – These are matured businesses. Groups prefer to dispose off such businesses (i. they are generators of resources. Tata Motors. Nelco. and they lack on competencies to take on competition and are basically cash traps (Eg. 102 . harvest.e. stability). Indian Hotels. and the company dominates the industry ahead of competition (i. Dogs – They are a drag on the group. Tata Press). Tata Pharma. Given that the growth potential in the business is low. Tata Chemicals). divest) as achieving a dominant position in these businesses is a difficult task.
103 . HUL). The terminologies used are somewhat prohibitive.LIMITATIONS It does not address the concerns of a business which is in the average category (usually the majority). niche – Rolex.e. The model does not provide specific solutions within a particular category. factors are limited. Certain businesses in the low market share category may be the result of a conscious strategy (i. Armani). Data may be prohibitive. Mercedes Benz. Cartier.BCG . Cash cows may actually need substantial investments to retain their market position (Eg. neither in high or low.
-) 104 .MATRIX Distinctive Capabilities Strong High Medium Weak Stability Industry Attractiveness Diversify (++) Intensify (+) Med Intensify(+) Stability Harvest (-) Low Stability Harvest (-) Divest (.GE .
ARTHUR’ D. LITTLE Inception Dominant Strong Favourable Tenable Weak Growth Maturity Decline Improve Selective Niche Abandon Industry Life-Cycle Divest Harvest 105 Competitive Position Invest Consolidate Hold .
SHELL – DIRECTIONAL POLICY MATRIX Business Sector Prospects Attractive Average Unattractive Generate Cash Phased Withdrawal Distinctive Capabilities Strong Market Leadership Try Harder Double Or Quit Growth Average Custodial Weak Phased Expand Withdrawal Divest 106 .
SBU – A business unit which is strategically different from another and also shares a different SIC code. Divest – Selling a part or the entire business at one go. Gap Analysis – It emphasizes what a firm wants to achieve.TERMINOLOGIES Harvest – It entails minimizing investments while trying to maximize short-run profits and cash flow with the intention to exit the business in the near future. Disinvestment involves selling in phases. BCG – Boston Consulting Group. 107 . Portfolio – An organization is perceived as a portfolio of businesses.
BUSINESS STRATEGY & COMPETITION 108 .
building market-share. and earning super-normal profits (i. 109 . The strength of a firm in a particular business usually stems from its competitive advantage.e. The principal focus is on meeting competition.COMPETITIVE STRATEGY A competitive strategy deals with how a firm competes in a particular business or product-market segment. Such resources or activities should be distinctive and sustainable over time. Competitive advantage refers to a firms resources or activities in which it is way ahead of competition. rent). Competitive advantage is the back-bone of strategy.
preventing new entry and/or competition (Hax & Wilde). Resource Based View – Obsession with competence building. identifying critical success factors. 110 . Delta Lock In – Two dominant players co-opt to selfreinforce and create or escalate an entry barrier.BUSINESS STRATEGY FRAMEWORKS How to be distinctive and yet sustainable – Differentiation – Understanding of the dynamics of competition. involving harmonizing and integrating multiple streams of technologies. developing competitive advantage (Porter). Blue Ocean – Consciously moving away from overcrowded industries to uncharted territories and making competition irrelevant (Kim & Mauborgne). leveraging (Prahalad).
Sources of cost advantage are varied and depends on the structure of the industry – Economies of size. preferential access to raw materials. proprietary technology. Steep experience curve effects. Locational or early entry advantage. 111 . Ayur. Nirma.PORTERS – COST LEADERSHIP Cost Leadership – It is a strategy that focuses on making a firm more competitive by producing its products more cheaply than its competitors. Reliance) or may pass it to customers to increase market-share (Eg. Compress project duration through crashing. T-Series). The firm may retain the benefits of cost advantage by enjoying higher margins (Eg. backward integration.
It selects one or more attributes that buyers perceive as important. Intel. 112 . avoiding brand dilution. undeterred attention to quality. Rayban). (Eg. Culture of experimentation. Feeling the pulse of the customer. and sufficient slack. Sony. innovation and out of the box thinking. Successful product differentiation is often followed by premium pricing. Focus on brand loyalty. Means of product differentiation are peculiar to each industry. Creativity.PORTERS – PRODUCT DIFFERENTIATION Product Differentiation – It is a strategy that attempts to provide products or services that are differentiated from competitive products in terms of its value proposition and uniqueness.
They are poorly served by mainstream players. A focuser seeks to achieve a competitive advantage in its target segment. though it may not possess an overall competitive advantage. Cartier. 113 . coupled with fear of structural erosion. Armani).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. Sub optimization alone may not be a source of superior performance. Mont-Blanc. The target segment must have unusual needs or the delivery system catering to this segment must be unique. Rolex. Maybach.
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 .
HYBRID STRATEGY A hybrid strategy is the simultaneous pursuit of cost leadership and differentiation. Reducing cost does not always involve a sacrifice in differentiation. jugaad or frugal engineering). Though cost leadership and differentiation are inconsistent.e. Tata Nano). Firms focusing on a hybrid strategy typically aim at shifting the productivity frontier and recreating a new product-market segment altogether (Eg. in a hyper competitive context the two strategies need not be mutually exclusive. similarly differentiation may not always lead to rising costs (i. 115 . and usually outperforms a stand alone generic strategy.
leading to what is called – straddling.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 . unless such a player is capable of discovering a profitable segment. The positioning therefore gets – blurred.stuck in the middle. 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. It tries to compete through every means. 116 . but achieves none. Industry maturity will usually widen the gap.
technological innovations. leading to a blurred productivity frontier and steep learning curve. It is characterized by – High level of technological uncertainty.) Excessive turbulence in the dynamics of the environment. Eg. Market segmentation not well defined. ending in a differential cost economics. First-time buyers.radical environmental changes. There is a lot of scope to define the rules of competition. Nano technology. coupled with low penetration levels. (Eg. Artificial intelligence). Speech recognition software's. changing customer needs. 117 .EMERGING INDUSTRY Emerging Industry – An evolving industry characterized by . 3D imaging. Consumer behaviour pattern unstable and evolving.
Paints. Retail and telecom. leading to clear fragmentation. because of lack of economies of size and scale. Consumer durables. IT. 118 . Eg. Diverse customer needs. MRTP may also cause fragmentation. Government regulations in the form Eg. High exit barriers because of huge investment in CAPEX.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). It is characterized by – Low entry barriers. Eg. Eg. Air Conditioning. Scope for players to change the rules of the game.
distribution networks. technological maturity. established industry dynamics. Cartel among existing players through collusion. Limited scope for innovation . Strong entry barriers. because of economies of size and learning curve effects.technological maturity.MATURED INDUSTRY Matured Industry – An industry characterized by saturation in growth rates. Firms are rule takers in the segment as productivity frontier is well defined. collaboration and co-option. 119 . well defined consumer behavioral patterns and imperfect competition leading to near monopoly. early entry and location advantages.
Nature of competition extremely high. with little or no signs of recovery. Typewriters. backed by corporate espionage.DECLINING INDUSTRY Declining Industry – An industry which has outlived its utility due to the entry of close substitutes and or radical product innovations which results in a shift of the productivity frontier. 120 . Firms facing a declining phase are characterized by inertia and slow to react to environmental changes. and costly price wars. Exit barriers are extremely high because of limited prospective buyers. Learning abilities have been stunted and firms adverse to investment in R&D and make fresh investments. scooters. dot-matrix printers). (Eg.
recreate new markets. premium pricing. Fragmented Industry – Identify. assess and overcome fragmentation. increasing scope. Matured Industry – Sophisticated cost analysis. reengineer. 121 . regenerate. strictly product differentiation and not standardization. process innovation. strike alliances. strictly cost differentiation. move beyond boundaries. branding and promotion. aggressive building of distribution networks. Declining Industry – Redesign. Locate a defendable position. mergers and acquisition.COMPETITIVE STRATEGIES Emerging Industry – Set benchmarks. focus more on product differentiation or even a hybrid one. or else exit the segment.
hence very rarely confer competitive advantage as can be easily acquired or replicated. positions based on resources which are unique and inimitable are far more sustainable even in the long term. and complex learning experiences in integrating and harmonizing technologies (distinctive capabilities) that play an important role in delivering competitive advantage through “causal ambiguity”. 122 . They are a standard in nature. Intangible – These refer to goodwill. brands. However.RESOURCE BASED VIEW Differentiation based on cost or products saturates and ceases to exist beyond the medium term. patents. A firms resources can be classified into – Tangible – These refer to real assets.
they are woven around technologies. can be leveraged across businesses) or specific to a particular business. Therefore firms should concentrate on developing complex resources that forms the very basis of differentiation. 123 . but not necessarily. They play a very critical role in shaping competitive advantage. Typically. Hence. Capabilities can be generic (i. There is a high degree of internal and external causal ambiguity involved in it.CAPABILITIES & COPMPETENCIES These include a complex combinations of tangible and intangible resources that organizations use to convert inputs to outputs. differentiation based on capabilities can be sustained even in the long run.e.
COMPETITIVE ADVANTAGE 124 .
e.COMPETITIVE ADVANTAGE A competitive advantage is a position of superiority relative (i. It enlarges the scope of an organization. 125 . competitive advantage subsequently becomes the back bone for a competitive strategy. A portfolio of competitive advantage comprises strategic advantage profile (SAP). not absolute) to competition. Success of a strategy critically depends on SAP. Strategy drives competitive advantage. and results in well springs of new business development. It results in a distinct differentiation advantage or a cost advantage or hybrid as well.
126 . SAP changes from time to time. In today's world of discontinuity. Most successful organizations around the world have a well balanced SAP. Internal strategic fit between its strategy and dominant logics is essential for the top management to stretch and leverage SAP. Identification of SAP is critical for and stretching and leveraging of resources. In most cases SAP is hidden and dormant.STRATEGIC ADVANTAGE PROFILE (SAP) Organizations have to systematically and continuously conduct exercises to identify its SAP.
each of the players need to be efficient backed by sufficient coordination at the contact points (i. 127 . Substantial cost reductions also follow. Competitive advantage arises not from an individual activity but a stream of inter-related activities. Today SCM is integrated with greening the environment as CSR practices. and enhanced customer tracking – higher market share. Inventory Mgt to Logistics Mgt to Supply Chain Mgt (SCM). kaizen or internal customer). VC pay-offs: better product availability. A VC is often compared with a relay team. faster product launches.e.VALUE CHAIN ANALYSIS A value-chain segregates a firm into strategically relevant activities to understand its composite behaviour.
THE VALUE CHAIN Support Infrastructure n gi ar M Human Resource Management Technology Development Procurement Out Logistics Mktg & Sales In Logistics Operations Primary Service M ar gi n 128 .
– First order fit refers to simple consistency between each activity and the overall strategy. 129 . – Third order fit refers to optimization of effort. – Second order fit occurs when activities are reinforcing amongst them. A high fit involving a complex chain of activities drives both competitive advantage and its sustainability. Fit is important because discrete activities result in negative synergy and can also be easily copied by competitors. A learning organization helps create strategic fit.STRATEGIC FIT – THE PORTER WAY The sustainability of the value chain depends on the degree of fit between the activities. Operational effectiveness is not strategy.
– Cannot be easily imitated or substituted. but not necessarily. – Can be leveraged across businesses. . These skills results in distinctive activities and processes. A core competence usually has its roots in technology. Core competence has a high degree of external and 130 internal causal ambiguity embedded in it. It forms the very basis of competitive advantage. It should satisfy the following conditions – Contributes significantly to customer benefits. – Can be sustained even in the long run.CORE COMPETENCE A core competence represents the collective learning's of an organization around diverse streams of technologies.
Majority of the firms have competitive advantage. only global leaders possess a core competence. 131 . A competitive advantage manifests from a function. A competitive advantage is sustainable in the shortmedium term. A competitive advantage may or may not lead to superior performance. a core competence has its roots in a set of skills. a core competence always implies a competitive advantage.CORE COMPETENCE A competitive advantage does not necessarily imply a core competence. a core competence is sustainable even in the long-term. a core competence usually does.
This is known as a zero-sum game. each of whom wants to win. Here the magnitude of gain offsets the magnitude of loss equally. 132 . illustrations depicting a win-win situation. the stringent assumptions of game theory and difficulty in ascertaining of pay-offs makes game theory application difficult in business. However. A game is a contest involving two or more players.GAME THEORY The game theory was developed in 1944 by Oscar Morgenstern. In a game (similar to a business) one players win is always another's loss. Subsequent work on game theory by John Nash led him to win the Nobel prize in 1994. In fact there are no.
An unbiased game is one where both the players have equal chances of winning. Firm Y’s Strategy Use Radio Use Radio +2 +6 Use Newspaper +7 -4 133 Firm X’s Strategy Use Newspaper Firm X’s Pay-Off Matrix .BIASED AND UNBIASED GAME A game is said to be biased when one of the players have a disproportionate chance of winning.
Firm Y’s Strategy Use Radio +3 +1 Use Newspaper +7 -2 134 Firm X’s Strategy Saddle Point Use Radio Use Newspaper Firm X’s Pay-Off Matrix . A saddle point is a situation where both the players are facing pure strategies.PURE STRATEGY GAME The strategy each player follows will always be the same regardless of the other players strategy.
iteration) rather than through collusion (E. Yahoo Vs Microsoft). Coke Vs Pepsi).g. 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. collaboration or cooption. This is usually through learning by “experience or observation” (i. 135 . However.TYPES OF GAMES Simultaneous Games – This is a situation where the players have an option to choose to cooperate or not through collusion.e. Repeated Games – In this situation the players interact repeatedly with each other sub-optimizing the outcome possibilities. It represents the classical “prisoner’s dilemma”.
– Building incentives for customer loyalty. – Making pricing more transparent. . but 136 players do not always behave rationally. 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. It results in a shift in the productivity frontier.CHANGING THE RULES OF THE GAME In a situation where a player is unable to compete with the existing rules of the game may attempt to change the rules of the game altogether. Game theory relies on the principle of rationality.
DELTA MODEL & LOCK-IN
Its a systematic approach where-in two or more industry majors, who by default has achieved a proprietary position (Microsoft – Software / IBM – Computers) which are not necessarily best-products in the industry, co-opt to create a lock-in. A lock-in implies that other players has to conform or relate to that standard in order to prosper. Becoming the industry standard requires – strong brand, causal ambiguity, and close relationship with other companies offering complimentary services. Lock-in is self reinforcing and escalating (i.e. accelerating effect).
THE THREE STRATEGIC POSITIONS
System Economics Market Dominance Complementary Share
Enabled through effective use of technology
Total Customer Solutions
Customer Economics Cooperation Customer Share
Product Economics Rivalry Product Share 138
Bill Gates is the richest man in the world not necessarily because he has developed the world’s best software's or excels at customer satisfaction; but he has got an army of people working for him who are not on his payroll – all the application software providers who are writing programs based on “Windows” compatible operating platform. Once you create the lock-in it is sustainable because of the “network effects”; which creates the proverbial “virtuous cycle” – customers want to buy the computer with largest set of applications and software developers want to write programs for the computers with the largest installed base.
The proponents (Hax & Wilde) believe that every organization has the ability to create and sustain a “lock-in” positioning (though in varying degree). This “system lock-in” is referred to as “delta” – delta being the Greek letter that stands for transformation and change amongst the players. The lock-in once created becomes very difficult for a firm to penetrate, and becomes a distinct entry barrier. The model is based on the belief that it compliments Porter’s differentiation model and RBV framework instead of contradicting them. In a lock-in strategy the performance outcomes are dependent on the success of another.
It relates to translating strategy formulations into practice. Performance realization of a strategy depends on the implementation effort. Successful implementation also depends on the appropriateness of the strategy. Since strategy implementation is a time bound process, alignment (i.e. strategic fit) is a key variable during times of radical change. Some of the other levers of successful strategy implementation are – Transformational leadership and motivating power. Resource allocation; its stretching and leveraging. Compatible organization structure & control systems. Inertia & resistance to change.
– Development of capabilities & competencies. internal strategic fit (strategy – dominant logic) is critical to strategy implementation. A high strategic fit (co alignment) is useful because it enables – – Appropriate and timely response. – Unlearning & learning of new skill sets.IMPORTANCE OF STRATEGIC FIT Strategic fit has a central role to play in strategic management. – Changing the rules of the game. – Better strategic and operational control. 143 . While external strategic fit (strategy – environment) is relevant for strategy formulation. – Resource commitment from top management.
In such a situation. learning levels are very high. 144 . In fact. formulation & implementation can occur simultaneously. effective strategies are better crafted when there is a subtle overlapping between the two (i. emergent strategy vis-à-vis intended & realized).FORMULATION Vs IMPLEMENTATION Traditionally. while control is very effective. According to Mintzberg. learning levels are very low.e. at the cost of sacrificing a lesser degree of control. In such a situation. strategy formulation and implementation has been perceived to be distinct & independent. Some of the key strategic learning's exists at the contact point between the organization and its customer.
transformational leaders go one step beyond – Design a well crafted and designed strategic intent of the organization. shift from compliance to commitment. bring about transparency. Install a system of shared beliefs and values. Pragmatism is the ability to make things happen. In contrast.ROLE OF TOP MANAGEMENT To bring about change and to implement strategies successfully. 145 . A transactional leader is usually confined to allocating tasks & responsibilities and extracting performance. He should be an agent of change. companies depend more on transformational leaders than transactional leaders.
brands.e. land. Intangible resources (Eg.RESOURCE ALLOCATION Resources allocation includes tangible resources (Eg. 146 . labour. patents. The various methods of resource allocation includes Historical Budget – The budgets framed by HQ for a particular SBU keeping in mind past trends. 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. skills) also includes complex resources like capabilities and competencies. Performance Budget – SBU managers need to justify the distinctive resources in terms of the opportunity it is pursuing yields the highest possible pay-offs. minimum requirement).
Distinctive capabilities are complex set of skills woven around technologies. Distinctive capabilities helps in stretching and leveraging resources thereby overcoming two major constraints involved in strategy implementation – times & costs. though not necessarily in the case of emerging markets. convergence of multiple streams of technologies at the product – market level is becoming increasingly evident (Eg. Due to causal ambiguity (complexity). 147 . Flat Screen Displays. these capabilities are sustainable even in the medium to long term. Moreover. Mobiles).CAPABILITIES & COMPETENCIES Technology and business are slowly becoming in – separable.
Once the structure is in place. 148 . 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. The level of centralization and decentralization is decisive.STRATEGY & STRUCTURE It is a framework within which individual efforts are coordinated to bring synergy. An appropriate organization structure & adequate control systems are essential to implement strategies and achieve stated goals. A firm in several related businesses usually employs a divisional structure.
Output). 149 . based on skills and competencies.TYPES OF STRUCTURES Functional Structure – Activities grouped together by a common function (Eg. Finance). disbanded subsequently. processes. Virtual Structure – A boundary less or hollow organization. Marketing. with team members having dual line of control. Team Structure – An informal group formed for a crisis. Project / Matrix Structure – A formal but temporary framework initiated for the completion of a particular project/crisis. Divisional Structure – Units grouped together in terms of products. SBU Structure – Businesses segregated in terms of strategic dissimilarities (Eg. or geographical locations.Technology. Inputs .
as span is broader. Environment & People – Economic and political conditions have a major bearing on structure coupled with the attitude and aspirations of the people in the organization. 150 .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. facing challenges & crises. assuming responsibility. leading to a tall structure. structures are becoming flatter and more simpler. It includes the desire for independence. Technology – With more and more convergence of technologies in business.
Inertia is a characteristic of a firm that endures status quo (i. Top managers resist change. Changes in top management and unlearning helps overcome inertia. irrespective whether it is from worse to good or good to worse.e. there is a tendency to continue along the same lines. Most firms undergo periods of strategic continuity rather than strategic discontinuity. Inertia acts as an impediment in strategy implementation.INERTIA When a firm has been operating in a certain fashion for a long time. co0ntinuity). Common sources of 151 inertia – complacency with past successes. .
However. firms should move beyond financial performance to strategic performance as organization systems are becoming complex. Since the internal and external environment is in a state of continuous flux. To prevent deviation of fit. Deviation of fit is detrimental to performance and may lead to strategic failure. . strategies need to be evaluated on an ongoing basis to prevent deviations of fit.STRATEGY EVALUATION Strategy evaluation centers around assessment of strategic fit. certain authors propose misfit as a source of superior 152 performance.
competitive advantages becoming disadvantages? Has the company acquired any new competency? Has the company been able to overcome the 153 environmental threats. . detecting changes in the external and internal environment and taking corrective action wherever necessary. 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.
However. It involves assessing – strategic thrusts and milestones. It is open-ended as well as . Special Alert Control – It intends to uncover unanticipated information having critical impact 154 on strategies. Implementation Control – It aims at assessing whether key activities are proceeding as per schedule.STRATEGY CONTROL IMPLEMENTATION It involves steering the company towards its original growth trajectory & stated goals. checking every premise is costly as well as difficult. Premise Control – Checking the validity of the assumptions on which a strategy was based.
low strategic fit due to consultants intervention. “If you cannot . Strategy not linked to resource allocation & capabilities – Lacking commitment of top management. Performance measures are defective – What to evaluate against? How to measure the 155 construct? As a saying goes.BARRIERS TO STRATEGY EXECUTION Vision and strategy not actionable – Utopian ideas. difficult to translate into practice. Strategy intent not linked with goals and objectives – Lack of coordination at lower levels leading to negative synergy.
Managers should take into account all seven of these factors. so if one fails to pay proper attention to one of them. On top of that. the relative importance of each factor may vary over time and context. Large or small. important or not they're all interdependent. 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. 156 . to be sure of successful implementation of a strategy. Together these factors determine the way in which a corporation operates. Today it is considered one of the most powerful tools for strategy implementation determining success or failure.
They had been investigating how Japanese industry had been so successful.BACKGROUND & ORIGIN The 7-S Framework was first mentioned in "The Art Of Japanese Management" by Richard Pascale and Anthony Athos in 1981. and was taken up as a basic tool by the global management consultancy company McKinsey. Since then it is known as their 7-S model and is extensively used by corporations worldwide to implement their strategies. The 7-S model was born at a meeting of these four authors in 1982. 157 . It appeared also in "In Search of Excellence" by Peters and Waterman. At around the same time in the US Tom Peters and Robert Waterman were exploring what made a company excellent.
Skills – An organizations capabilities and competencies. processes and routines that characterize how work should be done. Strategy – Trade-offs for the allocation of a firms scarce resources. Staff – Human inter-relationships. Style – The way in which the top management influences the functioning of an organization. 158 .THE 7’S Shared Values – It represents what the organization stands for and what the top management believes in. formal & informal . to reach identified & stated goals. over time. Structure – The way in which the organization's units relate to each other in terms of their commonalities. Systems – The procedures.
STRATEGIC FIT Strategy Structure Shared Values Systems Skills Staff Style 1st Order Fit 2nd Order Fit 3rd Order Fit 159 .
staff. Consider the 4P’s of marketing or 3R’s of SCM. the soft S’s (skill. Ineffective in case of a virtual company.A CRITIC OF THE 7S MODEL While the hard S’s (strategy. because most often they are culturally embedded and often neglected. In contrast. 160 . structure. shared values) are very malleable and comparatively more difficult to identify & influence. While the American co’s focuses on the hard S’s. A choice of an alphabet often limits the scope and skews the interpretation of a model. systems) are comparatively easy to identify and influence. style. their Japanese counterparts focus more on the soft S’s for their early success and sustainability.
STRATEGY IMPLEMENTATION ROUTES Strategic Fit .High Organic Growth Strategic Alliance Joint Venture Mergers & Acquisition Strategic Fit .Low Take Overs 161 .
soft loans. the entire value chain. Govt.e. i. . 162 Risk of cost and time overruns. concessions are available for green-field projects. subsidized power). i. technologies. It has complete control over inputs.ORGANIC GROWTH Here a firm builds up its facilities right from the scratch and continues to do so without any external participation. SEZ’s. tax holidays. Long gestation leads to delayed market entry. The entire infra-structural facilities are set up afresh having its own gestation and break-even. Reliance Industries).e. (Eg. and markets. (Eg. green-field projects.
. It has limited intervention power and usually lacks holistic commitment from the alliance partner. 163 It is a form of competitive collaboration. Tata Motors & Fiat). Alliances are usually in the areas of technologies or markets (Eg. Alliances are usually short-lived and disbanded once the purpose is achieved. There is no funding or equity participation from the alliance partner & both the firms continue to operate independently.STRATEGIC ALLIANCE It involves a pro-active collaboration between two or more firms on a particular domain or function for mutual gain. It touches upon a limited aspects of a firms value chain.
Hero . (Eg. Dominant logic of both the companies should be complimentary. Degree and extent of management control must be clearly 164 laid down. It is a win-win situation for both the companies. Tata – AIG. . Selecting the right partner is critical for success. leaving minimum scope of overlapping.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. A comprehensive MOU is essential.Honda).
ITC Tribeni Tissues. Economies in scale leading to lowering of costs. Revival of a sick-unit through better management practices is a major motive behind an acquisition 165 strategy.MERGERS & ACQUISITION It refers to the fusion of two or more firms into a single entity. Integrated distribution channel leads to better market penetration and overall synergy. Integration of assets and other financial resources. Brooke Bond & Lipton). . with the individual firms ceasing to exist any more (Eg. Acquisition is an outright purchase of a firm assets by another independent entity (Eg. Coca Cola – Thums Up).
Tata Steel .Corus). often the new firm is “left alone”. Larger geo-graphical diversity.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. Instant access to capacities and markets. Consolidation in a fragmented industry. Most countries have stringent laws that prevents hostile take over. Integration of organization structure & cultures is difficult. Inform SEBI / Stock Exchange after 5% stake is 166 acquired. Make a public offer of not less than .
MANAGEMENT TOOLS IN STRATEGY 167 .
The past is ceasing to be an indication of the future. Companies therefore need to ensure competitive advantages doesn’t become competitive disadvantages. 168 . it is also a source of potential threat. Radical change is superseding incremental change. or better still create next practices Reengineering – Redesigning work processes right from the scratch. Change provides enormous opportunities. Balanced Scorecard – Tracking strategy 3600. every time.WHY MANAGEMENT TOOLS? Change is becoming pertinent in the business environment. TQM – Doing the right thing the first time. Some tools to ensure that – Benchmarking – Adopt certain best practices.
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
clustering). Benchmarking is useful for bringing about operational efficiency.e. While strategy is all about differentiation and not looking alike.BENCHMARKING . Benchmarking merely reorients profits in the hands of few to profits in the hands in the hands of many (i. It can at best complement it. the more similar they end up looking. but it cannot be used as a strategic decision making tool. .LIMITATIONS More and more companies benchmark. It does not shifts the growth 175 trajectory of the industry as a whole. Strategy is more of creating best practices rather than copying them.
e. .g.e. process mapping) and eliminating or improving them (E. The task demands a total change in organisational 176 culture and mindset. DOS to Windows).g. clean sheet).RE-ENGINEERING Redesigning leads to identification of superfluous activities or product features (i. Re-engineering attempts to radically change an organizational products or process by challenging the basic assumptions surrounding it. Re-engineering involves complete reconstruction and overhauling of job descriptions from the scratch (i. for achieving performance improvement (E. Windows 95 to 97).
than people driven Innovative Vs Traditional Customer centric Vs Organisational centric 177 .REENGINEERING – KEY TENETS Ambition Focus Attitude Enabler Performance Large scale improvement by questioning basic assumptions about how work is done Micro Vs Macro Business Processes Vs Organisational Processes Starting right from the scratch Not historical More IT driven.
Strategic – It looks into the process of strategic planning.e. . processes. 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. structures. customers and suppliers and protects the organization from the future (i. Business – It looks into markets. It can be of the following types – Functional – It looks into the flow of operations (i.REENGINEERING .e. products. BPR).LEVELS Reengineering can be successfully leveraged at all levels of an organization with varying degree of results. 178 .
reverse engineering is a top-bottom approach. While traditional manufacturing is a bottom-up approach. – Causal Ambiguity. protection can be had in the following ways – – Patenting. It generally acts as a threat to innovation. 179 . with an intention to copy it (Eg. Cheaper versions of Intel chips and mother-boards manufactured in Taiwan. – High cost and time acts as a deterrent. However. learning curve advantage. – Early entry advantages. Indonesia).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.
e. machine tools to convert ideas into a marketable product (i. designing facilities. Inaccurate assessment at this stage may lead to a failure of the entire project. Implementation – Developing of a prototype. Introduction – Launching the product in the market. cost and effort necessary for the purpose of reverse engineering.STAGES IN REVERSE ENGINEERING Awareness – Recognizing whether the product is found to be worth the time. nano-technology). 180 . Usually in such cases segmentation and pricing is different from the original innovator. Actualization – Obtaining and dismantling of the product to assess how it functions.
Car) – – Performance – Mileage of 14 kms to a litre of fuel. 181 . It has eight dimensions (Eg. More and more companies are moving towards meeting implied rather than stated needs. – Reliability – Consistency in mileage.Euro IV. Air bags. – Durability – 1980 manufactured cars still on road. – Conformance – Emission standards . – Serviceability – Large no.WHAT IS QUALITY? It involves the totality of a product or service in meeting certain stated or implied needs. of service stations. – Perception – Customer notions. – Features – Anti-lock braking systems. – Aesthetics – Appeal in design.
Management of quality was traditionally inspect it .fix it in nature. It is deeply embedded as an aspect of 182 organisational life & culture. which ensures good market standing. TQM is a way of creating an organization culture committed to the continuous improvement of work processes – Deming. It had little impact on improving overall productivity. . touching upon a limited aspect of a value chain.TOTAL QUALITY MANAGEMENT Objective – Management of quality ensures conformance to certain pre-set standards. zero defects.
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). Empowerment – It takes place when employees are properly trained. Looking at quality as an endless journey. 183 . Kaizen – Make continuous improvement a way of life.TQM – KEY TENETS Do it right. Be customer centric – Generate the concept of internal customer (Ishikawa). fully involved in decision-making and fairly rewarded for results. not a final destination.
enabling the firm to concentrate on core activities essential to customer satisfaction. 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. 184 . of units meet preset standards (Eg.TQM . 6-Sigma). It is based on the principles of MBO (i.STRATEGIES Outsourcing – It is the process of self-contracting services and operations which are routine and mundane.e. Quality Circles – It a small group of shop-floor employees who meet periodically to take decisions regarding operational problems and crises. saving precious top management time. equal participation).
. it’s bad execution...... – Less than 10% of strategies effectively formulated are effectively executed. Source: Fortune Magazine Why CEO’s fail? 185 . strategy implementation has never been more important....BALANCED SCORE CARD Some interesting comments . – Efficiency and effectiveness is passé.... – In the majority of failures – we estimate 70% – the real problem isn’t (bad strategy) .
CONCEPTUALISATION A company’s performance depends on how it measures performance. 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. Most managers tend to rely on traditional measures of performance having its origin in finance as they are well tried and tested. 186 . In today’s context when organizational systems have become complex and multi-directional we need to have a holistic view of performance to cut the lag effects. rather than effects.BSC . Focus more on causes.
It has four dimensions – – How do customers see us? – What must we excel at? – Can we continue to improve and create value? – How do we look to shareholders? Firms more often have problems. and distinguish strategic problems from operational ones. 187 . The most critical element of a BSC is to measure these four dimensions. because they have too many.BSC – KAPLAN & NORTON (1992) A BSC helps a manager to track and communicate the different elements of company’s strategy.
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.
of times covered in media No.BUSINESS PERSPECTIVE GOALS Skills Excellence Exposure Introduction MEASURES New capabilities and competencies Implementation & gestation period Bank and supplier credit limits & PLR Unit Costs / Conversion Ratio / Defect Ratio No. of new product launches Vs competition Product pricing Vs competition 189 .
of product innovations 190 . of new patents registered Time to develop next generation products Average and spread in operating cycle % of products that equal 2/3 sales No.LEARNING PERSPECTIVE GOALS Technology Manufacturing Focus Timing MEASURES No.
Return on Investment Market Capitalization / PE ratio 191 .FINANCIAL PERSPECTIVE GOALS Survival Success Prosper Divestment MEASURES Cash flows Growth in Sales and Profits EPS.
STRATEGY MAPPING 192 .
IMPLEMENTATION 2 Translate strategy into operational terms 1 Mobilize change through effective leadership 5 STRATEGY Make strategy a continual process 3 Align the organization to the strategy 4 Make strategy everyone’s job 193 .BSC .
194 performance will automatically follow. Shift from control to strategy (i.what they don’t know. sharing of vision).e. Seek excellence. Focus on cause not effects. doing right things instead of doing things right). Modern managers should be poised to ask the right questions.ADVANTAGES Most often top managers face information overload. they don’t know . It helps translating strategy into practice (i. The BSC brings together the different elements of a company’s strategy at a glance. .e. As a result.BSC .
EFFICIENCY Vs EFFECTIVENESS Ineffective Effective Inefficient Goes out of Business quickly Survives Efficient Dies Slowly Thrives 195 .
Michael E. not only thrives. but also sustains it. . Porter 196 .EFFECTIVENESS + STRATEGY A company which is effective as well as strategic.
CORPORATE RESTRUCTURING 197 .
. As Peter Drucker pointed out. Tata Group). Strategic variety brings paradigm shift. “every organization must be prepared to abandon everything it does. from survival of the fittest . Strategic variety may be caused by changes in the as external well as internal environment.. to survival of the most adaptable.. Radical change brings about strategic variety. Restructuring involves consciously driving significant changes in the way an organizations thinks and looks (Eg. To adapt to the changing environment.CORPORATE RESTRUCTURING The only thing constant in today's business environment is change..” 198 ... firms use restructuring strategies.
Core Business – Company’s should introspect – What business are we in? Business evolved out of opportunism or myopia should be divested. Walkman. they should strive to provide unimaginable value ahead of its time (Eg. Instead. downscoping). etc).RESTRUCTURING – BASIC TENETS Customer Focus – Restructuring ideally begins and ends with the customer.e. downsizing or rightsizing). and dividing the core businesses into SBU’s (i. Fax. Company’s should go beyond just asking what he expects. ATM. Internal customers should also not be neglected. Structural Changes – Conventional hierarchical structures should be disbanded in favour of more 199 flexible ones (i.e. .
....RESTRUCTURING – BASIC TENETS Cultural Changes – A culture represents the values and beliefs of the people about the organization. Ratan Tata now drives the point the group means business. Kumar Birla today is more dependent on professionals.. It is created and institutionalized by the top management...) The Aditya Birla group typically relied on the “marwari” community for key management positions ..) Reliance dismantled their industrial embassies .. During the times of JRD.. started focusing on their capabilities. the Tatas were considered a benevolent and charitable organization.. 200 .. Restructuring also requires cultural reorientation. .
MOVING CLOSER TO THE CUSTOMER As companies evolve. they tend to move away from the customer. “ … one reason our customers are satisfied is that we aren’t. Organizing customer and supplier meets. Carry out PR campaigns. Use the reach of networking technologies. Communicating to the media about organization efforts to deliver quality products. Publicizing welfare projects to demonstrate CSR. Getting feedback & addressing customer complaints.” 201 . Restructuring provides a platform to close this gap. Honda’s ad says.
It can have two forms. Mittal – Arcelor) and can take various forms. Asset Swaps – It entails divesting and acquisition simultaneously by two companies. including its intangibles – Mergers – It may be vertical. Further spin-off can be classified as split-off and split-up. Hive Off – It involves siphoning of assets under control. it may be smooth (Eg. horizontal. 202 . or conglo-merate. Tata – Corus) or hostile (Eg. Further. where the difference in valuation is settled off through cash or equity (Eg. It may include brands as well. spin-off and equity carve. Glaxo – Heinz).ASSET RESTRUCTURING Asset Restructuring – The asset composition of a firm undergoes a major change.
203 . the existing shareholders receive equity in the subsidiary in exchange for the stocks of the parent company. the entire parent company loses its identity after being split into a number of subsidiaries. Most of these practices are not in consonance with Indian laws. in which the equity is allotted amongst the existing shareholders on a pro-rata basis (Eg. Equity Carve – It involves selling a minority stake to a third party while retaining control (Eg. – Split-Off – In a split-off. Reliance Ent). – Split-Up – In a split-up. Tata Industries selling 20% stake to Jardine Matheson).HIVE OFF Spin-Off – A spin off is the creation of a new entity.
for a specified market or in general with full management control. repay long-term debts. L&T sold its cements division to Aditya Birla group. Generic motives include – – Raise working capital. strategic misfit. A complete sell-out is known as divestment (TOMCO). In 2005. In 1995. Parle sold its Thums Up brand to Coke for $40 million apprehending fierce competition.DIVESTITURE It involves the sale of a brand or a division of a company to a third party. but retained its engineering division. Selling out in phases is called disinvestment (IPCL). – Poor performance. 204 .
It provides greater leverage as well as management control. Wipro).CAPITAL RESTRUCTURING Capital Restructuring . 205 . Share Buyback – It is a process of cancellation of shares out of free reserves to the extent of 25% of paid-up capital (Eg.3 billion.The internal & external liability composition undergoes a major change – LBO – Acquiring control over a substantially larger company through borrowed funds (Eg. Tatas take-over of Corus for US $11. Conversion – Replacing debt with equity or vice-versa or costlier with cheaper debt or cross currency debt. involving 608 pence per share).
256 cr ACC – Rs.Rs. 42 cr Voltas . 120 cr Tata AIG – Rs. 950 cr Merind . 250 cr Tata Tetley – Rs. 1700 cr Trent – Rs. 150 cr VSNL – Rs.BUSINESS RESTRUCTURING – TATAS Divestments Lakme – Rs. 1890 cr CMC – Rs. 230 cr Diversifications Tata Motors – Rs. 99 cr Tata Power – Rs. 1860 cr . 1170 cr Goodlass Nerolac – Rs. 1439 cr 206 Tata Timken – Rs 120 cr Tata Telecom – Rs.Rs.
Survival is the primary motive. keeping the composition of business intact (Jet Airways). of a firm’s employees and sometimes in the no.ORGANIZATIONAL RESTRUCTURING Organizational structure and systems calls for a change when strategic variety is apparent. Downscoping – It involves reducing the business and/or geographical scope of a firm (Aditya Birla group). Turnaround is the primary motive. It can be carried out in the following ways – Downsizing – It is a systematic one-time reduction in the no. of operating units. usually as a result external turbulence. 207 . Rightsizing – It is phasing of excess and redundant employees resulted out of faulty internal planning (SAIL).
Strategy change is unviable without a preceding change in its dominant logics. The longer the period.e.STRATEGIC CHANGE One of the most difficult components of organization restructuring is the mindset of the top management represented through its dominant logic and its shared values reflected in cultural orientation. as strategies are based on such beliefs and biases. Dominant logic becomes deep-rooted in organizational contexts depending on the period it is in place (tenure of the CEO). inertia). thumb rules) of the top management. 208 . the more difficult it becomes to uproot the paradigm (i.e. The dominant logic represents the perceptions and biases (i.
209 . 20% of the people carry out 80% of the changes). Companies achieve real agility only when people at every level rise above the ordinary to face the challenges – revitalization or transformation. In most organizations.FORCES AGAINST STRATEGIC CHANGE The problem with strategic change is that the whole burden typically rests on few people (i. Successful transformation requires – incorporating employees fully into the process – leading from a different place so as to maintain employee involvement – instill mental disciplines that will enable employees to behave differently. the factor that stifled change & performance was – culture.e.
Questioning every basic action of the organization. never take no for an answer. Manage from the future. Create relentless discomfort with the status quo.SUCCESSFUL TRANSFORMATION Build an intricate understanding of the business model at all levels of the organization. it is not about winning but about learning. Encourage uncompromising straight talk. Understand and deliver the quid pro quo. Harness setbacks. process ownership. Promote inventive accountability. 210 . The best way is to alter the institutional point of view.
Identify and implement facilitators of cultural change. by identifying forces for and against change. also known as cultural-web. Aspects of current culture which needs to be overcome. It involves identifying – Aspects of current culture which needs to be reinforced. that can be both enablers and blockages to change and restructuring.FORCE-FIELD ANALYSIS A force-field analysis provides an initial overview of change problems that needs to tackled. Culture and style of management are two main impediments in force-field analysis. It involves diagnosing a change situation – systems & structures. 211 .
Term Reduced labour costs Reduced debt costs Emphasis on strategic control Business High debt costs Higher risk 212 Long .Term Loss of human capital Lower performance Higher performance Capital .RESTRUCTURING .OUTCOMES Alternatives Organizational Short .
focuses on reengineering. 213 . hence go in for downsizing. While the first strategy produces results instantaneously. the second one is a more viable strategy and sustainable option in the long run.NUMERATOR & DENOMINATOR MGT Most firms across emerging markets undergo strategic discontinuity and as a result are forced to restructure their businesses. reverse engineering and regenerating. Numerator – It assumes that turnover is not a barrier or constraint. down-scoping or asset stripping. In order to put back the company on the right track they are resort to – Denominator – It assumes that turnover cannot be increased.
TURNAROUND MANAGEMENT 214 .
.. – Only seven of the first fifty Indian business groups in 1947 were even in business by the turn of this century. .. – Less than 10% of the Fortune 500 companies as first published in 1955. Source: Why do firms atrophy? (Business Today... January 1997). still exist as on 2005. and that the thirty-two of the country’s largest business groups in 1969 are no longer among the top fifty today.. 215 (Govindarajan and Trimble.WHY TURN AROUND MANAGEMENT? Some interesting insights .
While content focuses on endogenous and exogenous variables. As a sequence of events describing how things change and why they change (i. Stage Theory). Both content (what) and process (how) are equally important for a successful turnaround. and capabilities. 216 . and achieves sustainable performance recovery.e. A category of underlying principles and concepts.TURN AROUND MANAGEMENT A turnaround is said to occur when a firm perseveres through an existence threatening performance decline. ends the threat with a combination of strategies. skills. process focuses on – A logic to explain a causal relationship between intervening variables. systems.
unavailability or radical lowering of substitute costs or technological obsolescence. leading to lack of acceptability from distributors and customers. Some indicators Continuous cash flow crises as a result of dwindling market-share and profits.TURNAROUND INDICATORS Most firms atrophy simply because they fail to diagnose the indicators that acts as threat to organizational existence. especially in key positions. Low stakeholder confidence. Substantial shifts in consumer preferences. 217 . suppliers and bankers. Low employee morale leading to high employee attrition at all levels. Uncompetitive products or services. Rising input costs.
based on elasticity. Recalibrate prices. consider extension.. Extending work hours. “all is not well”. liquidating dead assets. Emphasis on advertising and market penetration. Product redesigning or reengineering. Revamp product portfolio. 218 . be more customer centric.TURNAROUND ILLUSION The first step to a successful turnaround is the basic acceptance of the fact that …. Common approaches adopted Change in key positions. prune work-force. Hence. they adopt surface level measures (disprin popping) which most often fail. which most top managers fail to appreciate. focus on power brands.
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 “resource led stretch” and subscribes to the view that a firm has substantial power to override the context. 220 . primarily dwindling resources and capabilities are responsible for decline. Identification of the stimulus leads to the arrest of the downfall.DECLINE Decline is the first stage in the turnaround process. It involves the identification of the theoretical perspectives that explains performance decline – K-Extinction – It suggests that macro economic and industry wide factors are responsible for decline. R-Extinction – It suggests that organization factors. It has its origin in “environment led fit” that subscribes to the view that a firm has little control over external factors.
diversification. The response must match the cause of the decline. new market initiatives. asset reduction. 221 . Strategic responses focus on changing or adjusting the business the firm is engaged in through long term moves such as – integration. If the decline stems from structural shifts. the response should be operational.RESPONSE INITIATION Turnaround responses are typically categorized as operating or strategic. the response should be strategic. Operating responses typically focuses on the way the firm conducts business and involves tactics geared towards – cost cutting and process redesigning (BPR). If the underlying cause is internal efficiency.
RESPONSE DICHOTOMY The response initiation is somewhat dichotomous and cannot be universally applicable. Similarly new market initiatives is feasible only for multi-product firms. when decline deepens shifts in strategic position becomes essential. 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. 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. 222 .
However.7 years with a range of (4-16) years. role model. Sustenance is the key factor in this stage. The top management has a key role to play through empowerment.e.TRANSITION Transition usually reflects the first signs of recovery. lead – lag). confidence building measures.e. Empirical studies show that average time is 7. 223 . transparency. many a times early signs of recovery fades out. participative management (i. consensus). However. Support from all the stake holders through resource commitment. substantial amount of time usually passes before results begin to show (i. Effective levers of transition.
Cut off points must be unequivocal.OUTCOME Outcome is said to be successful when a firm breaches the equilibrium performance level. it should adopt a holistic approach. Regaining lost market share and distributor confidence. Failure is an indication that initial momentum was not sustainable characterized by irreversibility. Supplier and banker confidence. Revival of key customers and new product launches. Share price indications and media coverage. 224 . Instead of focusing on financial parameters alone. Commanding a premium in the market.
COOPERATIVE STRATEGIES & ALLIANCES 225 .
In the cooperative strategy continuum as firms move up the value order. licensing. strategic alliance.COOPERATIVE STRATEGIES Cooperative strategies are a logical and timely response to changes in business dynamics. Any cooperative strategy maybe between firms within the same country or cross border as well. 226 . supply-chain partnership. and globalization . It can assume any of the following forms – franchising. the commitment and the involvement between the firms increases manifold. or joint venture. technology. More and more companies worldwide are moving away from competition to co-option to leverage their resources and enhance bargaining power. consortia.
227 . It is an effective strategy to penetrate markets in a shortest possible time at a minimum cost. owners of the brand Monginis allows its franchisees to sell its confectionary products.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. Switz Foods. Branding is critical to franchising. Titan Inds. owners of the brand Tanishq allows its franchisees to sell its jewellery products.
Become a systems integrator (CKD). Different levels of licensing Manufacturing without embracing any technology (CBU). 228 . as in Tata Indica. refine processes and adopt necessary technologies (SKD). Develop a product through its crude stage. HM manufacturing GM range of cars in India with a buy-back arrangement is a perfect example of CBU.LICENSING Licensing – It is a contractual agreement between two legally independent firms whereby the licensor grants the right to the licensee to manufacture the licensor’s product and do business under its brand-name in a given location for a specified period of time for a consideration.
Tata. 229 . It can be of the following types – Multipartner – Intends to share an underlying technology or asset. Airbus – Boeing). Hyundai). Cross Holdings – A maze of equity holdings through centralised control to ensure earnings stability & threshold resources for critical mass (Eg. enabling them to increase prices (Eg.CONSORTIA Consortia – They are defined as large inter-locking relationships & cross holdings between businesses in a similar industry. Coke – Pepsi). 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. . Tata Motors – IDEA). 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.
design next generation products. Partner selection is one of the critical success factors. Despite their popularity (50-60)% of the alliances fail to accomplish their stated objectives. effective R&D management. to gain knowledge and to obtain access to new markets (Eg. preempt competition. Generic motives involved are . instead of hurrying into a relationship.STRATEGIC ALLIANCE It is an short to medium term understanding between two or more firms to share knowledge and risk. 231 . enter newer markets. Firm’s should undertake a long courtship with potential partners.learning organization. Tata Motors – Fiat. Reliance – Du Pont). enhance credibility.
Coke – Pepsi). Bajaj – Castrol). Backward – An alliance (quasi or tapered) with a supplier of critical components seeking commitment (Eg. Airbus – Boeing). Complementary Equals – Two firms mutually promoting each others complimentary products (Eg. Bootstrap – An alliance between a weak and a strong company with an intention to acquire it. 232 .STRATEGIC ALLIANCE . Alliances of the Weak – An alliance is entered into to preempt competition (Eg. Whirlpool – Tide.TYPES Collusion – Tacit top management understanding to neutralize price wars (Eg. Maruti).
Cultural orientation has been found to have a profound effect on top management’s strategic orientation (Eg. Differences in level of economic development can produce differences in alliances motives. – Japan Vs US). Too much stress on financials & structure be avoided. Firms from developed markets seek access to markets and firms from emerging markets seeking access to technology. 233 .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.
Partner’s ability to acquire fresh skills. Unique Resources – Abilities or skills which cannot be easily duplicated. including ability to provide quality products and services. Intangible Assets – Move beyond the financials of the firm.PARTNER CHARACTERISTICS Complimentarity of Capabilities – The degree to which partners resources can be used in conjunction. Managerial capabilities. Willingness to share knowledge and skills. Experience related to previous alliances. 234 . Dominant Logic’s – Similarity in beliefs & biases.
235 . instead of focusing controlling the relationship. differences not anticipated earlier. partners should nurture it. Getting Engaged – It should incorporate a specific joint activity. degree of compatibility. vows to include commitment to expand the relationship. Learning to collaborate – strategic.MANAGING ALLIANCES Alliances are more than just a deal. Setting up the housekeeping. understanding the chemistry. Changing within. Selection & Courtship – It involves self analyzing. the value chain. incorporating clear signs of continuing independence for all partners. operational & cultural integration.
.e. whilst the partners continue to operate independently. It aims at creating new value (i. separation is very 236 bitter.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. synergy) rather than mere exchange (i.e. Conceptually. It lasts till the vision is reached. combining parts). There are substantial linkages in the value-chain. a joint venture is a selection among modes by which two or more firms can transact.
The market fails as sellers are unwilling to reveal their technology and buyers are unwilling to purchase in the absence of inspection. though more profitable alternative to other choices. Organizational Learning – It is a means through which a firm learns or seeks to retain their capabilities. Strategic Behaviour – Firms may override transaction costs. 237 . in addition to a high degree of asset specificity. It may also be linked to deterring entry or eroding competitors position.JOINT VENTURE – GENERIC MOTIVES Transaction Cost – The situational characteristics best suited for a JV are high performance uncertainty.
– Eg. – Eg. Sharing of resources. Learning new technologies. Define future industry standards. Maruti – Suzuki. – Eg. Endorsement from government authorities. Eli Lily – Ranbaxy. Essar – Hutch (Vodafone). Yamaha – Escorts.OTHER MOTIVES Entry into newer markets. – Eg. Daimler – Chrysler (Premium Cars) 238 . – Eg. – Eg. Renault – Nissan (Minivans – Cars). TVS – Suzuki (4-Stroke Engines) Fill gaps in existing product lines.
Tata – Aditya Birla in Idea Cellular 239 .RISKS INVOLVED Incompatibility – Differences in cultural background.Enka. – Maruti – Suzuki.e. LML – Piaggio Differences in size and resource base. – Eg. Modi – Telstra What after exit (parenting disadvantage)? – Eg. Century . – Godrej – Procter & Gamble. – Eg. technology) drain. Risk of over dependence. Risk of brain (i. PAL – Fiat If the cost of continuing exceeds the exit costs? – Eg.
PRE-REQUISITES FOR SUCCESS Commitment – Mutual trust. respect. Inertia – Differences in age and evolution patterns. Culture – Reconcile gaps. Partner – Avoid duplication of skills and capabilities. Objectives – Shared vision. Equality – Lack of dominance. Agreement – Clarity on operational control. Focus – Avoid strategic myopia. 240 . Incompatibility – Performance expectations. time sharing. Flexibility – Sufficient space to breathe and adjust. Costs – Other modes of transaction becomes cheaper.
MERGERS & ACQUISITION 241 .
SEBI Takeover Code. An acquisition is said be smooth if it is with the consent of the management (Eg. An acquisition is the purchase of a firm by a firm (of larger size. however. Ranbaxy . HLL – Tomco). Mittal Arcelor). reverses are also taking place through LBO) with a view to acquire conglomerate power and induce synergy (Eg. 2002).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. 242 . Most countries have stringent laws that prevents hostile takeovers (Eg. Brooke Bond – Lipton). The larger objective is to leverage on size.Daichi) and hostile if it is without the consent of the management (Eg.
Acquirer – Someone (individual or firm) who picks up an atleast 5% stake without mandatory disclosure having an intention to wrest management control (i. .SEBI TAKEOVER CODE. creeping acquisition). 2002 Promoter – A person who has a clear control of atleast 51% of the voting rights of the company and confidence of all the major stakeholders.e. Control – A special resolution of 75% of the share 243 holders approving the change of guard. Hike – An acquirer who has already picked up a 5% has to make a mandatory disclosure for every additional 1% stake that it acquires. Preferential – A preferential allottee ending up acquiring 5% stake also comes under its purview.
asset stripping). and/or does not enjoy the confidence of the different stake holders. credentials or track record is at stake. whichever is higher as an exit route (Eg.SEBI TAKEOVER CODE.e. Disclosure – All acquirers have to inform the respective stock exchanges where it is listed and SEBI upon acquiring the basic limit and upon every incremental limit thereon. SEBI – In case of a hostile take over. Grasim – L&T Cement. 2002 Pricing – Acquirers will have to offer minority shareholders (at least 20%) the past 26 weeks or past 2 weeks average price. Gujarat Ambuja – ACC). 244 . the SEBI can intervene and block share transfers if: the acquirer has ulterior motives (i.
Conglomerate – It involves integration of two distinctly unrelated businesses. Vertical – It involves complimentarily (partially related) in terms of supply of inputs or marketing activities (Eg. The type of merger is depends on the degree of relatedness (strategic) between the two businesses.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. Godrej.Kelvinator). usually opportunistic (Eg. Reliance). Horizontal – It involves integration of two highly related businesses (Eg. Electrolux . ITC). 245 .
Global image (Eg. Mittal – Arcelor). quick access). scale and scope. Access to newer segments (Eg. Reduced gestation (i. Avoiding risk of new product development. Ulterior motives – (Eg. ITC Bhadrachalam). Tax benefits (Eg. Tata Steel – Corus). Reduction in risk. Economies of size. Acquiring assets or capabilities (Eg.MERGERS & ACQUISITION .MOTIVES Increased market / conglomerate power. ICICI –ITC Classic). Coinsurance effect – Higher debt raising capability. Ranbaxy – Crosslands). Overcoming entry barriers (Eg. Asset Stripping – Shaw Wallace). 246 .e.
When Tata Steel started negotiations with Corus. Top management overtly focused on due diligence exercise and negotiations. while the ultimate acquisition was made at 607 pence/share). Merging of organisational structures. Overvaluation of buying firms (Eg.MERGERS & ACQUISITIONS PITFALLS Cultural differences (Eg. Tata – Corus). Overvaluation is often as a result of an ego drive and substantially affects future returns. Managing size. their initial offer was around 420 pence/share. neglecting core business. Managing over-diversification. Inability to achieve synergy. 247 .
248 . Brooke Bond – Lipton). with an objective to reinforce its growth trajectory or to take on the might of a comparatively larger player (Eg. Tata Steel – Corus). Growth – This stage may witness parallel merger of two firms of similar size. vertical to save transactions costs.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. Maturity – A larger firm acquires a smaller firm with an objective to achieve economies of scale and experience curve effects (Eg. Kingfisher – Air Deccan).
249 . Blanket promotions across entities and confidence building exercises needs to be practiced. active top management intervention in phases. Immediate attempts to super impose structure and culture may cause bottle necks. Left alone syndrome. A common shared vision. An acquisition just for the sake of it or reputation yields very little value in the long term.INTERNATIONAL M&A . Strong differences may stifle plans and its execution.FRAMEWORK Positive contribution to the acquired company. A concern of respect and trust for the business of the acquired company.
INTEGRATION .BLUEPRINT Take the media into confidence. Integrating work processes. Decide upon management control systems. promptly. 250 Do not ignore the “people factor”. . Determine business strategy. Redefine responsibilities and authority. They can carry the message to the various stake holders. Decide on the new hierarchy. Shift attention from business portfolio to people and processes. It will enable focus on customers and key people.
– Unstated reasons – Personal self interest and hubris. While under valuation may be a significant opportunity. over valuation can become a curse. 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.VALUATION The process of valuation is central to M&A. – Market for corporate control.M&A . 251 . – Synergy – Potential value gain from combining operations (i. operational & financial).e. The process takes (6-12) months.
Sources of operational synergy – Horizontal Synergy – Gains come from economies of scale which reduces costs. when the “fit” between the two entities is very poor. 252 . – Conglomerate Synergy – Gains come when one firm complements the resources or capabilities of another (Eg. – Vertical Synergy – Gains come from controlling the supplychain and savings in transaction costs.VALUING OPERATIONAL SYNERGY Synergy – It refers to the potential value gain where the whole is greater than the sum of the parts. or from increased market power which increases sales and margins. Synergy can be negative as well. Innovative product – Good distribution network).
Cash Slack – It reduces asymmetry between cash starved firms with deserving projects and cash cows with no investment opportunities. However. 253 . but availed after being merged with a profitable firm (Eg. and without paying take-over premiums. Hotmail).VALUING FINANCIAL SYNERGY Diversification – Reduce variability in earnings by diversifying into unrelated industries. ITC – Bhadrachalam Paper). Synergy comes from projects which would not have been undertaken if the two firms stayed apart (Eg. 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.
VALUING FINANCIAL SYNERGY Co-Insurance Effect – If the cash flows of the two firms are less than perfectly correlated. higher leverage. 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. as risky debt is spread across the new firm's operations. – Coupon rates may also be negotiated at lower rates. It relates to the concept of diversification. the cash flow the merged firm will be less variable than the individual firms. hence better performance. 254 . This will induce higher debt capacity. – Default risk comes down and credit rating improves.
The value of wrestling control is inversely proportional to the perceived quality of that management. While value of corporate control is negligible for firms that are operating close to their optimal value. The value of control can be substantial for firms that are operating well below optimal value.VALUING CORPORATE CONTROL Premium of M&A are often justified to control the management of the firm. 255 . Assessment of perceived quality is critical. since a restructuring can lead to significant increase in value. – – Value of Control = Value of firm after restructuring Value of firm before restructuring.
e. 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. debt component) at the time of buyout and rapid changes in capital structure over time. Confidence of investment bankers and the international financial community is essential. sometimes in combination with the assets of the acquiring company. It is a very costly and risky proposition. LBO facilitates a relatively smaller firm to bid for a comparatively larger firm in the bid for management control. 256 .
liquidity.access to financial markets. – The need to satisfy analysts and shareholders.TO GO PUBLIC OR NOT? However. – Increased information needs. – Separation of ownership from management. 257 . off-late many publicly traded firms have gone private keeping in mind the following – – The fear of LBO. However. the advantages of going public includes . The increased benefit showed in the following way – reduced costs and increased revenue. on-going valuation. A research study showed that 30% of the publicly listed firms reported above average returns after going private.
– Cash trapped company unable to utilize opportunities. – Cost of debt coming down (i.e. – Debts repaid off from increased value after successful restructuring and wresting management control. co-insurance effect). – It is a temporary phenomenon. which disappears once assets are liquidated and significant portion of debt is paid off. – Managers cannot be trusted to invest free cash flows wisely.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). 258 .
EFFECT OF HIGH LEVERAGE Increases the riskiness of dividend flows to shareholders by increasing the interest cost to debt holders. – Increase equity valuation. initial rise in leverage is anticipated. Lack of sufficient cash flows to repay costly debts resulting in a possible debt trap. A LBO has to pass two tests to be viable – – Restructuring to pay-off increased debt. Therefore. 259 . Any discounting has to reflect these changing cost of capital. leverage is expected to decrease over time. As the firm liquidates / pledges assets and pays off debt.
260 . small in size but having a promising business. – Facilitates better valuation and forthcoming offerings. – Prevents dilution of equity. or costly. – Tax shelter.REVERSE MERGER Reverse Merger – The acquisition of a public company. shell company) by a private company.e. allowing the private company to bypass the usually lengthy and complex process of going public. which has discontinued its operations (i. – Automatic listing in major exchanges. time-barred. Objectives – – Traditional route of filing prospectus and undergoing an IPO is costly.
– Merger announcements reported 20% excess returns. During bearish periods excess returns were 19%. However.EFFECT OF TAKE-OVER ANNOUNCEMENT The shareholders of target firms are the clear winners. 261 . Most target firms are taken over within (6090) days. – Takeover announcements reported 30% excess returns. Initial anomaly in stock prices usually normalizes over a period of time (6-12) months. takeover failures have only initial negative effects on stock prices. and 35% during bullish periods. Excess returns also vary across time periods.
Desai. as stock markets become more and more perfect such anomalies would reduce Source: Jensen and Ruback. 1988 . over time. Brickley. – Most studies reported insignificant excess returns around take-over offers or merger announcements. 1983.EFFECT OF TAKE-OVER ANNOUNCEMENT The effect of take-over announcement on bidder firm’s stock prices are not clear cut. and Netter. in the event of take-over failure negative returns to the extent of 5% on bidder firm stock prices is reflected. 262 Jarrel. 1983. and Kim. – However. – However. Bradley.
263 . Poison Pill – An offer to existing shareholders to buy shares at a substantial discount to increase their voting rights (Eg. Rights).DEFENSIVE STRATEGIES Golden Parachute – An employment contract that compensates top managers for loss of jobs as a result of change in management control. Asset Stripping – The targeted company hives off its key assets to another subsidiary. so that nothing is left for the raider to strip off. Poison Put – Premature retirement of bonds at attractive rates to pour surplus cash and make target investment unattractive.
Green Mail – The targeted company buys large blocks from holders either through premium or through pressure tactics (Eg. Pac Man – The target company makes a counter bid to take over the raider company. 264 .DEFENSIVE STRATEGIES White Knight – It is the placing of stocks to a cash rich investor and bargaining for protection in return. Shapoorji Pallonji). thus thwarting the raider company’s attention. East India Hotels – Reliance Industries – ITC). Gray Knight – The target company takes the help of friendly company to buy the shares of the raiding company. But often the White Knight turns a betrayer himself (Eg.
COMPETING FOR THE FUTURE 265 .
British Air overpowering Pan Am. Most companies were too preoccupied with the present than the future? 99% of the companies overpowered. What went wrong???? What were they doing with the present? What were they pre-occupied with? 266 . Honda overpowering GM. The reverse was true for the companies overpowering. Wal-Mart overpowering Sears. Nokia overpowering Motorola. were spending 99% of their precious time dealing with present.GETTING OFF THE TREADMILL Canon overpowering Xerox. Honda overpowering Volkswagen. Hitachi overpowering Westinghouse. Compaq overpowering IBM.
CEO’s brutally pick up the knife and ruthlessly carve away layers of corporate flab (delayering. Thus efficiency was grievously hurt. These denominator based managers stuck to their restructuring strategies (like building pyramids) and didn't know what to do next? Thus they became history? (like the pharaohs) 267 . downsizing). declining margins. most often they ended up cutting corporate muscle as well and became anorexic. Not knowing when to stop.THE PAST OF COMPETITION Beyond Restructuring – When a competitiveness become inescapable problem (stagnant growth. falling market share). decluttering.
The future is not about catching up with competition. 268 . incrementalism or nominal innovation has almost reached a plateau. but not of the future. ensuring only survival of the present. top managers believed that quality will be a source of competitive advantage of the future. but forging ahead in competition. However. A poll in circa 2000 revealed that 80% of the U.S. On the contrary only 20% of Japanese managers believed that quality will be a source of competitive advantage of the future.THE PRESENT OF COMPETITION Beyond Reengineering – Numerator based managers (innovation) at least offers some hope.
demographics and lifestyles. reinvent its industry.THE FUTURE OF COMPETITION Regenerating – Leaner. not just the organization. as important as these may be. Create a potential gap. 269 . and regenerate its strategies (breaking its – managerial frames). don’t predict. faster. Creating the future requires industry foresight. aspirations and resources. It involves Dream about the company’s future. Companies need to fundamentally reconcieve itself. not the other way. they are not enough to get a company to the future. Transform the industry. Empower from bottom to top. It is based on deep insights into trends in technology. better.
ABOUT THE DREAM Which customers will you be serving? What will the potential customer look like? Who will be your future competitors? What will be the basis of your competitive advantage? Where would your margins come from? What will be your future competencies? Which end product markets would you cater? 270 .
by converging technologies complex. they do not need to restructure. Successful companies have a complete grip over the industry.e. It is about deliberately creating a strategic misfit. 271 . blue oceans). hence do not fall sick in the first place. Redraw the boundaries between industries. Change in at least one fundamental way the rules of engagement in an industry. Therefore. Create entirely new industries (i.ABOUT THE TRANSFORMATION The future does not belong to those who take the industry for granted. It drives a hunger and a passion to transform.
Most successful revolutions (Gandhi to Mandela) rose from the dispossessed. More importantly. A revolution that is thrust upon from the top seldom sustains. 272 .ABOUT THE EMPOWERMENT Bring about a revolution (a paradigm shift) in the organization. Such a process is called institutionalization (from people centric to organisational centric). the revolution must start at the bottom and spread in all directions of the organization. The middle management plays a strong moderating role. Transformational leaders merely lead the way.
Companies need to strategize (think ahead of times). It requires a lot of common sense and a little bit of out of the box thinking. A process for finding and gaining insight into tomorrows opportunities (Eg. Get to the future first.THE FUTURE OF STRATEGY A company must get to the future not only first but also for less. South West Airlines – LCC. Apple – iphone). What does it take to get to the future first? Understanding how competition for the future is different. An ability to energize the company. 273 . Toshiba – LCD. without taking undue risk. Apply the 40 – 30 – 20 principle.
but hundreds. 274 . What distinguishes a leader from a laggard. is the ability to imagine in a different way what the future could be. We are in the midst of a 3600 vacuum. Companies of the future will be not based so much on the strength of their resources. The farther one can see in this endless space. as on their aspirations. each point in space represents a unique business opportunity. greatness from mediocrity.HOW DOES THE FUTURE LOOK LIKE? There is no rule which says that for every leader there will be a follower. As there is no one future. the farther it will be away from competition.
THE EMERGING STRATEGY PARADIGM Not Only Reengineering Processes But Also Regenerating Strategy The Competitive Challenge Organizational Transformation Industry Transformation Competing for Market Share Competing for Opportunity Share Finding the Future Strategy as Learning Strategy as Positioning Strategy as Engineering Strategy as Unlearning Strategy as Dream Strategy as Architecture 275 .
THE EMERGING STRATEGY PARADIGM Not Only But Also Mobilising for the Future Strategic Fit Resource Allocation Strategic Misfit Resource Stretch & Leverage Getting to the Future First Existing Industry Structure Product Leadership Single Entity Product Hits & Timing Future Industry Structure Competency Leadership Dominant Coalitions / Co-option Market Learning & Preemption 276 .
Degree of Learning Unlearning Curve P2: Unlearning in previous period does not necessarily ensure learning in the current period. Learning Curve t1 t2 t3 Time t4 t5 277 .LEARNING TO FORGET P1: The degree of learning in current period is directly proportional to the degree of unlearning in the previous period.
It cannot be matched even by its closest competitors. Leverage – They are the gateways to future markets.CORE COMPETENCE A core competence relates to a bundle of skills (not an asset or a business) that revolves around activities or processes and critically underpins a firm’s competitive advantage. It is characterized by the following – Unique – It provides unimaginable customer value ahead of its times. Inimitable & Insubstitutable – A high degree causal ambiguity between these skills yield sustainable competitive advantage. It represents the collective learning's of an organization centering around diverse streams of technologies. 278 .
Intel – nano-electronics. it gets more refined and valuable through use. A core competency cannot be outsourced. Nike – designing. 279 . Although a core competence may lose value over time. Toshiba – flat screen displays. at the most three to four. Toyota – lean manufacturing. Most companies around the world do not possess one. leaders have one. Canon – imaging. Wal-Mart – logistics.MORE ABOUT CORE COMPETENCE Sony – miniaturization. it is deeply embedded in the heart of the organization. SKF – antifriction and precision. Honda – engines. Coca Cola – brand. Core competencies are the roots of the organization.
ROOTS OF COMPETITIVENESS End Products 1 2 3 4 5 6 7 8 9 10 Core Businesses Core Business 1 Core Business 2 Core Business 3 Core Business 4 Core Product 2 Core Products Core Competencies Core Product 1 Competence 1 Competence 2 Competence 3 Competence 4 280 .
RESOURCE STRETCH & LEVERAGE
Initial resource position is a very poor indicator of future performance. It leads to atrophy and stagnation. Successful companies consciously create a potential gap between aspirations and resources. Resource crunch is a common factor among firms that faces a wealthy rival, and outperforms them. Leveraging what a company already has, rather than allocating it is a more creative response to scarcity. – By concentrating existing resources. – By accumulating existing resources. – By complementing existing resources. – By conserving existing resources. – By recovering existing resources.
Concentrating – It involves effectively directing portfolio of resources on key strategic goals in which individual efforts converge over time. It is a balance between individual mediocrity and collective brilliance. It is achieved through – Converging – Redirecting multiple diverging (i.e. fragmented) short term goals into one long term goal. It is then resources can be stretched over time. Focusing – Making trade-offs and preventing dilution of resources at a particular point of time. Targeting – Focusing on the right innovations that are likely to have the biggest impact on customer value.
Accumulating – Using existing reservoir of resources to build new resources. Each and every individual is a rich & potential source of learning, discover better ways of doing things. It is achieved through Mining – Extracting learning experiences from existing body of each additional experience (i.e. success or failure). It is an attitude that can be acquired, but never learnt. It leads to a substantial jump in the experience curve. Borrowing – Utilizing resources outside the firm through licensing, alliances, joint ventures. A firms absorptive capacity is as important as its inventive capacity.
Complementing – Using resources of one type with another that aligns smoothly to create higher order value. In a way it produces an accelerating effect on each individual resource. It is achieved through – Blending – Interweaving discrete capabilities to create world class technologies (GM – Honda) through integration and imagination. Different functional skills can also be blended to create a world class end products (Yamaha – Keyboard). Balancing – An ability to exploit excellence in one area is never imperiled by mediocrity in another (GE acquiring the CT scanning rights from EMI because of its inadequate market reach).
Conserving – Sustaining competencies over time through frequent usage. Resources are never abandoned; they are always preserved for future use. Recycling – Increasing the velocity of use of a competencies over time. As a result core competencies can be leveraged across an array of products (Sony - Betamax). It includes brand extensions as well. Co-Opting – Enticing resources of potential competitors to exercise influence in an industry (Fujitsu – IBM). Shielding – It involves identifying competitors blind spots and then attacking without having the fear of retaliation.
Recovering - It is the process of reducing the elapsed time between investing in resources and the recovery of those resources in the form of revenues via the market. Speeding – Prior to the 1980’s Detroit’s majors took an average of 8 years to develop an entirely new model; the Japanese reduced it to less than 4.5 years, with major new variants in 2 years. This envisaged Japanese players in giving customers more opportunities to switch allegiance and loyalty (Toyota). Protecting – It uses competitors strength to one’s own advantage, by deflecting it, rather than absorbing it as practiced in Judo.
INTERNATIONAL BUSINESS ENVIRONMENT 287 .
EMERGING MARKETS Emerging markets (India. Emerging markets are characterised by infrastructural bottlenecks. China. 288 . Therefore focused strategies based on core competence may not be suitable for emerging markets (Khanna & Palepu. high levels of market imperfection). strategies suited for the developed markets may not be appropriate for emerging markets. Chile) provide a different context (i. Korea. institutional gaps. Therefore.e. and high transaction costs. Diversified groups in operating in emerging markets therefore benefit from unrelated diversification. 1997).
DIVERSITY . subsequently negatively related across developed markets. Size & Scale.PERFORMANCE (I) Diversity attempts to measure the degree and extent of diversification (Herfindahl. (2000) 289 . Experience Strategic Fit Diversity Palich. et al. Optimum level of diversification Performance Diversity is initially positively related with performance. Synergy. Entropy). Concentric.
subsequently positively related across emerging markets.PERFORMANCE (II) Diversity is initially negatively related with performance.DIVERSITY . brand building Risk diversification. Huge initial investment. 2001) 290 . conglomerate power Threshold level of diversification Performance Diversity (Khanna & Palepu.
act locally (Eg. 291 . Characteristics – It should have a spread of affiliates or subsidiaries. It should have a spread of interest groups / stake holders. revenues and profits. It should think globally.INTERNATIONAL IDENTITY MNC’s consciously engage in FDI in different parts of the globe to forge resource diversity as a distinct competitive advantage. It should have a spread of manufacturing facilities. It should have a spread of assets. HSBC).
low group scale in developed markets and vice versa for emerging markets). Feminity Index . low risk profile in developed markets and vice versa for emerging markets). high feminity index in developed markets and vice versa for emerging markets). low power distance in developed markets and vice versa for emerging markets). Risk Profile – It reflects the risk attitude of the top management (Eg.It reflects the disparities in women in workforce (Eg.GLOBAL BUSINESS ENVIRONMENT Power Distance – It reflects the disparities in income and intellectual development (Eg.It reflects the relative role of team building (Eg. 292 . Group Scale .
attitude.GLOBAL BUSINESS ENVIRONMENT Cultural Adaptability – It reflects the adaptive ability to a changing environment . high cultural adaptability in developed markets and vice versa for emerging markets). credit rating. low country risk in developed markets and vice versa for emerging markets). Country Risk – It reflects the political and economic risk (Eg. corruption. currency.culture. time value. flexibility (Eg. way of life. interest rates. terrorism (9/11). inflation. code of conduct. political stability. customs. 293 . FOREX reserves. dress sense. judiciary) of doing business in a particular country (Eg.
and vice-versa.GLOBAL BUSINESS ENVIRONMENT Time Sensitiveness – Developed country managers regard time as precious. Other factors – local celebrations. 294 . however. in most emerging markets meetings are delayed and lasts unusually long. in most emerging markets use of an interpreter may be a standard protocol. Language Barriers – Developed country managers expect foreign partners to communicate in their languages. High levels of ethnocentrism usually has a negative effect on business. Ethnocentrism – Developed country managers tend to regard their own culture as superior. time-zones.
The 1999 (Seattle Round) saw a lot of protest amidst bringing agriculture under the purview of TRIPS. It a multi-lateral treaty with 143 (as on 2002) member countries to reduce tariff and non-tariff (quota) barriers. It also initiated provisions on anti-dumping. It focused largely on TRIPS (patents. copyrights.GATT GATT was a bi-lateral treaty initiated between US and some member countries in 1947 to promote free trade. BRIC). In 1995 (Uruguay Round) GATT was renamed to WTO. ASEAN. 295 . trademarks). The 2001 (Doha Round) focused on power blocks (NAFTA. It also highlighted the nexus between US & WTO.
However with current recession in the US 2002 onwards. primarily the OPEC countries.Pound). The notable exception was Great Britain which still continues with its local currency (i. Sterling . The Euro was significantly devalued against the Dollar till 2002.EURO – SINGLE CURRENCY In 1999 twelve member countries in Europe joined hands to move over to a single currency (i. 296 . the Dollar still remains the most preferred currency globally. three countries joined in 2002 increasing it to fifteen members as of 2008.e. the Euro slowly started outperforming the Dollar. Euro).e. However.
However. Transparency – A single currency is transparent and competitive. 297 . it helps avoiding transaction costs associated with a multiple currency. but it may have spill-over effects. 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. Trade Block – It will strengthen the EU identity which would not have been possible otherwise. a multiple currency is preferable where the business cycles of member nations are different.
e. – FII (transfer of intangible resources) is fast but may have strong repercussions (i. hot money). the gain of one country is loss of another). 298 . It is short-medium term with comparatively low levels of commitment. Neo classical economists believe that foreign investment may in fact be a win-win game. It is long term with high levels of commitment. – FDI (transfer of tangible resources) is slow but steady for the purpose of economic growth.e.FII Vs FDI INVESTMENT Classical economists believed that foreign investment (in any form) is basically a zero sum game (i.
buying patterns (spread). technology (microchip). Distribution – It depends on the market characteristics (fragmented – concentrated).culture (food habits).INTERNATION MARKETING Product – The various attributes of a product may receive different degrees of emphasis depending on differences in . promotion (surrogate advertising). customer awareness (microwaves). economic (middle class buying power). lifestyle (petroleum 299 outlets – departmental stores). Pricing – It depends on the competitive structure (PLC – Kellogg's). usage (talk time). .
India) may be different from that another trading country (US – GAAP or IRS). Leverage – The leverage may vary across countries depending upon money and capital market conditions (Eg. debt is cheap in US. Cost Structure – Companies in India need to investment in fixed costs due to poor infra-structure 300 compared to developed markets. . 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. equity is cheap in India).
and cultural barriers (language) vis-à-vis emerging markets. skills are more important that cultural fit and vice-versa. 301 . labour laws. Compensation – Differential pay packages exists because of differences in purchasing power. technology (convergence. however. in most cases it is not desirable nor practiced. Training – It is a pre-requisite for international business to reduce language. Recruitment – In local recruitment. shortened life cycles). social security. double taxation.INTERNATIONAL HR An uniform HR policy is idealistic to enable parity in performance appraisal.
Outsourcing – A company having a core competence may be the source of global outsourcing (Eg.INTERNATIONAL OPERATIONS Location Incentives – FDI in emerging markets should explore options for SEZ’s to explore benefits (tax holidays. Bosch spark plugs are used by car manufacturers worldwide). Technology – The cost to be evaluated in terms of latest technology (Euro VI) vis-à-vis effective cost of appropriate technology (Euro II). SCM – Use of ERP to network the extended enterprise 302 across the globe. . reduce power costs) vis-à-vis infrastructural bottlenecks.
CONTEMPORARY TOPICS 303 .
innovation is the first attempt to carry it out in practice. Innovation is all about staying ahead of competition. but has inherent risks involved as well. Innovations typically paves the way for more secured and improved lifestyle for consumers in general. it has destructive effects as well.INNOVATION An invention is the first occurrence of an idea for a new product or process. While innovation typically adds value for organizations. 304 . Innovation is the most preferred strategy today to maintain competitive advantage in the present turbulent business environment.
Strategic innovation has the potential to change the rules of the game. While product innovations are typically customer driven. process innovations are organizational driven. Tangible impact of product innovation on performance is significantly higher than process innovation.TYPES OF INNOVATION A key challenge is maintaining a balance between process and product innovations. Process innovation usually follows product innovation. process innovation is necessary to sustain the competitive advantage of product innovation. 305 . However.
Data Storage (Pen Drives).e.BUSINESS MODEL It is a simplified description and representation of a complex real world. Innovations are the back-bone of successful business models . 306 . Drug Development (Bio Chemicals).e. putting an idea into practice). It leads to a shift in the price – performance envelope. Processors (Pentium). a paradigm shift). Telecom (CDMA Technology). Medical Surgery (Lasik). Disruptive business models brings in a new frame of reference (i. about how an organization makes money (i.
The segment(s) of clients to be addressed. The proposed relationships established with clients. The channels to reach out to the clients. The key partners involved in the activities. The key activities / processes necessary for execution. 307 . The cost structure resulting from the business model. The revenue streams generated by the activities. The key resources and capabilities required.NINE BUILDING BLOCKS Value proposition offered to the market.
BUSINESS MODEL FRAMEWORK 308 .
309 . Real Estate) companies need to untangle and understand the intricacies of their business model. With the rapid erosion of certain industries (IT. Investment Banking. It is just one piece of the puzzle. It involves – Product Visualization – Product Prototype – Product Test – Capacity – Pricing – Distribution.REVENUE MODEL Positioning is just not sufficient. innovative companies to carve out unique business models to fend off competition. The revenue model described here are the means to generate revenues.
HOW TO MAKE INNOVATIVE CO’S Innovative company’s are a matter of culture and aspirations rather than tangible resources. Allow the workforce idiosyncrasies for their errors. Allow the management sufficient slack to be future oriented. Promote the culture of experimentation. Provide reasonable incentives (not necessarily monetary). Have a lean and a flat organization structure. 310 . Promote the grape-vine. A favourable intellectual property (IP) climate.
Collusion with the judiciary is also another distinct possibility in emerging markets. The most preferred strategy of internal protection includes imbibing “causal ambiguity” in the production process to make reverse engineering difficult.HOW TO PROTECT INNOVATION? Without adequate protection (external or otherwise) the effects of innovation does not translate to performance. In most emerging markets where the IP climate is not so favorable. however that possibility is slowly atrophying. companies are increasingly relying on internal protection to sustain innovation effects. 311 311 .
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 . In fact the principles of corporate governance implies that managers go beyond in satisfying the stated and unstated needs of the multiple stakeholders.CORPORATE GOVERNANCE 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.
However. According to the agency theory top managers and shareholders interests are usually conflicting in nature and tend to pull in opposite directions. also known as the principal-agent problem or agency dilemma. From the strategic point of view managers tend to diversify into unrelated businesses as it provides higher returns hence a more favourable appraisal. 313 . not present in portfolio diversifications.AGENCY THEORY The root of Corporate Governance goes back to the Agency Theory. shareholders can diversify their portfolio at a much lesser risk and cost. This exposes the shareholders to additional risks and higher costs.
. 2002 to restore public confidence in corporate governance. the US government passed the Sarbanes – Oxley Act. SEBI Report – 2005. 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. various laws were enacted to ensure proper usage of these funds. After the Enron downfall.ORIGIN & CONTEXT Since the early 20th century since a large part of public funds were held by publicly traded firms in the US.
GOVERNANCE PRINCIPLES Rights and equitable treatment of shareholders: Help shareholders exercise their rights by effectively communicating information in transparent ways that is understandable and accessible and encouraging shareholders to participate in general meetings. 315 . 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. Role and responsibilities of the board: It deals with issues about an appropriate mix of executive and nonexecutive directors. Interests of other stakeholders: Recognize the legal and other obligations of all legitimate stakeholders.
assessment and mitigation of risks and retirement by rotation over a fixed period of time.. They should also implement systems to independently verify and safeguard the integrity of the company's financial reporting. Independence of the entity's auditors: Identification. 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. Disclosure and transparency: Disclosure of information should be timely and balanced to ensure that investors have clear access to data and facts.
they should provide no mechanism or scope for opportunistic behaviour. Remuneration: Performance-based remuneration is designed to relate some proportion of salary to individual performance. However. fire and compensate top management. Regular board meetings allow potential problems to be identified.GOVERNANCE STRATEGIES Monitoring by the board of directors: The board of directors. a person benefitting from a decision should abstain from it. with its legal authority to hire. discussed and resolved. 317 . Balance of power: The simplest balance of power is very common. safeguards invested capital.
and was responsive to investors' requests for information on governance issues.GOVERNANCE & PERFORMANCE In its “Global Investor Opinion Survey” of over 200 institutional investors in 2002. who had no management ties. 318 . McKinsey found that 80% of the respondents would pay a premium for wellgoverned companies. from 10% for companies where the regulatory backdrop was least certain (those in Morocco. The size of the premium varied by market. They defined a well-governed company as one that had mostly out-side directors. Egypt and Russia) to around 40% for Canadian & European companies. undertook formal evaluation of its directors.
SHAREHODER – STAKE HOLDER THEORY Till the early part of the 20th the basic objective of modern organizations was to provide goods and services for public consumption for profit maximisation. However. Therefore. corporate philanthropy should be a part of every corporate mission. 319 . today economic institutions are considered as a major drivers of improvement in quality of life in general and therefore needs to include multiple stakeholders. Over a period of time. the short-term view of profit maximisation gave way to a more broader and mediumterm view wealth maximisation of the shareholders. The basic premise is that firms cannot exist in vacuum.
“a healthy business cannot exist in a sick and impoverished society”. However. the debate on CRS still continues whether firms should detract its focus from its business? 320 . giving a very important message that one cannot exist without the other.CORPORATE SOCIAL RESPONSIBILITY As Peter Drucker rightly pointed out that. in fact a large part of it is significantly overlapping. Therefore. CSR can be defined as. “an enterprises decisions and actions being taken for reasons at least partially beyond its immediate economic interests”. Therefore. economic and social responsibilities cannot be mutually exclusive.
GROWING CONCERN FOR CSR Awareness due to education: With growing literacy. 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. Fear of government interference: Excessive quench for profits may lead to build up of adverse public opinion compelling the government to intervene (Eg. 321 . The role of media: The media and various consumer organizations have come up in protecting consumer rights and exposing mal-practices.
Cement . and extended producer responsibility (Eg. Health & Hygiene – Attending the health hazards due to wastes and by-products to employees and society in proximity (Eg.CSR STRATEGIES Green Supply Chain Management: It includes environmentally preferable purchasing. designing eco-friendly products. Tata Steel – Life Line Express). Aditya Birla Research Centre – LBS). Education.Paper packaging. eco efficiency. Exide – Product take back). Refrigerators – CFC. 322 . Literacy & Training Programs – (Eg.
BOTTOM OF THE PYRAMID With the market across most developed markets including the US getting saturated. Prahalad notes that future markets exist collectively. 323 . across the world's billions of poor people having immense untapped buying power. They represent an enormous opportunity for companies who learn how to serve them. Strategic innovations leading to disruptive business models can show the way out. In turn companies by serving these markets. K. C. they're helping millions of the world's poorest people to escape poverty.
BLUE OCEAN STRATEGY 324 .
TWO WORLDS 325 .MARKETSPACE .
WHAT IS RED OCEAN? Companies have long engaged in head-to-head competition in search of sustained. competing head on results in nothing but a bloody red ocean of rivals fighting over a shrinking profit pool. profitable growth. They have fought for profits. where most industries are saturated. one companies gain is always at the 326 cost of another companies loss. In today’s red oceans. . battled over market-share. Yet in today’s overcrowded industries. and struggled for differentiation (cost or product).
rendering rivals obsolete and unleashing new demand.WHAT IS BLUE OCEAN? Tomorrow’s leading companies will succeed not by battling in red oceans. it will exist 327 in the future as well. Such strategic moves are possible through the pursuit of product differentiation and low cost simultaneously. It helps in creating powerful leaps in value for both the firm and its buyers. Blue Ocean’s have existed in the past. It is only the frames of the . but by creating blue oceans of uncontested market space ripe for growth .
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. Technological advances have substantially 329 improved industrial productivity. Niche markets & monopoly havens are continuing to disappear. Demand across developed markets reaching a plateau. . As trade barriers between nations & regions fall.BLUE OCEAN STRATEGY IMPERATIVES Prospects in most established market spaces – red oceans – are shrinking steadily. of European nations. information imperfections atrophy instantly.
.CONCEPTUAL UNDERPINNINGS Blue oceans have existed in the past and will exist in the future as well. They are not necessarily about technology. the underlying technology was often already in existence. Company & industry are the wrong units of 330 strategic analysis. Incumbents often create blue oceans within the ambit of their core business. 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).
BLUE OCEAN .IMPLEMENTATION Reduce Which factors to be reduced below the industry standard Eliminate Which of the industry factors that the industry takes for granted should be eliminated Create VI Which factors should be created that the industry has not offered Raise Which of the factors should be raised above the industry’s standard 331 .
IMPLEMENTATION SEQUENCE Buyer Utility (1) Is there exceptional buyer utility in your business idea? Price (2) Is your price easily accessible to the mass of buyers? Blue Ocean Strategy Adoption (4) What are the adoption hurdles in actualizing your business idea? Are you addressing them up front? Cost (3) Can you attain your cost target to profit at your strategic price? 332 .
SOME GLARING EXAMPLES In the last century authors Kim and Mauborgne have documented the creation of more than 150 blue ocean creations across 30 industries – Virgin Atlantic: Fractional jet ownership or travel to space. Citibank – Automated teller machines & credit 333 cards. Sony Play Station: Redefining machine-human interface in entertainment and targeting an altogether new user base. . Southwest Airlines: Pioneering the concept of LCC.
According to this view. Off late emerging views in strategy having its origin in (Organization Theory) led to a paradigm shift to what is called the – reconstructionist view. All they need to do is change their managerial frames. greater than themselves. 334 .WHAT THEN IS THE HANDICAP? Most of the traditional views in strategy having its origin in (Economic Theory) led to what is called the – structuralist paradigm. companies & managers are largely at the mercy of economic forces. According to this view managers need not be constrained to act within the confines of their industry.