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Course Code: 611 & 612 Dr. Subir Sen – Faculty Member, IBS
E-Mail: email@example.com, 9830697368 1) Crafting & Executing Strategy – Thompson & Strickland. 2) Strategic Management – Pearce & Robinson. 3) Strategic Management – Fred. R. David. 4) Exploring Corporate Strategy – Johnson & Scholes. 5) Competitive Advantage – Michael E. Porter. 6) HBR – Articles & Case Studies.
STRATEGY - DEFINITION
Strategy is all about making trade-offs between what to do and more importantly what not to do; consciously choosing to differentiate. It reflects a congruence between external opportunities and internal capabilities. Types of strategies – Corporate Strategies – It is all about making choices across various businesses and allocating resources among them. Business Strategies – It is all about developing leveraging and sustaining competitive advantage. Functional Strategies – It is all about finding newer ways to perform existing processes, or 3 better still adopting new processes altogether.
STRATEGIC MANAGEMENT DEFINITION
Strategic management attempts to integrate the traditional management functions and align the organization as a whole with the broader environment to make resource allocations in a way to achieve the strategic intent of the organization. This alignment is called strategic fit. It serves as a road-map for the organization in its growth trajectory. It provides the direction – extent – pace – timing. It depends on the turbulence of the environment and the aggressiveness of the organization. It distinguishes the winners from the losers.
PILLARS OF STRATEGIC MANAGEMENT
Differentiation – Differentiation of key inputs and technologies helps a firm to consciously move away from homogeneous to heterogeneous markets enabling them to earn super-normal profits from normal profits. Integration – Whenever dealing with a complex task of managing a business (i.e. involving a no. of variables with cross linkages) it is in the interest of simplicity that the task be broken up in smaller components. However, for effective control, integration is essential. Alignment – Since differentiation is prone to replication, it is in the interest of the firm to differentiate continuously by aligning the resources with environmental opportunities.
STRATEGIC MANAGEMENT FRAMEWORK
Economic al Strategic Finance Fit Political Strategic Intent Fit Political Marketin g Manageme nt Social & Cultural
It provides broad guidelines. It is long-term in nature.FEATURES It forms the core activity of the top management. It is irreversible. It involves substantial resource outlay. It requires full commitment of the top management.STRATEGIC MANAGEMENT . It is all about creativity and innovation. It is a holistic and integrated approach. It is about adaptation and response to the same. 7 .
It is fool-proof in nature.STRATEGIC MANAGEMENT – MYTHS It involves short-cuts. It is rocket science. It brings instant success. It involves nitty-gritty's. It involves only the top management. 8 . It is about a definite formula. It about mere data and facts. It a bundle of techniques or even tricks. It attempts to minimize risk. It is about forecasting.
scale and scope. To generate large resource pool. . To be insulated against environmental threats.STRATEGIC MANAGEMENT IMPERATIVES To be continuously alert. rather than reactive. again and again ……. To tap markets across boundaries. To be proactive. To be future oriented. To innovate. 9 To develop core–competencies. To gain expertise in technologies. To assimilate change faster. To leverage size.
In the ancient days battles were won not by virtue of size of the army or armory. Even in today’s markets. In the ancient days battles were fought over land. battles fought on the market front are won by companies by virtue of their obsession & strategies. 10 .ORIGIN The word strategy has its origin from the Greek word strategia meaning Military Commander. It is an old wine in a new bottle. and more importantly . today's battles are fought over markets. In contrast. but with a lot a rigour and robustness. obsession.strategies.STRATEGY . whose origin can be traced to some of the greatest battles fought in the ancient days. but by virtue of their courage.
SOME PARALLELS Japan’s attack on Pearl Harbour – Strategy: Attack where it hurts the most. US attack of Morocco to capture Germany – Strategy: Pin-hole strategy – Wal-Mart challenging Sears by entering small towns. – Reliance’s entry into telecom. challenging GM and Ford. Napoleon’s attack on Russia – Strategy: Waiting for the right time. – Toyota’s entry in the US. 11 . Allied Forces Vs Germany (WW-II) – Strategy: Forging alliances. – Yahoo and Microsoft challenging Google.
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. a radical change in the business environment brings about discontinuity.EVOLUTION OF MANAGEMENT As Peter Drucker refers to it. 12 . – Mass Production Organization Size – Complicated Processes – Complex Structures Evolving of an emerging paradigm – survival of the fittest (Fayol & Taylor.Industrial Revolution. The first major discontinuity in the history of global business environment was the . 1910).
push to pull). Survival of the most adaptable becomes a new management paradigm (Ansoff. 13 . Efficiency and effectiveness are no longer sufficient. – Homogeneous to heterogeneous products. From uniform performance. The question of outperforming the benchmark became the new buzzword. 1960).EVOLUTION OF STRATEGIC MANAGEMENT The second major discontinuity in the history of global economic environment – World War II.e. performance across firms became differentiated. – Changes in the technology fore-front. – Affluence of the new customer (i. – Global market place.
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. 15 . – It is primarily the top management’s prerogative.APPROACHES TO STRATEGY Analytical Approach – Igor H. Ansoff (1960) – Strategy can be segregated into certain mutually exclusive and inter-related components aimed at managing the growth of an organization. – Biases and prejudices has a very little role to play in strategic choices pursued by managers. Learning always begin on a clean sheet of paper. – The choice of product-market mix is based on conscious evaluation of risk – return factors.
how it will compete. – The top managers then decide on the type of organization structure & systems to be in place.APPROACHES TO STRATEGY Design Approach – Alfred Chandler (1970) – Structure follows strategy. Once the control systems are in place. Successful organizations align authority and responsibility of various departments in way to reach overall objectives. everything else follows. 16 . The organization initially decides which industry to enter. – Organization structure will precede and cause changes in strategy. – Management control systems has a dominating role in influencing firm performance. who will be the top managers.
new entrant. – The environmental forces comprises of – supplier. substitutes. – A firms performance is inversely related with the bargaining power of environmental forces to which it is exposed. 17 . Porter (1980) – Choose a consumer segment and position your product accordingly. customer.APPROACHES TO STRATEGY Positioning Approach – Michael E. – The organization will outperform the industry where environmental forces are weak and vice-versa. – An organization is seldom in a position to influence the larger business environment. competitors.
Prahalad (1990) – The key to superior performance is not doing the same as other organizations. They are complex resources and undermines a firms competitive advantage. – Core competencies are a set of skills that are unique and can be leveraged. K. but exploiting the resource differences among them. – It enables a firm to deliver unimaginable value ahead of time.APPROACHES TO STRATEGY Core Competence – C. – Organizations can significantly alter the way an industry functions. locating in most attractive industries and pursuing the same strategy. 18 .
STRATEGIC MANAGEMENT PROCESS Strategic Intent Strategic Planning Strategic Gap – Environmental Scanning – Internal Appraisal of the Firm Strategy Formulation – Corporate Strategy – Business Strategy Strategic Choices – Functional Strategy Strategy Implementation Strategy Performance Strategy Evaluation & Control 19 .
TOP MANAGEMENT PERSPECTIVE 20 .
It is the cornerstone of an organizations strategic architecture reflecting its desired future state or its aspirations. 21 .STRATEGIC INTENT If you cannot see the future. A gap that consciously manages between stagnation and atrophy. A substantial gap between its resources and aspirations. It provides a sense of direction and destiny. It involves an obsession to be the best or outperform the best. It’s a philosophy that distinguishes it from its competitors. A strategic intent is a statement of purpose of existence. you cannot reach there. It implies a significant stretch.
HIERARCHY Integrativ e m Do an in Visio n Mission Dominant Objective s Goal s Plans Lo g ic Single Specifi c Man y 22 t .STRATEGIC INTENT .
Dominant logic changes. 23 . It is core to the strategic intent of the firm. strategic variety) is apparent. To put it more simply. when radical changes in the internal and external environment (i.DOMINANT LOGIC A dominant logic can be defined as the way in which the top management team conceptualizes its various businesses and make critical resource allocation decisions.e. it 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.
but achievable aspirations.VISION It is a dream (not a forecast) about what the company wants to become in the foreseeable future. It enables the top management to remain focused. – It represents the company’s audacious. It ensures that the company does not wander off into unrelated zones or fall into an activity trap. It is a combination of three basic elements – – An organizations fundamental reason for existence. – It stands for the unchanging core values of the company. It provides an unity of purpose amidst diversity of personal goals. beyond just making money. 24 .
VISION . not an utopian dream. 25 . Clarity – Vividly descriptive image of what the company wants to be known for in the future. Empathy – It should reflect the company’s beliefs to which it is sensitive. 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. clear. Reachable – It should be within a reasonable target in the known future. and memorizable. Brevity – It should be short.CHARACTERISTICS Reliance – Where growth is a way of life.
It facilitates development of skills & capabilities.ADVANTAGES To stay focused on the right track. 26 .VISION . It fosters risk taking and experimentation. It makes strategic alignment easier. It gives a shared platform. To prevent the fall in a activity trap. It gives enlightment. It gives the impression of a forward-looking organisation. It lends integrity and genuineness. It provides a holistic picture.
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.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. its reason for existence. A broad mission statement helps in fending competitors. Although the purpose may change over time. 27 . It serves as a road map to reach the vision.
We offer comfort. – We do not offer insurance. Some other examples – We do not offer shoes. though some may seem unrelated in nature. …………………. – We do not offer steel. – We do not offer software's. …………………. 28 . All the businesses of the company are strongly integrated with their main business. We offer solutions. …………………. …………………. We offer strength. We offer security.MISSION – SOME IDEAS Reliance – We are in the business of integration.
– It is based on Management by Objectives (MBO).100K crore company by the year 2005. It provides a quantitative feel to an abstract proposition. It is an end result (quantifiable) something a firm aims and tries to reach in a time bound frame. – It adds legitimacy and motivation.GOALS & OBJECTIVES Reliance – We want to become a Rs. – It prevents deviation. – It lends direction – time frame in the medium term. – It helps identifying key success factors. – It provides a benchmark for evaluation. 29 . – It keeps the mid management pre-occupied.
It is the process of garnering necessary inputs.PLANS Reliance – Desire to invest 25K crore in telecom business by circa 2010. and gaining access to desired markets to achieve the desired goals and objectives. 30 . – Compress project times. It is specific to a particular business. – Leverage economies of size and scale. The details of the plan Reliance Telecom adopted were – Backward integrate process technologies. coordinating appropriate technologies. – Use price-elasticity to break market barriers. – Acquire a market share of indomitable position.
When changes in the environment is incremental. It often leads to an organizational crisis. However. past strategies tend to have a bearing on future strategies. strategies lose touch with the emerging realities. Historical studies have shown that most organizations tend to continue with their existing strategies. equilibrium is maintained. In such a context. This state of affairs is known as strategic drift. 31 . radical change may lead to disequilibrium. This tendency to restore continuity is known as inertia (resistance to change).STRATEGIC DRIFT Due to top management commitment.
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 .
– Distorting information to gain mileage. – Creating a favourable image. Some instances of organizational politics – Formation of powerful groups or coteries.ORGANIZATIONAL POLITICS Strategic drift often leads to organizational politics. – Hiding vulnerability. – Developing a platform of support. 33 . Organizational politics involves intentional acts of influence to enhance or protect the self-interest of individuals or groups over organizational goals. – Using covert tactics to pursue self interests. – Creating obligations of reciprocity.
– Influential stake-holders back out. A realized strategy is what the top management actually translates into practice. – Persons responsible for strategy conceptualization and implementation are34 divergent.INTENDED & REALISED STRATEGIES An intended strategy is an expression of interest of a desired strategic direction. Other causes – – The plans are unworkable and utopian. Usually there is wide gap between the two when organizational politics is evident. . – The environment context has changed.
35 . Strategy formulation and implementation are linked together in a continuous improvement cycle. but the master scheme of the rational comprehensive scheme is not apparent. but as a defensible response to the complexities of a large organization that mitigate against publicizing goals. They simply unfold the particulars of the sub-system in stages. Learning is an integral part of logical incrementalism. this is not to be treated as “muddling”. However.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.
Agent of Change – Formal ratification of a change plan through MBO.IMPLEMENTING INCREMENTALISM General Concern – A vaguely felt awareness of an issue or opportunity. Macro Broadcasting – The broad idea is floated without details to invite pros and cons leading to finer refinements. The broader objective should serve the overall interest of the organization. Adaptation – As implementation progresses. 36 . Leveraging Crisis – A sudden crisis or an opportunity should be used as a trigger to facilitate acceptance and implementation of change.
Strategic transformation becomes smooth through a change in top leadership. It creates blinders. Tampering with surface level factors often leads to atrophy. Dominant logic’s are the cornerstones of change when strategic transformation is apparent. As it brings 37 with it a different dominant logic.STRATEGIC TRANSFORMATION Strategic transformation (a complete overhauling of the strategic architecture) becomes inevitable whenever a strategic drift takes place. Dominant logic’s are very rigid and sticky and prone to inertia. .
– Organisational Slack – Enough free space. – Informal Networks – Emerging of new ideas. and skills that fosters experimentation and questioning and challenge around a shared purpose. It helps prevent a strategic drift from occurring at the first place. – Experimentation – Fosters a culture of risk taking. A learning organization must continuously focus on unlearning as well. Factors that fosters a learning organization – Pluralistic – An environment where different and even conflicting ideas are welcome. experience. – Constructive Bargaining – Agree to disagree. 38 .LEARNING ORGANIZATION A learning organization is capable of continual regeneration from knowledge.
ENVIRONMENTAL CONDITIONS Dynamic Scenario Planning Learning Organization Static Forecasting Decentralization Simple Complex 39 .
ANALYZING BUSINESS ENVIRONMENT 40 .
PLANNING & STRATEGIC PLANNING Formal planning is a function of extrapolating the past. gap analysis). It requires a quantum leap (i. It points to a position of superiority with relation to competition. It is reactive in nature.e. It is based on the assumption of radical change. Competitive advantage provides the surest way to fulfill the strategic gap. It is based on the assumption of incremental change. It is pro-active in nature. Strategic gap basically points towards a vacuum of where the organisation wants to be and where it is. 41 . Strategic planning is a function of discounting the future.
events.ENVIRONMENTAL SCANNING The environment is defined as the aggregate of conditions. resources and ideas move unhindered. 42 . It is exploratory in nature. 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. Environmental scanning is very important component of strategic planning. not guided by any boundaries. and influences that affect an organizations way of doing things. The world is flat. The segments of the environment a top manager scans selectively depends upon his dominant logics.
which may be different from the past impact. It is not intended to be used as an exhaustive list. 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. for which a holistic picture is required. 43 . Understanding the composite effect is critical. but also to analyze the complex linkages across them.PESTEL PESTEL attempts to provide a broad framework on how the broader environmental forces affects an organization and influences the way it practices strategy.
Government Attitude. Central – State Co-alignment. Inflation & Interest Rates. Economic Cycles. Subsidies & Protection. Infra-Structural Investments. Capital Market & Forex Reserves. Monsoon & Food Grains Reserves. Savings & Investment. Social Values.PESTEL FRAMEWORK Political – Government Stability. Religious Sentiments. FDI Inflows. Economic Model. Economic – GDP. Fiscal Deficit. Social – Population Diversity. Literacy Levels. 44 . Currency Stability. Income & Age Distribution. Licensing & Quotas. Language Barriers.
Extended Producer Responsibility. Environmental – Global Warming & CSR. Patent Laws. Patents. Product Safety & Health Hazards.PESTEL FRAMEWORK Technological – Innovation. Legal – Monopolies Legislation. Employment Laws. Environmentally Preferable Purchasing. Product Design. Waste Disposal & Emissions. Pollution Control Laws. Non-Fossil & Alternative Fuels. ERP. Carbon Credits. Research & Development. Obsolescence Rate. 45 . Technological Convergence. Consumer Protection Laws. Direct & Indirect Taxes.
MRTP Liberalization. New Trade Policy (NTP) – Lowering import tariffs. Structural Adjustments – Phasing out subsidies. Banking Sector Reforms. Abolition of import licenses.VRS. Encouraging FDI. Curtailment of PSU’s. FERA Liberalization. 46 . Encouraging exports. Dismantling price controls. Exit Policy. Capital Market Reforms. Economic Reforms – Fiscal & Monetary Reforms. Rupee convertibility. PSU Disinvestments.ECONOMIC LIBERALISATION New Industrial Policy (NIP) – Liberalizing industrial licensing.
Survival of the fittest MNC Onslaught – Enhancing stakes – Power Equation – Joint Ventures – Technological Alliances – Take-over threat.DISCONTINUITY Destabilization due to entrepreneurial freedom – Cocoon of protection disappears – Diversification spree – Existing notions of size shaken – Industry structures change radically – Economic Darwinism . 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 .
PORTER Threat of New Entrants Bargainin g power of Suppliers Competition from Existing Players Bargainin gBargainin power g of power of Suppliers Customer s Threat of Substitutes 50 .FIVE FORCES MODEL .
It depicts the attractiveness of an industry (i. profit potential) per se. but also used to understand how they can be countered and overcome. the forces are subject to changes. It should not only be used to understand the forces.FIVE FORCES MODEL ASSUMPTIONS The model is to be used at the SBU level and not at the industry level. 51 . The model should not be used as a snapshot in time. incremental or otherwise.e. The five forces have strong cross-linkages. It is even wiser to apply the same at the product – market level.
Low customer switching costs. 52 .PORTERS FIVE FORCES ANALYSIS Threat to Entry – Economies of size and scale. Industry stagnation. Learning curve advantages. Threat of Customers – Buyer concentration and volumes. Product differentiation through proprietary technology or brand power. Government policy. Low relative importance of the segment. Scope for backward integration. Resource profile & fear of retaliation. Low margins & stagnancy. Capital requirements. Access to distribution channels. Unimportance of product quality. High switching costs. Undifferentiated product. Presence of substitutes or unorganized sector.
PORTERS FIVE FORCES ANALYSIS Threat of Suppliers – Supplier monopoly. Produced by industries earning high profits. 53 . High exit barriers. Low relative importance of the segment. Piracy and counterfeits. Industry stagnancy. Buyer’s propensity to substitute. Intermittent overcapacity. Unorganised sector. Lack of substitute inputs. Differentiated inputs. Jockeying for position – Fragmented market. High customer switching costs. Scope for forward integration. Diversity of players. Product perishability. Threat of Substitutes – Improvement in price -performance trade-off. Low level of differentiation.
Resource Profile – It highlights the capabilities (generic) or competencies (business specific) of the firm. 54 .FIRM ENVIRONMENT Size and Scale of Operations – It is a very important component of competitiveness in today's global context (Bharti – MTN. Reliance). Business Scope – The intention whether the firm wants to be in a single. dominant or related diversified or unrelated diversified businesses (Infosys. Inertia – Excessive commitment to past strategies prevents firms from tapping emerging opportunities. Cohesiveness – Degree of bonding existing across affiliated firms. Tata).
and with lower prices it can increase its sales volume. experience teaches better and more effective way of doing things. The E-Curve thus enables organisations to build entry barriers. 55 . it can price its products more competitively. leverage it as a competitive advantage. However. With lower costs. which further reduces costs. an E-Curve can prove to be futile during discontinuity. Experience curve has strong linkages with performance. Matured firms will always be positioned advantageously on the ECurve than new entrants.EXPERIENCE CURVE The cost of performing an activity declines on per-unit basis as a firm becomes more efficient.
EXPERIENCE CURVE Cost per unit of output Decreases at an increasing rate Point of inflexion Decreases at a constant rate Decreases at a decreasing rate Production / Volume 56 .
TRADITIONAL VIEW Efficiency = Lower Costs 2 3 1 Experience = Efficiency Lower Costs = Higher Sales Entry Barrier = Better Performance 4 6 5 Higher Sales = Lower Costs Lower Costs = Entry Barrier 57 .EXPERIENCE CURVE .
EXPERIENCE CURVE .STRATEGIC VIEW Inertia = Limited Growth Experience = Inertia 2 3 1 Limited Growth = Diversification Strategic Failure = Poor Performance 6 5 4 Diversification = New Experience New Experience ≠ Old Experience 58 .
Websites. Acronym for Strengths – Weaknesses – Opportunities – Threats. A SWOT audit involves – Company Records – Annual Reports. Suppliers.SWOT The framework was originally conceptualized by Kenneth Andrews in 1970. It helps an organisation to capitalize on the opportunities by maximizing its strengths and neutralizing the threats minimizing the weaknesses.VULNERABILITY ANALYSIS . . Business Intelligence – Bankers. Press Clippings & Interviews. Case Studies – Structured Questionnaires. Customers. Competitors. 59 Analysts. Observation. It is one of the earliest models in environmental scanning. Interviews.
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 .
Economies of scale – Eg. Tata. Strong after sales & service network – Eg. Biocon. Large resource pool – Eg. ITC. Strong R&D base – Eg. Reliance. High quality products – Eg. Engineering Skills – Eg. Infosys. Honda. Motivated employees & cordial industrial relations – Eg. Sony. Volkswagen. Toyota. Siemens. Tata Steel. Aditya Birla. Ranbaxy.SOURCES OF STRENGTH Strong brand identity – Eg. 61 . HUL. Caterpillar. Good credit rating – Eg. Infosys. Dr. Reddy’s. SBI. Excellent penetration – Eg. Reliance.
Ballarpur Inds. Single product syndrome – Eg. Lacking experimentation culture – Eg. Inertia – Eg. Narrow business scope – Eg. Excessive diversification – Eg. Modi Group. CESC. Hindustan Motors. Organizational Politics – Eg. Group . Lack of product / brand clout – Eg. SAIL. Strategic myopia – Eg.SOURCES OF WEAKNESSES Outdated technology – Eg.Raymond. Bijoligrill. K. CMC (Tata Group) 62 . K. Inefficient top management – Eg. Excess manpower – Eg. B. Tatas. J. Procter & Gamble. Nirma.
Banking. Growing population – Eg. Market driven Pricing – Eg. VRS. Fertilizer. Fertilizers. 63 .SOURCES OF OPPORTUNITIES Delicensing of Industries – Eg. Abolishing CCI. Capital market reforms – Eg. Telecom. Middle-class buying power. Globalization – Eg. Collaborations & Joint Ventures – Bharti & WalMart. Market driven Interest rates – Eg. ECB’s. Retailing. Exit Policy – Eg. Insurance. Maruti. GDR’s. Sugar.Tata Motors. Sugar. Abolishing MRTP – Eg. Life style changes – Eg. Free pricing – Eg.
Land acquisition . Singur SEZ. Bajoria – Bombay Dyeing. Natural disaster – Eg. Hostile take-over – Eg. Nationalisation – Eg. Group disintegration – Eg. 11/9.Social activism – Eg. Import relaxation – Eg. Lack of Corporate Governance – Eg. 64 . Foreign Direct Investment (FDI) – Eg. Onida. Terrorist attacks – Eg. (1985–1990).SOURCES OF THREATS Political instability – Eg. Dumping from China. Reliance. Satyam. Earth Quake. 26/11. Economic recession – Eg. Tata Steel. (2008). Tsunami.
Delphi's technique. Strategic responses (including adaptation) to opportunities and threats is critical for survival and success. Assess the extent of impact of the factors. scenario analysis).ETOP Acronym for Environment – Threat – Opportunity – Profile. Holistic view – Prepare a complete overall picture. time series. 65 . It represents a summary picture of the external environmental factors and their likely impact on the organization.e. Forecasting – Predict the future (i. Stages in ETOP analysis – List the aspects of the environment that has a bearing on the organization.
Some key findings on major performance drivers that explains 75% deviations in performance – Product quality and relative market share. Relative attractiveness of the market. selectively. It is also a form of assessing vulnerability through longitudinal analysis. 66 Vertical integration is a powerful strategy. High investment intensity acts as a drag. An organization can draw upon the experience of its peers in similar situations.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. .
Managers should be particularly cautious while referring to such data during times of discontinuity as it makes past patterns futile. – Contexts may vary over time.LIMITATIONS The analysis is based on historical data and it does not take care of future challenges. . – Contexts may vary across countries. when radical changes in the economy takes place. As every organization is unique in its own way. therefore 67 validity may be a question. Authenticity of data is of prime importance – Contexts drawn across one organization may not be applicable to another.PIMS .
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 . KSF helps organizations spot early opportunities and convert them into value adding business propositions. It enables the top management to draw focus.KEY SUCCESS FACTORS (KSF) KSF relates to identification and putting concentrated effort on a particular activity or process which forms the very basis of competitive advantage.
IDENTIFYING ALTERNATIVE STRATEGIES 69 .
It provides broad direction to the groups vision and mission. 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.GRAND STRATEGY It is concerned with the overall business scope (single. national. It determines the locus a firm encounters with internal and external environment. unrelated) and geographical scope (local. 70 . It reflects the customer needs it intends to satisfy.CORPORATE . global) of a firm and deals with choices of allocating resources across them. 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 .
does not relate to do-nothing (Eg. – The firm may not be willing to take additional risk associated with new projects.STABILITY It involves maintaining status-quo or growing in a slow and selective manner. erosion of capabilities. The scale and scope of present operations remains almost intact. – Why disturb the existing equilibrium set up? – Limited resource position. Even during adverse times firms need to adopt a strategy to sustain current performance levels. (Eg. The reasons for stability strategy – – Lack of attractive opportunities. 72 . – To stop for a while and assess past records. Citibank). Stability however. Hindustan Motors).
GROWTH .ANSOFF’S MODEL New Product Existing Product Existing Market Market Penetration (+) Product Development (++) New Market Market Development (++) Diversificatio n (+++) Note: (+) indicates degree of growth and risk involved. 73 .
convert competitors customers. – Helps firms which are not comfortable with unfamiliar terrain. – Suitable for industries where scope for technological breakthrough is limited. 74 . within a well defined market segment. Nirma. Britannia). Market penetration can be achieved by – increasing sales to current customers. (Eg. Ujjala. direct non-users to users. – The company carries a risk of product obsolescence.MARKET PENETRATION It is a strategy where a firm directs its entire resources to the growth of a single product or a closely knit product set. – Elongated product life-cycle.
upholstery. – Moves across geographical boundaries.…… or Teflon: aircraft technologies to cutlery to paints or Raytheon Corp – Microwaves: radars to kitchen appliances). socks & stockings. fabrics. Du Pont – Nylon: parachutes. tyres. (Eg. 75 . – Stretches product life cycles. – Creativity and innovation – thinking out of the box. – Immense customer reach & flexible advertising.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. carpets. – Unconventional and flexible distribution channels.
– Deliverable through – redesigning or reengineering. features. reliability. durability.Strolleys). – Leverage on customer and brand loyalty. – Leveraging through – innovation.PRODUCT DEVELOPMENT It is a strategy where a firm tries to achieve growth through a radical new product (Eg. conformance. perception. – 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. – Areas of product improvement – performance. aesthetics. Refills) 76 . serviceability. Close Up: Fluoride – Gel toothpaste or VIP .
e. – High transaction costs and institutional gaps. Why do firms diversify in the Indian context? – Shift the growth trajectory or opportunistic. dominance). licenses (i. – Risk reduction. – Internal capital market. thereby creating a new business. – Permits: quotas. From the traditional point of view. From the modern point of view they are strategically dissimilar.DIVERSIFICATION It marks the entry of a firm into newer markets with new products. – Conglomerate or market power (i.e. 77 . industrial embassies). the new business is distinct from the existing business in terms of – inputs – technologies – markets.
If the hot wave dominates the planet. while the coffee business would register a return of 10%. either of which is equally likely to prevail. while the coffee business would register a return of 30%. If on the other hand. cold wave dominates the planet.HOW DIVERSIFICATION REDUCES RISK? Consider a hypothetical planet. ice-cream business would register a return of 10%. Let us assume that there are two businesses constituting the entire market – coffee and icecream. the ice-cream business would register a return of 30%. What would be your ideal diversification strategy through optimization? 78 . in which a given year is either under hot or cold wave.
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.
Reddy’s). 85 .Where one firm has full ownership and control over all the stages of a value-chain in the manufacturing of a product (Eg. Dr. Ranbaxy. Usually the firm concentrates on its core activities. and out-sources the noncore activities (Eg.A firm produces part of its own requirements and buys the rest from outside suppliers with a variable degree of ownership and control. Quasi-integration . Reliance). Maruti – Sona Steering).A firm gets most of its requirements from one or more outside suppliers that is under its partial control through value chain partnerships (Eg. Tapered integration .QUASI & TAPERED INTEGRATION Full Integration .
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 .
– Cost of neglect (i. myopia). lack of knowledge of competitive forces). 87 .e.CONGLOMERATE DIVERSIFICATION It relates to entry of firms into businesses which are distinct in terms of – inputs – technologies – markets. Firms usually engage in conglomerate diversification when emerging opportunities are very attractive and offers potential growth opportunities. Drawbacks of unrelated diversification – – Cost of failure (i.e. and are also strategically dissimilar. – Cost of ignorance (i. core business). – Cost of dysynergy (i. lack of strategic intent. synergies pulling in opposite directions).e.e.
CONGLOMERATE DIVERSIFICATION Paper & Packaging Edible Oils Tobacco Hotels Food & Confectionary 88 .
L&TCement Division to Aditya Birla Group) technically known as divestiture or a product (Eg. ACC) in full to an independent entity. It is may also be a pro-active strategy. In strategy there is no scope for sentimentality with divestment. Tata Press).DIVESTMENT Divestment is a defensive strategy involving the sale of entire stake (Eg. where a company simply exits because the business no longer contribute to or fit its dominant logic. 89 . (Eg. It taken into account when performance is disappointing (i. It may also involve a SBU (Eg. reactive) and survival is at stake and the firm does not have resources to fend off competitive forces. Tata Pharma. Glaxo’s “Glucon-D” to Heinz). Tatas sale of Goodlass Nerolac.e.
ROUTES Outright Sale – Popularly known as the asset route.3 billion. where 100% of the assets (including intangibles) are valued and paid for.DIVESTMENT . 1956 does not permit this mode. However. involving 608 pence per share). Tatas buy-out of Corus for US $ 11. Hive-Off – A hive off is the creation of a new entity followed by transfer of assets. (Eg. 90 . the Companies Act. (Eg. where the equity is allotted amongst the existing shareholders on a pro-rata basis. 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).
91 . There can be no ideal strategy for every business. It is usually pursued by a business group with diverse interests across multiple industries.e.COMBINATION STRATEGY It is a mixture of stability.e. developing facilities right from the scratch) or through brown-field projects (i. and divestment strategies applied simultaneously or sequentially for a portfolio of businesses. mergers and acquisition. A combination strategy can be implemented through green-field projects (i. joint ventures). growth. because every business has its own unique external and internal environment.
STRATEGY CHOICE & PORTFOLIO ANALYSIS 92 .
Dominant logic enables top managers to selectively scan the environment and make trade-offs.STRATEGIC CHOICE A strategic choice seeks to determine the alternative courses of action available before top managers to achieve its strategic intent. What then is the magical number? 93 . 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.
To identify the right problems. The key task before a top manager is to identify the right problems.SELECTIVITY IS THE KEY The role of a top manager is not to solve a problem. They must choose problems which will lead to the right kind of opportunities. nor is to a define a problem for others to solve. if addressed. 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 . will help the firm achieve its intent. managers need to ask the right questions.
e. Licenses & Quotas. chaebols in Korea. Proximity to the corridors of power (i. business houses in India. BRC). formal and informal ties. Managing Agency). .BUSINESS GROUP . Their origins can be traced back to market imperfections existing in an economy (MRTP Laws. High degree of centralized control (GEO. Their roots can be traced to a single family or clan and share broad similarities. embassies). Resource sharing.DEFINITION A business group is known by various names in various countries – guanxique in China. keiretsus in Japan. 95 Succession planning is critical to continuity.
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 .
Power and resources often goes hand in hand. sometimes impossible. next only to choice of business. Why? Businesses are not about liquid assets. Rules of the game are different. 99 . Investing in emerging businesses may not actually be so simple as it appears to be. Redeployment of resources upsets the established power bases of a group. there are high costs associated with entry and exit. therefore. Relatedness across resources are difficult to realize.PORTFOLIO ANALYSIS Resource allocation across a portfolio of businesses is an important strategic choice.
BCG GROWTH MODEL Relative Market Share (%) Industry Growth (%) Low High High Low Stars Question Mark ? Cash Cow Dogs 100 .
and their risk profile is high (Eg.e. diversification). Tata Steel). Tata-AIG).BUSINESS ANALYSIS – TATA GROUP Question Marks – They have potentials in the long term. Trent. These businesses are also net users of resources (Eg. Stars – They achievers in the near term. but to larger extent than a question mark. 101 . Tata Telecom. market penetration. provided the industry growth rate continues and the company is able to maintain its growth (i. provided the company is able to build up on its market-share (i. TCS. which remains a big? These businesses are net users of resources.e. product development). market development.
BUSINESS ANALYSIS – TATA GROUP Cash Cow – These are matured businesses. and they lack on competencies to take on competition and are basically cash traps (Eg. Groups prefer to dispose off such businesses (i. they are generators of resources.e. Dogs – They are a drag on the group. stability). Given that the growth potential in the business is low. However.e. Tata Chemicals). harvest. Indian Hotels. Tata Pharma. Tata Tea. Tata Motors. and the company dominates the industry ahead of competition (i. divest) as achieving a dominant position in these businesses is a difficult task. cash cows may also need to invest provided the industry takes an upswing (Eg. Nelco. 102 . Tata Press).
The model does not provide specific solutions within a particular category. 103 .LIMITATIONS It does not address the concerns of a business which is in the average category (usually the majority). factors are limited.e. HUL). The terminologies used are somewhat prohibitive. Cartier. Data may be prohibitive. niche – Rolex. Armani). Certain businesses in the low market share category may be the result of a conscious strategy (i.BCG . Cash cows may actually need substantial investments to retain their market position (Eg. neither in high or low. Mercedes Benz.
GE .MATRIX Distinctive Capabilities Strong High Medium Weak Stability Industry Attractiveness Diversify (++) Intensify (+) Med Intensify(+) Stability Harvest (-) Low Stability Harvest (-) Divest (.-) 104 .
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 .
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. Divest – Selling a part or the entire business at one go. Portfolio – An organization is perceived as a portfolio of businesses. Gap Analysis – It emphasizes what a firm wants to achieve. Disinvestment involves selling in phases. SBU – A business unit which is strategically different from another and also shares a different SIC code. BCG – Boston Consulting Group. 107 .
BUSINESS STRATEGY & COMPETITION 108 .
Such resources or activities should be distinctive and sustainable over time. The principal focus is on meeting competition. Competitive advantage refers to a firms resources or activities in which it is way ahead of competition.COMPETITIVE STRATEGY A competitive strategy deals with how a firm competes in a particular business or product-market segment. The strength of a firm in a particular business usually stems from its competitive advantage. building market-share. and earning super-normal profits (i.e. 109 . Competitive advantage is the back-bone of strategy. rent).
developing competitive advantage (Porter). leveraging (Prahalad). Resource Based View – Obsession with competence building. identifying critical success factors. preventing new entry and/or competition (Hax & Wilde). Delta Lock In – Two dominant players co-opt to selfreinforce and create or escalate an entry barrier. Blue Ocean – Consciously moving away from overcrowded industries to uncharted territories and making competition irrelevant (Kim & Mauborgne). 110 . involving harmonizing and integrating multiple streams of technologies.BUSINESS STRATEGY FRAMEWORKS How to be distinctive and yet sustainable – Differentiation – Understanding of the dynamics of competition.
Steep experience curve effects. Sources of cost advantage are varied and depends on the structure of the industry – Economies of size. 111 . Compress project duration through crashing. The firm may retain the benefits of cost advantage by enjoying higher margins (Eg. backward integration.PORTERS – COST LEADERSHIP Cost Leadership – It is a strategy that focuses on making a firm more competitive by producing its products more cheaply than its competitors. proprietary technology. T-Series). Nirma. Ayur. Locational or early entry advantage. preferential access to raw materials. Reliance) or may pass it to customers to increase market-share (Eg.
Means of product differentiation are peculiar to each industry. Feeling the pulse of the customer. Successful product differentiation is often followed by premium pricing. Culture of experimentation.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. innovation and out of the box thinking. 112 . (Eg. Focus on brand loyalty. It selects one or more attributes that buyers perceive as important. undeterred attention to quality. and sufficient slack. Sony. Creativity. Rayban). avoiding brand dilution. Intel.
Sub optimization alone may not be a source of superior performance. The target segment must have unusual needs or the delivery system catering to this segment must be unique. Mont-Blanc. They are poorly served by mainstream players.PORTERS NICHE OR FOCUS Focus / Niche – It is a variant strategy of cost leadership or product differentiation targeting a specific market or buyer sub-segment with the exclusion of others (Eg. though it may not possess an overall competitive advantage. Cartier. 113 . Armani). Rolex. coupled with fear of structural erosion. A focuser seeks to achieve a competitive advantage in its target segment. 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 .
similarly differentiation may not always lead to rising costs (i. Reducing cost does not always involve a sacrifice in differentiation. in a hyper competitive context the two strategies need not be mutually exclusive. Though cost leadership and differentiation are inconsistent. jugaad or frugal engineering).e. Tata Nano). 115 .HYBRID STRATEGY A hybrid strategy is the simultaneous pursuit of cost leadership and differentiation. and usually outperforms a stand alone generic strategy. Firms focusing on a hybrid strategy typically aim at shifting the productivity frontier and recreating a new product-market segment altogether (Eg.
but achieves none. The positioning therefore gets – blurred.stuck in the middle. It will have a competitive disadvantage vis-à-vis a clearly positioned generic player. It tries to compete through every means. 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 . It is usually the result of a firm not willing to make trade offs. unless such a player is capable of discovering a profitable segment. Industry maturity will usually widen the gap. 116 .
Speech recognition software's. Nano technology. 3D imaging. 117 .) Excessive turbulence in the dynamics of the environment. (Eg. Market segmentation not well defined. coupled with low penetration levels. changing customer needs.radical environmental changes. Eg. It is characterized by – High level of technological uncertainty. Artificial intelligence). technological innovations. First-time buyers. Consumer behaviour pattern unstable and evolving. ending in a differential cost economics. leading to a blurred productivity frontier and steep learning curve. There is a lot of scope to define the rules of competition.EMERGING INDUSTRY Emerging Industry – An evolving industry characterized by .
High exit barriers because of huge investment in CAPEX. Retail and telecom. Paints. IT. MRTP may also cause fragmentation. Eg. Government regulations in the form Eg. because of lack of economies of size and scale. 118 . Eg. Diverse customer needs. It is characterized by – Low entry barriers. Air Conditioning. leading to clear fragmentation.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). Scope for players to change the rules of the game. Eg. Consumer durables.
MATURED INDUSTRY Matured Industry – An industry characterized by saturation in growth rates. Limited scope for innovation . technological maturity. Firms are rule takers in the segment as productivity frontier is well defined. established industry dynamics. distribution networks. Cartel among existing players through collusion. well defined consumer behavioral patterns and imperfect competition leading to near monopoly. early entry and location advantages.technological maturity. 119 . Strong entry barriers. because of economies of size and learning curve effects. collaboration and co-option.
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. Nature of competition extremely high. Firms facing a declining phase are characterized by inertia and slow to react to environmental changes. Typewriters. with little or no signs of recovery.DECLINING INDUSTRY Declining Industry – An industry which has outlived its utility due to the entry of close substitutes and or radical product innovations which results in a shift of the productivity frontier. backed by corporate espionage. dot-matrix printers). (Eg. scooters. and costly price wars. 120 .
mergers and acquisition. Locate a defendable position. premium pricing. Fragmented Industry – Identify. move beyond boundaries.COMPETITIVE STRATEGIES Emerging Industry – Set benchmarks. focus more on product differentiation or even a hybrid one. process innovation. branding and promotion. strictly product differentiation and not standardization. increasing scope. Matured Industry – Sophisticated cost analysis. strictly cost differentiation. strike alliances. aggressive building of distribution networks. or else exit the segment. Declining Industry – Redesign. recreate new markets. regenerate. reengineer. assess and overcome fragmentation. 121 .
A firms resources can be classified into – Tangible – These refer to real assets.RESOURCE BASED VIEW Differentiation based on cost or products saturates and ceases to exist beyond the medium term. hence very rarely confer competitive advantage as can be easily acquired or replicated. Intangible – These refer to goodwill. 122 . However. They are a standard in nature. and complex learning experiences in integrating and harmonizing technologies (distinctive capabilities) that play an important role in delivering competitive advantage through “causal ambiguity”. positions based on resources which are unique and inimitable are far more sustainable even in the long term. brands. patents.
Hence. Typically. but not necessarily. can be leveraged across businesses) or specific to a particular business.e. differentiation based on capabilities can be sustained even in the long run. They play a very critical role in shaping competitive advantage.CAPABILITIES & COPMPETENCIES These include a complex combinations of tangible and intangible resources that organizations use to convert inputs to outputs. There is a high degree of internal and external causal ambiguity involved in it. 123 . Capabilities can be generic (i. Therefore firms should concentrate on developing complex resources that forms the very basis of differentiation. they are woven around technologies.
COMPETITIVE ADVANTAGE 124 .
It enlarges the scope of an organization. not absolute) to competition. Success of a strategy critically depends on SAP.COMPETITIVE ADVANTAGE A competitive advantage is a position of superiority relative (i. and results in well springs of new business development. competitive advantage subsequently becomes the back bone for a competitive strategy. A portfolio of competitive advantage comprises strategic advantage profile (SAP). 125 .e. Strategy drives competitive advantage. It results in a distinct differentiation advantage or a cost advantage or hybrid as well.
Internal strategic fit between its strategy and dominant logics is essential for the top management to stretch and leverage SAP.STRATEGIC ADVANTAGE PROFILE (SAP) Organizations have to systematically and continuously conduct exercises to identify its SAP. Most successful organizations around the world have a well balanced SAP. In today's world of discontinuity. In most cases SAP is hidden and dormant. 126 . SAP changes from time to time. Identification of SAP is critical for and stretching and leveraging of resources.
Competitive advantage arises not from an individual activity but a stream of inter-related activities. VC pay-offs: better product availability. Inventory Mgt to Logistics Mgt to Supply Chain Mgt (SCM). A VC is often compared with a relay team. 127 . and enhanced customer tracking – higher market share.e. Substantial cost reductions also follow. faster product launches. Today SCM is integrated with greening the environment as CSR practices.VALUE CHAIN ANALYSIS A value-chain segregates a firm into strategically relevant activities to understand its composite behaviour. each of the players need to be efficient backed by sufficient coordination at the contact points (i. kaizen or internal customer).
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 .
Fit is important because discrete activities result in negative synergy and can also be easily copied by competitors. – Second order fit occurs when activities are reinforcing amongst them. – Third order fit refers to optimization of effort. 129 .STRATEGIC FIT – THE PORTER WAY The sustainability of the value chain depends on the degree of fit between the activities. A high fit involving a complex chain of activities drives both competitive advantage and its sustainability. – First order fit refers to simple consistency between each activity and the overall strategy. Operational effectiveness is not strategy. A learning organization helps create strategic fit.
Core competence has a high degree of external and 130 internal causal ambiguity embedded in it. These skills results in distinctive activities and processes. It forms the very basis of competitive advantage. A core competence usually has its roots in technology. – Cannot be easily imitated or substituted. – Can be leveraged across businesses. but not necessarily.CORE COMPETENCE A core competence represents the collective learning's of an organization around diverse streams of technologies. – Can be sustained even in the long run. It should satisfy the following conditions – Contributes significantly to customer benefits. .
A competitive advantage may or may not lead to superior performance. a core competence always implies a competitive advantage. 131 . Majority of the firms have competitive advantage. A competitive advantage manifests from a function. a core competence usually does. a core competence has its roots in a set of skills. A competitive advantage is sustainable in the shortmedium term. only global leaders possess a core competence.CORE COMPETENCE A competitive advantage does not necessarily imply a core competence. a core competence is sustainable even in the long-term.
each of whom wants to win. A game is a contest involving two or more players. illustrations depicting a win-win situation. However. In fact there are no. Here the magnitude of gain offsets the magnitude of loss equally. the stringent assumptions of game theory and difficulty in ascertaining of pay-offs makes game theory application difficult in business. Subsequent work on game theory by John Nash led him to win the Nobel prize in 1994.GAME THEORY The game theory was developed in 1944 by Oscar Morgenstern. This is known as a zero-sum game. In a game (similar to a business) one players win is always another's loss. 132 .
Firm Y’s Strategy Use Radio Use Radio +2 +6 Use Newspaper +7 -4 133 Firm X’s Strategy Use Newspaper Firm X’s Pay-Off Matrix .BIASED AND UNBIASED GAME A game is said to be biased when one of the players have a disproportionate chance of winning. An unbiased game is one where both the players have equal chances of winning.
A saddle point is a situation where both the players are facing pure strategies. Firm Y’s Strategy Use Radio +3 +1 Use Newspaper +7 -2 134 Firm X’s Strategy Saddle Point Use Radio Use Newspaper Firm X’s Pay-Off Matrix .PURE STRATEGY GAME The strategy each player follows will always be the same regardless of the other players strategy.
It represents the classical “prisoner’s dilemma”. 135 . collaboration or cooption.g. Coke Vs Pepsi). iteration) rather than through collusion (E. However. Repeated Games – In this situation the players interact repeatedly with each other sub-optimizing the outcome possibilities.e. there is likely to be temptation by any of the players to try to steal the advantage over the other by breaking the rules of the game (Eg. This is usually through learning by “experience or observation” (i.TYPES OF GAMES Simultaneous Games – This is a situation where the players have an option to choose to cooperate or not through collusion. Yahoo Vs Microsoft).
In a market dominated by price-based differentiation one may attempt to change the rules of the game by/when – – Bases of differentiation dependent on clear identification of what customer wants or value. but 136 players do not always behave rationally. . – Making pricing more transparent.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. – Building incentives for customer loyalty. It results in a shift in the productivity frontier.
DELTA MODEL & LOCK-IN
Its a systematic approach where-in two or more industry majors, who by default has achieved a proprietary position (Microsoft – Software / IBM – Computers) which are not necessarily best-products in the industry, co-opt to create a lock-in. A lock-in implies that other players has to conform or relate to that standard in order to prosper. Becoming the industry standard requires – strong brand, causal ambiguity, and close relationship with other companies offering complimentary services. Lock-in is self reinforcing and escalating (i.e. accelerating effect).
THE THREE STRATEGIC POSITIONS
System Economics Market Dominance Complementary Share
Enabled through effective use of technology
Total Customer Solutions
Customer Economics Cooperation Customer Share
Product Economics Rivalry Product Share 138
Bill Gates is the richest man in the world not necessarily because he has developed the world’s best software's or excels at customer satisfaction; but he has got an army of people working for him who are not on his payroll – all the application software providers who are writing programs based on “Windows” compatible operating platform. Once you create the lock-in it is sustainable because of the “network effects”; which creates the proverbial “virtuous cycle” – customers want to buy the computer with largest set of applications and software developers want to write programs for the computers with the largest installed base.
The proponents (Hax & Wilde) believe that every organization has the ability to create and sustain a “lock-in” positioning (though in varying degree). This “system lock-in” is referred to as “delta” – delta being the Greek letter that stands for transformation and change amongst the players. The lock-in once created becomes very difficult for a firm to penetrate, and becomes a distinct entry barrier. The model is based on the belief that it compliments Porter’s differentiation model and RBV framework instead of contradicting them. In a lock-in strategy the performance outcomes are dependent on the success of another.
It relates to translating strategy formulations into practice. Performance realization of a strategy depends on the implementation effort. Successful implementation also depends on the appropriateness of the strategy. Since strategy implementation is a time bound process, alignment (i.e. strategic fit) is a key variable during times of radical change. Some of the other levers of successful strategy implementation are – Transformational leadership and motivating power. Resource allocation; its stretching and leveraging. Compatible organization structure & control systems. Inertia & resistance to change.
internal strategic fit (strategy – dominant logic) is critical to strategy implementation. – Resource commitment from top management. 143 . A high strategic fit (co alignment) is useful because it enables – – Appropriate and timely response. While external strategic fit (strategy – environment) is relevant for strategy formulation. – Better strategic and operational control.IMPORTANCE OF STRATEGIC FIT Strategic fit has a central role to play in strategic management. – Development of capabilities & competencies. – Unlearning & learning of new skill sets. – Changing the rules of the game.
In fact. while control is very effective. 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. In such a situation. learning levels are very high. effective strategies are better crafted when there is a subtle overlapping between the two (i. According to Mintzberg. emergent strategy vis-à-vis intended & realized). formulation & implementation can occur simultaneously. at the cost of sacrificing a lesser degree of control.FORMULATION Vs IMPLEMENTATION Traditionally.e. learning levels are very low. In such a situation. 144 .
Pragmatism is the ability to make things happen. companies depend more on transformational leaders than transactional leaders. shift from compliance to commitment. He should be an agent of change. transformational leaders go one step beyond – Design a well crafted and designed strategic intent of the organization. A transactional leader is usually confined to allocating tasks & responsibilities and extracting performance. 145 .ROLE OF TOP MANAGEMENT To bring about change and to implement strategies successfully. In contrast. Install a system of shared beliefs and values. bring about transparency.
brands. minimum requirement). 146 . land. machines) referred to as threshold resources (i. labour. The various methods of resource allocation includes Historical Budget – The budgets framed by HQ for a particular SBU keeping in mind past trends.RESOURCE ALLOCATION Resources allocation includes tangible resources (Eg. patents. skills) also includes complex resources like capabilities and competencies. Intangible resources (Eg. Performance Budget – SBU managers need to justify the distinctive resources in terms of the opportunity it is pursuing yields the highest possible pay-offs.e. Zero Based Budget – In this case the budget of a SBU has to be worked out right from the scratch.
Distinctive capabilities helps in stretching and leveraging resources thereby overcoming two major constraints involved in strategy implementation – times & costs. Distinctive capabilities are complex set of skills woven around technologies. 147 . these capabilities are sustainable even in the medium to long term. Mobiles).CAPABILITIES & COMPETENCIES Technology and business are slowly becoming in – separable. Flat Screen Displays. 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). Moreover.
An appropriate organization structure & adequate control systems are essential to implement strategies and achieve stated goals. processes become people independent. The level of centralization and decentralization is decisive. A single product or a dominant business firm usually employs a functional structure. A firm in several unrelated businesses usually employs a SBU structure. Once the structure is in place.STRATEGY & STRUCTURE It is a framework within which individual efforts are coordinated to bring synergy. A firm in several related businesses usually employs a divisional structure. 148 .
Finance). Inputs . Marketing. or geographical locations. disbanded subsequently.Technology. Team Structure – An informal group formed for a crisis. processes. 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. Output). with team members having dual line of control.TYPES OF STRUCTURES Functional Structure – Activities grouped together by a common function (Eg. based on skills and competencies. 149 . Virtual Structure – A boundary less or hollow organization.
structures are becoming flatter and more simpler. Environment & People – Economic and political conditions have a major bearing on structure coupled with the attitude and aspirations of the people in the organization. facing challenges & crises. 150 . It includes the desire for independence.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. leading to a tall structure. Technology – With more and more convergence of technologies in business. assuming responsibility. as span is broader.
Inertia is a characteristic of a firm that endures status quo (i. irrespective whether it is from worse to good or good to worse. Common sources of 151 inertia – complacency with past successes.e. Top managers resist change. there is a tendency to continue along the same lines. Inertia acts as an impediment in strategy implementation. Changes in top management and unlearning helps overcome inertia. Most firms undergo periods of strategic continuity rather than strategic discontinuity. co0ntinuity). .INERTIA When a firm has been operating in a certain fashion for a long time.
strategies need to be evaluated on an ongoing basis to prevent deviations of fit. . firms should move beyond financial performance to strategic performance as organization systems are becoming complex. Deviation of fit is detrimental to performance and may lead to strategic failure. Since the internal and external environment is in a state of continuous flux. To prevent deviation of fit.STRATEGY EVALUATION Strategy evaluation centers around assessment of strategic fit. certain authors propose misfit as a source of superior 152 performance. However.
It attempts to answer the following questions – Is the strategic intent appropriate to the changing context? Are the organizations capabilities still holding good. competitive advantages becoming disadvantages? Has the company acquired any new competency? Has the company been able to overcome the 153 environmental threats.STRATEGY CONTROL It is concerned with trafficking a strategy as it is being implemented. . detecting changes in the external and internal environment and taking corrective action wherever necessary.
checking every premise is costly as well as difficult. It involves assessing – strategic thrusts and milestones. It is open-ended as well as .STRATEGY CONTROL IMPLEMENTATION It involves steering the company towards its original growth trajectory & stated goals. Special Alert Control – It intends to uncover unanticipated information having critical impact 154 on strategies. Implementation Control – It aims at assessing whether key activities are proceeding as per schedule. Premise Control – Checking the validity of the assumptions on which a strategy was based. However.
difficult to translate into practice. Strategy not linked to resource allocation & capabilities – Lacking commitment of top management. “If you cannot . Performance measures are defective – What to evaluate against? How to measure the 155 construct? As a saying goes. low strategic fit due to consultants intervention.BARRIERS TO STRATEGY EXECUTION Vision and strategy not actionable – Utopian ideas. Strategy intent not linked with goals and objectives – Lack of coordination at lower levels leading to negative synergy.
so if one fails to pay proper attention to one of them.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. On top of that. Today it is considered one of the most powerful tools for strategy implementation determining success or failure. important or not they're all interdependent. this may effect all others as well. to be sure of successful implementation of a strategy. the relative importance of each factor may vary over time and context. Managers should take into account all seven of these factors. Large or small. 156 . Together these factors determine the way in which a corporation operates.
and was taken up as a basic tool by the global management consultancy company McKinsey. The 7-S model was born at a meeting of these four authors in 1982. It appeared also in "In Search of Excellence" by Peters and Waterman. At around the same time in the US Tom Peters and Robert Waterman were exploring what made a company excellent. 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. Since then it is known as their 7-S model and is extensively used by corporations worldwide to implement their strategies. 157 .
to reach identified & stated goals. 158 . Structure – The way in which the organization's units relate to each other in terms of their commonalities. processes and routines that characterize how work should be done. formal & informal .THE 7’S Shared Values – It represents what the organization stands for and what the top management believes in. Style – The way in which the top management influences the functioning of an organization. Systems – The procedures. over time. Skills – An organizations capabilities and competencies. Staff – Human inter-relationships. Strategy – Trade-offs for the allocation of a firms scarce resources.
STRATEGIC FIT Strategy Structure Shared Values Systems Skills Staff Style 1st Order Fit 2nd Order Fit 3rd Order Fit 159 .
In contrast. While the American co’s focuses on the hard S’s. staff. systems) are comparatively easy to identify and influence. structure. style. A choice of an alphabet often limits the scope and skews the interpretation of a model. their Japanese counterparts focus more on the soft S’s for their early success and sustainability. Consider the 4P’s of marketing or 3R’s of SCM. the soft S’s (skill. because most often they are culturally embedded and often neglected. Ineffective in case of a virtual company.A CRITIC OF THE 7S MODEL While the hard S’s (strategy. shared values) are very malleable and comparatively more difficult to identify & influence. 160 .
Low Take Overs 161 .High Organic Growth Strategic Alliance Joint Venture Mergers & Acquisition Strategic Fit .STRATEGY IMPLEMENTATION ROUTES Strategic Fit .
ORGANIC GROWTH Here a firm builds up its facilities right from the scratch and continues to do so without any external participation. (Eg. and markets. concessions are available for green-field projects.e. (Eg.e. It has complete control over inputs. tax holidays. . Long gestation leads to delayed market entry. soft loans. Reliance Industries). green-field projects. the entire value chain. i. The entire infra-structural facilities are set up afresh having its own gestation and break-even. technologies. SEZ’s. i. Govt. 162 Risk of cost and time overruns. subsidized power).
Tata Motors & Fiat).STRATEGIC ALLIANCE It involves a pro-active collaboration between two or more firms on a particular domain or function for mutual gain. Alliances are usually short-lived and disbanded once the purpose is achieved. It has limited intervention power and usually lacks holistic commitment from the alliance partner. Alliances are usually in the areas of technologies or markets (Eg. There is no funding or equity participation from the alliance partner & both the firms continue to operate independently. 163 It is a form of competitive collaboration. It touches upon a limited aspects of a firms value chain. .
leaving minimum scope of overlapping. A comprehensive MOU is essential. (Eg. Degree and extent of management control must be clearly 164 laid down. Tata – AIG.Honda). Dominant logic of both the companies should be complimentary. It is a win-win situation for both the companies. Hero . Selecting the right partner is critical for success. .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.
with the individual firms ceasing to exist any more (Eg. Coca Cola – Thums Up). Brooke Bond & Lipton).MERGERS & ACQUISITION It refers to the fusion of two or more firms into a single entity. . Integration of assets and other financial resources. 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. Acquisition is an outright purchase of a firm assets by another independent entity (Eg. ITC Tribeni Tissues. Integrated distribution channel leads to better market penetration and overall synergy.
Consolidation in a fragmented industry.TAKE OVERS It refers to the acquisition of significant management control by buying out majority stake in a firm through due diligence or hostility (Eg. Larger geo-graphical diversity. Instant access to capacities and markets. Inform SEBI / Stock Exchange after 5% stake is 166 acquired. Make a public offer of not less than . Tata Steel .Corus). Most countries have stringent laws that prevents hostile take over. often the new firm is “left alone”. Integration of organization structure & cultures is difficult.
MANAGEMENT TOOLS IN STRATEGY 167 .
Change provides enormous opportunities. Some tools to ensure that – Benchmarking – Adopt certain best practices. Radical change is superseding incremental change. Balanced Scorecard – Tracking strategy 3600. The past is ceasing to be an indication of the future. or better still create next practices Reengineering – Redesigning work processes right from the scratch. 168 . Companies therefore need to ensure competitive advantages doesn’t become competitive disadvantages. TQM – Doing the right thing the first time. it is also a source of potential threat.WHY MANAGEMENT TOOLS? Change is becoming pertinent in the business environment. every time.
A best practice is defined as an activity performed by a company in a particular domain or function which distinguishes it from others and making them world-class. These exemplary practices involves the stakeholders of the company and helps achieve its strategic intent. Best practices centers around looking at a different way to satisfy various stakeholders. Benchmarking involves the identification, understanding and adapting of certain best practices and implementing them to enhance performance. Firms are moving towards next practices as best practices make firms look more and more homogeneous.
SOME BEST PRACTICES
Dell: Customized configuration of computers. Caterpillar: 48 hours delivery anywhere in the world. Citi Bank : Priority banking services. Maruti: Certified “true value” pre-owned cars. Microsoft: ESOP to employees. Infosys: Customized work-stations. TCS: Referencing potential new recruits. ITC: Shareholders factory visit. AmEx: Outsourcing data warehousing mining. MARG: Set-top box to study viewing patterns. Honda: CEO’s visit to dealers.
TYPES OF BENCHMARKING
Functional – Used by companies to improve a particular management activity. Eg. Motorola learnt delivery scheduling from Domino’s. Process – Improving specific key processes and operations from experiences in similar businesses. Eg. Ford adopting assembly lay-out plan of Toyota. Competitive – It involves assessing the sources of competitive advantage and imitating them. Eg. Samsung leveraging miniaturization skills of Sony. Strategic – It involves assessing business models and replicating them in a different market. Eg. Reliance replicating AT&T business model.
HOW TO BENCHMARK?
Phase 1: Planning – What to benchmark? Whom to benchmark? – Identify key performance indicators & Data source. Phase 2: Analysis – Assessment of performance gaps. – Predict future performance levels. Phase 3: Integration – Communicate findings and gain acceptance. – Establish functional goals and its implementation. Phase 4: Action – Implement and monitor progress. – Measure results against stakeholder wants and needs. – Recalibrate or outperform benchmarks.
WHOM TO BENCHMARK?
Selecting the benchmarking partner is critical to solving the problem. Firms should generally avoid selecting the industry leader, because it may not always adopt the best practices for every process or activity. Benchmarking partners may also be from different industries. Types – – Internal – It involves benchmarking against its own branches, divisions, SBU’s. Proximity to data and cooperation is taken care of automatically. – External – It involves benchmarking against firms that succeeded on account of their best practices. It may also involve benchmarking against world-class firms. Friction may arise due to presence in competing industries.
BENCHMARKING - ADVANTAGES
Finding better ways of meeting stakeholder needs. Organizational learning comes from internal as well as external sources. Establishing goals based on formal assessment of external conditions. Defining effective measure of indicators, facilitate comparison, adopt from other organizations. Ensuring a continuous learning organization. Reducing competitive disadvantage. Organizational turnaround, especially effective in case of a wide strategic drift when differentiation strategies fail to work. 174
It can at best complement it. . While strategy is all about differentiation and not looking alike. It does not shifts the growth 175 trajectory of the industry as a whole.LIMITATIONS More and more companies benchmark.e. clustering). Benchmarking merely reorients profits in the hands of few to profits in the hands in the hands of many (i. but it cannot be used as a strategic decision making tool. the more similar they end up looking. Benchmarking is useful for bringing about operational efficiency.BENCHMARKING . Strategy is more of creating best practices rather than copying them.
RE-ENGINEERING Redesigning leads to identification of superfluous activities or product features (i. clean sheet). Windows 95 to 97).g. DOS to Windows). The task demands a total change in organisational 176 culture and mindset. 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. process mapping) and eliminating or improving them (E.e. .g.e.
than people driven Innovative Vs Traditional Customer centric Vs Organisational centric 177 .REENGINEERING – KEY TENETS Ambition Focus Attitude Enabler Performance Large scale improvement by questioning basic assumptions about how work is done Micro Vs Macro Business Processes Vs Organisational Processes Starting right from the scratch Not historical More IT driven.
etc) and supports the organization for the present. processes. Strategic – It looks into the process of strategic planning. .e. Business – It looks into markets. structures. 178 .LEVELS Reengineering can be successfully leveraged at all levels of an organization with varying degree of results.e. customers and suppliers and protects the organization from the future (i.REENGINEERING . BPR). resource allocation and prepares the organization for the future through a reorientation of the entire strategic architecture. products. It can be of the following types – Functional – It looks into the flow of operations (i.
– Causal Ambiguity. reverse engineering is a top-bottom approach. – High cost and time acts as a deterrent. protection can be had in the following ways – – Patenting. It generally acts as a threat to innovation. learning curve advantage. Cheaper versions of Intel chips and mother-boards manufactured in Taiwan. While traditional manufacturing is a bottom-up approach. 179 . – Early entry advantages.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. However. with an intention to copy it (Eg. Indonesia).
Inaccurate assessment at this stage may lead to a failure of the entire project.e. cost and effort necessary for the purpose of reverse engineering. designing facilities.STAGES IN REVERSE ENGINEERING Awareness – Recognizing whether the product is found to be worth the time. machine tools to convert ideas into a marketable product (i. Introduction – Launching the product in the market. 180 . nano-technology). Usually in such cases segmentation and pricing is different from the original innovator. Implementation – Developing of a prototype. Actualization – Obtaining and dismantling of the product to assess how it functions.
– Perception – Customer notions. It has eight dimensions (Eg. – Durability – 1980 manufactured cars still on road. – Conformance – Emission standards .Euro IV. – Aesthetics – Appeal in design. More and more companies are moving towards meeting implied rather than stated needs. Air bags. 181 . Car) – – Performance – Mileage of 14 kms to a litre of fuel. of service stations. – Reliability – Consistency in mileage.WHAT IS QUALITY? It involves the totality of a product or service in meeting certain stated or implied needs. – Serviceability – Large no. – Features – Anti-lock braking systems.
It is deeply embedded as an aspect of 182 organisational life & culture. which ensures good market standing. Management of quality was traditionally inspect it . touching upon a limited aspect of a value chain. .fix it in nature. 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.TOTAL QUALITY MANAGEMENT Objective – Management of quality ensures conformance to certain pre-set standards. zero defects.
Kaizen – Make continuous improvement a way of life. not a final destination. Be customer centric – Generate the concept of internal customer (Ishikawa). Empowerment – It takes place when employees are properly trained. fully involved in decision-making and fairly rewarded for results. provided with all relevant information and best possible tools.TQM – KEY TENETS Do it right. 183 . Looking at quality as an endless journey. the first time – From reactively fixing error in products to proactively preventing errors from occurring at the first place (Juran).
saving precious top management time.TQM . SQC – It is a process used to determine how many units of a product should be inspected to calculate a probability that the total no.e. of units meet preset standards (Eg. Quality Circles – It a small group of shop-floor employees who meet periodically to take decisions regarding operational problems and crises. 6-Sigma). 184 . It is based on the principles of MBO (i. enabling the firm to concentrate on core activities essential to customer satisfaction.STRATEGIES Outsourcing – It is the process of self-contracting services and operations which are routine and mundane. equal participation).
... it’s bad execution. Source: Fortune Magazine Why CEO’s fail? 185 .. – In the majority of failures – we estimate 70% – the real problem isn’t (bad strategy) ... – Efficiency and effectiveness is passé.BALANCED SCORE CARD Some interesting comments ... strategy implementation has never been more important..... – Less than 10% of strategies effectively formulated are effectively executed.
BSC .CONCEPTUALISATION A company’s performance depends on how it measures performance. These measures worked well when organizational systems were simple and unidirectional and more importantly the environment was static. Organizations need to move from financial to strategic performance. 186 . rather than effects. Focus more on causes. 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. Most managers tend to rely on traditional measures of performance having its origin in finance as they are well tried and tested.
187 . because they have too many. It has four dimensions – – How do customers see us? – What must we excel at? – Can we continue to improve and create value? – How do we look to shareholders? Firms more often have problems.BSC – KAPLAN & NORTON (1992) A BSC helps a manager to track and communicate the different elements of company’s strategy. The most critical element of a BSC is to measure these four dimensions. and distinguish strategic problems from operational ones.
of visits or calls made % of NPA’s 188 .CUSTOMER PERSPECTIVE GOALS Products Supply Preference Relationship MEASURES Relative market share (%) % of sales from new Vs proprietary products Timely deliveries and service Customer credit analysis (i.e. ageing schedule) % of key customer transactions Ranking of key customer accounts No.
of times covered in media No. of new product launches Vs competition Product pricing Vs competition 189 .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 patents registered Time to develop next generation products Average and spread in operating cycle % of products that equal 2/3 sales No. of product innovations 190 .LEARNING PERSPECTIVE GOALS Technology Manufacturing Focus Timing MEASURES No.
FINANCIAL PERSPECTIVE GOALS Survival Success Prosper Divestment MEASURES Cash flows Growth in Sales and Profits EPS. Return on Investment Market Capitalization / PE ratio 191 .
STRATEGY MAPPING 192 .
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. doing right things instead of doing things right). Seek excellence.what they don’t know. they don’t know . As a result.e. It helps translating strategy into practice (i.ADVANTAGES Most often top managers face information overload. sharing of vision). Focus on cause not effects. Modern managers should be poised to ask the right questions. The BSC brings together the different elements of a company’s strategy at a glance. Shift from control to strategy (i.BSC .e.
EFFICIENCY Vs EFFECTIVENESS Ineffective Effective Inefficient Goes out of Business quickly Survives Efficient Dies Slowly Thrives 195 .
EFFECTIVENESS + STRATEGY A company which is effective as well as strategic.Michael E. not only thrives. . but also sustains it. Porter 196 .
CORPORATE RESTRUCTURING 197 .
.. To adapt to the changing environment. to survival of the most adaptable. “every organization must be prepared to abandon everything it does. firms use restructuring strategies. Strategic variety may be caused by changes in the as external well as internal environment. Radical change brings about strategic variety. Tata Group).CORPORATE RESTRUCTURING The only thing constant in today's business environment is change..” 198 .. from survival of the fittest . Restructuring involves consciously driving significant changes in the way an organizations thinks and looks (Eg... As Peter Drucker pointed out. Strategic variety brings paradigm shift.
e. Core Business – Company’s should introspect – What business are we in? Business evolved out of opportunism or myopia should be divested.RESTRUCTURING – BASIC TENETS Customer Focus – Restructuring ideally begins and ends with the customer. and dividing the core businesses into SBU’s (i. Fax. downsizing or rightsizing). downscoping). Walkman. Company’s should go beyond just asking what he expects. Internal customers should also not be neglected. . etc).e. they should strive to provide unimaginable value ahead of its time (Eg. ATM. Structural Changes – Conventional hierarchical structures should be disbanded in favour of more 199 flexible ones (i. Instead.
RESTRUCTURING – BASIC TENETS Cultural Changes – A culture represents the values and beliefs of the people about the organization....... the Tatas were considered a benevolent and charitable organization.. 200 .. Restructuring also requires cultural reorientation. .. It is created and institutionalized by the top management.. started focusing on their capabilities. During the times of JRD.) Reliance dismantled their industrial embassies .. Kumar Birla today is more dependent on professionals.) The Aditya Birla group typically relied on the “marwari” community for key management positions .. Ratan Tata now drives the point the group means business.
“ … one reason our customers are satisfied is that we aren’t.MOVING CLOSER TO THE CUSTOMER As companies evolve. Publicizing welfare projects to demonstrate CSR. Organizing customer and supplier meets. Use the reach of networking technologies. Getting feedback & addressing customer complaints. they tend to move away from the customer.” 201 . Honda’s ad says. Carry out PR campaigns. Communicating to the media about organization efforts to deliver quality products. Restructuring provides a platform to close this gap.
including its intangibles – Mergers – It may be vertical. Mittal – Arcelor) and can take various forms. Tata – Corus) or hostile (Eg. Asset Swaps – It entails divesting and acquisition simultaneously by two companies. spin-off and equity carve. Further. where the difference in valuation is settled off through cash or equity (Eg. Hive Off – It involves siphoning of assets under control. Glaxo – Heinz). It may include brands as well. Further spin-off can be classified as split-off and split-up. or conglo-merate.ASSET RESTRUCTURING Asset Restructuring – The asset composition of a firm undergoes a major change. it may be smooth (Eg. horizontal. 202 . It can have two forms.
Equity Carve – It involves selling a minority stake to a third party while retaining control (Eg.HIVE OFF Spin-Off – A spin off is the creation of a new entity. – Split-Off – In a split-off. – Split-Up – In a split-up. in which the equity is allotted amongst the existing shareholders on a pro-rata basis (Eg. 203 . the existing shareholders receive equity in the subsidiary in exchange for the stocks of the parent company. Tata Industries selling 20% stake to Jardine Matheson). the entire parent company loses its identity after being split into a number of subsidiaries. Reliance Ent). Most of these practices are not in consonance with Indian laws.
Selling out in phases is called disinvestment (IPCL). A complete sell-out is known as divestment (TOMCO). strategic misfit. L&T sold its cements division to Aditya Birla group. repay long-term debts. Generic motives include – – Raise working capital. In 2005. 204 . – Poor performance. In 1995. but retained its engineering division. 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. for a specified market or in general with full management control.
3 billion.The internal & external liability composition undergoes a major change – LBO – Acquiring control over a substantially larger company through borrowed funds (Eg. 205 . It provides greater leverage as well as management control. 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. Wipro).CAPITAL RESTRUCTURING Capital Restructuring . Share Buyback – It is a process of cancellation of shares out of free reserves to the extent of 25% of paid-up capital (Eg. involving 608 pence per share).
150 cr VSNL – Rs. 42 cr Voltas . 230 cr Diversifications Tata Motors – Rs. 250 cr Tata Tetley – Rs. 1890 cr CMC – Rs. 120 cr Tata AIG – Rs.Rs. 99 cr Tata Power – Rs. 1439 cr 206 Tata Timken – Rs 120 cr Tata Telecom – Rs.BUSINESS RESTRUCTURING – TATAS Divestments Lakme – Rs. 1170 cr Goodlass Nerolac – Rs. 1860 cr . 950 cr Merind . 1700 cr Trent – Rs. 256 cr ACC – Rs.Rs.
Turnaround is the primary motive. of operating units. Survival is the primary motive.ORGANIZATIONAL RESTRUCTURING Organizational structure and systems calls for a change when strategic variety is apparent. It can be carried out in the following ways – Downsizing – It is a systematic one-time reduction in the no. keeping the composition of business intact (Jet Airways). Rightsizing – It is phasing of excess and redundant employees resulted out of faulty internal planning (SAIL). of a firm’s employees and sometimes in the no. usually as a result external turbulence. Downscoping – It involves reducing the business and/or geographical scope of a firm (Aditya Birla group). 207 .
Strategy change is unviable without a preceding change in its dominant logics. inertia). as strategies are based on such beliefs and biases. the more difficult it becomes to uproot the paradigm (i.STRATEGIC CHANGE One of the most difficult components of organization restructuring is the mindset of the top management represented through its dominant logic and its shared values reflected in cultural orientation.e. 208 . The dominant logic represents the perceptions and biases (i. The longer the period. Dominant logic becomes deep-rooted in organizational contexts depending on the period it is in place (tenure of the CEO).e. thumb rules) of the top management.
FORCES AGAINST STRATEGIC CHANGE The problem with strategic change is that the whole burden typically rests on few people (i. In most organizations. Companies achieve real agility only when people at every level rise above the ordinary to face the challenges – revitalization or transformation. Successful transformation requires – incorporating employees fully into the process – leading from a different place so as to maintain employee involvement – instill mental disciplines that will enable employees to behave differently.e. 20% of the people carry out 80% of the changes). 209 . the factor that stifled change & performance was – culture.
Understand and deliver the quid pro quo. never take no for an answer. The best way is to alter the institutional point of view.SUCCESSFUL TRANSFORMATION Build an intricate understanding of the business model at all levels of the organization. Encourage uncompromising straight talk. Manage from the future. 210 . process ownership. Create relentless discomfort with the status quo. Promote inventive accountability. Questioning every basic action of the organization. it is not about winning but about learning. Harness setbacks.
It involves identifying – Aspects of current culture which needs to be reinforced. also known as cultural-web. Culture and style of management are two main impediments in force-field analysis. by identifying forces for and against change. It involves diagnosing a change situation – systems & structures. 211 . that can be both enablers and blockages to change and restructuring. Identify and implement facilitators of cultural change. Aspects of current culture which needs to be overcome.FORCE-FIELD ANALYSIS A force-field analysis provides an initial overview of change problems that needs to tackled.
Term Loss of human capital Lower performance Higher performance Capital .Term Reduced labour costs Reduced debt costs Emphasis on strategic control Business High debt costs Higher risk 212 Long .RESTRUCTURING .OUTCOMES Alternatives Organizational Short .
Numerator – It assumes that turnover is not a barrier or constraint. In order to put back the company on the right track they are resort to – Denominator – It assumes that turnover cannot be increased. 213 . down-scoping or asset stripping. 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. focuses on reengineering. hence go in for downsizing. While the first strategy produces results instantaneously.
TURNAROUND MANAGEMENT 214 .
... January 1997). . and that the thirty-two of the country’s largest business groups in 1969 are no longer among the top fifty today. – Less than 10% of the Fortune 500 companies as first published in 1955. – Only seven of the first fifty Indian business groups in 1947 were even in business by the turn of this century. still exist as on 2005.WHY TURN AROUND MANAGEMENT? Some interesting insights .. 215 (Govindarajan and Trimble.. Source: Why do firms atrophy? (Business Today..
and achieves sustainable performance recovery. While content focuses on endogenous and exogenous variables. skills. 216 . As a sequence of events describing how things change and why they change (i. A category of underlying principles and concepts. Both content (what) and process (how) are equally important for a successful turnaround.TURN AROUND MANAGEMENT A turnaround is said to occur when a firm perseveres through an existence threatening performance decline.e. process focuses on – A logic to explain a causal relationship between intervening variables. and capabilities. ends the threat with a combination of strategies. Stage Theory). systems.
TURNAROUND INDICATORS Most firms atrophy simply because they fail to diagnose the indicators that acts as threat to organizational existence. suppliers and bankers. leading to lack of acceptability from distributors and customers. unavailability or radical lowering of substitute costs or technological obsolescence. Some indicators Continuous cash flow crises as a result of dwindling market-share and profits. Low stakeholder confidence. 217 . Uncompetitive products or services. especially in key positions. Low employee morale leading to high employee attrition at all levels. Substantial shifts in consumer preferences. Rising input costs.
liquidating dead assets. Revamp product portfolio.. Extending work hours. focus on power brands. prune work-force.TURNAROUND ILLUSION The first step to a successful turnaround is the basic acceptance of the fact that …. 218 . based on elasticity. Common approaches adopted Change in key positions. “all is not well”. consider extension. they adopt surface level measures (disprin popping) which most often fail. which most top managers fail to appreciate. Hence. be more customer centric. Product redesigning or reengineering. Emphasis on advertising and market penetration. Recalibrate prices.
TURNAROUND STAGE THEORY Stage 1 Decline Stage 2 Stage 3 Stage 4 Outcome Response Transition Performance Equilibrium Line Success Failure Indeterminate Nadir Time 219 .
Identification of the stimulus leads to the arrest of the downfall. 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. 220 . It involves the identification of the theoretical perspectives that explains performance decline – K-Extinction – It suggests that macro economic and industry wide factors are responsible for decline. It has its origin in “resource led stretch” and subscribes to the view that a firm has substantial power to override the context.DECLINE Decline is the first stage in the turnaround process. primarily dwindling resources and capabilities are responsible for decline.
If the decline stems from structural shifts. new market initiatives. Strategic responses focus on changing or adjusting the business the firm is engaged in through long term moves such as – integration. diversification. The response must match the cause of the decline. If the underlying cause is internal efficiency. the response should be operational.RESPONSE INITIATION Turnaround responses are typically categorized as operating or strategic. Operating responses typically focuses on the way the firm conducts business and involves tactics geared towards – cost cutting and process redesigning (BPR). 221 . asset reduction. the response should be strategic.
which may be unavailable to a focused firm. Scope – A diversified conglomerate may acquire a distressed business to turn it around and gain valuable synergies. when decline deepens shifts in strategic position becomes essential. Untangling this question brings into focus three events – Domain – Many of the strategic cures have limited applicability for an affiliated firm. Similarly new market initiatives is feasible only for multi-product firms. Contour – It is easier to reverse decline in the earlier stages through operational measures.RESPONSE DICHOTOMY The response initiation is somewhat dichotomous and cannot be universally applicable. 222 .
e.e. Support from all the stake holders through resource commitment. However. many a times early signs of recovery fades out. participative management (i. lead – lag). role model. Empirical studies show that average time is 7. confidence building measures. substantial amount of time usually passes before results begin to show (i.TRANSITION Transition usually reflects the first signs of recovery. However. Sustenance is the key factor in this stage. transparency. Effective levers of transition.7 years with a range of (4-16) years. 223 . consensus). The top management has a key role to play through empowerment.
Revival of key customers and new product launches. Supplier and banker confidence.OUTCOME Outcome is said to be successful when a firm breaches the equilibrium performance level. Share price indications and media coverage. Failure is an indication that initial momentum was not sustainable characterized by irreversibility. 224 . it should adopt a holistic approach. Regaining lost market share and distributor confidence. Commanding a premium in the market. Instead of focusing on financial parameters alone. Cut off points must be unequivocal.
COOPERATIVE STRATEGIES & ALLIANCES 225 .
More and more companies worldwide are moving away from competition to co-option to leverage their resources and enhance bargaining power. licensing. In the cooperative strategy continuum as firms move up the value order. supply-chain partnership. and globalization .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. or joint venture. consortia. technology. strategic alliance. 226 . It can assume any of the following forms – franchising. the commitment and the involvement between the firms increases manifold.
Titan Inds. It is an effective strategy to penetrate markets in a shortest possible time at a minimum cost. owners of the brand Tanishq allows its franchisees to sell its jewellery products. owners of the brand Monginis allows its franchisees to sell its confectionary products. Switz Foods. Branding is critical to franchising. 227 .FRANCHISING Franchising – It is a contractual agreement between two legally independent firms whereby the franchiser grants the right to the franchisee to sell the franchisor’s product or service or do business under its brand-name in a given location for a specified period of time for a consideration.
228 . Different levels of licensing Manufacturing without embracing any technology (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. HM manufacturing GM range of cars in India with a buy-back arrangement is a perfect example of CBU. Become a systems integrator (CKD). as in Tata Indica. Develop a product through its crude stage. refine processes and adopt necessary technologies (SKD).
leverage upon size to preempt competition by escalating entry barriers (Eg. Airbus – Boeing). Collusion – Few firms in a matured industry collude to reduce industry output below the equilibrium level. enabling them to increase prices (Eg. Coke – Pepsi). Cross Holdings – A maze of equity holdings through centralised control to ensure earnings stability & threshold resources for critical mass (Eg.CONSORTIA Consortia – They are defined as large inter-locking relationships & cross holdings between businesses in a similar industry. It can be of the following types – Multipartner – Intends to share an underlying technology or asset. Hyundai). 229 . Tata.
SUPPLY CHAIN PARTNERSHIP It is a pro-active & collaborative arrangement between supplier and customer aimed at achieving better control over the value chain (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. . Continuous sharing of knowledge is critical to the success of a supply chain partnership. Companies in different industries with different but complimentary skills. link their capabilities to create value for end users.
effective R&D management. Firm’s should undertake a long courtship with potential partners. Partner selection is one of the critical success factors. instead of hurrying into a relationship.learning organization. to gain knowledge and to obtain access to new markets (Eg. Generic motives involved are . enter newer markets.STRATEGIC ALLIANCE It is an short to medium term understanding between two or more firms to share knowledge and risk. Tata Motors – Fiat. Despite their popularity (50-60)% of the alliances fail to accomplish their stated objectives. preempt competition. enhance credibility. design next generation products. 231 . Reliance – Du Pont).
Bajaj – Castrol). Airbus – Boeing). 232 . Coke – Pepsi). Bootstrap – An alliance between a weak and a strong company with an intention to acquire it. Alliances of the Weak – An alliance is entered into to preempt competition (Eg. Complementary Equals – Two firms mutually promoting each others complimentary products (Eg. Whirlpool – Tide. Backward – An alliance (quasi or tapered) with a supplier of critical components seeking commitment (Eg. Maruti).STRATEGIC ALLIANCE .TYPES Collusion – Tacit top management understanding to neutralize price wars (Eg.
Firms from developed markets seek access to markets and firms from emerging markets seeking access to technology. – Japan Vs US). Too much stress on financials & structure be avoided.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. Cultural orientation has been found to have a profound effect on top management’s strategic orientation (Eg. 233 . Differences in level of economic development can produce differences in alliances motives.
Managerial capabilities. Dominant Logic’s – Similarity in beliefs & biases. 234 . Partner’s ability to acquire fresh skills. Intangible Assets – Move beyond the financials of the firm. including ability to provide quality products and services. Unique Resources – Abilities or skills which cannot be easily duplicated.PARTNER CHARACTERISTICS Complimentarity of Capabilities – The degree to which partners resources can be used in conjunction. Willingness to share knowledge and skills. Experience related to previous alliances.
Learning to collaborate – strategic. incorporating clear signs of continuing independence for all partners. Setting up the housekeeping. partners should nurture it. Changing within. vows to include commitment to expand the relationship. Getting Engaged – It should incorporate a specific joint activity. operational & cultural integration. 235 . degree of compatibility. differences not anticipated earlier.MANAGING ALLIANCES Alliances are more than just a deal. the value chain. understanding the chemistry. Selection & Courtship – It involves self analyzing. instead of focusing controlling the relationship.
Conceptually. There are substantial linkages in the value-chain. It lasts till the vision is reached.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. combining parts). . whilst the partners continue to operate independently. It aims at creating new value (i. synergy) rather than mere exchange (i. separation is very 236 bitter. a joint venture is a selection among modes by which two or more firms can transact.e.e.
Organizational Learning – It is a means through which a firm learns or seeks to retain their capabilities. Strategic Behaviour – Firms may override transaction costs. in addition to a high degree of asset specificity.JOINT VENTURE – GENERIC MOTIVES Transaction Cost – The situational characteristics best suited for a JV are high performance uncertainty. though more profitable alternative to other choices. 237 . The market fails as sellers are unwilling to reveal their technology and buyers are unwilling to purchase in the absence of inspection. It may also be linked to deterring entry or eroding competitors position.
Define future industry standards. – Eg. Maruti – Suzuki. Eli Lily – Ranbaxy. Learning new technologies. Daimler – Chrysler (Premium Cars) 238 . TVS – Suzuki (4-Stroke Engines) Fill gaps in existing product lines. – Eg.OTHER MOTIVES Entry into newer markets. – Eg. – Eg. Renault – Nissan (Minivans – Cars). – Eg. – Eg. Yamaha – Escorts. Sharing of resources. Essar – Hutch (Vodafone). Endorsement from government authorities.
Enka.e. – Maruti – Suzuki. Tata – Aditya Birla in Idea Cellular 239 . Century . Risk of over dependence. technology) drain. LML – Piaggio Differences in size and resource base. – Eg. – Godrej – Procter & Gamble. Risk of brain (i.RISKS INVOLVED Incompatibility – Differences in cultural background. Modi – Telstra What after exit (parenting disadvantage)? – Eg. – Eg. PAL – Fiat If the cost of continuing exceeds the exit costs? – Eg.
Equality – Lack of dominance. Culture – Reconcile gaps. Partner – Avoid duplication of skills and capabilities. Costs – Other modes of transaction becomes cheaper.PRE-REQUISITES FOR SUCCESS Commitment – Mutual trust. Incompatibility – Performance expectations. respect. Objectives – Shared vision. time sharing. Agreement – Clarity on operational control. Focus – Avoid strategic myopia. Inertia – Differences in age and evolution patterns. Flexibility – Sufficient space to breathe and adjust. 240 .
MERGERS & ACQUISITION 241 .
SEBI Takeover Code. Mittal Arcelor). Most countries have stringent laws that prevents hostile takeovers (Eg.MERGERS & ACQUISITION A merger is a mutually beneficial consent between two or more firms (usually of similar size) to form a newly evolved entity by absolving their individual entities to preempt competition (Eg. An acquisition is the purchase of a firm by a firm (of larger size.Daichi) and hostile if it is without the consent of the management (Eg. An acquisition is said be smooth if it is with the consent of the management (Eg. Ranbaxy . 2002). however. The larger objective is to leverage on size. HLL – Tomco). Brooke Bond – Lipton). 242 . reverses are also taking place through LBO) with a view to acquire conglomerate power and induce synergy (Eg.
Hike – An acquirer who has already picked up a 5% has to make a mandatory disclosure for every additional 1% stake that it acquires. .e.SEBI TAKEOVER CODE. Acquirer – Someone (individual or firm) who picks up an atleast 5% stake without mandatory disclosure having an intention to wrest management control (i. 2002 Promoter – A person who has a clear control of atleast 51% of the voting rights of the company and confidence of all the major stakeholders. Preferential – A preferential allottee ending up acquiring 5% stake also comes under its purview. creeping acquisition). Control – A special resolution of 75% of the share 243 holders approving the change of guard.
Gujarat Ambuja – ACC). asset stripping). 244 . and/or does not enjoy the confidence of the different stake holders.SEBI TAKEOVER CODE. 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. Grasim – L&T Cement. whichever is higher as an exit route (Eg. SEBI – In case of a hostile take over. credentials or track record is at stake. the SEBI can intervene and block share transfers if: the acquirer has ulterior motives (i. 2002 Pricing – Acquirers will have to offer minority shareholders (at least 20%) the past 26 weeks or past 2 weeks average price.e.
Kelvinator). Vertical – It involves complimentarily (partially related) in terms of supply of inputs or marketing activities (Eg. Electrolux . ITC). Godrej. Reliance). Horizontal – It involves integration of two highly related businesses (Eg. 245 . The type of merger is depends on the degree of relatedness (strategic) between the two businesses. usually opportunistic (Eg. Conglomerate – It involves integration of two distinctly unrelated 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.
Reduced gestation (i. Tax benefits (Eg. Overcoming entry barriers (Eg. Ranbaxy – Crosslands). Acquiring assets or capabilities (Eg. Access to newer segments (Eg.e. Mittal – Arcelor). Tata Steel – Corus). Economies of size. 246 . ICICI –ITC Classic). Ulterior motives – (Eg. quick access). Coinsurance effect – Higher debt raising capability. Global image (Eg. Avoiding risk of new product development. Asset Stripping – Shaw Wallace).MERGERS & ACQUISITION . scale and scope.MOTIVES Increased market / conglomerate power. ITC Bhadrachalam). Reduction in risk.
neglecting core business. Tata – Corus). 247 . Managing size. Inability to achieve synergy. while the ultimate acquisition was made at 607 pence/share). Merging of organisational structures. Managing over-diversification. When Tata Steel started negotiations with Corus. their initial offer was around 420 pence/share. Overvaluation is often as a result of an ego drive and substantially affects future returns. Top management overtly focused on due diligence exercise and negotiations.MERGERS & ACQUISITIONS PITFALLS Cultural differences (Eg. Overvaluation of buying firms (Eg.
Maturity – A larger firm acquires a smaller firm with an objective to achieve economies of scale and experience curve effects (Eg. Tata Steel – Corus). Growth – This stage may witness parallel merger of two firms of similar size. Decline – Horizontal mergers are undertaken to ensure survival. vertical to save transactions costs. 248 . Kingfisher – Air Deccan).MERGER TYPE & PLC Introduction – A larger firm may acquire a newly formed entity with an objective to preempt new competition or acquire its license (Eg. Brooke Bond – Lipton). with an objective to reinforce its growth trajectory or to take on the might of a comparatively larger player (Eg.
249 . active top management intervention in phases. Strong differences may stifle plans and its execution.INTERNATIONAL M&A . Immediate attempts to super impose structure and culture may cause bottle necks. Blanket promotions across entities and confidence building exercises needs to be practiced. Left alone syndrome. An acquisition just for the sake of it or reputation yields very little value in the long term. A concern of respect and trust for the business of the acquired company.FRAMEWORK Positive contribution to the acquired company. A common shared vision.
They can carry the message to the various stake holders. Determine business strategy. 250 Do not ignore the “people factor”. promptly. Redefine responsibilities and authority. Shift attention from business portfolio to people and processes. .INTEGRATION . It will enable focus on customers and key people. Decide on the new hierarchy.BLUEPRINT Take the media into confidence. Decide upon management control systems. Integrating work processes.
251 . – Market for corporate control. Valuation decisions are arrived through a due diligence process when the prospective acquirer gets access to the books of accounts of acquiring company. operational & financial). The process takes (6-12) months.e.VALUATION The process of valuation is central to M&A. – Synergy – Potential value gain from combining operations (i. – Unstated reasons – Personal self interest and hubris. While under valuation may be a significant opportunity. over valuation can become a curse.M&A . Financial motives – Undervaluation relative to true value.
252 . Innovative product – Good distribution network). or from increased market power which increases sales and margins. Synergy can be negative as well.VALUING OPERATIONAL SYNERGY Synergy – It refers to the potential value gain where the whole is greater than the sum of the parts. Sources of operational synergy – Horizontal Synergy – Gains come from economies of scale which reduces costs. – Conglomerate Synergy – Gains come when one firm complements the resources or capabilities of another (Eg. when the “fit” between the two entities is very poor. – Vertical Synergy – Gains come from controlling the supplychain and savings in transaction costs.
but availed after being merged with a profitable firm (Eg. Tax Benefits – Tax benefits may accrue from tax entitlements and depreciation benefits unutilized by a loss making firm. ITC – Bhadrachalam Paper). shareholders can accomplish the same at a much lesser cost. Hotmail).VALUING FINANCIAL SYNERGY Diversification – Reduce variability in earnings by diversifying into unrelated industries. However. and without paying take-over premiums. 253 . Cash Slack – It reduces asymmetry between cash starved firms with deserving projects and cash cows with no investment opportunities. Synergy comes from projects which would not have been undertaken if the two firms stayed apart (Eg.
hence better performance. as risky debt is spread across the new firm's operations. 254 . 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. – Default risk comes down and credit rating improves. – 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. This will induce higher debt capacity. higher leverage.VALUING FINANCIAL SYNERGY Co-Insurance Effect – If the cash flows of the two firms are less than perfectly correlated.
Assessment of perceived quality is critical. The value of wrestling control is inversely proportional to the perceived quality of that management. since a restructuring can lead to significant increase in value. 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 . While value of corporate control is negligible for firms that are operating close to their optimal value. – – Value of Control = Value of firm after restructuring Value of firm before restructuring.
LEVERAGE BUYOUT (LBO) The basic difference between a take-over and a LBO is the high inherent leverage (i. Confidence of investment bankers and the international financial community is essential. sometimes in combination with the assets of the acquiring company. The assets of the acquired company are used as collateral for the borrowed capital. debt component) at the time of buyout and rapid changes in capital structure over time. It is a very costly and risky proposition.e. 256 . LBO facilitates a relatively smaller firm to bid for a comparatively larger firm in the bid for management control.
A research study showed that 30% of the publicly listed firms reported above average returns after going private. liquidity. – The need to satisfy analysts and shareholders. – Separation of ownership from management. 257 . However.TO GO PUBLIC OR NOT? However. – Increased information needs. the advantages of going public includes . The increased benefit showed in the following way – reduced costs and increased revenue.access to financial markets. off-late many publicly traded firms have gone private keeping in mind the following – – The fear of LBO. on-going valuation.
– Cost of debt coming down (i. which disappears once assets are liquidated and significant portion of debt is paid off. 258 .e. – Debts repaid off from increased value after successful restructuring and wresting management control.RATIONALE FOR HIGH LEVERAGE The high leverage in a LBO can be justified by – – If the target firm has too little debt (relative to its optimal capital structure). – Cash trapped company unable to utilize opportunities. co-insurance effect). – It is a temporary phenomenon. – Managers cannot be trusted to invest free cash flows wisely.
EFFECT OF HIGH LEVERAGE Increases the riskiness of dividend flows to shareholders by increasing the interest cost to debt holders. Any discounting has to reflect these changing cost of capital. As the firm liquidates / pledges assets and pays off debt. 259 . Therefore. Lack of sufficient cash flows to repay costly debts resulting in a possible debt trap. – Increase equity valuation. initial rise in leverage is anticipated. A LBO has to pass two tests to be viable – – Restructuring to pay-off increased debt. leverage is expected to decrease over time.
REVERSE MERGER Reverse Merger – The acquisition of a public company.e. allowing the private company to bypass the usually lengthy and complex process of going public. small in size but having a promising business. time-barred. 260 . – Tax shelter. Objectives – – Traditional route of filing prospectus and undergoing an IPO is costly. shell company) by a private company. or costly. which has discontinued its operations (i. – Automatic listing in major exchanges. – Prevents dilution of equity. – Facilitates better valuation and forthcoming offerings.
261 . During bearish periods excess returns were 19%. Most target firms are taken over within (6090) days. However. and 35% during bullish periods.EFFECT OF TAKE-OVER ANNOUNCEMENT The shareholders of target firms are the clear winners. Excess returns also vary across time periods. – Merger announcements reported 20% excess returns. takeover failures have only initial negative effects on stock prices. Initial anomaly in stock prices usually normalizes over a period of time (6-12) months. – Takeover announcements reported 30% excess returns.
Brickley. 1983. over time. 1988 . – Most studies reported insignificant excess returns around take-over offers or merger announcements. and Netter. and Kim. 262 Jarrel. Desai. in the event of take-over failure negative returns to the extent of 5% on bidder firm stock prices is reflected.EFFECT OF TAKE-OVER ANNOUNCEMENT The effect of take-over announcement on bidder firm’s stock prices are not clear cut. – However. as stock markets become more and more perfect such anomalies would reduce Source: Jensen and Ruback. Bradley. 1983. – However.
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 Pill – An offer to existing shareholders to buy shares at a substantial discount to increase their voting rights (Eg. Poison Put – Premature retirement of bonds at attractive rates to pour surplus cash and make target investment unattractive. 263 .DEFENSIVE STRATEGIES Golden Parachute – An employment contract that compensates top managers for loss of jobs as a result of change in management control. Rights).
Gray Knight – The target company takes the help of friendly company to buy the shares of the raiding company. thus thwarting the raider company’s attention. But often the White Knight turns a betrayer himself (Eg. East India Hotels – Reliance Industries – ITC). Pac Man – The target company makes a counter bid to take over the raider company.DEFENSIVE STRATEGIES White Knight – It is the placing of stocks to a cash rich investor and bargaining for protection in return. 264 . Shapoorji Pallonji). Green Mail – The targeted company buys large blocks from holders either through premium or through pressure tactics (Eg.
COMPETING FOR THE FUTURE 265 .
Compaq overpowering IBM. The reverse was true for the companies overpowering. British Air overpowering Pan Am. Honda overpowering Volkswagen. What went wrong???? What were they doing with the present? What were they pre-occupied with? 266 . Most companies were too preoccupied with the present than the future? 99% of the companies overpowered. Nokia overpowering Motorola.GETTING OFF THE TREADMILL Canon overpowering Xerox. Honda overpowering GM. Hitachi overpowering Westinghouse. Wal-Mart overpowering Sears. were spending 99% of their precious time dealing with present.
These denominator based managers stuck to their restructuring strategies (like building pyramids) and didn't know what to do next? Thus they became history? (like the pharaohs) 267 . Not knowing when to stop. decluttering. CEO’s brutally pick up the knife and ruthlessly carve away layers of corporate flab (delayering.THE PAST OF COMPETITION Beyond Restructuring – When a competitiveness become inescapable problem (stagnant growth. declining margins. falling market share). downsizing). most often they ended up cutting corporate muscle as well and became anorexic. Thus efficiency was grievously hurt.
A poll in circa 2000 revealed that 80% of the U. incrementalism or nominal innovation has almost reached a plateau. The future is not about catching up with competition. However. On the contrary only 20% of Japanese managers believed that quality will be a source of competitive advantage of the future. top managers believed that quality will be a source of competitive advantage of the future.S. but forging ahead in competition. 268 .THE PRESENT OF COMPETITION Beyond Reengineering – Numerator based managers (innovation) at least offers some hope. but not of the future. ensuring only survival of the present.
they are not enough to get a company to the future. 269 . don’t predict. Empower from bottom to top. aspirations and resources. not just the organization. Creating the future requires industry foresight. faster. and regenerate its strategies (breaking its – managerial frames). It involves Dream about the company’s future. demographics and lifestyles. as important as these may be.THE FUTURE OF COMPETITION Regenerating – Leaner. Transform the industry. reinvent its industry. Create a potential gap. better. not the other way. Companies need to fundamentally reconcieve itself. It is based on deep insights into trends in technology.
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 .
they do not need to restructure. It is about deliberately creating a strategic misfit. It drives a hunger and a passion to transform. Therefore. Create entirely new industries (i. Change in at least one fundamental way the rules of engagement in an industry.e.ABOUT THE TRANSFORMATION The future does not belong to those who take the industry for granted. Successful companies have a complete grip over the industry. blue oceans). by converging technologies complex. Redraw the boundaries between industries. hence do not fall sick in the first place. 271 .
More importantly.ABOUT THE EMPOWERMENT Bring about a revolution (a paradigm shift) in the organization. The middle management plays a strong moderating role. 272 . A revolution that is thrust upon from the top seldom sustains. Transformational leaders merely lead the way. 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. Most successful revolutions (Gandhi to Mandela) rose from the dispossessed.
It requires a lot of common sense and a little bit of out of the box thinking. What does it take to get to the future first? Understanding how competition for the future is different. 273 . South West Airlines – LCC. A process for finding and gaining insight into tomorrows opportunities (Eg. Apple – iphone). Get to the future first.THE FUTURE OF STRATEGY A company must get to the future not only first but also for less. without taking undue risk. Apply the 40 – 30 – 20 principle. Companies need to strategize (think ahead of times). An ability to energize the company. Toshiba – LCD.
HOW DOES THE FUTURE LOOK LIKE? There is no rule which says that for every leader there will be a follower. 274 . What distinguishes a leader from a laggard. As there is no one future. The farther one can see in this endless space. each point in space represents a unique business opportunity. but hundreds. greatness from mediocrity. We are in the midst of a 3600 vacuum. the farther it will be away from competition. is the ability to imagine in a different way what the future could be. as on their aspirations. Companies of the future will be not based so much on the strength of their resources.
THE EMERGING STRATEGY PARADIGM Not Only Reengineering Processes But Also Regenerating Strategy The Competitive Challenge Organizational Transformation Industry Transformation Competing for Market Share Competing for Opportunity Share Finding the Future Strategy as Learning Strategy as Positioning Strategy as Engineering Strategy as Unlearning Strategy as Dream Strategy as Architecture 275 .
THE EMERGING STRATEGY PARADIGM Not Only But Also Mobilising for the Future Strategic Fit Resource Allocation Strategic Misfit Resource Stretch & Leverage Getting to the Future First Existing Industry Structure Product Leadership Single Entity Product Hits & Timing Future Industry Structure Competency Leadership Dominant Coalitions / Co-option Market Learning & Preemption 276 .
LEARNING TO FORGET P1: The degree of learning in current period is directly proportional to the degree of unlearning in the previous period. Degree of Learning Unlearning Curve P2: Unlearning in previous period does not necessarily ensure learning in the current period. Learning Curve t1 t2 t3 Time t4 t5 277 .
It cannot be matched even by its closest competitors. Leverage – They are the gateways to future markets. It is characterized by the following – Unique – It provides unimaginable customer value ahead of its times. 278 . Inimitable & Insubstitutable – A high degree causal ambiguity between these skills yield sustainable competitive advantage. It represents the collective learning's of an organization centering around diverse streams of technologies.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 deeply embedded in the heart of the organization. Intel – nano-electronics. Toshiba – flat screen displays. at the most three to four. Although a core competence may lose value over time. it gets more refined and valuable through use. 279 . Toyota – lean manufacturing. Canon – imaging. Honda – engines. A core competency cannot be outsourced.MORE ABOUT CORE COMPETENCE Sony – miniaturization. Wal-Mart – logistics. SKF – antifriction and precision. Most companies around the world do not possess one. Nike – designing. Core competencies are the roots of the organization. leaders have one. Coca Cola – brand.
ROOTS OF COMPETITIVENESS End Products 1 2 3 4 5 6 7 8 9 10 Core Businesses Core Business 1 Core Business 2 Core Business 3 Core Business 4 Core Product 2 Core Products Core Competencies Core Product 1 Competence 1 Competence 2 Competence 3 Competence 4 280 .
RESOURCE STRETCH & LEVERAGE
Initial resource position is a very poor indicator of future performance. It leads to atrophy and stagnation. Successful companies consciously create a potential gap between aspirations and resources. Resource crunch is a common factor among firms that faces a wealthy rival, and outperforms them. Leveraging what a company already has, rather than allocating it is a more creative response to scarcity. – By concentrating existing resources. – By accumulating existing resources. – By complementing existing resources. – By conserving existing resources. – By recovering existing resources.
Concentrating – It involves effectively directing portfolio of resources on key strategic goals in which individual efforts converge over time. It is a balance between individual mediocrity and collective brilliance. It is achieved through – Converging – Redirecting multiple diverging (i.e. fragmented) short term goals into one long term goal. It is then resources can be stretched over time. Focusing – Making trade-offs and preventing dilution of resources at a particular point of time. Targeting – Focusing on the right innovations that are likely to have the biggest impact on customer value.
Accumulating – Using existing reservoir of resources to build new resources. Each and every individual is a rich & potential source of learning, discover better ways of doing things. It is achieved through Mining – Extracting learning experiences from existing body of each additional experience (i.e. success or failure). It is an attitude that can be acquired, but never learnt. It leads to a substantial jump in the experience curve. Borrowing – Utilizing resources outside the firm through licensing, alliances, joint ventures. A firms absorptive capacity is as important as its inventive capacity.
Complementing – Using resources of one type with another that aligns smoothly to create higher order value. In a way it produces an accelerating effect on each individual resource. It is achieved through – Blending – Interweaving discrete capabilities to create world class technologies (GM – Honda) through integration and imagination. Different functional skills can also be blended to create a world class end products (Yamaha – Keyboard). Balancing – An ability to exploit excellence in one area is never imperiled by mediocrity in another (GE acquiring the CT scanning rights from EMI because of its inadequate market reach).
Conserving – Sustaining competencies over time through frequent usage. Resources are never abandoned; they are always preserved for future use. Recycling – Increasing the velocity of use of a competencies over time. As a result core competencies can be leveraged across an array of products (Sony - Betamax). It includes brand extensions as well. Co-Opting – Enticing resources of potential competitors to exercise influence in an industry (Fujitsu – IBM). Shielding – It involves identifying competitors blind spots and then attacking without having the fear of retaliation.
Recovering - It is the process of reducing the elapsed time between investing in resources and the recovery of those resources in the form of revenues via the market. Speeding – Prior to the 1980’s Detroit’s majors took an average of 8 years to develop an entirely new model; the Japanese reduced it to less than 4.5 years, with major new variants in 2 years. This envisaged Japanese players in giving customers more opportunities to switch allegiance and loyalty (Toyota). Protecting – It uses competitors strength to one’s own advantage, by deflecting it, rather than absorbing it as practiced in Judo.
INTERNATIONAL BUSINESS ENVIRONMENT 287 .
China. high levels of market imperfection). Chile) provide a different context (i. and high transaction costs.EMERGING MARKETS Emerging markets (India. Therefore. institutional gaps. strategies suited for the developed markets may not be appropriate for emerging markets. Therefore focused strategies based on core competence may not be suitable for emerging markets (Khanna & Palepu. Emerging markets are characterised by infrastructural bottlenecks. 288 . Korea. 1997). Diversified groups in operating in emerging markets therefore benefit from unrelated diversification.e.
Entropy). Synergy. Experience Strategic Fit Diversity Palich. Optimum level of diversification Performance Diversity is initially positively related with performance. subsequently negatively related across developed markets. Concentric. et al. (2000) 289 . Size & Scale.DIVERSITY .PERFORMANCE (I) Diversity attempts to measure the degree and extent of diversification (Herfindahl.
subsequently positively related across emerging markets.DIVERSITY . conglomerate power Threshold level of diversification Performance Diversity (Khanna & Palepu.PERFORMANCE (II) Diversity is initially negatively related with performance. brand building Risk diversification. Huge initial investment. 2001) 290 .
It should have a spread of assets. Characteristics – It should have a spread of affiliates or subsidiaries. It should have a spread of interest groups / stake holders. It should have a spread of manufacturing facilities.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 think globally. 291 . revenues and profits. act locally (Eg. HSBC).
It reflects the disparities in women in workforce (Eg. low risk profile in developed markets and vice versa for emerging markets). low group scale in developed markets and vice versa for emerging markets). Group Scale .GLOBAL BUSINESS ENVIRONMENT Power Distance – It reflects the disparities in income and intellectual development (Eg.It reflects the relative role of team building (Eg. Risk Profile – It reflects the risk attitude of the top management (Eg. 292 . low power distance in developed markets and vice versa for emerging markets). Feminity Index . high feminity index in developed markets and vice versa for emerging markets).
terrorism (9/11). currency. political stability. judiciary) of doing business in a particular country (Eg. interest rates. flexibility (Eg. time value. dress sense. customs.culture. credit rating. Country Risk – It reflects the political and economic risk (Eg. inflation. FOREX reserves. way of life. 293 . code of conduct. 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). corruption. low country risk in developed markets and vice versa for emerging markets).
Language Barriers – Developed country managers expect foreign partners to communicate in their languages. High levels of ethnocentrism usually has a negative effect on business. in most emerging markets meetings are delayed and lasts unusually long. time-zones. and vice-versa. Ethnocentrism – Developed country managers tend to regard their own culture as superior. 294 . in most emerging markets use of an interpreter may be a standard protocol. Other factors – local celebrations.GLOBAL BUSINESS ENVIRONMENT Time Sensitiveness – Developed country managers regard time as precious. however.
It also highlighted the nexus between US & WTO. ASEAN. It a multi-lateral treaty with 143 (as on 2002) member countries to reduce tariff and non-tariff (quota) barriers. It focused largely on TRIPS (patents. trademarks). BRIC). In 1995 (Uruguay Round) GATT was renamed to WTO. copyrights. 295 .GATT GATT was a bi-lateral treaty initiated between US and some member countries in 1947 to promote free trade. It also initiated provisions on anti-dumping. The 1999 (Seattle Round) saw a lot of protest amidst bringing agriculture under the purview of TRIPS. The 2001 (Doha Round) focused on power blocks (NAFTA.
e.Pound). the Dollar still remains the most preferred currency globally. The notable exception was Great Britain which still continues with its local currency (i. 296 . Euro).e.EURO – SINGLE CURRENCY In 1999 twelve member countries in Europe joined hands to move over to a single currency (i. primarily the OPEC countries. the Euro slowly started outperforming the Dollar. three countries joined in 2002 increasing it to fifteen members as of 2008. However with current recession in the US 2002 onwards. Sterling . The Euro was significantly devalued against the Dollar till 2002. However.
SINGLE Vs MULTIPLE CURRENCY Transaction Costs – Though the initial cost of introduction of a single currency is very complicated and costly. a multiple currency is preferable where the business cycles of member nations are different. Trade Block – It will strengthen the EU identity which would not have been possible otherwise. 297 . Transparency – A single currency is transparent and competitive. but it may have spill-over effects. However. Rate Uncertainty – A single currency eliminates the risk of competitive devaluations. it helps avoiding transaction costs associated with a multiple currency.
It is long term with high levels of commitment. It is short-medium term with comparatively low levels of commitment.e. – FII (transfer of intangible resources) is fast but may have strong repercussions (i. – FDI (transfer of tangible resources) is slow but steady for the purpose of economic growth. 298 .FII Vs FDI INVESTMENT Classical economists believed that foreign investment (in any form) is basically a zero sum game (i. the gain of one country is loss of another). hot money). Neo classical economists believe that foreign investment may in fact be a win-win game.e.
Pricing – It depends on the competitive structure (PLC – Kellogg's). promotion (surrogate advertising). lifestyle (petroleum 299 outlets – departmental stores). customer awareness (microwaves). usage (talk time). Distribution – It depends on the market characteristics (fragmented – concentrated). . technology (microchip).INTERNATION MARKETING Product – The various attributes of a product may receive different degrees of emphasis depending on differences in . economic (middle class buying power). buying patterns (spread).culture (food habits).
India) may be different from that another trading country (US – GAAP or IRS). Cost Structure – Companies in India need to investment in fixed costs due to poor infra-structure 300 compared to developed markets. . 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. Leverage – The leverage may vary across countries depending upon money and capital market conditions (Eg. debt is cheap in US. equity is cheap in India).
Training – It is a pre-requisite for international business to reduce language. social security. Compensation – Differential pay packages exists because of differences in purchasing power.INTERNATIONAL HR An uniform HR policy is idealistic to enable parity in performance appraisal. Recruitment – In local recruitment. and cultural barriers (language) vis-à-vis emerging markets. labour laws. technology (convergence. shortened life cycles). 301 . however. in most cases it is not desirable nor practiced. double taxation. skills are more important that cultural fit and vice-versa.
Bosch spark plugs are used by car manufacturers worldwide). reduce power costs) vis-à-vis infrastructural bottlenecks. Technology – The cost to be evaluated in terms of latest technology (Euro VI) vis-à-vis effective cost of appropriate technology (Euro II). Outsourcing – A company having a core competence may be the source of global outsourcing (Eg. SCM – Use of ERP to network the extended enterprise 302 across the globe. .INTERNATIONAL OPERATIONS Location Incentives – FDI in emerging markets should explore options for SEZ’s to explore benefits (tax holidays.
CONTEMPORARY TOPICS 303 .
but has inherent risks involved as well.INNOVATION An invention is the first occurrence of an idea for a new product or process. it has destructive effects as well. While innovation typically adds value for organizations. Innovations typically paves the way for more secured and improved lifestyle for consumers in general. innovation is the first attempt to carry it out in practice. Innovation is the most preferred strategy today to maintain competitive advantage in the present turbulent business environment. Innovation is all about staying ahead of competition. 304 .
process innovation is necessary to sustain the competitive advantage of product innovation. However. Strategic innovation has the potential to change the rules of the game. Tangible impact of product innovation on performance is significantly higher than process innovation. process innovations are organizational driven. Process innovation usually follows product innovation. 305 .TYPES OF INNOVATION A key challenge is maintaining a balance between process and product innovations. While product innovations are typically customer driven.
BUSINESS MODEL It is a simplified description and representation of a complex real world.e. 306 . Drug Development (Bio Chemicals).e. Processors (Pentium). It leads to a shift in the price – performance envelope. Medical Surgery (Lasik). Telecom (CDMA Technology). about how an organization makes money (i. Disruptive business models brings in a new frame of reference (i. Data Storage (Pen Drives). Innovations are the back-bone of successful business models . a paradigm shift). putting an idea into practice).
The channels to reach out to the clients. The segment(s) of clients to be addressed. The key resources and capabilities required. 307 . The key partners involved in the activities.NINE BUILDING BLOCKS Value proposition offered to the market. The key activities / processes necessary for execution. The cost structure resulting from the business model. The revenue streams generated by the activities. The proposed relationships established with clients.
BUSINESS MODEL FRAMEWORK 308 .
Investment Banking. Real Estate) companies need to untangle and understand the intricacies of their business model. The revenue model described here are the means to generate revenues. innovative companies to carve out unique business models to fend off competition. With the rapid erosion of certain industries (IT. It is just one piece of the puzzle. 309 .REVENUE MODEL Positioning is just not sufficient. It involves – Product Visualization – Product Prototype – Product Test – Capacity – Pricing – Distribution.
Allow the management sufficient slack to be future oriented. Promote the grape-vine.HOW TO MAKE INNOVATIVE CO’S Innovative company’s are a matter of culture and aspirations rather than tangible resources. 310 . Provide reasonable incentives (not necessarily monetary). Allow the workforce idiosyncrasies for their errors. Have a lean and a flat organization structure. A favourable intellectual property (IP) climate. Promote the culture of experimentation.
companies are increasingly relying on internal protection to sustain innovation effects. The most preferred strategy of internal protection includes imbibing “causal ambiguity” in the production process to make reverse engineering difficult. Collusion with the judiciary is also another distinct possibility in emerging markets.HOW TO PROTECT INNOVATION? Without adequate protection (external or otherwise) the effects of innovation does not translate to performance. In most emerging markets where the IP climate is not so favorable. 311 311 . however that possibility is slowly atrophying.
312 312 .CORPORATE GOVERNANCE The basic theme of corporate governance is to ensure that professional managers are identified and made accountable in terms of clear business processes or activities and held responsible through adequate mechanisms & control systems for channelizing their decisions for the benefit of stakeholders at large. In fact the principles of corporate governance implies that managers go beyond in satisfying the stated and unstated needs of the multiple stakeholders. Corporate governance aims to reduce the principal-agent problem present in most professional managed organizations through appropriate forms of accountability and control mechanisms.
This exposes the shareholders to additional risks and higher costs.AGENCY THEORY The root of Corporate Governance goes back to the Agency Theory. also known as the principal-agent problem or agency dilemma. not present in portfolio diversifications. However. 313 . shareholders can diversify their portfolio at a much lesser risk and cost. According to the agency theory top managers and shareholders interests are usually conflicting in nature and tend to pull in opposite directions. From the strategic point of view managers tend to diversify into unrelated businesses as it provides higher returns hence a more favourable appraisal.
2002 to restore public confidence in corporate governance. . 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. the US government passed the Sarbanes – Oxley Act.ORIGIN & CONTEXT Since the early 20th century since a large part of public funds were held by publicly traded firms in the US. various laws were enacted to ensure proper usage of these funds. After the Enron downfall.
Interests of other stakeholders: Recognize the legal and other obligations of all legitimate stakeholders. 315 . The key roles of chairperson and CEO should not be held by the same person and their offices be clearly separated. including the society at large. Role and responsibilities of the board: It deals with issues about an appropriate mix of executive and nonexecutive directors.GOVERNANCE PRINCIPLES Rights and equitable treatment of shareholders: Help shareholders exercise their rights by effectively communicating information in transparent ways that is understandable and accessible and encouraging shareholders to participate in general meetings.
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. assessment and mitigation of risks and retirement by rotation over a fixed period of time.
they should provide no mechanism or scope for opportunistic behaviour. 317 . Balance of power: The simplest balance of power is very common. a person benefitting from a decision should abstain from it. with its legal authority to hire.GOVERNANCE STRATEGIES Monitoring by the board of directors: The board of directors. safeguards invested capital. Regular board meetings allow potential problems to be identified. Remuneration: Performance-based remuneration is designed to relate some proportion of salary to individual performance. fire and compensate top management. However. discussed and resolved.
318 . McKinsey found that 80% of the respondents would pay a premium for wellgoverned companies. They defined a well-governed company as one that had mostly out-side directors. from 10% for companies where the regulatory backdrop was least certain (those in Morocco. undertook formal evaluation of its directors. Egypt and Russia) to around 40% for Canadian & European companies. who had no management ties. and was responsive to investors' requests for information on governance issues. The size of the premium varied by market.GOVERNANCE & PERFORMANCE In its “Global Investor Opinion Survey” of over 200 institutional investors in 2002.
The basic premise is that firms cannot exist in vacuum. However.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. 319 . the short-term view of profit maximisation gave way to a more broader and mediumterm view wealth maximisation of the shareholders. 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. corporate philanthropy should be a part of every corporate mission. Therefore.
CSR can be defined as. “an enterprises decisions and actions being taken for reasons at least partially beyond its immediate economic interests”.CORPORATE SOCIAL RESPONSIBILITY As Peter Drucker rightly pointed out that. However. in fact a large part of it is significantly overlapping. Therefore. economic and social responsibilities cannot be mutually exclusive. Therefore. 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. “a healthy business cannot exist in a sick and impoverished society”.
GROWING CONCERN FOR CSR Awareness due to education: With growing literacy. MRTP). 321 . The role of media: The media and various consumer organizations have come up in protecting consumer rights and exposing mal-practices. Fear of government interference: Excessive quench for profits may lead to build up of adverse public opinion compelling the government to intervene (Eg. Public image: Entrepreneurs are increasingly relying on public image as a source of competitive advantage and a higher financial discounting. people are becoming increasingly aware of their right to a decent and healthy life.
Health & Hygiene – Attending the health hazards due to wastes and by-products to employees and society in proximity (Eg. eco efficiency. Refrigerators – CFC. Education. Aditya Birla Research Centre – LBS). designing eco-friendly products. Cement . and extended producer responsibility (Eg. Exide – Product take back). Tata Steel – Life Line Express).Paper packaging.CSR STRATEGIES Green Supply Chain Management: It includes environmentally preferable purchasing. Literacy & Training Programs – (Eg. 322 .
BOTTOM OF THE PYRAMID With the market across most developed markets including the US getting saturated. 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. they're helping millions of the world's poorest people to escape poverty. Strategic innovations leading to disruptive business models can show the way out. K. C. In turn companies by serving these markets. Prahalad notes that future markets exist collectively.
BLUE OCEAN STRATEGY 324 .
MARKETSPACE .TWO WORLDS 325 .
battled over market-share.WHAT IS RED OCEAN? Companies have long engaged in head-to-head competition in search of sustained. In today’s red oceans. . profitable growth. competing head on results in nothing but a bloody red ocean of rivals fighting over a shrinking profit pool. They have fought for profits. and struggled for differentiation (cost or product). one companies gain is always at the 326 cost of another companies loss. Yet in today’s overcrowded industries. where most industries are saturated.
Such strategic moves are possible through the pursuit of product differentiation and low cost simultaneously. but by creating blue oceans of uncontested market space ripe for growth . 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. 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 .
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 .
As trade barriers between nations & regions fall. of European nations. Niche markets & monopoly havens are continuing to disappear.BLUE OCEAN STRATEGY IMPERATIVES Prospects in most established market spaces – red oceans – are shrinking steadily. . Technological advances have substantially 329 improved industrial productivity. Demand across developed markets reaching a plateau. Population shrinkage across a no. information imperfections atrophy instantly.
the underlying technology was often already in existence. Incumbents often create blue oceans within the ambit of their core business. History indicates that blue oceans exist in three basic industries – automobiles (how people get to work) – computers (what people use at work) – entertainment (what people do after work). . They are not necessarily about technology. Company & industry are the wrong units of 330 strategic analysis. managerial moves are.CONCEPTUAL UNDERPINNINGS Blue oceans have existed in the past and will exist in the future as well.
IMPLEMENTATION Reduce Which factors to be reduced below the industry standard Eliminate Which of the industry factors that the industry takes for granted should be eliminated Create VI Which factors should be created that the industry has not offered Raise Which of the factors should be raised above the industry’s standard 331 .BLUE OCEAN .
IMPLEMENTATION SEQUENCE Buyer Utility (1) Is there exceptional buyer utility in your business idea? Price (2) Is your price easily accessible to the mass of buyers? Blue Ocean Strategy Adoption (4) What are the adoption hurdles in actualizing your business idea? Are you addressing them up front? Cost (3) Can you attain your cost target to profit at your strategic price? 332 .
Sony Play Station: Redefining machine-human interface in entertainment and targeting an altogether new user base. Southwest Airlines: Pioneering the concept of LCC. .SOME GLARING EXAMPLES In the last century authors Kim and Mauborgne have documented the creation of more than 150 blue ocean creations across 30 industries – Virgin Atlantic: Fractional jet ownership or travel to space. Citibank – Automated teller machines & credit 333 cards.
According to this view managers need not be constrained to act within the confines of their industry. All they need to do is change their managerial frames. Off late emerging views in strategy having its origin in (Organization Theory) led to a paradigm shift to what is called the – reconstructionist view. 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.
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