This action might not be possible to undo. Are you sure you want to continue?
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
STRATEGIC MANAGEMENT . It is irreversible.FEATURES It forms the core activity of the top management. 7 . It is all about creativity and innovation. It is a holistic and integrated approach. It provides broad guidelines. It requires full commitment of the top management. It is about adaptation and response to the same. It is long-term in nature. It involves substantial resource outlay.
It a bundle of techniques or even tricks. It involves nitty-gritty's. It is about forecasting. 8 . It attempts to minimize risk. It about mere data and facts.STRATEGIC MANAGEMENT – MYTHS It involves short-cuts. It brings instant success. It is about a definite formula. It is fool-proof in nature. It is rocket science. It involves only the top management.
again and again ……. To gain expertise in technologies.STRATEGIC MANAGEMENT IMPERATIVES To be continuously alert. 9 To develop core–competencies. scale and scope. rather than reactive. To assimilate change faster. To innovate. To be proactive. To tap markets across boundaries. . To be future oriented. To generate large resource pool. To be insulated against environmental threats. To leverage size.
STRATEGY . but by virtue of their courage. but with a lot a rigour and robustness. In contrast.ORIGIN The word strategy has its origin from the Greek word strategia meaning Military Commander. In the ancient days battles were fought over land. obsession. It is an old wine in a new bottle. whose origin can be traced to some of the greatest battles fought in the ancient days. today's battles are fought over markets. battles fought on the market front are won by companies by virtue of their obsession & strategies.strategies. In the ancient days battles were won not by virtue of size of the army or armory. and more importantly . 10 . Even in today’s markets.
Napoleon’s attack on Russia – Strategy: Waiting for the right time. 11 . challenging GM and Ford. – Yahoo and Microsoft challenging Google. – Toyota’s entry in the US.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. Allied Forces Vs Germany (WW-II) – Strategy: Forging alliances.
Industrial Revolution.EVOLUTION OF MANAGEMENT As Peter Drucker refers to it. 12 . 1910). a radical change in the business environment brings about discontinuity. A paradigm is a dominant belief about how the business and its environment operates. The first major discontinuity in the history of global business environment was the . The things happening around the firm when totally disconnected from the past leads to a paradigm shift. – Mass Production Organization Size – Complicated Processes – Complex Structures Evolving of an emerging paradigm – survival of the fittest (Fayol & Taylor.
– Homogeneous to heterogeneous products. performance across firms became differentiated. The question of outperforming the benchmark became the new buzzword. push to pull).EVOLUTION OF STRATEGIC MANAGEMENT The second major discontinuity in the history of global economic environment – World War II. 13 . 1960). – Changes in the technology fore-front. – Affluence of the new customer (i. – Global market place.e. Efficiency and effectiveness are no longer sufficient. From uniform performance. Survival of the most adaptable becomes a new management paradigm (Ansoff.
ENVIRONMENTAL CHANGE Phase IV: Horizon of Scenarios 2 1 Phase I: Extrapolation of the past 1 3 1990 onwards 1 2 1 3 1A 1B 2A Prior to 1950 Phase II: Discrete Scenarios Phase III: Range of Scenarios 1970 to 1990 2 2B 1950 to 1970 14 .
– The choice of product-market mix is based on conscious evaluation of risk – return factors. – It is primarily the top management’s prerogative. Learning always begin on a clean sheet of paper. – The choice of strategy is primarily concerned with external ones rather than internal ones. 15 . Ansoff (1960) – Strategy can be segregated into certain mutually exclusive and inter-related components aimed at managing the growth of an organization.APPROACHES TO STRATEGY Analytical Approach – Igor H. – Biases and prejudices has a very little role to play in strategic choices pursued by managers.
– Organization structure will precede and cause changes in strategy. – Management control systems has a dominating role in influencing firm performance. – The top managers then decide on the type of organization structure & systems to be in place. everything else follows. Once the control systems are in place. who will be the top managers. Successful organizations align authority and responsibility of various departments in way to reach overall objectives. how it will compete. The organization initially decides which industry to enter.APPROACHES TO STRATEGY Design Approach – Alfred Chandler (1970) – Structure follows strategy. 16 .
competitors. – An organization is seldom in a position to influence the larger business environment. customer. Porter (1980) – Choose a consumer segment and position your product accordingly. new entrant. – The organization will outperform the industry where environmental forces are weak and vice-versa. – The environmental forces comprises of – supplier. – A firms performance is inversely related with the bargaining power of environmental forces to which it is exposed. substitutes. 17 .APPROACHES TO STRATEGY Positioning Approach – Michael E.
but exploiting the resource differences among them. 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. – Organizations can significantly alter the way an industry functions. locating in most attractive industries and pursuing the same strategy. – It enables a firm to deliver unimaginable value ahead of time.APPROACHES TO STRATEGY Core Competence – C. – Core competencies are a set of skills that are unique and can be leveraged. 18 . K.
STRATEGIC MANAGEMENT PROCESS Strategic Intent Strategic Planning Strategic Gap – Environmental Scanning – Internal Appraisal of the Firm Strategy Formulation – Corporate Strategy – Business Strategy Strategic Choices – Functional Strategy Strategy Implementation Strategy Performance Strategy Evaluation & Control 19 .
TOP MANAGEMENT PERSPECTIVE 20 .
It implies a significant stretch. It involves an obsession to be the best or outperform the best. It is the cornerstone of an organizations strategic architecture reflecting its desired future state or its aspirations. A gap that consciously manages between stagnation and atrophy. It’s a philosophy that distinguishes it from its competitors. It provides a sense of direction and destiny. 21 . A strategic intent is a statement of purpose of existence. A substantial gap between its resources and aspirations. you cannot reach there.STRATEGIC INTENT If you cannot see the future.
STRATEGIC INTENT .HIERARCHY Integrativ e m Do an in Visio n Mission Dominant Objective s Goal s Plans Lo g ic Single Specifi c Man y 22 t .
To put it more simply. It is core to the strategic intent of the firm.DOMINANT LOGIC A dominant logic can be defined as the way in which the top management team conceptualizes its various businesses and make critical resource allocation decisions. it can be perceived as a set of working rules (similar to thumb rules) that enables the top management to decide what can be done and more importantly what cannot be done. Dominant logic changes. when radical changes in the internal and external environment (i.e. 23 . strategic variety) is apparent.
It ensures that the company does not wander off into unrelated zones or fall into an activity trap. It provides an unity of purpose amidst diversity of personal goals. It enables the top management to remain focused. – It represents the company’s audacious. but achievable aspirations. 24 .VISION It is a dream (not a forecast) about what the company wants to become in the foreseeable future. – It stands for the unchanging core values of the company. It is a combination of three basic elements – – An organizations fundamental reason for existence. beyond just making money.
and memorizable. 25 . not an utopian dream. Reachable – It should be within a reasonable target in the known future. Empathy – It should reflect the company’s beliefs to which it is sensitive. Clarity – Vividly descriptive image of what the company wants to be known for in the future. clear.VISION . Brevity – It should be short. 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.CHARACTERISTICS Reliance – Where growth is a way of life.
ADVANTAGES To stay focused on the right track. To prevent the fall in a activity trap. It gives a shared platform. It lends integrity and genuineness. It provides a holistic picture. 26 . It gives enlightment. It gives the impression of a forward-looking organisation. It fosters risk taking and experimentation.VISION . It makes strategic alignment easier. It facilitates development of skills & capabilities.
It enables the firm to define its business landscape and identify its competitive forces. It serves as a road map to reach the vision. 27 . its reason for existence. A broad mission statement helps in fending competitors. Although the purpose may change over time.MISSION Mission defines the space that a business wants to create for itself in a competitive terrain. It 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.
…………………. Some other examples – We do not offer shoes. 28 . …………………. All the businesses of the company are strongly integrated with their main business. …………………. – We do not offer software's. …………………. We offer strength. – We do not offer steel.MISSION – SOME IDEAS Reliance – We are in the business of integration. – We do not offer insurance. We offer solutions. We offer comfort. We offer security. though some may seem unrelated in nature.
It is an end result (quantifiable) something a firm aims and tries to reach in a time bound frame. – It lends direction – time frame in the medium term. – It is based on Management by Objectives (MBO). – It prevents deviation.100K crore company by the year 2005. 29 . – It provides a benchmark for evaluation. – It adds legitimacy and motivation.GOALS & OBJECTIVES Reliance – We want to become a Rs. – It keeps the mid management pre-occupied. – It helps identifying key success factors. It provides a quantitative feel to an abstract proposition.
– Compress project times. and gaining access to desired markets to achieve the desired goals and objectives. – Acquire a market share of indomitable position. It is the process of garnering necessary inputs. – Use price-elasticity to break market barriers. The details of the plan Reliance Telecom adopted were – Backward integrate process technologies. coordinating appropriate technologies. – Leverage economies of size and scale.PLANS Reliance – Desire to invest 25K crore in telecom business by circa 2010. 30 . It is specific to a particular business.
31 . radical change may lead to disequilibrium. Historical studies have shown that most organizations tend to continue with their existing strategies. It often leads to an organizational crisis. past strategies tend to have a bearing on future strategies. In such a context. equilibrium is maintained. strategies lose touch with the emerging realities. However.STRATEGIC DRIFT Due to top management commitment. This state of affairs is known as strategic drift. This tendency to restore continuity is known as inertia (resistance to change). When changes in the environment is incremental.
STRATEGIC DRIFT FRAMEWORK Environmental Change Degree of change Strategic Change Radical Change Incremental Change State of Flux Continuity Stage of Transformation Strategic Drift Stage of Atrophy Time 32 .
33 . – Creating a favourable image. Some instances of organizational politics – Formation of powerful groups or coteries. Organizational politics involves intentional acts of influence to enhance or protect the self-interest of individuals or groups over organizational goals. – Distorting information to gain mileage. – Developing a platform of support. – Hiding vulnerability. – Creating obligations of reciprocity. – Using covert tactics to pursue self interests.ORGANIZATIONAL POLITICS Strategic drift often leads to organizational politics.
– 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. A realized strategy is what the top management actually translates into practice. – Influential stake-holders back out. . – The environment context has changed. Other causes – – The plans are unworkable and utopian. Usually there is wide gap between the two when organizational politics is evident.
Strategy formulation and implementation are linked together in a continuous improvement cycle. However. this is not to be treated as “muddling”. Learning is an integral part of logical incrementalism. 35 . but as a defensible response to the complexities of a large organization that mitigate against publicizing goals. but the master scheme of the rational comprehensive scheme is not apparent. They simply unfold the particulars of the sub-system in stages.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.
The broader objective should serve the overall interest of the organization.IMPLEMENTING INCREMENTALISM General Concern – A vaguely felt awareness of an issue or opportunity. Agent of Change – Formal ratification of a change plan through MBO. 36 . Adaptation – As implementation progresses. Macro Broadcasting – The broad idea is floated without details to invite pros and cons leading to finer refinements. Leveraging Crisis – A sudden crisis or an opportunity should be used as a trigger to facilitate acceptance and implementation of change.
Tampering with surface level factors often leads to atrophy. Dominant logic’s are very rigid and sticky and prone to inertia.STRATEGIC TRANSFORMATION Strategic transformation (a complete overhauling of the strategic architecture) becomes inevitable whenever a strategic drift takes place. Dominant logic’s are the cornerstones of change when strategic transformation is apparent. . Strategic transformation becomes smooth through a change in top leadership. It creates blinders. As it brings 37 with it a different dominant logic.
A learning organization must continuously focus on unlearning as well.LEARNING ORGANIZATION A learning organization is capable of continual regeneration from knowledge. It helps prevent a strategic drift from occurring at the first place. – Experimentation – Fosters a culture of risk taking. – Informal Networks – Emerging of new ideas. – Organisational Slack – Enough free space. – Constructive Bargaining – Agree to disagree. 38 . and skills that fosters experimentation and questioning and challenge around a shared purpose. Factors that fosters a learning organization – Pluralistic – An environment where different and even conflicting ideas are welcome. experience.
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. It is reactive in nature. Strategic gap basically points towards a vacuum of where the organisation wants to be and where it is. gap analysis). It is based on the assumption of incremental change. It is pro-active in nature. It points to a position of superiority with relation to competition. 41 . Strategic planning is a function of discounting the future. It is based on the assumption of radical change. Competitive advantage provides the surest way to fulfill the strategic gap. It requires a quantum leap (i.e.
42 . resources and ideas move unhindered.ENVIRONMENTAL SCANNING The environment is defined as the aggregate of conditions. Environmental factors can be external as well as internal to the organization. A manager has to continuously scan the environment to ensure alignment of the strategies with the radically changing environment. events. It is exploratory in nature. Environmental scanning is very important component of strategic planning. The world is flat. The segments of the environment a top manager scans selectively depends upon his dominant logics. and influences that affect an organizations way of doing things. not guided by any boundaries.
PESTEL PESTEL attempts to provide a broad framework on how the broader environmental forces affects an organization and influences the way it practices strategy. It is important not only to identify the structural drivers of change. It is not intended to be used as an exhaustive list. but also to analyze the complex linkages across them. which may be different from the past impact. for which a holistic picture is required. 43 . Understanding the composite effect is critical. It is particularly important that PESTEL be used to look at the future impact of environmental factors.
Fiscal Deficit. Government Attitude. FDI Inflows. Language Barriers. Licensing & Quotas. Income & Age Distribution. Currency Stability. Economic Cycles. Economic – GDP. Economic Model. Savings & Investment. Inflation & Interest Rates. 44 . Social – Population Diversity. Literacy Levels. Central – State Co-alignment. Religious Sentiments.PESTEL FRAMEWORK Political – Government Stability. Capital Market & Forex Reserves. Infra-Structural Investments. Subsidies & Protection. Social Values. Monsoon & Food Grains Reserves.
Pollution Control Laws. Direct & Indirect Taxes. Technological Convergence. Environmentally Preferable Purchasing. ERP. Waste Disposal & Emissions. Consumer Protection Laws. Product Design. Extended Producer Responsibility. Non-Fossil & Alternative Fuels. Employment Laws. Obsolescence Rate. Patents. Carbon Credits. Legal – Monopolies Legislation. Product Safety & Health Hazards. Patent Laws.PESTEL FRAMEWORK Technological – Innovation. 45 . Research & Development. Environmental – Global Warming & CSR.
Rupee convertibility. Capital Market Reforms. PSU Disinvestments. Exit Policy. MRTP Liberalization. Curtailment of PSU’s. Encouraging FDI.ECONOMIC LIBERALISATION New Industrial Policy (NIP) – Liberalizing industrial licensing. Abolition of import licenses. Economic Reforms – Fiscal & Monetary Reforms. Structural Adjustments – Phasing out subsidies. Encouraging exports. Dismantling price controls. FERA Liberalization. Banking Sector Reforms.VRS. New Trade Policy (NTP) – Lowering import tariffs. 46 .
Survival of the fittest MNC Onslaught – Enhancing stakes – Power Equation – Joint Ventures – Technological Alliances – Take-over threat. Mergers & Acquisitions 47 .DISCONTINUITY Destabilization due to entrepreneurial freedom – Cocoon of protection disappears – Diversification spree – Existing notions of size shaken – Industry structures change radically – Economic Darwinism .
Globalization – Cheap Imports & Dumping – Push to Pull Marketing Buyers exacting demands – Shortage to surplus – Price competition – Life-style changes – Stress on quality.DISCONTINUITY Hyper Competition – MNC’s . Consumerism Challenges on the technology front – Competencies become technology based – Investment in R&D become inescapable 48 .
DISCONTINUITY Compulsion to find export markets – Identifying competitive advantage – Technological gap – Global presence – Depreciating currency – Exports Corporate vulnerability – It is no longer business as usual – Capital inadequacy – Lack of product clout and brand power – One product syndrome – Loss of monopoly 49 .
FIVE FORCES MODEL .PORTER Threat of New Entrants Bargainin g power of Suppliers Competition from Existing Players Bargainin gBargainin power g of power of Suppliers Customer s Threat of Substitutes 50 .
The five forces have strong cross-linkages. incremental or otherwise. the forces are subject to changes. It should not only be used to understand the forces. It is even wiser to apply the same at the product – market level.FIVE FORCES MODEL ASSUMPTIONS The model is to be used at the SBU level and not at the industry level.e. profit potential) per se. but also used to understand how they can be countered and overcome. It depicts the attractiveness of an industry (i. The model should not be used as a snapshot in time. 51 .
Low customer switching costs. Threat of Customers – Buyer concentration and volumes. Learning curve advantages. 52 . Low margins & stagnancy. Capital requirements. Product differentiation through proprietary technology or brand power. Scope for backward integration. Government policy.PORTERS FIVE FORCES ANALYSIS Threat to Entry – Economies of size and scale. Industry stagnation. Access to distribution channels. Presence of substitutes or unorganized sector. Resource profile & fear of retaliation. High switching costs. Unimportance of product quality. Undifferentiated product. Low relative importance of the segment.
PORTERS FIVE FORCES ANALYSIS Threat of Suppliers – Supplier monopoly. High exit barriers. Intermittent overcapacity. Piracy and counterfeits. Product perishability. Lack of substitute inputs. High customer switching costs. Industry stagnancy. Low level of differentiation. Buyer’s propensity to substitute. 53 . Diversity of players. Unorganised sector. Differentiated inputs. Low relative importance of the segment. Jockeying for position – Fragmented market. Threat of Substitutes – Improvement in price -performance trade-off. Scope for forward integration. Produced by industries earning high profits.
Cohesiveness – Degree of bonding existing across affiliated firms. Reliance). Resource Profile – It highlights the capabilities (generic) or competencies (business specific) of the firm.FIRM ENVIRONMENT Size and Scale of Operations – It is a very important component of competitiveness in today's global context (Bharti – MTN. Tata). Inertia – Excessive commitment to past strategies prevents firms from tapping emerging opportunities. 54 . dominant or related diversified or unrelated diversified businesses (Infosys. Business Scope – The intention whether the firm wants to be in a single.
which further reduces costs. With lower costs. leverage it as a competitive advantage. an E-Curve can prove to be futile during discontinuity. The E-Curve thus enables organisations to build entry barriers. experience teaches better and more effective way of doing things. However. Experience curve has strong linkages with performance. 55 . it can price its products more competitively.EXPERIENCE CURVE The cost of performing an activity declines on per-unit basis as a firm becomes more efficient. Matured firms will always be positioned advantageously on the ECurve than new entrants. and with lower prices it can increase its sales volume.
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 .
Case Studies – Structured Questionnaires. Press Clippings & Interviews. Business Intelligence – Bankers.SWOT The framework was originally conceptualized by Kenneth Andrews in 1970. A SWOT audit involves – Company Records – Annual Reports.VULNERABILITY ANALYSIS . Websites. Customers. Acronym for Strengths – Weaknesses – Opportunities – Threats. Suppliers. . Competitors. 59 Analysts. Observation. It is one of the earliest models in environmental scanning. Interviews. It helps an organisation to capitalize on the opportunities by maximizing its strengths and neutralizing the threats minimizing the weaknesses.
FRAMEWORK Opportunities Nullify weaknesses which prevents you from exploiting opportunities Leverage strengths to make use of opportunities Weaknesses Minimize weaknesses which prevents you from countering threats Strengths Threats Utilise strengths to counter threats (?) 60 .SWOT ANALYSIS .
Tata. Reddy’s. 61 . Dr. Tata Steel. Economies of scale – Eg. Aditya Birla. Sony. SBI. Siemens. HUL. Honda. Reliance. Toyota. Engineering Skills – Eg. Caterpillar. Ranbaxy. Large resource pool – Eg. High quality products – Eg. Biocon. Strong R&D base – Eg. Good credit rating – Eg. Strong after sales & service network – Eg. Motivated employees & cordial industrial relations – Eg. Reliance. Infosys.SOURCES OF STRENGTH Strong brand identity – Eg. ITC. Excellent penetration – Eg. Volkswagen. Infosys.
Inertia – Eg. CMC (Tata Group) 62 . Modi Group. Tatas. Procter & Gamble.SOURCES OF WEAKNESSES Outdated technology – Eg. B. J. Ballarpur Inds. Group . K. Strategic myopia – Eg. Narrow business scope – Eg. Hindustan Motors.Raymond. Organizational Politics – Eg. Single product syndrome – Eg. Excess manpower – Eg. K. CESC. Bijoligrill. Inefficient top management – Eg. Nirma. Excessive diversification – Eg. SAIL. Lack of product / brand clout – Eg. Lacking experimentation culture – Eg.
Maruti. Sugar. Market driven Pricing – Eg. Retailing. Telecom. Banking. Capital market reforms – Eg. Growing population – Eg. 63 . Fertilizers. Insurance. Exit Policy – Eg. Free pricing – Eg. Abolishing MRTP – Eg. Market driven Interest rates – Eg. VRS.SOURCES OF OPPORTUNITIES Delicensing of Industries – Eg. Fertilizer. Sugar. Abolishing CCI. Collaborations & Joint Ventures – Bharti & WalMart. Life style changes – Eg. ECB’s. Globalization – Eg.Tata Motors. Middle-class buying power. GDR’s.
Hostile take-over – Eg. Nationalisation – Eg.SOURCES OF THREATS Political instability – Eg. Dumping from China. Tsunami. Satyam. Land acquisition . 11/9. Reliance. Onida. Natural disaster – Eg. Earth Quake. Lack of Corporate Governance – Eg. Singur SEZ. Economic recession – Eg. Bajoria – Bombay Dyeing. (2008). (1985–1990). 26/11.Social activism – Eg. Import relaxation – Eg. Group disintegration – Eg. 64 . Terrorist attacks – Eg. Foreign Direct Investment (FDI) – Eg. Tata Steel.
time series. Forecasting – Predict the future (i.ETOP Acronym for Environment – Threat – Opportunity – Profile. It represents a summary picture of the external environmental factors and their likely impact on the organization. Delphi's technique. scenario analysis).e. 65 . Strategic responses (including adaptation) to opportunities and threats is critical for survival and success. Stages in ETOP analysis – List the aspects of the environment that has a bearing on the organization. Assess the extent of impact of the factors. Holistic view – Prepare a complete overall picture.
. selectively. It is also a form of assessing vulnerability through longitudinal analysis. Some key findings on major performance drivers that explains 75% deviations in performance – Product quality and relative market share. 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. 66 Vertical integration is a powerful strategy. High investment intensity acts as a drag. Relative attractiveness of the market.
. Managers should be particularly cautious while referring to such data during times of discontinuity as it makes past patterns futile. when radical changes in the economy takes place. – Contexts may vary over time. As every organization is unique in its own way.PIMS .LIMITATIONS The analysis is based on historical data and it does not take care of future challenges. – Contexts may vary across countries. 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.
KSF helps organizations spot early opportunities and convert them into value adding business propositions. It involves a three-stage process – Identify KSF – What does it take to be successful in a business? Drawing KSF – What should be the organizations response to the same? Benchmarking KSF – How do we evaluate organization success on this factor? 68 .KEY SUCCESS FACTORS (KSF) KSF relates to identification and putting concentrated effort on a particular activity or process which forms the very basis of competitive advantage. It enables the top management to draw focus.
IDENTIFYING ALTERNATIVE STRATEGIES 69 .
unrelated) and geographical scope (local. dominant. national. A corporate strategy identifies and fixes the strategic gap it proposes to fill.GRAND STRATEGY It is concerned with the overall business scope (single. It determines the locus a firm encounters with internal and external environment. It indicates the quality of growth an organization is looking for. It reflects the customer needs it intends to satisfy. It provides broad direction to the groups vision and mission.CORPORATE . global) of a firm and deals with choices of allocating resources across them. 70 . related.
CORPORATE STRATEGY MATRIX Corporate Strategy Stability Stability Growth Growth Combination Diversification Divestment Intensification Market Penetration Related Vertical Market Development Product Development Unrelated Horizontal 71 .
erosion of capabilities. Hindustan Motors). 72 . does not relate to do-nothing (Eg. The scale and scope of present operations remains almost intact. (Eg.STABILITY It involves maintaining status-quo or growing in a slow and selective manner. The reasons for stability strategy – – Lack of attractive opportunities. – Why disturb the existing equilibrium set up? – Limited resource position. Citibank). Even during adverse times firms need to adopt a strategy to sustain current performance levels. – To stop for a while and assess past records. – The firm may not be willing to take additional risk associated with new projects. Stability however.
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 .
direct non-users to users. – Elongated product life-cycle. convert competitors customers. – Suitable for industries where scope for technological breakthrough is limited. – 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. Nirma. 74 . (Eg. within a well defined market segment. Britannia). Market penetration can be achieved by – increasing sales to current customers. Ujjala. – Helps firms which are not comfortable with unfamiliar terrain.
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. – Immense customer reach & flexible advertising. – Stretches product life cycles. 75 . socks & stockings. tyres. upholstery. fabrics. Du Pont – Nylon: parachutes. – Unconventional and flexible distribution channels. – Moves across geographical boundaries. (Eg.…… or Teflon: aircraft technologies to cutlery to paints or Raytheon Corp – Microwaves: radars to kitchen appliances). carpets. – Creativity and innovation – thinking out of the box.
Microsoft: DOS to Windows) or a substantial improved version (incremental) of an existing product to repeatedly enter the same market (Eg.PRODUCT DEVELOPMENT It is a strategy where a firm tries to achieve growth through a radical new product (Eg. – Leveraging through – innovation. conformance. – Areas of product improvement – performance. reliability. Close Up: Fluoride – Gel toothpaste or VIP . – Leverage on customer and brand loyalty. – Deliverable through – redesigning or reengineering. serviceability. perception. aesthetics. features. Refills) 76 .Strolleys). durability. – Substitutes that serve the same needs (Eg.
– Conglomerate or market power (i. dominance). – Risk reduction. thereby creating a new business. 77 .e. – Internal capital market.DIVERSIFICATION It marks the entry of a firm into newer markets with new products. licenses (i. Why do firms diversify in the Indian context? – Shift the growth trajectory or opportunistic.e. From the modern point of view they are strategically dissimilar. – Permits: quotas. the new business is distinct from the existing business in terms of – inputs – technologies – markets. industrial embassies). – High transaction costs and institutional gaps. From the traditional point of view.
either of which is equally likely to prevail. ice-cream business would register a return of 10%.HOW DIVERSIFICATION REDUCES RISK? Consider a hypothetical planet. If on the other hand. the ice-cream business would register a return of 30%. in which a given year is either under hot or cold wave. while the coffee business would register a return of 30%. cold wave dominates the planet. What would be your ideal diversification strategy through optimization? 78 . Let us assume that there are two businesses constituting the entire market – coffee and icecream. If the hot wave dominates the planet. while the coffee business would register a return of 10%.
If we diversified in either of the two businesses, our expected return will be 20%, with a possible risk of 10%. If, we split our investment between the two businesses in equal proportion, half of our investment will earn a return of 30%, while the other half would earn 10%, so our expected return would still be 20%. But in the second instance there is no possibility of deviation of returns (i.e. risk). Diversification results in 20% expected return with zero risk, whereas investing in individual businesses was yielding an expected return of 20% with a risk factor of 10%. The pivotal point is that the two businesses are negatively correlated. 79
It takes place when a company increases the breadth of a firms business or geographical scope by getting into product – market segments which compliments its existing businesses (Eg. Reliance). Alternatively, existing business may recreate new businesses, which are distinct, but supplements its existing business (Eg. Bajaj – scooters to motorcycles, Dove – soaps to shampoo). – It results in increased market power. – Leveraging existing capabilities. – Resources can be shared for mutual benefit. – Reduces economic risk (i.e. business cycles). – Enables brand or product line extension.
It increases the depth of its business scope either in a backward business process or in a forward one. Backward integration occurs when the company starts manufacturing its inputs or catalysts. In forward integration a firm moves into marketing of its products and services. Advantages of backward integration – – Cost competitiveness – entry barrier. – Better operational control – timely supplies, quality control, coordination – JIT, savings in indirect taxes. Disadvantages of backward integration – – It may spark of a chain reaction - contagion effect. – Long gestation & break even - investment in CAPEX.
Oil & Gas exploration Naptha-cracking Acetic Acid Paraxylene (PX)
Purified tetra-pthalic acid
Polyester Filament Polyester Staple Fibre (PSF) Yarn (PFY) Textiles 83
DIVERSIFICATION SUCCESS ?
While diversifying into new businesses, the scope of relatedness or unrelatedness should not be judged from the traditional static view, but from the modern dynamic view which incorporates strategic factors like capabilities and dominant logic. Countermanding reasons – Potential to reap economies of scope across SBU’s that can share the same strategic asset. Potential to use an existing capability to help improve the quality of a strategic asset in another business. Potential to use an existing capability to create a new strategic asset in another business. Potential to expand the existing pool of capabilities. Dominant logic ensures timely & appropriate response.
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 . Usually the firm concentrates on its core activities.Where one firm has full ownership and control over all the stages of a value-chain in the manufacturing of a product (Eg.QUASI & TAPERED INTEGRATION Full Integration .A firm gets most of its requirements from one or more outside suppliers that is under its partial control through value chain partnerships (Eg. Ranbaxy. Tapered integration . Reddy’s). Maruti – Sona Steering). Reliance). 85 . and out-sources the noncore activities (Eg. Dr.
A CASE OF TAPERED INTEGRATION Partial Ownershi p Transmission Engine Design Electricals Steering 86 Seats & Carpets Windscreen Ordinary Components Zero Ownership Very Critical Component s Full Ownership Critical Component s .
lack of knowledge of competitive forces).e. Drawbacks of unrelated diversification – – Cost of failure (i. and are also strategically dissimilar. Firms usually engage in conglomerate diversification when emerging opportunities are very attractive and offers potential growth opportunities.e. synergies pulling in opposite directions). myopia). – Cost of dysynergy (i.e. 87 .CONGLOMERATE DIVERSIFICATION It relates to entry of firms into businesses which are distinct in terms of – inputs – technologies – markets. – Cost of neglect (i.e. – Cost of ignorance (i. lack of strategic intent. core business).
CONGLOMERATE DIVERSIFICATION Paper & Packaging Edible Oils Tobacco Hotels Food & Confectionary 88 .
ACC) in full to an independent entity. where a company simply exits because the business no longer contribute to or fit its dominant logic. reactive) and survival is at stake and the firm does not have resources to fend off competitive forces. Tata Pharma. 89 . It taken into account when performance is disappointing (i.DIVESTMENT Divestment is a defensive strategy involving the sale of entire stake (Eg. Tata Press). Glaxo’s “Glucon-D” to Heinz). In strategy there is no scope for sentimentality with divestment. L&TCement Division to Aditya Birla Group) technically known as divestiture or a product (Eg. It is may also be a pro-active strategy.e. Tatas sale of Goodlass Nerolac. It may also involve a SBU (Eg. (Eg.
where the equity is allotted amongst the existing shareholders on a pro-rata basis. Sale of Diamond Beverages to Coca-Cola for US $ 40 million). the Companies Act.3 billion. 1956 does not permit this mode.DIVESTMENT . (Eg. However. Hive-Off – A hive off is the creation of a new entity followed by transfer of assets.ROUTES Outright Sale – Popularly known as the asset route. 90 . where 100% of the assets (including intangibles) are valued and paid for. (Eg. involving 608 pence per share). Leveraged Buy-Out (LBO) – Here the company’s shareholders are bought out through a negotiated deal using borrowed funds. Tatas buy-out of Corus for US $ 11.
It is usually pursued by a business group with diverse interests across multiple industries.e. growth.e. mergers and acquisition. developing facilities right from the scratch) or through brown-field projects (i. because every business has its own unique external and internal environment. and divestment strategies applied simultaneously or sequentially for a portfolio of businesses. There can be no ideal strategy for every business. 91 .COMBINATION STRATEGY It is a mixture of stability. A combination strategy can be implemented through green-field projects (i. joint ventures).
STRATEGY CHOICE & PORTFOLIO ANALYSIS 92 .
It attempts to answer the following questions – How effective has the existing strategy been? How effective will that strategy be in the future? What will be the effectiveness of alternative strategies? It is impossible for a manager to assess all the alternatives. What then is the magical number? 93 .STRATEGIC CHOICE A strategic choice seeks to determine the alternative courses of action available before top managers to achieve its strategic intent. Dominant logic enables top managers to selectively scan the environment and make trade-offs. In most cases the trade-off is between resources and opportunities.
They must choose problems which will lead to the right kind of opportunities. nor is to a define a problem for others to solve. managers need to ask the right questions. will help the firm achieve its intent. For an optimal choice the following four issues need to be resolved – Is the strategy clearly identifiable? Is it consistent with the resources of the firm? Will it be able to exploit the opportunities in full? Is it in tune with the values and beliefs of the firm? 94 .SELECTIVITY IS THE KEY The role of a top manager is not to solve a problem. if addressed. The key task before a top manager is to identify the right problems. To identify the right problems.
DEFINITION A business group is known by various names in various countries – guanxique in China. chaebols in Korea. . business houses in India. High degree of centralized control (GEO. Resource sharing. Licenses & Quotas. 95 Succession planning is critical to continuity.e. Their roots can be traced to a single family or clan and share broad similarities. formal and informal ties. Managing Agency). BRC). embassies). keiretsus in Japan. Proximity to the corridors of power (i.BUSINESS GROUP . Their origins can be traced back to market imperfections existing in an economy (MRTP Laws.
RESOURCE SHARING ACROSS FIRMS Parent Company Firm 1 Firm 5 Firm 3 Firm 2 Firm 4 96 .
STRATEGIC CHOICE – MACRO TIMING Recession (Stability) Prosperity (Diversificatio n) Depression (Divestmen t) Recovery (Intensification ) 97 .
Divestment Duration (Yrs) Inception Intensification 98 .STRATEGIC CHOICE – MICRO TIMING ReEngineering Growth (%) Maturity Stability Growth Diversification Decline .
there are high costs associated with entry and exit. Redeployment of resources upsets the established power bases of a group. Power and resources often goes hand in hand. therefore. 99 . Relatedness across resources are difficult to realize. sometimes impossible. Why? Businesses are not about liquid assets. Rules of the game are different. Investing in emerging businesses may not actually be so simple as it appears to be. next only to choice of business.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 .
Tata Steel). 101 .BUSINESS ANALYSIS – TATA GROUP Question Marks – They have potentials in the long term. which remains a big? These businesses are net users of resources.e. provided the industry growth rate continues and the company is able to maintain its growth (i. and their risk profile is high (Eg. market penetration.e. diversification). product development). Trent. Tata-AIG). These businesses are also net users of resources (Eg. TCS. but to larger extent than a question mark. Stars – They achievers in the near term. Tata Telecom. provided the company is able to build up on its market-share (i. market development.
Nelco. Tata Chemicals). cash cows may also need to invest provided the industry takes an upswing (Eg.e. divest) as achieving a dominant position in these businesses is a difficult task. harvest. Groups prefer to dispose off such businesses (i. Tata Tea. and they lack on competencies to take on competition and are basically cash traps (Eg. Indian Hotels. they are generators of resources. Tata Pharma. Dogs – They are a drag on the group. Given that the growth potential in the business is low.e.BUSINESS ANALYSIS – TATA GROUP Cash Cow – These are matured businesses. Tata Press). Tata Motors. and the company dominates the industry ahead of competition (i. However. 102 . stability).
HUL).e. niche – Rolex. 103 .LIMITATIONS It does not address the concerns of a business which is in the average category (usually the majority). Mercedes Benz. The terminologies used are somewhat prohibitive. Cash cows may actually need substantial investments to retain their market position (Eg. Armani). Data may be prohibitive. neither in high or low. Cartier. Certain businesses in the low market share category may be the result of a conscious strategy (i. The model does not provide specific solutions within a particular category. factors are limited.BCG .
MATRIX Distinctive Capabilities Strong High Medium Weak Stability Industry Attractiveness Diversify (++) Intensify (+) Med Intensify(+) Stability Harvest (-) Low Stability Harvest (-) Divest (.GE .-) 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 .
Portfolio – An organization is perceived as a portfolio of businesses. Gap Analysis – It emphasizes what a firm wants to achieve. SBU – A business unit which is strategically different from another and also shares a different SIC code. Disinvestment involves selling in phases.TERMINOLOGIES Harvest – It entails minimizing investments while trying to maximize short-run profits and cash flow with the intention to exit the business in the near future. BCG – Boston Consulting Group. Divest – Selling a part or the entire business at one go. 107 .
BUSINESS STRATEGY & COMPETITION 108 .
109 .e. The strength of a firm in a particular business usually stems from its competitive advantage. The principal focus is on meeting competition. Such resources or activities should be distinctive and sustainable over time. rent). building market-share.COMPETITIVE STRATEGY A competitive strategy deals with how a firm competes in a particular business or product-market segment. Competitive advantage refers to a firms resources or activities in which it is way ahead of competition. Competitive advantage is the back-bone of strategy. and earning super-normal profits (i.
110 . 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. involving harmonizing and integrating multiple streams of technologies. Blue Ocean – Consciously moving away from overcrowded industries to uncharted territories and making competition irrelevant (Kim & Mauborgne). leveraging (Prahalad). developing competitive advantage (Porter). Resource Based View – Obsession with competence building.BUSINESS STRATEGY FRAMEWORKS How to be distinctive and yet sustainable – Differentiation – Understanding of the dynamics of competition. identifying critical success factors.
Sources of cost advantage are varied and depends on the structure of the industry – Economies of size. proprietary technology. T-Series). Nirma. Reliance) or may pass it to customers to increase market-share (Eg. Compress project duration through crashing. Steep experience curve effects. Ayur. Locational or early entry advantage. The firm may retain the benefits of cost advantage by enjoying higher margins (Eg. preferential access to raw materials. backward integration. 111 .PORTERS – COST LEADERSHIP Cost Leadership – It is a strategy that focuses on making a firm more competitive by producing its products more cheaply than its competitors.
undeterred attention to quality. Culture of experimentation. Means of product differentiation are peculiar to each industry. 112 . avoiding brand dilution. It selects one or more attributes that buyers perceive as important.PORTERS – PRODUCT DIFFERENTIATION Product Differentiation – It is a strategy that attempts to provide products or services that are differentiated from competitive products in terms of its value proposition and uniqueness. Intel. innovation and out of the box thinking. Feeling the pulse of the customer. Focus on brand loyalty. and sufficient slack. Creativity. Successful product differentiation is often followed by premium pricing. Sony. Rayban). (Eg.
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. coupled with fear of structural erosion. Cartier. 113 . Mont-Blanc. The target segment must have unusual needs or the delivery system catering to this segment must be unique. Armani). Sub optimization alone may not be a source of superior performance. Maybach. They are poorly served by mainstream players. though it may not possess an overall competitive advantage. Rolex. A focuser seeks to achieve a competitive advantage in its target segment.
COMPETITIVE POSITIONS Competitive Advantage Cost Differentiation Product Differentiation Competitive Scope Broad Cost Leadership (Toyota) Product Differentiation (General Motors) Narrow Cost Focus (Hyundai) Differentiation Focus (Mercedes) 114 .
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. in a hyper competitive context the two strategies need not be mutually exclusive.e. 115 . Though cost leadership and differentiation are inconsistent.HYBRID STRATEGY A hybrid strategy is the simultaneous pursuit of cost leadership and differentiation. similarly differentiation may not always lead to rising costs (i. Tata Nano). Reducing cost does not always involve a sacrifice in differentiation. jugaad or frugal engineering).
unless such a player is capable of discovering a profitable segment.stuck in the middle. It will have a competitive disadvantage vis-à-vis a clearly positioned generic player. 116 . It is usually the result of a firm not willing to make trade offs. It tries to compete through every means. The positioning therefore gets – blurred. but achieves none. 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 . Industry maturity will usually widen the gap.
coupled with low penetration levels. ending in a differential cost economics. Consumer behaviour pattern unstable and evolving.EMERGING INDUSTRY Emerging Industry – An evolving industry characterized by . technological innovations. First-time buyers. 3D imaging. There is a lot of scope to define the rules of competition. Artificial intelligence). 117 . (Eg. Speech recognition software's. leading to a blurred productivity frontier and steep learning curve. Eg. It is characterized by – High level of technological uncertainty. Market segmentation not well defined. changing customer needs.) Excessive turbulence in the dynamics of the environment. Nano technology.radical environmental changes.
Scope for players to change the rules of the game. because of lack of economies of size and scale. leading to clear fragmentation. Eg. Eg. Diverse customer needs. Retail and telecom. MRTP may also cause fragmentation. Consumer durables. IT. Government regulations in the form Eg. Eg. 118 .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). Air Conditioning. It is characterized by – Low entry barriers. Paints. High exit barriers because of huge investment in CAPEX.
collaboration and co-option. well defined consumer behavioral patterns and imperfect competition leading to near monopoly. Cartel among existing players through collusion. 119 . established industry dynamics. Limited scope for innovation .technological maturity. technological maturity. because of economies of size and learning curve effects. Strong entry barriers. Firms are rule takers in the segment as productivity frontier is well defined.MATURED INDUSTRY Matured Industry – An industry characterized by saturation in growth rates. distribution networks. early entry and location advantages.
Learning abilities have been stunted and firms adverse to investment in R&D and make fresh investments. with little or no signs of recovery. 120 . backed by corporate espionage. Nature of competition extremely high. dot-matrix printers). Firms facing a declining phase are characterized by inertia and slow to react to environmental changes. scooters. Typewriters.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. and costly price wars. (Eg. Exit barriers are extremely high because of limited prospective buyers.
aggressive building of distribution networks.COMPETITIVE STRATEGIES Emerging Industry – Set benchmarks. strictly product differentiation and not standardization. reengineer. move beyond boundaries. branding and promotion. Declining Industry – Redesign. focus more on product differentiation or even a hybrid one. Locate a defendable position. 121 . regenerate. strictly cost differentiation. recreate new markets. increasing scope. Fragmented Industry – Identify. or else exit the segment. premium pricing. process innovation. mergers and acquisition. assess and overcome fragmentation. Matured Industry – Sophisticated cost analysis. strike alliances.
Intangible – These refer to goodwill. and complex learning experiences in integrating and harmonizing technologies (distinctive capabilities) that play an important role in delivering competitive advantage through “causal ambiguity”.RESOURCE BASED VIEW Differentiation based on cost or products saturates and ceases to exist beyond the medium term. positions based on resources which are unique and inimitable are far more sustainable even in the long term. brands. However. hence very rarely confer competitive advantage as can be easily acquired or replicated. They are a standard in nature. patents. A firms resources can be classified into – Tangible – These refer to real assets. 122 .
differentiation based on capabilities can be sustained even in the long run. Typically. but not necessarily.CAPABILITIES & COPMPETENCIES These include a complex combinations of tangible and intangible resources that organizations use to convert inputs to outputs. They play a very critical role in shaping competitive advantage.e. Capabilities can be generic (i. There is a high degree of internal and external causal ambiguity involved in it. 123 . Hence. they are woven around technologies. Therefore firms should concentrate on developing complex resources that forms the very basis of differentiation. can be leveraged across businesses) or specific to a particular business.
COMPETITIVE ADVANTAGE 124 .
e. Success of a strategy critically depends on SAP. Strategy drives competitive advantage. not absolute) to competition. It enlarges the scope of an organization. A portfolio of competitive advantage comprises strategic advantage profile (SAP).COMPETITIVE ADVANTAGE A competitive advantage is a position of superiority relative (i. competitive advantage subsequently becomes the back bone for a competitive strategy. and results in well springs of new business development. 125 . It results in a distinct differentiation advantage or a cost advantage or hybrid as well.
Identification of SAP is critical for and stretching and leveraging of resources. In today's world of discontinuity. 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. SAP changes from time to time. 126 . In most cases SAP is hidden and dormant. Most successful organizations around the world have a well balanced SAP.
and enhanced customer tracking – higher market share. VC pay-offs: better product availability. each of the players need to be efficient backed by sufficient coordination at the contact points (i. Today SCM is integrated with greening the environment as CSR practices. A VC is often compared with a relay team. Inventory Mgt to Logistics Mgt to Supply Chain Mgt (SCM). kaizen or internal customer).VALUE CHAIN ANALYSIS A value-chain segregates a firm into strategically relevant activities to understand its composite behaviour. faster product launches. Substantial cost reductions also follow. 127 . Competitive advantage arises not from an individual activity but a stream of inter-related activities.e.
THE VALUE CHAIN Support Infrastructure n gi ar M Human Resource Management Technology Development Procurement Out Logistics Mktg & Sales In Logistics Operations Primary Service M ar gi n 128 .
– First order fit refers to simple consistency between each activity and the overall strategy. 129 . – Second order fit occurs when activities are reinforcing amongst them. A high fit involving a complex chain of activities drives both competitive advantage and its sustainability. Operational effectiveness is not strategy. A learning organization helps create strategic fit. Fit is important because discrete activities result in negative synergy and can also be easily copied by competitors.STRATEGIC FIT – THE PORTER WAY The sustainability of the value chain depends on the degree of fit between the activities. – Third order fit refers to optimization of effort.
These skills results in distinctive activities and processes.CORE COMPETENCE A core competence represents the collective learning's of an organization around diverse streams of technologies. but not necessarily. – Can be leveraged across businesses. . A core competence usually has its roots in technology. It should satisfy the following conditions – Contributes significantly to customer benefits. – Can be sustained even in the long run. – Cannot be easily imitated or substituted. It forms the very basis of competitive advantage. Core competence has a high degree of external and 130 internal causal ambiguity embedded in it.
a core competence has its roots in a set of skills. Majority of the firms have competitive advantage. A competitive advantage may or may not lead to superior performance. only global leaders possess a core competence. A competitive advantage is sustainable in the shortmedium term. A competitive advantage manifests from a function. a core competence always implies a competitive advantage.CORE COMPETENCE A competitive advantage does not necessarily imply a core competence. 131 . a core competence is sustainable even in the long-term. a core competence usually does.
132 . Subsequent work on game theory by John Nash led him to win the Nobel prize in 1994. illustrations depicting a win-win situation. In a game (similar to a business) one players win is always another's loss. the stringent assumptions of game theory and difficulty in ascertaining of pay-offs makes game theory application difficult in business. In fact there are no. A game is a contest involving two or more players.GAME THEORY The game theory was developed in 1944 by Oscar Morgenstern. each of whom wants to win. This is known as a zero-sum game. However. Here the magnitude of gain offsets the magnitude of loss equally.
An unbiased game is one where both the players have equal chances of winning. Firm Y’s Strategy Use Radio Use Radio +2 +6 Use Newspaper +7 -4 133 Firm X’s Strategy Use Newspaper Firm X’s Pay-Off Matrix .BIASED AND UNBIASED GAME A game is said to be biased when one of the players have a disproportionate chance of winning.
PURE STRATEGY GAME The strategy each player follows will always be the same regardless of the other players strategy. 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 .
iteration) rather than through collusion (E. Coke Vs Pepsi). 135 . Yahoo Vs Microsoft). This is usually through learning by “experience or observation” (i. collaboration or cooption.TYPES OF GAMES Simultaneous Games – This is a situation where the players have an option to choose to cooperate or not through collusion.g. However. It represents the classical “prisoner’s dilemma”. 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.e. Repeated Games – In this situation the players interact repeatedly with each other sub-optimizing the outcome possibilities.
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. – Making pricing more transparent. . In a market dominated by price-based differentiation one may attempt to change the rules of the game by/when – – Bases of differentiation dependent on clear identification of what customer wants or value. It results in a shift in the productivity frontier. – Building incentives for customer loyalty. but 136 players do not always behave rationally.
DELTA MODEL & LOCK-IN
Its a systematic approach where-in two or more industry majors, who by default has achieved a proprietary position (Microsoft – Software / IBM – Computers) which are not necessarily best-products in the industry, co-opt to create a lock-in. A lock-in implies that other players has to conform or relate to that standard in order to prosper. Becoming the industry standard requires – strong brand, causal ambiguity, and close relationship with other companies offering complimentary services. Lock-in is self reinforcing and escalating (i.e. accelerating effect).
THE THREE STRATEGIC POSITIONS
System Economics Market Dominance Complementary Share
Enabled through effective use of technology
Total Customer Solutions
Customer Economics Cooperation Customer Share
Product Economics Rivalry Product Share 138
Bill Gates is the richest man in the world not necessarily because he has developed the world’s best software's or excels at customer satisfaction; but he has got an army of people working for him who are not on his payroll – all the application software providers who are writing programs based on “Windows” compatible operating platform. Once you create the lock-in it is sustainable because of the “network effects”; which creates the proverbial “virtuous cycle” – customers want to buy the computer with largest set of applications and software developers want to write programs for the computers with the largest installed base.
The proponents (Hax & Wilde) believe that every organization has the ability to create and sustain a “lock-in” positioning (though in varying degree). This “system lock-in” is referred to as “delta” – delta being the Greek letter that stands for transformation and change amongst the players. The lock-in once created becomes very difficult for a firm to penetrate, and becomes a distinct entry barrier. The model is based on the belief that it compliments Porter’s differentiation model and RBV framework instead of contradicting them. In a lock-in strategy the performance outcomes are dependent on the success of another.
It relates to translating strategy formulations into practice. Performance realization of a strategy depends on the implementation effort. Successful implementation also depends on the appropriateness of the strategy. Since strategy implementation is a time bound process, alignment (i.e. strategic fit) is a key variable during times of radical change. Some of the other levers of successful strategy implementation are – Transformational leadership and motivating power. Resource allocation; its stretching and leveraging. Compatible organization structure & control systems. Inertia & resistance to change.
– Resource commitment from top management. 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. – Changing the rules of the game. – Development of capabilities & competencies. – Unlearning & learning of new skill sets. 143 . – Better strategic and operational control. internal strategic fit (strategy – dominant logic) is critical to strategy implementation.IMPORTANCE OF STRATEGIC FIT Strategic fit has a central role to play in strategic management.
According to Mintzberg. formulation & implementation can occur simultaneously. strategy formulation and implementation has been perceived to be distinct & independent.e. at the cost of sacrificing a lesser degree of control. Some of the key strategic learning's exists at the contact point between the organization and its customer. while control is very effective. 144 . In fact. learning levels are very high.FORMULATION Vs IMPLEMENTATION Traditionally. emergent strategy vis-à-vis intended & realized). In such a situation. effective strategies are better crafted when there is a subtle overlapping between the two (i. learning levels are very low. In such a situation.
145 . Pragmatism is the ability to make things happen. bring about transparency. In contrast. A transactional leader is usually confined to allocating tasks & responsibilities and extracting performance. transformational leaders go one step beyond – Design a well crafted and designed strategic intent of the organization. companies depend more on transformational leaders than transactional leaders. He should be an agent of change. shift from compliance to commitment. Install a system of shared beliefs and values.ROLE OF TOP MANAGEMENT To bring about change and to implement strategies successfully.
Intangible resources (Eg. 146 . The various methods of resource allocation includes Historical Budget – The budgets framed by HQ for a particular SBU keeping in mind past trends. machines) referred to as threshold resources (i. labour. Zero Based Budget – In this case the budget of a SBU has to be worked out right from the scratch.e. skills) also includes complex resources like capabilities and competencies.RESOURCE ALLOCATION Resources allocation includes tangible resources (Eg. minimum requirement). brands. patents. land. Performance Budget – SBU managers need to justify the distinctive resources in terms of the opportunity it is pursuing yields the highest possible pay-offs.
convergence of multiple streams of technologies at the product – market level is becoming increasingly evident (Eg. 147 . Distinctive capabilities helps in stretching and leveraging resources thereby overcoming two major constraints involved in strategy implementation – times & costs. Mobiles). Moreover.CAPABILITIES & COMPETENCIES Technology and business are slowly becoming in – separable. Distinctive capabilities are complex set of skills woven around technologies. Flat Screen Displays. though not necessarily in the case of emerging markets. Due to causal ambiguity (complexity). these capabilities are sustainable even in the medium to long term.
Once the structure is in place. A firm in several related businesses usually employs a divisional structure. An appropriate organization structure & adequate control systems are essential to implement strategies and achieve stated goals. A single product or a dominant business firm usually employs a functional structure. processes become people independent. A firm in several unrelated businesses usually employs a SBU structure. 148 . The level of centralization and decentralization is decisive.STRATEGY & STRUCTURE It is a framework within which individual efforts are coordinated to bring synergy.
disbanded subsequently. Divisional Structure – Units grouped together in terms of products. processes. Finance).Technology. with team members having dual line of control. Marketing. or geographical locations. Output). SBU Structure – Businesses segregated in terms of strategic dissimilarities (Eg. 149 . Virtual Structure – A boundary less or hollow organization. based on skills and competencies. Project / Matrix Structure – A formal but temporary framework initiated for the completion of a particular project/crisis. Team Structure – An informal group formed for a crisis.TYPES OF STRUCTURES Functional Structure – Activities grouped together by a common function (Eg. Inputs .
150 . Environment & People – Economic and political conditions have a major bearing on structure coupled with the attitude and aspirations of the people in the organization. assuming responsibility. facing challenges & crises. leading to a tall structure. Technology – With more and more convergence of technologies in business. It includes the desire for independence. structures are becoming flatter and more simpler. as span is broader.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.
co0ntinuity).e. there is a tendency to continue along the same lines.INERTIA When a firm has been operating in a certain fashion for a long time. Most firms undergo periods of strategic continuity rather than strategic discontinuity. Changes in top management and unlearning helps overcome inertia. Common sources of 151 inertia – complacency with past successes. . Inertia is a characteristic of a firm that endures status quo (i. Inertia acts as an impediment in strategy implementation. Top managers resist change. irrespective whether it is from worse to good or good to worse.
certain authors propose misfit as a source of superior 152 performance. . However. firms should move beyond financial performance to strategic performance as organization systems are becoming complex. strategies need to be evaluated on an ongoing basis to prevent deviations of fit.STRATEGY EVALUATION Strategy evaluation centers around assessment of strategic fit. Since the internal and external environment is in a state of continuous flux. Deviation of fit is detrimental to performance and may lead to strategic failure. To prevent deviation of fit.
. It attempts to answer the following questions – Is the strategic intent appropriate to the changing context? Are the organizations capabilities still holding good. detecting changes in the external and internal environment and taking corrective action wherever necessary. 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.
It involves assessing – strategic thrusts and milestones. checking every premise is costly as well as difficult. However. Implementation Control – It aims at assessing whether key activities are proceeding as per schedule.STRATEGY CONTROL IMPLEMENTATION It involves steering the company towards its original growth trajectory & stated goals. It is open-ended as well as . Special Alert Control – It intends to uncover unanticipated information having critical impact 154 on strategies. Premise Control – Checking the validity of the assumptions on which a strategy was based.
“If you cannot . Strategy not linked to resource allocation & capabilities – Lacking commitment of top management. difficult to translate into practice. low strategic fit due to consultants intervention. Performance measures are defective – What to evaluate against? How to measure the 155 construct? As a saying goes. Strategy intent not linked with goals and objectives – Lack of coordination at lower levels leading to negative synergy.BARRIERS TO STRATEGY EXECUTION Vision and strategy not actionable – Utopian ideas.
this may effect all others as well. Large or small. to be sure of successful implementation of a strategy. important or not they're all interdependent. Managers should take into account all seven of these factors. On top of that. 156 . Today it is considered one of the most powerful tools for strategy implementation determining success or failure. so if one fails to pay proper attention to one of them. the relative importance of each factor may vary over time and context.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. Together these factors determine the way in which a corporation operates.
BACKGROUND & ORIGIN The 7-S Framework was first mentioned in "The Art Of Japanese Management" by Richard Pascale and Anthony Athos in 1981. They had been investigating how Japanese industry had been so successful. 157 . Since then it is known as their 7-S model and is extensively used by corporations worldwide to implement their strategies. It appeared also in "In Search of Excellence" by Peters and Waterman. The 7-S model was born at a meeting of these four authors in 1982. At around the same time in the US Tom Peters and Robert Waterman were exploring what made a company excellent. and was taken up as a basic tool by the global management consultancy company McKinsey.
Strategy – Trade-offs for the allocation of a firms scarce resources. Structure – The way in which the organization's units relate to each other in terms of their commonalities. Systems – The procedures. formal & informal . Style – The way in which the top management influences the functioning of an organization. processes and routines that characterize how work should be done. to reach identified & stated goals. over time. Staff – Human inter-relationships. 158 .THE 7’S Shared Values – It represents what the organization stands for and what the top management believes in. Skills – An organizations capabilities and competencies.
STRATEGIC FIT Strategy Structure Shared Values Systems Skills Staff Style 1st Order Fit 2nd Order Fit 3rd Order Fit 159 .
structure. A choice of an alphabet often limits the scope and skews the interpretation of a model. shared values) are very malleable and comparatively more difficult to identify & influence. the soft S’s (skill.A CRITIC OF THE 7S MODEL While the hard S’s (strategy. their Japanese counterparts focus more on the soft S’s for their early success and sustainability. While the American co’s focuses on the hard S’s. Consider the 4P’s of marketing or 3R’s of SCM. systems) are comparatively easy to identify and influence. because most often they are culturally embedded and often neglected. 160 . staff. In contrast. Ineffective in case of a virtual company. style.
STRATEGY IMPLEMENTATION ROUTES Strategic Fit .High Organic Growth Strategic Alliance Joint Venture Mergers & Acquisition Strategic Fit .Low Take Overs 161 .
(Eg.e. technologies.e. It has complete control over inputs. i. 162 Risk of cost and time overruns. tax holidays. subsidized power). . Govt. concessions are available for green-field projects. SEZ’s. and markets. soft loans. Long gestation leads to delayed market entry. green-field projects. (Eg.ORGANIC GROWTH Here a firm builds up its facilities right from the scratch and continues to do so without any external participation. The entire infra-structural facilities are set up afresh having its own gestation and break-even. Reliance Industries). i. the entire value chain.
STRATEGIC ALLIANCE It involves a pro-active collaboration between two or more firms on a particular domain or function for mutual gain. Tata Motors & Fiat). . Alliances are usually short-lived and disbanded once the purpose is achieved. There is no funding or equity participation from the alliance partner & both the firms continue to operate independently. It touches upon a limited aspects of a firms value chain. 163 It is a form of competitive collaboration. 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.
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. Hero . Degree and extent of management control must be clearly 164 laid down. It is a win-win situation for both the companies. Selecting the right partner is critical for success. Dominant logic of both the companies should be complimentary. (Eg. A comprehensive MOU is essential. Tata – AIG. leaving minimum scope of overlapping. .Honda).
with the individual firms ceasing to exist any more (Eg. Brooke Bond & Lipton).MERGERS & ACQUISITION It refers to the fusion of two or more firms into a single entity. 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. Coca Cola – Thums Up). ITC Tribeni Tissues. . Acquisition is an outright purchase of a firm assets by another independent entity (Eg. Integrated distribution channel leads to better market penetration and overall synergy. Integration of assets and other financial resources.
Larger geo-graphical diversity. Inform SEBI / Stock Exchange after 5% stake is 166 acquired. Make a public offer of not less than .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. Consolidation in a fragmented industry. Integration of organization structure & cultures is difficult. Tata Steel . Most countries have stringent laws that prevents hostile take over.Corus). often the new firm is “left alone”. Instant access to capacities and markets.
MANAGEMENT TOOLS IN STRATEGY 167 .
The past is ceasing to be an indication of the future. 168 . every time. Companies therefore need to ensure competitive advantages doesn’t become competitive disadvantages. Some tools to ensure that – Benchmarking – Adopt certain best practices. 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. Balanced Scorecard – Tracking strategy 3600. Change provides enormous opportunities. or better still create next practices Reengineering – Redesigning work processes right from the scratch. Radical change is superseding incremental change.
A best practice is defined as an activity performed by a company in a particular domain or function which distinguishes it from others and making them world-class. These exemplary practices involves the stakeholders of the company and helps achieve its strategic intent. Best practices centers around looking at a different way to satisfy various stakeholders. Benchmarking involves the identification, understanding and adapting of certain best practices and implementing them to enhance performance. Firms are moving towards next practices as best practices make firms look more and more homogeneous.
SOME BEST PRACTICES
Dell: Customized configuration of computers. Caterpillar: 48 hours delivery anywhere in the world. Citi Bank : Priority banking services. Maruti: Certified “true value” pre-owned cars. Microsoft: ESOP to employees. Infosys: Customized work-stations. TCS: Referencing potential new recruits. ITC: Shareholders factory visit. AmEx: Outsourcing data warehousing mining. MARG: Set-top box to study viewing patterns. Honda: CEO’s visit to dealers.
TYPES OF BENCHMARKING
Functional – Used by companies to improve a particular management activity. Eg. Motorola learnt delivery scheduling from Domino’s. Process – Improving specific key processes and operations from experiences in similar businesses. Eg. Ford adopting assembly lay-out plan of Toyota. Competitive – It involves assessing the sources of competitive advantage and imitating them. Eg. Samsung leveraging miniaturization skills of Sony. Strategic – It involves assessing business models and replicating them in a different market. Eg. Reliance replicating AT&T business model.
HOW TO BENCHMARK?
Phase 1: Planning – What to benchmark? Whom to benchmark? – Identify key performance indicators & Data source. Phase 2: Analysis – Assessment of performance gaps. – Predict future performance levels. Phase 3: Integration – Communicate findings and gain acceptance. – Establish functional goals and its implementation. Phase 4: Action – Implement and monitor progress. – Measure results against stakeholder wants and needs. – Recalibrate or outperform benchmarks.
WHOM TO BENCHMARK?
Selecting the benchmarking partner is critical to solving the problem. Firms should generally avoid selecting the industry leader, because it may not always adopt the best practices for every process or activity. Benchmarking partners may also be from different industries. Types – – Internal – It involves benchmarking against its own branches, divisions, SBU’s. Proximity to data and cooperation is taken care of automatically. – External – It involves benchmarking against firms that succeeded on account of their best practices. It may also involve benchmarking against world-class firms. Friction may arise due to presence in competing industries.
BENCHMARKING - ADVANTAGES
Finding better ways of meeting stakeholder needs. Organizational learning comes from internal as well as external sources. Establishing goals based on formal assessment of external conditions. Defining effective measure of indicators, facilitate comparison, adopt from other organizations. Ensuring a continuous learning organization. Reducing competitive disadvantage. Organizational turnaround, especially effective in case of a wide strategic drift when differentiation strategies fail to work. 174
It does not shifts the growth 175 trajectory of the industry as a whole.BENCHMARKING . the more similar they end up looking. .LIMITATIONS More and more companies benchmark. Benchmarking is useful for bringing about operational efficiency. but it cannot be used as a strategic decision making tool. clustering). While strategy is all about differentiation and not looking alike. It can at best complement it.e. Strategy is more of creating best practices rather than copying them. Benchmarking merely reorients profits in the hands of few to profits in the hands in the hands of many (i.
e. DOS to Windows). . The task demands a total change in organisational 176 culture and mindset. for achieving performance improvement (E. Re-engineering involves complete reconstruction and overhauling of job descriptions from the scratch (i. Windows 95 to 97). process mapping) and eliminating or improving them (E.e. clean sheet). Re-engineering attempts to radically change an organizational products or process by challenging the basic assumptions surrounding it.g.g.RE-ENGINEERING Redesigning leads to identification of superfluous activities or product features (i.
REENGINEERING – KEY TENETS Ambition Focus Attitude Enabler Performance Large scale improvement by questioning basic assumptions about how work is done Micro Vs Macro Business Processes Vs Organisational Processes Starting right from the scratch Not historical More IT driven. than people driven Innovative Vs Traditional Customer centric Vs Organisational centric 177 .
178 . BPR). processes. customers and suppliers and protects the organization from the future (i. etc) and supports the organization for the present.e. resource allocation and prepares the organization for the future through a reorientation of the entire strategic architecture.e.LEVELS Reengineering can be successfully leveraged at all levels of an organization with varying degree of results.REENGINEERING . It can be of the following types – Functional – It looks into the flow of operations (i. structures. Strategic – It looks into the process of strategic planning. products. Business – It looks into markets. .
179 . – Early entry advantages. It generally acts as a threat to innovation. protection can be had in the following ways – – Patenting. – Causal Ambiguity. – High cost and time acts as a deterrent. Cheaper versions of Intel chips and mother-boards manufactured in Taiwan. learning curve advantage. with an intention to copy it (Eg. Indonesia). While traditional manufacturing is a bottom-up approach. reverse engineering is a top-bottom approach. However.REVERSE ENGINEERING It is a process by which a product is dismantled and analyzed in order to understand how the product was designed and manufactured.
Implementation – Developing of a prototype. designing facilities. 180 .e. cost and effort necessary for the purpose of reverse engineering. Usually in such cases segmentation and pricing is different from the original innovator. machine tools to convert ideas into a marketable product (i. Inaccurate assessment at this stage may lead to a failure of the entire project.STAGES IN REVERSE ENGINEERING Awareness – Recognizing whether the product is found to be worth the time. nano-technology). Introduction – Launching the product in the market. Actualization – Obtaining and dismantling of the product to assess how it functions.
Euro IV. of service stations. – Durability – 1980 manufactured cars still on road. – Features – Anti-lock braking systems. It has eight dimensions (Eg. Air bags. Car) – – Performance – Mileage of 14 kms to a litre of fuel. – Aesthetics – Appeal in design. – Conformance – Emission standards . – Reliability – Consistency in mileage.WHAT IS QUALITY? It involves the totality of a product or service in meeting certain stated or implied needs. More and more companies are moving towards meeting implied rather than stated needs. – Serviceability – Large no. 181 . – Perception – Customer notions.
It had little impact on improving overall productivity. TQM is a way of creating an organization culture committed to the continuous improvement of work processes – Deming. Management of quality was traditionally inspect it . . It is deeply embedded as an aspect of 182 organisational life & culture.fix it in nature. zero defects.TOTAL QUALITY MANAGEMENT Objective – Management of quality ensures conformance to certain pre-set standards. touching upon a limited aspect of a value chain. which ensures good market standing.
Empowerment – It takes place when employees are properly trained. provided with all relevant information and best possible tools. Be customer centric – Generate the concept of internal customer (Ishikawa). Looking at quality as an endless journey.TQM – KEY TENETS Do it right. not a final destination. fully involved in decision-making and fairly rewarded for results. Kaizen – Make continuous improvement a way of life. 183 . the first time – From reactively fixing error in products to proactively preventing errors from occurring at the first place (Juran).
STRATEGIES Outsourcing – It is the process of self-contracting services and operations which are routine and mundane. equal participation). Quality Circles – It a small group of shop-floor employees who meet periodically to take decisions regarding operational problems and crises. saving precious top management time.e. 6-Sigma). 184 . of units meet preset standards (Eg. 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.TQM . enabling the firm to concentrate on core activities essential to customer satisfaction. It is based on the principles of MBO (i.
.... – Less than 10% of strategies effectively formulated are effectively executed.BALANCED SCORE CARD Some interesting comments .. strategy implementation has never been more important. – In the majority of failures – we estimate 70% – the real problem isn’t (bad strategy) .. – Efficiency and effectiveness is passé... Source: Fortune Magazine Why CEO’s fail? 185 .... it’s bad execution..
BSC . 186 . Organizations need to move from financial to strategic performance. rather than effects. Most managers tend to rely on traditional measures of performance having its origin in finance as they are well tried and tested. 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.CONCEPTUALISATION A company’s performance depends on how it measures performance. Focus more on causes. These measures worked well when organizational systems were simple and unidirectional and more importantly the environment was static.
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. 187 . and distinguish strategic problems from operational ones. It has four dimensions – – How do customers see us? – What must we excel at? – Can we continue to improve and create value? – How do we look to shareholders? Firms more often have problems. because they have too many.
e. ageing schedule) % of key customer transactions Ranking of key customer accounts No. 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.
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 product innovations 190 . of new patents registered Time to develop next generation products Average and spread in operating cycle % of products that equal 2/3 sales No.LEARNING PERSPECTIVE GOALS Technology Manufacturing Focus Timing MEASURES No.
Return on Investment Market Capitalization / PE ratio 191 .FINANCIAL PERSPECTIVE GOALS Survival Success Prosper Divestment MEASURES Cash flows Growth in Sales and Profits EPS.
STRATEGY MAPPING 192 .
IMPLEMENTATION 2 Translate strategy into operational terms 1 Mobilize change through effective leadership 5 STRATEGY Make strategy a continual process 3 Align the organization to the strategy 4 Make strategy everyone’s job 193 .BSC .
Focus on cause not effects.ADVANTAGES Most often top managers face information overload. The BSC brings together the different elements of a company’s strategy at a glance. As a result. they don’t know . Seek excellence.BSC . It helps translating strategy into practice (i.what they don’t know.e. 194 performance will automatically follow. doing right things instead of doing things right).e. Modern managers should be poised to ask the right questions. Shift from control to strategy (i. sharing of vision). .
EFFICIENCY Vs EFFECTIVENESS Ineffective Effective Inefficient Goes out of Business quickly Survives Efficient Dies Slowly Thrives 195 .
Michael E. but also sustains it. .EFFECTIVENESS + STRATEGY A company which is effective as well as strategic. Porter 196 . not only thrives.
CORPORATE RESTRUCTURING 197 .
. Strategic variety may be caused by changes in the as external well as internal environment.. firms use restructuring strategies. Strategic variety brings paradigm shift. Restructuring involves consciously driving significant changes in the way an organizations thinks and looks (Eg. Radical change brings about strategic variety... As Peter Drucker pointed out.” 198 . “every organization must be prepared to abandon everything it does. to survival of the most adaptable. from survival of the fittest . To adapt to the changing environment.CORPORATE RESTRUCTURING The only thing constant in today's business environment is change.. Tata Group)..
Internal customers should also not be neglected.e. and dividing the core businesses into SBU’s (i. . Fax. Instead. Core Business – Company’s should introspect – What business are we in? Business evolved out of opportunism or myopia should be divested.e.RESTRUCTURING – BASIC TENETS Customer Focus – Restructuring ideally begins and ends with the customer. downsizing or rightsizing). etc). Structural Changes – Conventional hierarchical structures should be disbanded in favour of more 199 flexible ones (i. Walkman. they should strive to provide unimaginable value ahead of its time (Eg. ATM. Company’s should go beyond just asking what he expects. downscoping).
. started focusing on their capabilities. . Restructuring also requires cultural reorientation.. 200 .. During the times of JRD..) Reliance dismantled their industrial embassies .) The Aditya Birla group typically relied on the “marwari” community for key management positions . Ratan Tata now drives the point the group means business.. Kumar Birla today is more dependent on professionals.. It is created and institutionalized by the top management......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.
Getting feedback & addressing customer complaints. Carry out PR campaigns. Organizing customer and supplier meets. Restructuring provides a platform to close this gap. Communicating to the media about organization efforts to deliver quality products. Use the reach of networking technologies. Publicizing welfare projects to demonstrate CSR. Honda’s ad says.” 201 . “ … one reason our customers are satisfied is that we aren’t.MOVING CLOSER TO THE CUSTOMER As companies evolve. they tend to move away from the customer.
Mittal – Arcelor) and can take various forms. spin-off and equity carve. it may be smooth (Eg. It can have two forms. Further spin-off can be classified as split-off and split-up. Asset Swaps – It entails divesting and acquisition simultaneously by two companies. including its intangibles – Mergers – It may be vertical. or conglo-merate. Tata – Corus) or hostile (Eg. It may include brands as well. Hive Off – It involves siphoning of assets under control. 202 . where the difference in valuation is settled off through cash or equity (Eg. horizontal.ASSET RESTRUCTURING Asset Restructuring – The asset composition of a firm undergoes a major change. Glaxo – Heinz). Further.
– Split-Off – In a split-off. 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. the existing shareholders receive equity in the subsidiary in exchange for the stocks of the parent company. in which the equity is allotted amongst the existing shareholders on a pro-rata basis (Eg. the entire parent company loses its identity after being split into a number of subsidiaries. Tata Industries selling 20% stake to Jardine Matheson). – Split-Up – In a split-up. Reliance Ent). 203 . Most of these practices are not in consonance with Indian laws.
A complete sell-out is known as divestment (TOMCO). but retained its engineering division. L&T sold its cements division to Aditya Birla group. Parle sold its Thums Up brand to Coke for $40 million apprehending fierce competition. Selling out in phases is called disinvestment (IPCL). In 1995.DIVESTITURE It involves the sale of a brand or a division of a company to a third party. – Poor performance. In 2005. 204 . for a specified market or in general with full management control. repay long-term debts. Generic motives include – – Raise working capital. strategic misfit.
205 .The internal & external liability composition undergoes a major change – LBO – Acquiring control over a substantially larger company through borrowed funds (Eg. Tatas take-over of Corus for US $11. Wipro). involving 608 pence per share). Conversion – Replacing debt with equity or vice-versa or costlier with cheaper debt or cross currency debt.3 billion. Share Buyback – It is a process of cancellation of shares out of free reserves to the extent of 25% of paid-up capital (Eg. It provides greater leverage as well as management control.CAPITAL RESTRUCTURING Capital Restructuring .
250 cr Tata Tetley – Rs. 1439 cr 206 Tata Timken – Rs 120 cr Tata Telecom – Rs.Rs. 120 cr Tata AIG – Rs. 256 cr ACC – Rs. 1860 cr . 1170 cr Goodlass Nerolac – Rs. 1890 cr CMC – Rs. 1700 cr Trent – Rs. 230 cr Diversifications Tata Motors – Rs. 150 cr VSNL – Rs.BUSINESS RESTRUCTURING – TATAS Divestments Lakme – Rs. 99 cr Tata Power – Rs. 42 cr Voltas .Rs. 950 cr Merind .
207 . 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). Survival is the primary motive. Turnaround is the primary motive. of operating units. It can be carried out in the following ways – Downsizing – It is a systematic one-time reduction in the no.ORGANIZATIONAL RESTRUCTURING Organizational structure and systems calls for a change when strategic variety is apparent. keeping the composition of business intact (Jet Airways). Rightsizing – It is phasing of excess and redundant employees resulted out of faulty internal planning (SAIL).
The dominant logic represents the perceptions and biases (i.STRATEGIC CHANGE One of the most difficult components of organization restructuring is the mindset of the top management represented through its dominant logic and its shared values reflected in cultural orientation. thumb rules) of the top management. Dominant logic becomes deep-rooted in organizational contexts depending on the period it is in place (tenure of the CEO). the more difficult it becomes to uproot the paradigm (i. The longer the period. Strategy change is unviable without a preceding change in its dominant logics. 208 .e.e. inertia). as strategies are based on such beliefs and biases.
the factor that stifled change & performance was – culture. In most organizations. Companies achieve real agility only when people at every level rise above the ordinary to face the challenges – revitalization or transformation.FORCES AGAINST STRATEGIC CHANGE The problem with strategic change is that the whole burden typically rests on few people (i. 209 .e. Successful transformation requires – incorporating employees fully into the process – leading from a different place so as to maintain employee involvement – instill mental disciplines that will enable employees to behave differently. 20% of the people carry out 80% of the changes).
process ownership. Questioning every basic action of the organization. it is not about winning but about learning. Encourage uncompromising straight talk. Create relentless discomfort with the status quo. 210 . never take no for an answer. Harness setbacks. Understand and deliver the quid pro quo. The best way is to alter the institutional point of view. Promote inventive accountability.SUCCESSFUL TRANSFORMATION Build an intricate understanding of the business model at all levels of the organization. Manage from the future.
Aspects of current culture which needs to be overcome. It involves identifying – Aspects of current culture which needs to be reinforced. Culture and style of management are two main impediments in force-field analysis. also known as cultural-web. by identifying forces for and against change. that can be both enablers and blockages to change and restructuring. Identify and implement facilitators of cultural change.FORCE-FIELD ANALYSIS A force-field analysis provides an initial overview of change problems that needs to tackled. It involves diagnosing a change situation – systems & structures. 211 .
Term Reduced labour costs Reduced debt costs Emphasis on strategic control Business High debt costs Higher risk 212 Long .OUTCOMES Alternatives Organizational Short .Term Loss of human capital Lower performance Higher performance Capital .RESTRUCTURING .
reverse engineering and regenerating. the second one is a more viable strategy and sustainable option in the long run. hence go in for downsizing. In order to put back the company on the right track they are resort to – Denominator – It assumes that turnover cannot be increased.NUMERATOR & DENOMINATOR MGT Most firms across emerging markets undergo strategic discontinuity and as a result are forced to restructure their businesses. focuses on reengineering. Numerator – It assumes that turnover is not a barrier or constraint. While the first strategy produces results instantaneously. 213 . down-scoping or asset stripping.
TURNAROUND MANAGEMENT 214 .
. – 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... and that the thirty-two of the country’s largest business groups in 1969 are no longer among the top fifty today. Source: Why do firms atrophy? (Business Today.. .. 215 (Govindarajan and Trimble. January 1997). still exist as on 2005.WHY TURN AROUND MANAGEMENT? Some interesting insights ..
process focuses on – A logic to explain a causal relationship between intervening variables. 216 . A category of underlying principles and concepts. ends the threat with a combination of strategies. Stage Theory).TURN AROUND MANAGEMENT A turnaround is said to occur when a firm perseveres through an existence threatening performance decline. and capabilities. systems. As a sequence of events describing how things change and why they change (i.e. Both content (what) and process (how) are equally important for a successful turnaround. While content focuses on endogenous and exogenous variables. and achieves sustainable performance recovery. skills.
Substantial shifts in consumer preferences. Some indicators Continuous cash flow crises as a result of dwindling market-share and profits. Uncompetitive products or services. leading to lack of acceptability from distributors and customers. unavailability or radical lowering of substitute costs or technological obsolescence. Low stakeholder confidence.TURNAROUND INDICATORS Most firms atrophy simply because they fail to diagnose the indicators that acts as threat to organizational existence. Rising input costs. Low employee morale leading to high employee attrition at all levels. especially in key positions. suppliers and bankers. 217 .
Recalibrate prices. they adopt surface level measures (disprin popping) which most often fail. Product redesigning or reengineering. Hence. Extending work hours.TURNAROUND ILLUSION The first step to a successful turnaround is the basic acceptance of the fact that …. Revamp product portfolio. Emphasis on advertising and market penetration. 218 . focus on power brands. Common approaches adopted Change in key positions. which most top managers fail to appreciate. “all is not well”. based on elasticity.. prune work-force. be more customer centric. consider extension. liquidating dead assets.
TURNAROUND STAGE THEORY Stage 1 Decline Stage 2 Stage 3 Stage 4 Outcome Response Transition Performance Equilibrium Line Success Failure Indeterminate Nadir Time 219 .
It has its origin in “environment led fit” that subscribes to the view that a firm has little control over external factors.DECLINE Decline is the first stage in the turnaround process. 220 . Identification of the stimulus leads to the arrest of the downfall. It has its origin in “resource led stretch” and subscribes to the view that a firm has substantial power to override the context. R-Extinction – It suggests that organization factors. 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. primarily dwindling resources and capabilities are responsible for decline.
The response must match the cause of the decline. If the decline stems from structural shifts. new market initiatives. diversification. If the underlying cause is internal efficiency. the response should be operational. asset reduction. the response should be strategic.RESPONSE INITIATION Turnaround responses are typically categorized as operating or strategic. 221 . Strategic responses focus on changing or adjusting the business the firm is engaged in through long term moves such as – integration. Operating responses typically focuses on the way the firm conducts business and involves tactics geared towards – cost cutting and process redesigning (BPR).
when decline deepens shifts in strategic position becomes essential. 222 . Contour – It is easier to reverse decline in the earlier stages through operational measures. Scope – A diversified conglomerate may acquire a distressed business to turn it around and gain valuable synergies. 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.RESPONSE DICHOTOMY The response initiation is somewhat dichotomous and cannot be universally applicable. which may be unavailable to a focused firm.
e. substantial amount of time usually passes before results begin to show (i. Sustenance is the key factor in this stage. 223 . confidence building measures. participative management (i. consensus). Effective levers of transition. Empirical studies show that average time is 7. However. lead – lag).7 years with a range of (4-16) years.TRANSITION Transition usually reflects the first signs of recovery. Support from all the stake holders through resource commitment. However. role model. The top management has a key role to play through empowerment. many a times early signs of recovery fades out. transparency.e.
Cut off points must be unequivocal. Instead of focusing on financial parameters alone. Failure is an indication that initial momentum was not sustainable characterized by irreversibility. Commanding a premium in the market. Revival of key customers and new product launches. 224 .OUTCOME Outcome is said to be successful when a firm breaches the equilibrium performance level. it should adopt a holistic approach. Supplier and banker confidence. Regaining lost market share and distributor confidence. Share price indications and media coverage.
COOPERATIVE STRATEGIES & ALLIANCES 225 .
strategic alliance. supply-chain partnership. consortia. or joint venture. It can assume any of the following forms – franchising. More and more companies worldwide are moving away from competition to co-option to leverage their resources and enhance bargaining power. In the cooperative strategy continuum as firms move up the value order.COOPERATIVE STRATEGIES Cooperative strategies are a logical and timely response to changes in business dynamics. technology. licensing. Any cooperative strategy maybe between firms within the same country or cross border as well. and globalization . the commitment and the involvement between the firms increases manifold. 226 .
owners of the brand Monginis allows its franchisees to sell its confectionary products. Branding is critical to franchising. owners of the brand Tanishq allows its franchisees to sell its jewellery products. 227 . It is an effective strategy to penetrate markets in a shortest possible time at a minimum cost. Switz Foods.FRANCHISING Franchising – It is a contractual agreement between two legally independent firms whereby the franchiser grants the right to the franchisee to sell the franchisor’s product or service or do business under its brand-name in a given location for a specified period of time for a consideration. Titan Inds.
228 . HM manufacturing GM range of cars in India with a buy-back arrangement is a perfect example of CBU. Develop a product through its crude stage. Different levels of licensing Manufacturing without embracing any technology (CBU). Become a systems integrator (CKD).LICENSING Licensing – It is a contractual agreement between two legally independent firms whereby the licensor grants the right to the licensee to manufacture the licensor’s product and do business under its brand-name in a given location for a specified period of time for a consideration. refine processes and adopt necessary technologies (SKD). as in Tata Indica.
enabling them to increase prices (Eg. Hyundai). leverage upon size to preempt competition by escalating entry barriers (Eg. It can be of the following types – Multipartner – Intends to share an underlying technology or asset.CONSORTIA Consortia – They are defined as large inter-locking relationships & cross holdings between businesses in a similar industry. Airbus – Boeing). 229 . Collusion – Few firms in a matured industry collude to reduce industry output below the equilibrium level. Cross Holdings – A maze of equity holdings through centralised control to ensure earnings stability & threshold resources for critical mass (Eg. Coke – Pepsi). Tata.
Tata Motors – IDEA).SUPPLY CHAIN PARTNERSHIP It is a pro-active & collaborative arrangement between supplier and customer aimed at achieving better control over the value chain (Eg. Continuous sharing of knowledge is critical to the success of a supply chain partnership. Companies in different industries with different but complimentary skills. It usually provides a platform to sort out differences between conceptualization and implementation to suit local market needs. link their capabilities to create value for end users. otherwise it 230 becomes routine outsourcing. .
enter newer markets. 231 . Reliance – Du Pont). Tata Motors – Fiat. Generic motives involved are . Partner selection is one of the critical success factors. enhance credibility. Despite their popularity (50-60)% of the alliances fail to accomplish their stated objectives. Firm’s should undertake a long courtship with potential partners.STRATEGIC ALLIANCE It is an short to medium term understanding between two or more firms to share knowledge and risk.learning organization. instead of hurrying into a relationship. design next generation products. preempt competition. to gain knowledge and to obtain access to new markets (Eg. effective R&D management.
TYPES Collusion – Tacit top management understanding to neutralize price wars (Eg. Coke – Pepsi). Maruti).STRATEGIC ALLIANCE . 232 . Alliances of the Weak – An alliance is entered into to preempt competition (Eg. Complementary Equals – Two firms mutually promoting each others complimentary products (Eg. Bajaj – Castrol). Bootstrap – An alliance between a weak and a strong company with an intention to acquire it. Whirlpool – Tide. Airbus – Boeing). Backward – An alliance (quasi or tapered) with a supplier of critical components seeking commitment (Eg.
233 . Differences in level of economic development can produce differences in alliances motives. – Japan Vs US).PARTNER SELECTION CRITERIA It is likely that partners will not have complete consent on alliance objectives because the institutional context in which the alliance embedded varies from country to country. Firms from developed markets seek access to markets and firms from emerging markets seeking access to technology. Too much stress on financials & structure be avoided. Cultural orientation has been found to have a profound effect on top management’s strategic orientation (Eg.
Unique Resources – Abilities or skills which cannot be easily duplicated. Dominant Logic’s – Similarity in beliefs & biases. Partner’s ability to acquire fresh skills. Intangible Assets – Move beyond the financials of the firm. Experience related to previous alliances. Managerial capabilities. Willingness to share knowledge and skills. including ability to provide quality products and services. 234 .PARTNER CHARACTERISTICS Complimentarity of Capabilities – The degree to which partners resources can be used in conjunction.
incorporating clear signs of continuing independence for all partners. 235 . Setting up the housekeeping. degree of compatibility. Selection & Courtship – It involves self analyzing. differences not anticipated earlier. Getting Engaged – It should incorporate a specific joint activity. operational & cultural integration.MANAGING ALLIANCES Alliances are more than just a deal. instead of focusing controlling the relationship. understanding the chemistry. partners should nurture it. vows to include commitment to expand the relationship. Changing within. Learning to collaborate – strategic. the value chain.
combining parts). Conceptually. whilst the partners continue to operate independently. a joint venture is a selection among modes by which two or more firms can transact.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. separation is very 236 bitter.e. It aims at creating new value (i. There are substantial linkages in the value-chain. synergy) rather than mere exchange (i. It lasts till the vision is reached. .e.
Organizational Learning – It is a means through which a firm learns or seeks to retain their capabilities. 237 . It may also be linked to deterring entry or eroding competitors position. though more profitable alternative to other choices.JOINT VENTURE – GENERIC MOTIVES Transaction Cost – The situational characteristics best suited for a JV are high performance uncertainty. The market fails as sellers are unwilling to reveal their technology and buyers are unwilling to purchase in the absence of inspection. in addition to a high degree of asset specificity. Strategic Behaviour – Firms may override transaction costs.
Daimler – Chrysler (Premium Cars) 238 . Learning new technologies. Endorsement from government authorities. Sharing of resources. – Eg. – Eg. – Eg. Renault – Nissan (Minivans – Cars). – Eg. – Eg. – Eg. Yamaha – Escorts. TVS – Suzuki (4-Stroke Engines) Fill gaps in existing product lines. Eli Lily – Ranbaxy. Define future industry standards.OTHER MOTIVES Entry into newer markets. Maruti – Suzuki. Essar – Hutch (Vodafone).
– Eg.Enka. – Maruti – Suzuki. Modi – Telstra What after exit (parenting disadvantage)? – Eg.e. PAL – Fiat If the cost of continuing exceeds the exit costs? – Eg. Century . Risk of over dependence.RISKS INVOLVED Incompatibility – Differences in cultural background. technology) drain. – Godrej – Procter & Gamble. Tata – Aditya Birla in Idea Cellular 239 . – Eg. LML – Piaggio Differences in size and resource base. Risk of brain (i.
Inertia – Differences in age and evolution patterns. Flexibility – Sufficient space to breathe and adjust.PRE-REQUISITES FOR SUCCESS Commitment – Mutual trust. Costs – Other modes of transaction becomes cheaper. Partner – Avoid duplication of skills and capabilities. 240 . Focus – Avoid strategic myopia. Agreement – Clarity on operational control. Objectives – Shared vision. time sharing. respect. Equality – Lack of dominance. Incompatibility – Performance expectations. Culture – Reconcile gaps.
MERGERS & ACQUISITION 241 .
The larger objective is to leverage on size.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. 2002).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. An acquisition is the purchase of a firm by a firm (of larger size. HLL – Tomco). however. Ranbaxy . Most countries have stringent laws that prevents hostile takeovers (Eg. Mittal Arcelor). reverses are also taking place through LBO) with a view to acquire conglomerate power and induce synergy (Eg. Brooke Bond – Lipton). 242 . SEBI Takeover Code.
creeping acquisition).SEBI TAKEOVER CODE. Control – A special resolution of 75% of the share 243 holders approving the change of guard. 2002 Promoter – A person who has a clear control of atleast 51% of the voting rights of the company and confidence of all the major stakeholders. Hike – An acquirer who has already picked up a 5% has to make a mandatory disclosure for every additional 1% stake that it acquires. Preferential – A preferential allottee ending up acquiring 5% stake also comes under its purview. .e. Acquirer – Someone (individual or firm) who picks up an atleast 5% stake without mandatory disclosure having an intention to wrest management control (i.
Disclosure – All acquirers have to inform the respective stock exchanges where it is listed and SEBI upon acquiring the basic limit and upon every incremental limit thereon. Gujarat Ambuja – ACC). Grasim – L&T Cement. 2002 Pricing – Acquirers will have to offer minority shareholders (at least 20%) the past 26 weeks or past 2 weeks average price.SEBI TAKEOVER CODE. credentials or track record is at stake. whichever is higher as an exit route (Eg. 244 . the SEBI can intervene and block share transfers if: the acquirer has ulterior motives (i.e. SEBI – In case of a hostile take over. and/or does not enjoy the confidence of the different stake holders. asset stripping).
Godrej. ITC). usually opportunistic (Eg. Electrolux . Vertical – It involves complimentarily (partially related) in terms of supply of inputs or marketing activities (Eg. 245 .TYPES OF MERGERS A business is an activity that involves procuring of desired inputs to transform it to an output by using appropriate technologies and thereby creating value for its stake holders in the process. Horizontal – It involves integration of two highly related businesses (Eg. The type of merger is depends on the degree of relatedness (strategic) between the two businesses. Reliance).Kelvinator). Conglomerate – It involves integration of two distinctly unrelated businesses.
Tata Steel – Corus). Avoiding risk of new product development. Coinsurance effect – Higher debt raising capability. Access to newer segments (Eg. 246 . Mittal – Arcelor). Reduction in risk. Asset Stripping – Shaw Wallace). Overcoming entry barriers (Eg.e. quick access). Economies of size.MERGERS & ACQUISITION . ITC Bhadrachalam). scale and scope. ICICI –ITC Classic). Reduced gestation (i. Ulterior motives – (Eg. Acquiring assets or capabilities (Eg.MOTIVES Increased market / conglomerate power. Ranbaxy – Crosslands). Tax benefits (Eg. Global image (Eg.
Managing over-diversification. Tata – Corus). Overvaluation of buying firms (Eg.MERGERS & ACQUISITIONS PITFALLS Cultural differences (Eg. When Tata Steel started negotiations with Corus. while the ultimate acquisition was made at 607 pence/share). neglecting core business. their initial offer was around 420 pence/share. Top management overtly focused on due diligence exercise and negotiations. Merging of organisational structures. 247 . Managing size. Overvaluation is often as a result of an ego drive and substantially affects future returns. Inability to achieve synergy.
Brooke Bond – Lipton). Decline – Horizontal mergers are undertaken to ensure survival. Kingfisher – Air Deccan). with an objective to reinforce its growth trajectory or to take on the might of a comparatively larger player (Eg. Maturity – A larger firm acquires a smaller firm with an objective to achieve economies of scale and experience curve effects (Eg. Growth – This stage may witness parallel merger of two firms of similar size. vertical to save transactions costs. 248 .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. Tata Steel – Corus).
A common shared vision. active top management intervention in phases. Blanket promotions across entities and confidence building exercises needs to be practiced.INTERNATIONAL M&A . Strong differences may stifle plans and its execution. Left alone syndrome. Immediate attempts to super impose structure and culture may cause bottle necks.FRAMEWORK Positive contribution to the acquired company. 249 . 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.
promptly. Decide upon management control systems. 250 Do not ignore the “people factor”. Redefine responsibilities and authority. Integrating work processes.BLUEPRINT Take the media into confidence. Decide on the new hierarchy.INTEGRATION . Shift attention from business portfolio to people and processes. . Determine business strategy. It will enable focus on customers and key people. They can carry the message to the various stake holders.
251 .e. – Market for corporate control. operational & financial). While under valuation may be a significant opportunity. The process takes (6-12) months.VALUATION The process of valuation is central to M&A.M&A . – Synergy – Potential value gain from combining operations (i. Valuation decisions are arrived through a due diligence process when the prospective acquirer gets access to the books of accounts of acquiring company. Financial motives – Undervaluation relative to true value. over valuation can become a curse. – Unstated reasons – Personal self interest and hubris.
Synergy can be negative as well. 252 . – Vertical Synergy – Gains come from controlling the supplychain and savings in transaction costs. Innovative product – Good distribution network). – Conglomerate Synergy – Gains come when one firm complements the resources or capabilities of another (Eg.VALUING OPERATIONAL SYNERGY Synergy – It refers to the potential value gain where the whole is greater than the sum of the parts. when the “fit” between the two entities is very poor. Sources of operational synergy – Horizontal Synergy – Gains come from economies of scale which reduces costs. or from increased market power which increases sales and margins.
VALUING FINANCIAL SYNERGY Diversification – Reduce variability in earnings by diversifying into unrelated industries. Synergy comes from projects which would not have been undertaken if the two firms stayed apart (Eg. Cash Slack – It reduces asymmetry between cash starved firms with deserving projects and cash cows with no investment opportunities. 253 . 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. but availed after being merged with a profitable firm (Eg. However. and without paying take-over premiums. Hotmail).
hence better performance. the cash flow the merged firm will be less variable than the individual firms. 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.VALUING FINANCIAL SYNERGY Co-Insurance Effect – If the cash flows of the two firms are less than perfectly correlated. as risky debt is spread across the new firm's operations. It relates to the concept of diversification. – Default risk comes down and credit rating improves. higher leverage. – Coupon rates may also be negotiated at lower rates. This will induce higher debt capacity.
255 . since a restructuring can lead to significant increase in value. Assessment of perceived quality is critical. 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. The value of wrestling control is inversely proportional to the perceived quality of that management. 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.
256 . 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. Confidence of investment bankers and the international financial community is essential.e. sometimes in combination with the assets of the acquiring company. It is a very costly and risky proposition. LBO facilitates a relatively smaller firm to bid for a comparatively larger firm in the bid for management control.LEVERAGE BUYOUT (LBO) The basic difference between a take-over and a LBO is the high inherent leverage (i.
the advantages of going public includes . – The need to satisfy analysts and shareholders. The increased benefit showed in the following way – reduced costs and increased revenue.access to financial markets. liquidity. 257 . However. – Separation of ownership from management. – Increased information needs. on-going valuation. off-late many publicly traded firms have gone private keeping in mind the following – – The fear of LBO.TO GO PUBLIC OR NOT? However. A research study showed that 30% of the publicly listed firms reported above average returns after going private.
258 .e. which disappears once assets are liquidated and significant portion of debt is paid off.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. – Cost of debt coming down (i. – Managers cannot be trusted to invest free cash flows wisely. – It is a temporary phenomenon. – Debts repaid off from increased value after successful restructuring and wresting management control. co-insurance effect).
leverage is expected to decrease over time. Lack of sufficient cash flows to repay costly debts resulting in a possible debt trap. initial rise in leverage is anticipated. Any discounting has to reflect these changing cost of capital. A LBO has to pass two tests to be viable – – Restructuring to pay-off increased debt. 259 . – Increase equity valuation. As the firm liquidates / pledges assets and pays off debt.EFFECT OF HIGH LEVERAGE Increases the riskiness of dividend flows to shareholders by increasing the interest cost to debt holders. Therefore.
time-barred. small in size but having a promising business. – Facilitates better valuation and forthcoming offerings.e. or costly. – Automatic listing in major exchanges. allowing the private company to bypass the usually lengthy and complex process of going public. Objectives – – Traditional route of filing prospectus and undergoing an IPO is costly.REVERSE MERGER Reverse Merger – The acquisition of a public company. 260 . – Tax shelter. which has discontinued its operations (i. – Prevents dilution of equity. shell company) by a private company.
Initial anomaly in stock prices usually normalizes over a period of time (6-12) months. – Takeover announcements reported 30% excess returns. During bearish periods excess returns were 19%.EFFECT OF TAKE-OVER ANNOUNCEMENT The shareholders of target firms are the clear winners. Most target firms are taken over within (6090) days. takeover failures have only initial negative effects on stock prices. Excess returns also vary across time periods. However. and 35% during bullish periods. – Merger announcements reported 20% excess returns. 261 .
Brickley. – However. 1988 . and Kim. 1983. in the event of take-over failure negative returns to the extent of 5% on bidder firm stock prices is reflected. – Most studies reported insignificant excess returns around take-over offers or merger announcements.EFFECT OF TAKE-OVER ANNOUNCEMENT The effect of take-over announcement on bidder firm’s stock prices are not clear cut. Bradley. over time. – However. Desai. 1983. and Netter. 262 Jarrel. as stock markets become more and more perfect such anomalies would reduce Source: Jensen and Ruback.
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. Rights). Poison Put – Premature retirement of bonds at attractive rates to pour surplus cash and make target investment unattractive.DEFENSIVE STRATEGIES Golden Parachute – An employment contract that compensates top managers for loss of jobs as a result of change in management control. 263 .
Gray Knight – The target company takes the help of friendly company to buy the shares of the raiding company. 264 . thus thwarting the raider company’s attention. East India Hotels – Reliance Industries – ITC). But often the White Knight turns a betrayer himself (Eg. Shapoorji Pallonji). Green Mail – The targeted company buys large blocks from holders either through premium or through pressure tactics (Eg.DEFENSIVE STRATEGIES White Knight – It is the placing of stocks to a cash rich investor and bargaining for protection in return. Pac Man – The target company makes a counter bid to take over the raider company.
COMPETING FOR THE FUTURE 265 .
GETTING OFF THE TREADMILL Canon overpowering Xerox. Wal-Mart overpowering Sears. Nokia overpowering Motorola. Honda overpowering Volkswagen. British Air overpowering Pan Am. were spending 99% of their precious time dealing with present. Most companies were too preoccupied with the present than the future? 99% of the companies overpowered. Honda overpowering GM. The reverse was true for the companies overpowering. Compaq overpowering IBM. What went wrong???? What were they doing with the present? What were they pre-occupied with? 266 . Hitachi overpowering Westinghouse.
Thus efficiency was grievously hurt. decluttering. declining margins. Not knowing when to stop. falling market share). most often they ended up cutting corporate muscle as well and became anorexic. These denominator based managers stuck to their restructuring strategies (like building pyramids) and didn't know what to do next? Thus they became history? (like the pharaohs) 267 . downsizing).THE PAST OF COMPETITION Beyond Restructuring – When a competitiveness become inescapable problem (stagnant growth. CEO’s brutally pick up the knife and ruthlessly carve away layers of corporate flab (delayering.
THE PRESENT OF COMPETITION Beyond Reengineering – Numerator based managers (innovation) at least offers some hope. However. ensuring only survival of the present. but not of the future. On the contrary only 20% of Japanese managers believed that quality will be a source of competitive advantage of the future. The future is not about catching up with competition. top managers believed that quality will be a source of competitive advantage of the future. incrementalism or nominal innovation has almost reached a plateau.S. 268 . but forging ahead in competition. A poll in circa 2000 revealed that 80% of the U.
Creating the future requires industry foresight. faster. 269 . Companies need to fundamentally reconcieve itself. don’t predict. and regenerate its strategies (breaking its – managerial frames). It involves Dream about the company’s future. Transform the industry. Create a potential gap. It is based on deep insights into trends in technology.THE FUTURE OF COMPETITION Regenerating – Leaner. better. Empower from bottom to top. not just the organization. not the other way. demographics and lifestyles. they are not enough to get a company to the future. as important as these may be. aspirations and resources. reinvent its industry.
ABOUT THE DREAM Which customers will you be serving? What will the potential customer look like? Who will be your future competitors? What will be the basis of your competitive advantage? Where would your margins come from? What will be your future competencies? Which end product markets would you cater? 270 .
It drives a hunger and a passion to transform. by converging technologies complex. blue oceans). Therefore. 271 . Redraw the boundaries between industries.e. they do not need to restructure.ABOUT THE TRANSFORMATION The future does not belong to those who take the industry for granted. It is about deliberately creating a strategic misfit. hence do not fall sick in the first place. Create entirely new industries (i. Change in at least one fundamental way the rules of engagement in an industry. Successful companies have a complete grip over the industry.
272 .ABOUT THE EMPOWERMENT Bring about a revolution (a paradigm shift) in the organization. Such a process is called institutionalization (from people centric to organisational centric). A revolution that is thrust upon from the top seldom sustains. Most successful revolutions (Gandhi to Mandela) rose from the dispossessed. More importantly. The middle management plays a strong moderating role. the revolution must start at the bottom and spread in all directions of the organization. Transformational leaders merely lead the way.
A process for finding and gaining insight into tomorrows opportunities (Eg. Companies need to strategize (think ahead of times). Apply the 40 – 30 – 20 principle. Apple – iphone). Get to the future first. What does it take to get to the future first? Understanding how competition for the future is different.THE FUTURE OF STRATEGY A company must get to the future not only first but also for less. It requires a lot of common sense and a little bit of out of the box thinking. 273 . South West Airlines – LCC. An ability to energize the company. Toshiba – LCD. without taking undue risk.
Companies of the future will be not based so much on the strength of their resources. What distinguishes a leader from a laggard. as on their aspirations. 274 . greatness from mediocrity. the farther it will be away from competition. As there is no one future. The farther one can see in this endless space.HOW DOES THE FUTURE LOOK LIKE? There is no rule which says that for every leader there will be a follower. each point in space represents a unique business opportunity. but hundreds. is the ability to imagine in a different way what the future could be. We are in the midst of a 3600 vacuum.
THE EMERGING STRATEGY PARADIGM Not Only Reengineering Processes But Also Regenerating Strategy The Competitive Challenge Organizational Transformation Industry Transformation Competing for Market Share Competing for Opportunity Share Finding the Future Strategy as Learning Strategy as Positioning Strategy as Engineering Strategy as Unlearning Strategy as Dream Strategy as Architecture 275 .
THE EMERGING STRATEGY PARADIGM Not Only But Also Mobilising for the Future Strategic Fit Resource Allocation Strategic Misfit Resource Stretch & Leverage Getting to the Future First Existing Industry Structure Product Leadership Single Entity Product Hits & Timing Future Industry Structure Competency Leadership Dominant Coalitions / Co-option Market Learning & Preemption 276 .
Degree of Learning Unlearning Curve P2: Unlearning in previous period does not necessarily ensure learning in the current period.LEARNING TO FORGET P1: The degree of learning in current period is directly proportional to the degree of unlearning in the previous period. Learning Curve t1 t2 t3 Time t4 t5 277 .
CORE COMPETENCE A core competence relates to a bundle of skills (not an asset or a business) that revolves around activities or processes and critically underpins a firm’s competitive advantage. 278 . It cannot be matched even by its closest competitors. It is characterized by the following – Unique – It provides unimaginable customer value ahead of its times. Leverage – They are the gateways to future markets. It represents the collective learning's of an organization centering around diverse streams of technologies. Inimitable & Insubstitutable – A high degree causal ambiguity between these skills yield sustainable competitive advantage.
leaders have one. Toshiba – flat screen displays. Wal-Mart – logistics. it is deeply embedded in the heart of the organization. Nike – designing. 279 .MORE ABOUT CORE COMPETENCE Sony – miniaturization. Honda – engines. at the most three to four. Coca Cola – brand. SKF – antifriction and precision. Canon – imaging. Intel – nano-electronics. A core competency cannot be outsourced. Most companies around the world do not possess one. it gets more refined and valuable through use. Although a core competence may lose value over time. Toyota – lean manufacturing. Core competencies are the roots of the organization.
ROOTS OF COMPETITIVENESS End Products 1 2 3 4 5 6 7 8 9 10 Core Businesses Core Business 1 Core Business 2 Core Business 3 Core Business 4 Core Product 2 Core Products Core Competencies Core Product 1 Competence 1 Competence 2 Competence 3 Competence 4 280 .
RESOURCE STRETCH & LEVERAGE
Initial resource position is a very poor indicator of future performance. It leads to atrophy and stagnation. Successful companies consciously create a potential gap between aspirations and resources. Resource crunch is a common factor among firms that faces a wealthy rival, and outperforms them. Leveraging what a company already has, rather than allocating it is a more creative response to scarcity. – By concentrating existing resources. – By accumulating existing resources. – By complementing existing resources. – By conserving existing resources. – By recovering existing resources.
Concentrating – It involves effectively directing portfolio of resources on key strategic goals in which individual efforts converge over time. It is a balance between individual mediocrity and collective brilliance. It is achieved through – Converging – Redirecting multiple diverging (i.e. fragmented) short term goals into one long term goal. It is then resources can be stretched over time. Focusing – Making trade-offs and preventing dilution of resources at a particular point of time. Targeting – Focusing on the right innovations that are likely to have the biggest impact on customer value.
Accumulating – Using existing reservoir of resources to build new resources. Each and every individual is a rich & potential source of learning, discover better ways of doing things. It is achieved through Mining – Extracting learning experiences from existing body of each additional experience (i.e. success or failure). It is an attitude that can be acquired, but never learnt. It leads to a substantial jump in the experience curve. Borrowing – Utilizing resources outside the firm through licensing, alliances, joint ventures. A firms absorptive capacity is as important as its inventive capacity.
Complementing – Using resources of one type with another that aligns smoothly to create higher order value. In a way it produces an accelerating effect on each individual resource. It is achieved through – Blending – Interweaving discrete capabilities to create world class technologies (GM – Honda) through integration and imagination. Different functional skills can also be blended to create a world class end products (Yamaha – Keyboard). Balancing – An ability to exploit excellence in one area is never imperiled by mediocrity in another (GE acquiring the CT scanning rights from EMI because of its inadequate market reach).
Conserving – Sustaining competencies over time through frequent usage. Resources are never abandoned; they are always preserved for future use. Recycling – Increasing the velocity of use of a competencies over time. As a result core competencies can be leveraged across an array of products (Sony - Betamax). It includes brand extensions as well. Co-Opting – Enticing resources of potential competitors to exercise influence in an industry (Fujitsu – IBM). Shielding – It involves identifying competitors blind spots and then attacking without having the fear of retaliation.
Recovering - It is the process of reducing the elapsed time between investing in resources and the recovery of those resources in the form of revenues via the market. Speeding – Prior to the 1980’s Detroit’s majors took an average of 8 years to develop an entirely new model; the Japanese reduced it to less than 4.5 years, with major new variants in 2 years. This envisaged Japanese players in giving customers more opportunities to switch allegiance and loyalty (Toyota). Protecting – It uses competitors strength to one’s own advantage, by deflecting it, rather than absorbing it as practiced in Judo.
INTERNATIONAL BUSINESS ENVIRONMENT 287 .
1997).EMERGING MARKETS Emerging markets (India. institutional gaps. Emerging markets are characterised by infrastructural bottlenecks. China. Therefore. strategies suited for the developed markets may not be appropriate for emerging markets. and high transaction costs. 288 . Chile) provide a different context (i. high levels of market imperfection).e. Therefore focused strategies based on core competence may not be suitable for emerging markets (Khanna & Palepu. Diversified groups in operating in emerging markets therefore benefit from unrelated diversification. Korea.
subsequently negatively related across developed markets.PERFORMANCE (I) Diversity attempts to measure the degree and extent of diversification (Herfindahl. Size & Scale. Entropy). Optimum level of diversification Performance Diversity is initially positively related with performance. et al. Synergy. (2000) 289 . Experience Strategic Fit Diversity Palich. Concentric.DIVERSITY .
conglomerate power Threshold level of diversification Performance Diversity (Khanna & Palepu. 2001) 290 . brand building Risk diversification.PERFORMANCE (II) Diversity is initially negatively related with performance.DIVERSITY . subsequently positively related across emerging markets. Huge initial investment.
revenues and profits. act locally (Eg. It should have a spread of assets. It should have a spread of manufacturing facilities. Characteristics – It should have a spread of affiliates or subsidiaries.INTERNATIONAL IDENTITY MNC’s consciously engage in FDI in different parts of the globe to forge resource diversity as a distinct competitive advantage. HSBC). It should have a spread of interest groups / stake holders. It should think globally. 291 .
It reflects the disparities in women in workforce (Eg. low group scale in developed markets and vice versa for emerging markets). low risk profile in developed markets and vice versa for emerging markets). Risk Profile – It reflects the risk attitude of the top management (Eg. low power distance in developed markets and vice versa for emerging markets). 292 . high feminity index in developed markets and vice versa for emerging markets).GLOBAL BUSINESS ENVIRONMENT Power Distance – It reflects the disparities in income and intellectual development (Eg. Feminity Index .It reflects the relative role of team building (Eg. Group Scale .
low country risk in developed markets and vice versa for emerging markets). terrorism (9/11). customs. FOREX reserves. code of conduct. interest rates. Country Risk – It reflects the political and economic risk (Eg. time value. political stability. corruption. inflation. judiciary) of doing business in a particular country (Eg. flexibility (Eg.culture. dress sense. way of life. credit rating. currency. 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). 293 .
and vice-versa. in most emerging markets use of an interpreter may be a standard protocol. time-zones. Ethnocentrism – Developed country managers tend to regard their own culture as superior. Other factors – local celebrations.GLOBAL BUSINESS ENVIRONMENT Time Sensitiveness – Developed country managers regard time as precious. 294 . 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. however.
In 1995 (Uruguay Round) GATT was renamed to WTO. It also highlighted the nexus between US & WTO.GATT GATT was a bi-lateral treaty initiated between US and some member countries in 1947 to promote free trade. BRIC). copyrights. The 2001 (Doha Round) focused on power blocks (NAFTA. The 1999 (Seattle Round) saw a lot of protest amidst bringing agriculture under the purview of TRIPS. ASEAN. It focused largely on TRIPS (patents. It also initiated provisions on anti-dumping. 295 . It a multi-lateral treaty with 143 (as on 2002) member countries to reduce tariff and non-tariff (quota) barriers. trademarks).
296 .e. the Euro slowly started outperforming the Dollar.Pound). primarily the OPEC countries. The Euro was significantly devalued against the Dollar till 2002. three countries joined in 2002 increasing it to fifteen members as of 2008. Sterling . The notable exception was Great Britain which still continues with its local currency (i.EURO – SINGLE CURRENCY In 1999 twelve member countries in Europe joined hands to move over to a single currency (i.e. the Dollar still remains the most preferred currency globally. However with current recession in the US 2002 onwards. Euro). However.
it helps avoiding transaction costs associated with a multiple currency. Rate Uncertainty – A single currency eliminates the risk of competitive devaluations. a multiple currency is preferable where the business cycles of member nations are different. but it may have spill-over effects. However.SINGLE Vs MULTIPLE CURRENCY Transaction Costs – Though the initial cost of introduction of a single currency is very complicated and costly. Trade Block – It will strengthen the EU identity which would not have been possible otherwise. 297 . Transparency – A single currency is transparent and competitive.
e. the gain of one country is loss of another).FII Vs FDI INVESTMENT Classical economists believed that foreign investment (in any form) is basically a zero sum game (i. Neo classical economists believe that foreign investment may in fact be a win-win game. It is short-medium term with comparatively low levels of commitment. hot money). 298 . – FDI (transfer of tangible resources) is slow but steady for the purpose of economic growth.e. It is long term with high levels of commitment. – FII (transfer of intangible resources) is fast but may have strong repercussions (i.
lifestyle (petroleum 299 outlets – departmental stores). Distribution – It depends on the market characteristics (fragmented – concentrated). . economic (middle class buying power). customer awareness (microwaves).INTERNATION MARKETING Product – The various attributes of a product may receive different degrees of emphasis depending on differences in . buying patterns (spread). technology (microchip). promotion (surrogate advertising). usage (talk time). Pricing – It depends on the competitive structure (PLC – Kellogg's).culture (food habits).
Accounting Norms – The accounting norms of one country (AS . debt is cheap in US. Cost Structure – Companies in India need to investment in fixed costs due to poor infra-structure 300 compared to developed markets. equity is cheap in India). Leverage – The leverage may vary across countries depending upon money and capital market conditions (Eg.INTERNATION FINANCE Currency Risk – Many Indian IT companies (Rs) having business in US (Dollar) are asking for quotes in (Euro) or are shifting bases out of US to avoid risk of devaluation of Dollar. .India) may be different from that another trading country (US – GAAP or IRS).
Compensation – Differential pay packages exists because of differences in purchasing power. double taxation. however. shortened life cycles). Training – It is a pre-requisite for international business to reduce language. Recruitment – In local recruitment. labour laws. social security.INTERNATIONAL HR An uniform HR policy is idealistic to enable parity in performance appraisal. technology (convergence. and cultural barriers (language) vis-à-vis emerging markets. skills are more important that cultural fit and vice-versa. 301 . in most cases it is not desirable nor practiced.
. Technology – The cost to be evaluated in terms of latest technology (Euro VI) vis-à-vis effective cost of appropriate technology (Euro II). Bosch spark plugs are used by car manufacturers worldwide).INTERNATIONAL OPERATIONS Location Incentives – FDI in emerging markets should explore options for SEZ’s to explore benefits (tax holidays. SCM – Use of ERP to network the extended enterprise 302 across the globe. Outsourcing – A company having a core competence may be the source of global outsourcing (Eg. reduce power costs) vis-à-vis infrastructural bottlenecks.
CONTEMPORARY TOPICS 303 .
it has destructive effects as well. Innovation is the most preferred strategy today to maintain competitive advantage in the present turbulent business environment. 304 . Innovation is all about staying ahead of competition. but has inherent risks involved as well. innovation is the first attempt to carry it out in practice. While innovation typically adds value for organizations.INNOVATION An invention is the first occurrence of an idea for a new product or process. Innovations typically paves the way for more secured and improved lifestyle for consumers in general.
process innovations are organizational driven. process innovation is necessary to sustain the competitive advantage of product innovation. However. Tangible impact of product innovation on performance is significantly higher than process innovation. 305 . Strategic innovation has the potential to change the rules of the game. Process innovation usually follows product innovation.TYPES OF INNOVATION A key challenge is maintaining a balance between process and product innovations. While product innovations are typically customer driven.
Medical Surgery (Lasik). It leads to a shift in the price – performance envelope. Processors (Pentium). Data Storage (Pen Drives).e. 306 . putting an idea into practice).e. a paradigm shift). Innovations are the back-bone of successful business models . about how an organization makes money (i. Telecom (CDMA Technology). Disruptive business models brings in a new frame of reference (i. Drug Development (Bio Chemicals).BUSINESS MODEL It is a simplified description and representation of a complex real world.
The key partners involved in the activities. The cost structure resulting from the business model. The key activities / processes necessary for execution. The proposed relationships established with clients. 307 . The revenue streams generated by the activities. The channels to reach out to the clients. The key resources and capabilities required. The segment(s) of clients to be addressed.NINE BUILDING BLOCKS Value proposition offered to the market.
BUSINESS MODEL FRAMEWORK 308 .
It involves – Product Visualization – Product Prototype – Product Test – Capacity – Pricing – Distribution. With the rapid erosion of certain industries (IT. The revenue model described here are the means to generate revenues. 309 .REVENUE MODEL Positioning is just not sufficient. Investment Banking. innovative companies to carve out unique business models to fend off competition. It is just one piece of the puzzle. Real Estate) companies need to untangle and understand the intricacies of their business model.
Provide reasonable incentives (not necessarily monetary). A favourable intellectual property (IP) climate. Have a lean and a flat organization structure. Promote the culture of experimentation. Allow the management sufficient slack to be future oriented. Allow the workforce idiosyncrasies for their errors. Promote the grape-vine. 310 .HOW TO MAKE INNOVATIVE CO’S Innovative company’s are a matter of culture and aspirations rather than tangible resources.
In most emerging markets where the IP climate is not so favorable. Collusion with the judiciary is also another distinct possibility in emerging markets. however that possibility is slowly atrophying. 311 311 . The most preferred strategy of internal protection includes imbibing “causal ambiguity” in the production process to make reverse engineering difficult.HOW TO PROTECT INNOVATION? Without adequate protection (external or otherwise) the effects of innovation does not translate to performance. companies are increasingly relying on internal protection to sustain innovation effects.
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. 312 312 .
also known as the principal-agent problem or agency dilemma.AGENCY THEORY The root of Corporate Governance goes back to the Agency Theory. 313 . not present in portfolio diversifications. This exposes the shareholders to additional risks and higher costs. 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. However. From the strategic point of view managers tend to diversify into unrelated businesses as it provides higher returns hence a more favourable appraisal.
various laws were enacted to ensure proper usage of these funds. 2002 to restore public confidence in corporate governance. SEBI Report – 2005. . the US government passed the Sarbanes – Oxley Act. 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. After the Enron downfall.ORIGIN & CONTEXT Since the early 20th century since a large part of public funds were held by publicly traded firms in the US.
Interests of other stakeholders: Recognize the legal and other obligations of all legitimate stakeholders. 315 . 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. The key roles of chairperson and CEO should not be held by the same person and their offices be clearly separated.
assessment and mitigation of risks and retirement by rotation over a fixed period of time. 316 316 . Disclosure and transparency: Disclosure of information should be timely and balanced to ensure that investors have clear access to data and facts. They should also implement systems to independently verify and safeguard the integrity of the company's financial reporting.. Independence of the entity's auditors: Identification.GOVERNANCE PRINCIPLES Integrity and ethical behaviour: Organizations should develop a code of conduct for their top management that promotes ethical and responsible decision making.
a person benefitting from a decision should abstain from it. discussed and resolved. Remuneration: Performance-based remuneration is designed to relate some proportion of salary to individual performance. fire and compensate top management. with its legal authority to hire. Regular board meetings allow potential problems to be identified. they should provide no mechanism or scope for opportunistic behaviour. However. 317 . safeguards invested capital. Balance of power: The simplest balance of power is very common.GOVERNANCE STRATEGIES Monitoring by the board of directors: The board of directors.
The size of the premium varied by market. Egypt and Russia) to around 40% for Canadian & European companies.GOVERNANCE & PERFORMANCE In its “Global Investor Opinion Survey” of over 200 institutional investors in 2002. undertook formal evaluation of its directors. and was responsive to investors' requests for information on governance issues. McKinsey found that 80% of the respondents would pay a premium for wellgoverned companies. 318 . from 10% for companies where the regulatory backdrop was least certain (those in Morocco. who had no management ties. They defined a well-governed company as one that had mostly out-side directors.
corporate philanthropy should be a part of every corporate mission. Over a period of time. Therefore. today economic institutions are considered as a major drivers of improvement in quality of life in general and therefore needs to include multiple stakeholders. The basic premise is that firms cannot exist in vacuum. the short-term view of profit maximisation gave way to a more broader and mediumterm view wealth maximisation of the shareholders.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 . However.
“an enterprises decisions and actions being taken for reasons at least partially beyond its immediate economic interests”. in fact a large part of it is significantly overlapping. economic and social responsibilities cannot be mutually exclusive. “a healthy business cannot exist in a sick and impoverished society”. Therefore. the debate on CRS still continues whether firms should detract its focus from its business? 320 .CORPORATE SOCIAL RESPONSIBILITY As Peter Drucker rightly pointed out that. Therefore. giving a very important message that one cannot exist without the other. CSR can be defined as. However.
people are becoming increasingly aware of their right to a decent and healthy life. Fear of government interference: Excessive quench for profits may lead to build up of adverse public opinion compelling the government to intervene (Eg. MRTP). Public image: Entrepreneurs are increasingly relying on public image as a source of competitive advantage and a higher financial discounting.GROWING CONCERN FOR CSR Awareness due to education: With growing literacy. The role of media: The media and various consumer organizations have come up in protecting consumer rights and exposing mal-practices. 321 .
Cement . Refrigerators – CFC. Aditya Birla Research Centre – LBS). designing eco-friendly products. Health & Hygiene – Attending the health hazards due to wastes and by-products to employees and society in proximity (Eg. eco efficiency. Education. Literacy & Training Programs – (Eg. Tata Steel – Life Line Express). Exide – Product take back). 322 .CSR STRATEGIES Green Supply Chain Management: It includes environmentally preferable purchasing.Paper packaging. and extended producer responsibility (Eg.
They represent an enormous opportunity for companies who learn how to serve them. Strategic innovations leading to disruptive business models can show the way out. they're helping millions of the world's poorest people to escape poverty. 323 . across the world's billions of poor people having immense untapped buying power. Prahalad notes that future markets exist collectively. C. K. In turn companies by serving these markets.BOTTOM OF THE PYRAMID With the market across most developed markets including the US getting saturated.
BLUE OCEAN STRATEGY 324 .
TWO WORLDS 325 .MARKETSPACE .
one companies gain is always at the 326 cost of another companies loss. They have fought for profits. profitable growth. In today’s red oceans. battled over market-share.WHAT IS RED OCEAN? Companies have long engaged in head-to-head competition in search of sustained. competing head on results in nothing but a bloody red ocean of rivals fighting over a shrinking profit pool. . where most industries are saturated. and struggled for differentiation (cost or product). Yet in today’s overcrowded industries.
WHAT IS BLUE OCEAN? Tomorrow’s leading companies will succeed not by battling in red oceans. but by creating blue oceans of uncontested market space ripe for growth . it will exist 327 in the future as well. Such strategic moves are possible through the pursuit of product differentiation and low cost simultaneously. It is only the frames of the . It helps in creating powerful leaps in value for both the firm and its buyers. rendering rivals obsolete and unleashing new demand. Blue Ocean’s have existed in the past.
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. Population shrinkage across a no. . Demand across developed markets reaching a plateau. Niche markets & monopoly havens are continuing to disappear. Technological advances have substantially 329 improved industrial productivity. of European nations.BLUE OCEAN STRATEGY IMPERATIVES Prospects in most established market spaces – red oceans – are shrinking steadily. information imperfections atrophy instantly.
. 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). Company & industry are the wrong units of 330 strategic analysis.CONCEPTUAL UNDERPINNINGS Blue oceans have existed in the past and will exist in the future as well. managerial moves are. They are not necessarily about technology. the underlying technology was often already in existence. Incumbents often create blue oceans within the ambit of their core business.
BLUE OCEAN .IMPLEMENTATION Reduce Which factors to be reduced below the industry standard Eliminate Which of the industry factors that the industry takes for granted should be eliminated Create VI Which factors should be created that the industry has not offered Raise Which of the factors should be raised above the industry’s standard 331 .
IMPLEMENTATION SEQUENCE Buyer Utility (1) Is there exceptional buyer utility in your business idea? Price (2) Is your price easily accessible to the mass of buyers? Blue Ocean Strategy Adoption (4) What are the adoption hurdles in actualizing your business idea? Are you addressing them up front? Cost (3) Can you attain your cost target to profit at your strategic price? 332 .
. Southwest Airlines: Pioneering the concept of LCC. Sony Play Station: Redefining machine-human interface in entertainment and targeting an altogether new user base.SOME GLARING EXAMPLES In the last century authors Kim and Mauborgne have documented the creation of more than 150 blue ocean creations across 30 industries – Virgin Atlantic: Fractional jet ownership or travel to space. Citibank – Automated teller machines & credit 333 cards.
According to this view managers need not be constrained to act within the confines of their industry.WHAT THEN IS THE HANDICAP? Most of the traditional views in strategy having its origin in (Economic Theory) led to what is called the – structuralist paradigm. greater than themselves. 334 . According to this view. All they need to do is change their managerial frames. companies & managers are largely at the mercy of economic forces. Off late emerging views in strategy having its origin in (Organization Theory) led to a paradigm shift to what is called the – reconstructionist view.
This action might not be possible to undo. Are you sure you want to continue?
We've moved you to where you read on your other device.
Get the full title to continue listening from where you left off, or restart the preview.