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Course Code: 611 & 612 Dr. Subir Sen – Faculty Member, IBS
E-Mail: firstname.lastname@example.org, 9830697368 1) Crafting & Executing Strategy – Thompson & Strickland. 2) Strategic Management – Pearce & Robinson. 3) Strategic Management – Fred. R. David. 4) Exploring Corporate Strategy – Johnson & Scholes. 5) Competitive Advantage – Michael E. Porter. 6) HBR – Articles & Case Studies.
STRATEGY - DEFINITION
Strategy is all about making trade-offs between what to do and more importantly what not to do; consciously choosing to differentiate. It reflects a congruence between external opportunities and internal capabilities. Types of strategies – Corporate Strategies – It is all about making choices across various businesses and allocating resources among them. Business Strategies – It is all about developing leveraging and sustaining competitive advantage. Functional Strategies – It is all about finding newer ways to perform existing processes, or 3 better still adopting new processes altogether.
STRATEGIC MANAGEMENT DEFINITION
Strategic management attempts to integrate the traditional management functions and align the organization as a whole with the broader environment to make resource allocations in a way to achieve the strategic intent of the organization. This alignment is called strategic fit. It serves as a road-map for the organization in its growth trajectory. It provides the direction – extent – pace – timing. It depends on the turbulence of the environment and the aggressiveness of the organization. It distinguishes the winners from the losers.
PILLARS OF STRATEGIC MANAGEMENT
Differentiation – Differentiation of key inputs and technologies helps a firm to consciously move away from homogeneous to heterogeneous markets enabling them to earn super-normal profits from normal profits. Integration – Whenever dealing with a complex task of managing a business (i.e. involving a no. of variables with cross linkages) it is in the interest of simplicity that the task be broken up in smaller components. However, for effective control, integration is essential. Alignment – Since differentiation is prone to replication, it is in the interest of the firm to differentiate continuously by aligning the resources with environmental opportunities.
STRATEGIC MANAGEMENT FRAMEWORK
Economic al Strategic Finance Fit Political Strategic Intent Fit Political Marketin g Manageme nt Social & Cultural
It involves substantial resource outlay. It requires full commitment of the top management. It is irreversible.STRATEGIC MANAGEMENT . It is all about creativity and innovation. It is about adaptation and response to the same. 7 . It is a holistic and integrated approach. It is long-term in nature. It provides broad guidelines.FEATURES It forms the core activity of the top management.
8 . It involves only the top management. It is rocket science.STRATEGIC MANAGEMENT – MYTHS It involves short-cuts. It brings instant success. It about mere data and facts. It attempts to minimize risk. It is fool-proof in nature. It is about forecasting. It a bundle of techniques or even tricks. It involves nitty-gritty's. It is about a definite formula.
rather than reactive. To innovate. To assimilate change faster. To generate large resource pool. To be proactive.STRATEGIC MANAGEMENT IMPERATIVES To be continuously alert. To be future oriented. To tap markets across boundaries. To be insulated against environmental threats. . again and again ……. 9 To develop core–competencies. To gain expertise in technologies. scale and scope. To leverage size.
today's battles are fought over markets. obsession. but with a lot a rigour and robustness. In the ancient days battles were fought over land. battles fought on the market front are won by companies by virtue of their obsession & strategies. but by virtue of their courage. Even in today’s markets. whose origin can be traced to some of the greatest battles fought in the ancient days. It is an old wine in a new bottle.STRATEGY .strategies. and more importantly . In the ancient days battles were won not by virtue of size of the army or armory. In contrast. 10 .ORIGIN The word strategy has its origin from the Greek word strategia meaning Military Commander.
Allied Forces Vs Germany (WW-II) – Strategy: Forging alliances. challenging GM and Ford.SOME PARALLELS Japan’s attack on Pearl Harbour – Strategy: Attack where it hurts the most. – Yahoo and Microsoft challenging Google. US attack of Morocco to capture Germany – Strategy: Pin-hole strategy – Wal-Mart challenging Sears by entering small towns. – Toyota’s entry in the US. 11 . Napoleon’s attack on Russia – Strategy: Waiting for the right time. – Reliance’s entry into telecom.
A paradigm is a dominant belief about how the business and its environment operates. a radical change in the business environment brings about discontinuity. The things happening around the firm when totally disconnected from the past leads to a paradigm shift. – Mass Production Organization Size – Complicated Processes – Complex Structures Evolving of an emerging paradigm – survival of the fittest (Fayol & Taylor.Industrial Revolution.EVOLUTION OF MANAGEMENT As Peter Drucker refers to it. The first major discontinuity in the history of global business environment was the . 12 . 1910).
1960).EVOLUTION OF STRATEGIC MANAGEMENT The second major discontinuity in the history of global economic environment – World War II.e. – Affluence of the new customer (i. The question of outperforming the benchmark became the new buzzword. 13 . – Global market place. – Homogeneous to heterogeneous products. Efficiency and effectiveness are no longer sufficient. performance across firms became differentiated. push to pull). Survival of the most adaptable becomes a new management paradigm (Ansoff. – Changes in the technology fore-front. From uniform performance.
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. 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. – The choice of strategy is primarily concerned with external ones rather than internal ones. Learning always begin on a clean sheet of paper. – It is primarily the top management’s prerogative. – Biases and prejudices has a very little role to play in strategic choices pursued by managers.
APPROACHES TO STRATEGY Design Approach – Alfred Chandler (1970) – Structure follows strategy. 16 . – Management control systems has a dominating role in influencing firm performance. everything else follows. Once the control systems are in place. – The top managers then decide on the type of organization structure & systems to be in place. Successful organizations align authority and responsibility of various departments in way to reach overall objectives. who will be the top managers. – Organization structure will precede and cause changes in strategy. The organization initially decides which industry to enter. how it will compete.
– An organization is seldom in a position to influence the larger business environment. – The organization will outperform the industry where environmental forces are weak and vice-versa. competitors. substitutes. – A firms performance is inversely related with the bargaining power of environmental forces to which it is exposed. customer. 17 .APPROACHES TO STRATEGY Positioning Approach – Michael E. new entrant. – The environmental forces comprises of – supplier. Porter (1980) – Choose a consumer segment and position your product accordingly.
but exploiting the resource differences among them. 18 . locating in most attractive industries and pursuing the same strategy. They are complex resources and undermines a firms competitive advantage. – Organizations can significantly alter the way an industry functions. Prahalad (1990) – The key to superior performance is not doing the same as other organizations.APPROACHES TO STRATEGY Core Competence – C. – Core competencies are a set of skills that are unique and can be leveraged. – It enables a firm to deliver unimaginable value ahead of time. 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 provides a sense of direction and destiny. It implies a significant stretch.STRATEGIC INTENT If you cannot see the future. It involves an obsession to be the best or outperform the best. A substantial gap between its resources and aspirations. A strategic intent is a statement of purpose of existence. 21 . A gap that consciously manages between stagnation and atrophy. It is the cornerstone of an organizations strategic architecture reflecting its desired future state or its aspirations. It’s a philosophy that distinguishes it from its competitors. you cannot reach there.
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 .
strategic variety) is apparent. 23 .DOMINANT LOGIC A dominant logic can be defined as the way in which the top management team conceptualizes its various businesses and make critical resource allocation decisions.e. To put it more simply. it can be perceived as a set of working rules (similar to thumb rules) that enables the top management to decide what can be done and more importantly what cannot be done. It is core to the strategic intent of the firm. Dominant logic changes. when radical changes in the internal and external environment (i.
VISION It is a dream (not a forecast) about what the company wants to become in the foreseeable future. beyond just making money. It enables the top management to remain focused. but achievable aspirations. 24 . It provides an unity of purpose amidst diversity of personal goals. It is a combination of three basic elements – – An organizations fundamental reason for existence. – It represents the company’s audacious. It ensures that the company does not wander off into unrelated zones or fall into an activity trap. – It stands for the unchanging core values of the company.
In Reliance when a new project becomes operational top managers hand over charge to the SBU heads and move on to a new project. and memorizable. clear. 25 . Clarity – Vividly descriptive image of what the company wants to be known for in the future. Sharing – The company across all hierarchies should have faith in it. 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.CHARACTERISTICS Reliance – Where growth is a way of life. Brevity – It should be short.VISION .
It makes strategic alignment easier. It gives enlightment.ADVANTAGES To stay focused on the right track. It provides a holistic picture.VISION . It gives a shared platform. It lends integrity and genuineness. 26 . It fosters risk taking and experimentation. It gives the impression of a forward-looking organisation. It facilitates development of skills & capabilities. To prevent the fall in a activity trap.
It serves as a road map to reach the vision. Although the purpose may change over time. A broad mission statement helps in fending competitors. its reason for existence.MISSION Mission defines the space that a business wants to create for itself in a competitive terrain. 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. 27 . It enables the firm to define its business landscape and identify its competitive forces.
– We do not offer insurance. ………………….MISSION – SOME IDEAS Reliance – We are in the business of integration. though some may seem unrelated in nature. We offer security. All the businesses of the company are strongly integrated with their main business. 28 . We offer comfort. – We do not offer steel. We offer strength. …………………. …………………. …………………. We offer solutions. Some other examples – We do not offer shoes. – We do not offer software's.
– It helps identifying key success factors. – It adds legitimacy and motivation. – It provides a benchmark for evaluation. 29 .GOALS & OBJECTIVES Reliance – We want to become a Rs. – It prevents deviation. – It keeps the mid management pre-occupied. – It is based on Management by Objectives (MBO). It provides a quantitative feel to an abstract proposition. – It lends direction – time frame in the medium term.100K crore company by the year 2005. It is an end result (quantifiable) something a firm aims and tries to reach in a time bound frame.
It is specific to a particular business. – Leverage economies of size and scale. 30 . – Use price-elasticity to break market barriers. – Compress project times. It is the process of garnering necessary inputs. and gaining access to desired markets to achieve the desired goals and objectives. coordinating appropriate technologies. The details of the plan Reliance Telecom adopted were – Backward integrate process technologies. – Acquire a market share of indomitable position.PLANS Reliance – Desire to invest 25K crore in telecom business by circa 2010.
However. equilibrium is maintained. It often leads to an organizational crisis. This state of affairs is known as strategic drift. past strategies tend to have a bearing on future strategies.STRATEGIC DRIFT Due to top management commitment. Historical studies have shown that most organizations tend to continue with their existing strategies. strategies lose touch with the emerging realities. 31 . In such a context. This tendency to restore continuity is known as inertia (resistance to change). radical change may lead to disequilibrium. 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 .
– Creating a favourable image. – Hiding vulnerability. – Creating obligations of reciprocity. – Developing a platform of support. 33 .ORGANIZATIONAL POLITICS Strategic drift often leads to organizational politics. – Distorting information to gain mileage. 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. – Using covert tactics to pursue self interests.
INTENDED & REALISED STRATEGIES An intended strategy is an expression of interest of a desired strategic direction. . – The environment context has changed. – Persons responsible for strategy conceptualization and implementation are34 divergent. Usually there is wide gap between the two when organizational politics is evident. A realized strategy is what the top management actually translates into practice. Other causes – – The plans are unworkable and utopian. – Influential stake-holders back out.
LOGICAL INCREMENTALISM According to the incrementalism approach (contrary to integrated approach) practitioners simply do not arrive at goals and announce them in crafted and well defined packages. 35 . this is not to be treated as “muddling”. 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. However. Strategy formulation and implementation are linked together in a continuous improvement cycle. Learning is an integral part of logical incrementalism.
Adaptation – As implementation progresses. Leveraging Crisis – A sudden crisis or an opportunity should be used as a trigger to facilitate acceptance and implementation of change. The broader objective should serve the overall interest of the organization. Agent of Change – Formal ratification of a change plan through MBO. 36 . Macro Broadcasting – The broad idea is floated without details to invite pros and cons leading to finer refinements.IMPLEMENTING INCREMENTALISM General Concern – A vaguely felt awareness of an issue or opportunity.
Dominant logic’s are very rigid and sticky and prone to inertia. Dominant logic’s are the cornerstones of change when strategic transformation is apparent. Tampering with surface level factors often leads to atrophy. Strategic transformation becomes smooth through a change in top leadership.STRATEGIC TRANSFORMATION Strategic transformation (a complete overhauling of the strategic architecture) becomes inevitable whenever a strategic drift takes place. As it brings 37 with it a different dominant logic. . It creates blinders.
– Constructive Bargaining – Agree to disagree. – Organisational Slack – Enough free space. – Informal Networks – Emerging of new ideas. – Experimentation – Fosters a culture of risk taking. and skills that fosters experimentation and questioning and challenge around a shared purpose. 38 . Factors that fosters a learning organization – Pluralistic – An environment where different and even conflicting ideas are welcome.LEARNING ORGANIZATION A learning organization is capable of continual regeneration from knowledge. experience. A learning organization must continuously focus on unlearning as well. It helps prevent a strategic drift from occurring at the first place.
ENVIRONMENTAL CONDITIONS Dynamic Scenario Planning Learning Organization Static Forecasting Decentralization Simple Complex 39 .
ANALYZING BUSINESS ENVIRONMENT 40 .
It requires a quantum leap (i. 41 . It is based on the assumption of radical change. It is based on the assumption of incremental change. Strategic gap basically points towards a vacuum of where the organisation wants to be and where it is. It is pro-active in nature. It is reactive in nature. It points to a position of superiority with relation to competition. Competitive advantage provides the surest way to fulfill the strategic gap. gap analysis).PLANNING & STRATEGIC PLANNING Formal planning is a function of extrapolating the past. Strategic planning is a function of discounting the future.e.
Environmental factors can be external as well as internal to the organization.ENVIRONMENTAL SCANNING The environment is defined as the aggregate of conditions. A manager has to continuously scan the environment to ensure alignment of the strategies with the radically changing environment. 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. Environmental scanning is very important component of strategic planning. events. resources and ideas move unhindered. The world is flat. It is exploratory in nature. not guided by any boundaries. 42 .
which may be different from the past impact. but also to analyze the complex linkages across them. for which a holistic picture is required.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 particularly important that PESTEL be used to look at the future impact of environmental factors. Understanding the composite effect is critical. It is not intended to be used as an exhaustive list. It is important not only to identify the structural drivers of change. 43 .
Economic – GDP. Capital Market & Forex Reserves. Economic Model. Subsidies & Protection. Infra-Structural Investments. Monsoon & Food Grains Reserves. Inflation & Interest Rates. Social – Population Diversity. Central – State Co-alignment. 44 . Language Barriers. Licensing & Quotas. Literacy Levels. Income & Age Distribution. Religious Sentiments. Fiscal Deficit.PESTEL FRAMEWORK Political – Government Stability. FDI Inflows. Social Values. Currency Stability. Savings & Investment. Economic Cycles. Government Attitude.
Product Safety & Health Hazards. Obsolescence Rate. Employment Laws. Pollution Control Laws.PESTEL FRAMEWORK Technological – Innovation. Patents. Carbon Credits. 45 . Technological Convergence. Extended Producer Responsibility. Environmental – Global Warming & CSR. Research & Development. Waste Disposal & Emissions. Direct & Indirect Taxes. Patent Laws. Legal – Monopolies Legislation. Product Design. ERP. Non-Fossil & Alternative Fuels. Consumer Protection Laws. Environmentally Preferable Purchasing.
VRS. Dismantling price controls.ECONOMIC LIBERALISATION New Industrial Policy (NIP) – Liberalizing industrial licensing. Exit Policy. Rupee convertibility. Encouraging exports. Banking Sector Reforms. Curtailment of PSU’s. MRTP Liberalization. PSU Disinvestments. Abolition of import licenses. Capital Market Reforms. Economic Reforms – Fiscal & Monetary Reforms. Encouraging FDI. Structural Adjustments – Phasing out subsidies. New Trade Policy (NTP) – Lowering import tariffs. FERA Liberalization. 46 .
DISCONTINUITY Destabilization due to entrepreneurial freedom – Cocoon of protection disappears – Diversification spree – Existing notions of size shaken – Industry structures change radically – Economic Darwinism .Survival of the fittest MNC Onslaught – Enhancing stakes – Power Equation – Joint Ventures – Technological Alliances – Take-over threat. Mergers & Acquisitions 47 .
Consumerism Challenges on the technology front – Competencies become technology based – Investment in R&D become inescapable 48 .DISCONTINUITY Hyper Competition – MNC’s .Globalization – Cheap Imports & Dumping – Push to Pull Marketing Buyers exacting demands – Shortage to surplus – Price competition – Life-style changes – Stress on quality.
DISCONTINUITY Compulsion to find export markets – Identifying competitive advantage – Technological gap – Global presence – Depreciating currency – Exports Corporate vulnerability – It is no longer business as usual – Capital inadequacy – Lack of product clout and brand power – One product syndrome – Loss of monopoly 49 .
FIVE FORCES MODEL .PORTER Threat of New Entrants Bargainin g power of Suppliers Competition from Existing Players Bargainin gBargainin power g of power of Suppliers Customer s Threat of Substitutes 50 .
incremental or otherwise. The five forces have strong cross-linkages.FIVE FORCES MODEL ASSUMPTIONS The model is to be used at the SBU level and not at the industry level. The model should not be used as a snapshot in time. profit potential) per se. It is even wiser to apply the same at the product – market level. It depicts the attractiveness of an industry (i. 51 . the forces are subject to changes.e. It should not only be used to understand the forces. but also used to understand how they can be countered and overcome.
Presence of substitutes or unorganized sector. Threat of Customers – Buyer concentration and volumes. Learning curve advantages. Scope for backward integration. Low customer switching costs. Low relative importance of the segment. Undifferentiated product. Low margins & stagnancy.PORTERS FIVE FORCES ANALYSIS Threat to Entry – Economies of size and scale. Product differentiation through proprietary technology or brand power. Access to distribution channels. Resource profile & fear of retaliation. High switching costs. Unimportance of product quality. 52 . Capital requirements. Government policy. Industry stagnation.
Buyer’s propensity to substitute. Industry stagnancy. 53 . Intermittent overcapacity. High exit barriers.PORTERS FIVE FORCES ANALYSIS Threat of Suppliers – Supplier monopoly. Differentiated inputs. Threat of Substitutes – Improvement in price -performance trade-off. Low level of differentiation. Produced by industries earning high profits. Unorganised sector. Low relative importance of the segment. Lack of substitute inputs. Product perishability. Diversity of players. Piracy and counterfeits. High customer switching costs. Scope for forward integration. Jockeying for position – Fragmented market.
dominant or related diversified or unrelated diversified businesses (Infosys. Business Scope – The intention whether the firm wants to be in a single. 54 . Reliance). Cohesiveness – Degree of bonding existing across affiliated firms. Tata). Inertia – Excessive commitment to past strategies prevents firms from tapping emerging opportunities.FIRM ENVIRONMENT Size and Scale of Operations – It is a very important component of competitiveness in today's global context (Bharti – MTN. Resource Profile – It highlights the capabilities (generic) or competencies (business specific) of the firm.
an E-Curve can prove to be futile during discontinuity. it can price its products more competitively. The E-Curve thus enables organisations to build entry barriers. With lower costs. Experience curve has strong linkages with performance. leverage it as a competitive advantage. Matured firms will always be positioned advantageously on the ECurve than new entrants. However. experience teaches better and more effective way of doing things. and with lower prices it can increase its sales volume. which further reduces costs.EXPERIENCE CURVE The cost of performing an activity declines on per-unit basis as a firm becomes more efficient. 55 .
EXPERIENCE CURVE Cost per unit of output Decreases at an increasing rate Point of inflexion Decreases at a constant rate Decreases at a decreasing rate Production / Volume 56 .
TRADITIONAL VIEW Efficiency = Lower Costs 2 3 1 Experience = Efficiency Lower Costs = Higher Sales Entry Barrier = Better Performance 4 6 5 Higher Sales = Lower Costs Lower Costs = Entry Barrier 57 .EXPERIENCE CURVE .
STRATEGIC VIEW Inertia = Limited Growth Experience = Inertia 2 3 1 Limited Growth = Diversification Strategic Failure = Poor Performance 6 5 4 Diversification = New Experience New Experience ≠ Old Experience 58 .EXPERIENCE CURVE .
Case Studies – Structured Questionnaires. 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. Business Intelligence – Bankers. Acronym for Strengths – Weaknesses – Opportunities – Threats. Competitors. .VULNERABILITY ANALYSIS . Websites. Press Clippings & Interviews.SWOT The framework was originally conceptualized by Kenneth Andrews in 1970. Suppliers. A SWOT audit involves – Company Records – Annual Reports. Customers.
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 .
Strong R&D base – Eg. Motivated employees & cordial industrial relations – Eg. Volkswagen. HUL. Biocon. Tata Steel. Infosys. Good credit rating – Eg. Caterpillar. Reliance. Large resource pool – Eg. High quality products – Eg. Toyota. 61 . Reddy’s. Siemens. Engineering Skills – Eg. ITC. Tata. Economies of scale – Eg. Dr. Infosys. Excellent penetration – Eg. Ranbaxy.SOURCES OF STRENGTH Strong brand identity – Eg. Strong after sales & service network – Eg. Reliance. Aditya Birla. SBI. Sony. Honda.
SOURCES OF WEAKNESSES Outdated technology – Eg. Inertia – Eg. K. Procter & Gamble. CESC. Narrow business scope – Eg. Hindustan Motors. Tatas. Excess manpower – Eg. B. J. Single product syndrome – Eg. Lack of product / brand clout – Eg.Raymond. Group . Nirma. Inefficient top management – Eg. Organizational Politics – Eg. Ballarpur Inds. Lacking experimentation culture – Eg. CMC (Tata Group) 62 . Bijoligrill. Strategic myopia – Eg. Modi Group. Excessive diversification – Eg. SAIL. K.
Abolishing MRTP – Eg. Fertilizer. Insurance. Telecom. 63 . Exit Policy – Eg. ECB’s. Maruti. Market driven Pricing – Eg. VRS. GDR’s. Fertilizers. Capital market reforms – Eg. Collaborations & Joint Ventures – Bharti & WalMart. Market driven Interest rates – Eg. Sugar.SOURCES OF OPPORTUNITIES Delicensing of Industries – Eg. Life style changes – Eg. Retailing. Middle-class buying power. Free pricing – Eg. Abolishing CCI. Sugar.Tata Motors. Globalization – Eg. Banking. Growing population – Eg.
Social activism – Eg. Natural disaster – Eg. Nationalisation – Eg. Tsunami. Bajoria – Bombay Dyeing. Hostile take-over – Eg. Terrorist attacks – Eg. Economic recession – Eg. Satyam. Onida. (1985–1990).SOURCES OF THREATS Political instability – Eg. Tata Steel. Singur SEZ. Earth Quake. Foreign Direct Investment (FDI) – Eg. Import relaxation – Eg. Dumping from China. Lack of Corporate Governance – Eg. 11/9. Land acquisition . 64 . Group disintegration – Eg. (2008). Reliance. 26/11.
time series. Holistic view – Prepare a complete overall picture. Forecasting – Predict the future (i. Stages in ETOP analysis – List the aspects of the environment that has a bearing on the organization.e. Strategic responses (including adaptation) to opportunities and threats is critical for survival and success.ETOP Acronym for Environment – Threat – Opportunity – Profile. 65 . It represents a summary picture of the external environmental factors and their likely impact on the organization. Assess the extent of impact of the factors. Delphi's technique. scenario analysis).
selectively. 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. High investment intensity acts as a drag. Some key findings on major performance drivers that explains 75% deviations in performance – Product quality and relative market share. 66 Vertical integration is a powerful strategy. It is also a form of assessing vulnerability through longitudinal analysis. Relative attractiveness of the market. .
when radical changes in the economy takes place. – Contexts may vary over time. therefore 67 validity may be a question. .PIMS . Managers should be particularly cautious while referring to such data during times of discontinuity as it makes past patterns futile. Authenticity of data is of prime importance – Contexts drawn across one organization may not be applicable to another. – Contexts may vary across countries. As every organization is unique in its own way.LIMITATIONS The analysis is based on historical data and it does not take care of future challenges.
It involves a three-stage process – Identify KSF – What does it take to be successful in a business? Drawing KSF – What should be the organizations response to the same? Benchmarking KSF – How do we evaluate organization success on this factor? 68 . It enables the top management to draw focus. KSF helps organizations spot early opportunities and convert them into value adding business propositions.KEY SUCCESS FACTORS (KSF) KSF relates to identification and putting concentrated effort on a particular activity or process which forms the very basis of competitive advantage.
IDENTIFYING ALTERNATIVE STRATEGIES 69 .
CORPORATE . global) of a firm and deals with choices of allocating resources across them. It indicates the quality of growth an organization is looking for. related. It provides broad direction to the groups vision and mission. 70 . It determines the locus a firm encounters with internal and external environment. unrelated) and geographical scope (local.GRAND STRATEGY It is concerned with the overall business scope (single. dominant. It reflects the customer needs it intends to satisfy. national. A corporate strategy identifies and fixes the strategic gap it proposes to fill.
CORPORATE STRATEGY MATRIX Corporate Strategy Stability Stability Growth Growth Combination Diversification Divestment Intensification Market Penetration Related Vertical Market Development Product Development Unrelated Horizontal 71 .
Citibank). erosion of capabilities. Stability however. – The firm may not be willing to take additional risk associated with new projects. does not relate to do-nothing (Eg. Hindustan Motors).STABILITY It involves maintaining status-quo or growing in a slow and selective manner. 72 . – To stop for a while and assess past records. Even during adverse times firms need to adopt a strategy to sustain current performance levels. The scale and scope of present operations remains almost intact. – Why disturb the existing equilibrium set up? – Limited resource position. (Eg. The reasons for stability strategy – – Lack of attractive opportunities.
ANSOFF’S MODEL New Product Existing Product Existing Market Market Penetration (+) Product Development (++) New Market Market Development (++) Diversificatio n (+++) Note: (+) indicates degree of growth and risk involved.GROWTH . 73 .
Ujjala. – Helps firms which are not comfortable with unfamiliar terrain. – Elongated product life-cycle. Market penetration can be achieved by – increasing sales to current customers. 74 . convert competitors customers. within a well defined market segment. – Suitable for industries where scope for technological breakthrough is limited. direct non-users to users. Britannia). – The company carries a risk of product obsolescence. Nirma.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. (Eg.
– Moves across geographical boundaries. fabrics. socks & stockings. Du Pont – Nylon: parachutes. tyres. 75 .…… or Teflon: aircraft technologies to cutlery to paints or Raytheon Corp – Microwaves: radars to kitchen appliances). carpets. upholstery.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. – Creativity and innovation – thinking out of the box. (Eg. – Stretches product life cycles. – Unconventional and flexible distribution channels. – Immense customer reach & flexible advertising.
– Areas of product improvement – performance. – Substitutes that serve the same needs (Eg. – Leverage on customer and brand loyalty. durability. – Leveraging through – innovation. Microsoft: DOS to Windows) or a substantial improved version (incremental) of an existing product to repeatedly enter the same market (Eg. – Deliverable through – redesigning or reengineering.PRODUCT DEVELOPMENT It is a strategy where a firm tries to achieve growth through a radical new product (Eg. Refills) 76 . conformance. reliability. Close Up: Fluoride – Gel toothpaste or VIP . serviceability. perception.Strolleys). features. aesthetics.
thereby creating a new business. Why do firms diversify in the Indian context? – Shift the growth trajectory or opportunistic. industrial embassies). – Internal capital market. the new business is distinct from the existing business in terms of – inputs – technologies – markets.e. – High transaction costs and institutional gaps. – Risk reduction.DIVERSIFICATION It marks the entry of a firm into newer markets with new products. – Conglomerate or market power (i. From the traditional point of view.e. From the modern point of view they are strategically dissimilar. dominance). 77 . – Permits: quotas. licenses (i.
Let us assume that there are two businesses constituting the entire market – coffee and icecream. in which a given year is either under hot or cold wave. the ice-cream business would register a return of 30%. If the hot wave dominates the planet. while the coffee business would register a return of 30%. ice-cream business would register a return of 10%. What would be your ideal diversification strategy through optimization? 78 . either of which is equally likely to prevail.HOW DIVERSIFICATION REDUCES RISK? Consider a hypothetical planet. while the coffee business would register a return of 10%. If on the other hand. cold wave dominates the planet.
If we diversified in either of the two businesses, our expected return will be 20%, with a possible risk of 10%. If, we split our investment between the two businesses in equal proportion, half of our investment will earn a return of 30%, while the other half would earn 10%, so our expected return would still be 20%. But in the second instance there is no possibility of deviation of returns (i.e. risk). Diversification results in 20% expected return with zero risk, whereas investing in individual businesses was yielding an expected return of 20% with a risk factor of 10%. The pivotal point is that the two businesses are negatively correlated. 79
It takes place when a company increases the breadth of a firms business or geographical scope by getting into product – market segments which compliments its existing businesses (Eg. Reliance). Alternatively, existing business may recreate new businesses, which are distinct, but supplements its existing business (Eg. Bajaj – scooters to motorcycles, Dove – soaps to shampoo). – It results in increased market power. – Leveraging existing capabilities. – Resources can be shared for mutual benefit. – Reduces economic risk (i.e. business cycles). – Enables brand or product line extension.
It increases the depth of its business scope either in a backward business process or in a forward one. Backward integration occurs when the company starts manufacturing its inputs or catalysts. In forward integration a firm moves into marketing of its products and services. Advantages of backward integration – – Cost competitiveness – entry barrier. – Better operational control – timely supplies, quality control, coordination – JIT, savings in indirect taxes. Disadvantages of backward integration – – It may spark of a chain reaction - contagion effect. – Long gestation & break even - investment in CAPEX.
Oil & Gas exploration Naptha-cracking Acetic Acid Paraxylene (PX)
Purified tetra-pthalic acid
Polyester Filament Polyester Staple Fibre (PSF) Yarn (PFY) Textiles 83
DIVERSIFICATION SUCCESS ?
While diversifying into new businesses, the scope of relatedness or unrelatedness should not be judged from the traditional static view, but from the modern dynamic view which incorporates strategic factors like capabilities and dominant logic. Countermanding reasons – Potential to reap economies of scope across SBU’s that can share the same strategic asset. Potential to use an existing capability to help improve the quality of a strategic asset in another business. Potential to use an existing capability to create a new strategic asset in another business. Potential to expand the existing pool of capabilities. Dominant logic ensures timely & appropriate response.
Reddy’s). Quasi-integration .QUASI & TAPERED INTEGRATION Full Integration . Dr. Ranbaxy.A firm produces part of its own requirements and buys the rest from outside suppliers with a variable degree of ownership and control. and out-sources the noncore activities (Eg. Tapered integration . 85 .A firm gets most of its requirements from one or more outside suppliers that is under its partial control through value chain partnerships (Eg.Where one firm has full ownership and control over all the stages of a value-chain in the manufacturing of a product (Eg. Reliance). Maruti – Sona Steering). Usually the firm concentrates on its core activities.
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 .
Firms usually engage in conglomerate diversification when emerging opportunities are very attractive and offers potential growth opportunities.e. synergies pulling in opposite directions). 87 . – Cost of dysynergy (i. lack of strategic intent. core business).e. – Cost of ignorance (i. and are also strategically dissimilar.e. lack of knowledge of competitive forces). Drawbacks of unrelated diversification – – Cost of failure (i.CONGLOMERATE DIVERSIFICATION It relates to entry of firms into businesses which are distinct in terms of – inputs – technologies – markets. – Cost of neglect (i. myopia).e.
CONGLOMERATE DIVERSIFICATION Paper & Packaging Edible Oils Tobacco Hotels Food & Confectionary 88 .
Tata Pharma. Glaxo’s “Glucon-D” to Heinz). reactive) and survival is at stake and the firm does not have resources to fend off competitive forces. ACC) in full to an independent entity. where a company simply exits because the business no longer contribute to or fit its dominant logic.DIVESTMENT Divestment is a defensive strategy involving the sale of entire stake (Eg. It is may also be a pro-active strategy. In strategy there is no scope for sentimentality with divestment.e. (Eg. Tata Press). L&TCement Division to Aditya Birla Group) technically known as divestiture or a product (Eg. It may also involve a SBU (Eg. Tatas sale of Goodlass Nerolac. 89 . It taken into account when performance is disappointing (i.
DIVESTMENT . Hive-Off – A hive off is the creation of a new entity followed by transfer of assets.3 billion. Sale of Diamond Beverages to Coca-Cola for US $ 40 million). Tatas buy-out of Corus for US $ 11. 1956 does not permit this mode.ROUTES Outright Sale – Popularly known as the asset route. the Companies Act. involving 608 pence per share). where 100% of the assets (including intangibles) are valued and paid for. Leveraged Buy-Out (LBO) – Here the company’s shareholders are bought out through a negotiated deal using borrowed funds. where the equity is allotted amongst the existing shareholders on a pro-rata basis. (Eg. (Eg. However. 90 .
There can be no ideal strategy for every business. 91 . It is usually pursued by a business group with diverse interests across multiple industries.COMBINATION STRATEGY It is a mixture of stability.e. and divestment strategies applied simultaneously or sequentially for a portfolio of businesses. developing facilities right from the scratch) or through brown-field projects (i. joint ventures). because every business has its own unique external and internal environment. growth. mergers and acquisition.e. A combination strategy can be implemented through green-field projects (i.
STRATEGY CHOICE & PORTFOLIO ANALYSIS 92 .
In most cases the trade-off is between resources and opportunities. 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. Dominant logic enables top managers to selectively scan the environment and make trade-offs.STRATEGIC CHOICE A strategic choice seeks to determine the alternative courses of action available before top managers to achieve its strategic intent. What then is the magical number? 93 .
For an optimal choice the following four issues need to be resolved – Is the strategy clearly identifiable? Is it consistent with the resources of the firm? Will it be able to exploit the opportunities in full? Is it in tune with the values and beliefs of the firm? 94 . will help the firm achieve its intent. They must choose problems which will lead to the right kind of opportunities. To identify the right problems.SELECTIVITY IS THE KEY The role of a top manager is not to solve a problem. managers need to ask the right questions. The key task before a top manager is to identify the right problems. if addressed. nor is to a define a problem for others to solve.
Their roots can be traced to a single family or clan and share broad similarities. Their origins can be traced back to market imperfections existing in an economy (MRTP Laws. Resource sharing. 95 Succession planning is critical to continuity.DEFINITION A business group is known by various names in various countries – guanxique in China. business houses in India. keiretsus in Japan. chaebols in Korea.e. Proximity to the corridors of power (i. embassies). Licenses & Quotas.BUSINESS GROUP . Managing Agency). BRC). High degree of centralized control (GEO. formal and informal ties. .
RESOURCE SHARING ACROSS FIRMS Parent Company Firm 1 Firm 5 Firm 3 Firm 2 Firm 4 96 .
STRATEGIC CHOICE – MACRO TIMING Recession (Stability) Prosperity (Diversificatio n) Depression (Divestmen t) Recovery (Intensification ) 97 .
STRATEGIC CHOICE – MICRO TIMING ReEngineering Growth (%) Maturity Stability Growth Diversification Decline .Divestment Duration (Yrs) Inception Intensification 98 .
next only to choice of business. Rules of the game are different. 99 . Why? Businesses are not about liquid assets. Relatedness across resources are difficult to realize. Investing in emerging businesses may not actually be so simple as it appears to be. Power and resources often goes hand in hand.PORTFOLIO ANALYSIS Resource allocation across a portfolio of businesses is an important strategic choice. there are high costs associated with entry and exit. sometimes impossible. Redeployment of resources upsets the established power bases of a group. therefore.
BCG GROWTH MODEL Relative Market Share (%) Industry Growth (%) Low High High Low Stars Question Mark ? Cash Cow Dogs 100 .
which remains a big? These businesses are net users of resources.e. market development. Tata Steel). Tata Telecom. TCS. but to larger extent than a question mark. provided the company is able to build up on its market-share (i. diversification).e. product development). Stars – They achievers in the near term. These businesses are also net users of resources (Eg. Tata-AIG). 101 . market penetration. Trent.BUSINESS ANALYSIS – TATA GROUP Question Marks – They have potentials in the long term. provided the industry growth rate continues and the company is able to maintain its growth (i. and their risk profile is high (Eg.
However.BUSINESS ANALYSIS – TATA GROUP Cash Cow – These are matured businesses. and the company dominates the industry ahead of competition (i. Tata Chemicals). divest) as achieving a dominant position in these businesses is a difficult task. Given that the growth potential in the business is low. Dogs – They are a drag on the group. cash cows may also need to invest provided the industry takes an upswing (Eg. Tata Pharma. Groups prefer to dispose off such businesses (i. harvest. Nelco. stability). and they lack on competencies to take on competition and are basically cash traps (Eg.e. Tata Tea. 102 . they are generators of resources.e. Indian Hotels. Tata Press). Tata Motors.
Mercedes Benz.e. Data may be prohibitive.BCG . HUL). The terminologies used are somewhat prohibitive. Armani). The model does not provide specific solutions within a particular category. Cartier.LIMITATIONS It does not address the concerns of a business which is in the average category (usually the majority). niche – Rolex. 103 . neither in high or low. Certain businesses in the low market share category may be the result of a conscious strategy (i. Cash cows may actually need substantial investments to retain their market position (Eg. factors are limited.
MATRIX Distinctive Capabilities Strong High Medium Weak Stability Industry Attractiveness Diversify (++) Intensify (+) Med Intensify(+) Stability Harvest (-) Low Stability Harvest (-) Divest (.GE .-) 104 .
LITTLE Inception Dominant Strong Favourable Tenable Weak Growth Maturity Decline Improve Selective Niche Abandon Industry Life-Cycle Divest Harvest 105 Competitive Position Invest Consolidate Hold .ARTHUR’ D.
SHELL – DIRECTIONAL POLICY MATRIX Business Sector Prospects Attractive Average Unattractive Generate Cash Phased Withdrawal Distinctive Capabilities Strong Market Leadership Try Harder Double Or Quit Growth Average Custodial Weak Phased Expand Withdrawal Divest 106 .
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. Portfolio – An organization is perceived as a portfolio of businesses. Divest – Selling a part or the entire business at one go. SBU – A business unit which is strategically different from another and also shares a different SIC code. 107 . Gap Analysis – It emphasizes what a firm wants to achieve. BCG – Boston Consulting Group. Disinvestment involves selling in phases.
BUSINESS STRATEGY & COMPETITION 108 .
109 . The principal focus is on meeting competition. building market-share.COMPETITIVE STRATEGY A competitive strategy deals with how a firm competes in a particular business or product-market segment.e. Such resources or activities should be distinctive and sustainable over time. and earning super-normal profits (i. Competitive advantage is the back-bone of strategy. rent). Competitive advantage refers to a firms resources or activities in which it is way ahead of competition. The strength of a firm in a particular business usually stems from its competitive advantage.
leveraging (Prahalad). 110 . Blue Ocean – Consciously moving away from overcrowded industries to uncharted territories and making competition irrelevant (Kim & Mauborgne). Resource Based View – Obsession with competence building. identifying critical success factors. preventing new entry and/or competition (Hax & Wilde). Delta Lock In – Two dominant players co-opt to selfreinforce and create or escalate an entry barrier. developing competitive advantage (Porter). involving harmonizing and integrating multiple streams of technologies.BUSINESS STRATEGY FRAMEWORKS How to be distinctive and yet sustainable – Differentiation – Understanding of the dynamics of competition.
backward integration. Steep experience curve effects. The firm may retain the benefits of cost advantage by enjoying higher margins (Eg. Compress project duration through crashing. Ayur.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. T-Series). Locational or early entry advantage. Sources of cost advantage are varied and depends on the structure of the industry – Economies of size. 111 . preferential access to raw materials. Reliance) or may pass it to customers to increase market-share (Eg. Nirma. proprietary technology.
undeterred attention to quality. and sufficient slack. Successful product differentiation is often followed by premium pricing. avoiding brand dilution. Sony. It selects one or more attributes that buyers perceive as important. (Eg. Creativity. Culture of experimentation. 112 . Intel. innovation and out of the box thinking. Rayban). Focus on brand loyalty.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. Feeling the pulse of the customer. Means of product differentiation are peculiar to each industry.
Maybach. Sub optimization alone may not be a source of superior performance. A focuser seeks to achieve a competitive advantage in its target segment. Rolex. Mont-Blanc. They are poorly served by mainstream players. coupled with fear of structural erosion. Cartier. Armani).PORTERS NICHE OR FOCUS Focus / Niche – It is a variant strategy of cost leadership or product differentiation targeting a specific market or buyer sub-segment with the exclusion of others (Eg. though it may not possess an overall competitive advantage. 113 . The target segment must have unusual needs or the delivery system catering to this segment must be unique.
COMPETITIVE POSITIONS Competitive Advantage Cost Differentiation Product Differentiation Competitive Scope Broad Cost Leadership (Toyota) Product Differentiation (General Motors) Narrow Cost Focus (Hyundai) Differentiation Focus (Mercedes) 114 .
HYBRID STRATEGY A hybrid strategy is the simultaneous pursuit of cost leadership and differentiation. in a hyper competitive context the two strategies need not be mutually exclusive. and usually outperforms a stand alone generic strategy. Though cost leadership and differentiation are inconsistent. Firms focusing on a hybrid strategy typically aim at shifting the productivity frontier and recreating a new product-market segment altogether (Eg.e. jugaad or frugal engineering). Tata Nano). similarly differentiation may not always lead to rising costs (i. 115 . Reducing cost does not always involve a sacrifice in differentiation.
The positioning therefore gets – blurred. leading to what is called – straddling. It will have a competitive disadvantage vis-à-vis a clearly positioned generic player. unless such a player is capable of discovering a profitable segment.stuck in the middle. but achieves none. It is usually the result of a firm not willing to make trade offs.STUCK IN THE MIDDLE A firm that engages in a hybrid strategy and fails to achieve a competitive advantage because it was ill conceived will be . It tries to compete through every means. 116 . Industry maturity will usually widen the gap.
117 . changing customer needs. Eg. (Eg. technological innovations. Market segmentation not well defined. coupled with low penetration levels. Consumer behaviour pattern unstable and evolving. Speech recognition software's. There is a lot of scope to define the rules of competition.) Excessive turbulence in the dynamics of the environment.radical environmental changes. leading to a blurred productivity frontier and steep learning curve. ending in a differential cost economics. First-time buyers.EMERGING INDUSTRY Emerging Industry – An evolving industry characterized by . 3D imaging. Nano technology. It is characterized by – High level of technological uncertainty. Artificial intelligence).
Retail and telecom. leading to clear fragmentation. MRTP may also cause fragmentation. It is characterized by – Low entry barriers. Eg. Scope for players to change the rules of the game. Air Conditioning. 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). High exit barriers because of huge investment in CAPEX. Diverse customer needs. Consumer durables. Government regulations in the form Eg. because of lack of economies of size and scale. Eg. IT. Eg. Paints.
Limited scope for innovation . well defined consumer behavioral patterns and imperfect competition leading to near monopoly. early entry and location advantages. distribution networks. Cartel among existing players through collusion. Firms are rule takers in the segment as productivity frontier is well defined. Strong entry barriers. established industry dynamics. 119 . technological maturity. collaboration and co-option.MATURED INDUSTRY Matured Industry – An industry characterized by saturation in growth rates.technological maturity. because of economies of size and learning curve effects.
with little or no signs of recovery. Exit barriers are extremely high because of limited prospective buyers. Learning abilities have been stunted and firms adverse to investment in R&D and make fresh investments. (Eg. dot-matrix printers). Typewriters. scooters. backed by corporate espionage. 120 .DECLINING INDUSTRY Declining Industry – An industry which has outlived its utility due to the entry of close substitutes and or radical product innovations which results in a shift of the productivity frontier. and costly price wars. Firms facing a declining phase are characterized by inertia and slow to react to environmental changes. Nature of competition extremely high.
reengineer. strictly cost differentiation. Matured Industry – Sophisticated cost analysis. Locate a defendable position. assess and overcome fragmentation. or else exit the segment. Fragmented Industry – Identify. 121 . move beyond boundaries. premium pricing. branding and promotion. recreate new markets.COMPETITIVE STRATEGIES Emerging Industry – Set benchmarks. increasing scope. Declining Industry – Redesign. aggressive building of distribution networks. focus more on product differentiation or even a hybrid one. mergers and acquisition. strike alliances. process innovation. strictly product differentiation and not standardization. regenerate.
hence very rarely confer competitive advantage as can be easily acquired or replicated. brands. Intangible – These refer to goodwill. A firms resources can be classified into – Tangible – These refer to real assets. 122 . However. They are a standard in nature. positions based on resources which are unique and inimitable are far more sustainable even in the long term. and complex learning experiences in integrating and harmonizing technologies (distinctive capabilities) that play an important role in delivering competitive advantage through “causal ambiguity”. patents.RESOURCE BASED VIEW Differentiation based on cost or products saturates and ceases to exist beyond the medium term.
Hence.e. Typically. Capabilities can be generic (i.CAPABILITIES & COPMPETENCIES These include a complex combinations of tangible and intangible resources that organizations use to convert inputs to outputs. they are woven around technologies. They play a very critical role in shaping competitive advantage. but not necessarily. Therefore firms should concentrate on developing complex resources that forms the very basis of differentiation. There is a high degree of internal and external causal ambiguity involved in it. can be leveraged across businesses) or specific to a particular business. differentiation based on capabilities can be sustained even in the long run. 123 .
COMPETITIVE ADVANTAGE 124 .
A portfolio of competitive advantage comprises strategic advantage profile (SAP). It results in a distinct differentiation advantage or a cost advantage or hybrid as well. competitive advantage subsequently becomes the back bone for a competitive strategy. Success of a strategy critically depends on SAP. not absolute) to competition. 125 .e. It enlarges the scope of an organization. Strategy drives competitive advantage.COMPETITIVE ADVANTAGE A competitive advantage is a position of superiority relative (i. and results in well springs of new business development.
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. 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.STRATEGIC ADVANTAGE PROFILE (SAP) Organizations have to systematically and continuously conduct exercises to identify its SAP. Identification of SAP is critical for and stretching and leveraging of resources.
Today SCM is integrated with greening the environment as CSR practices. 127 . VC pay-offs: better product availability. each of the players need to be efficient backed by sufficient coordination at the contact points (i.VALUE CHAIN ANALYSIS A value-chain segregates a firm into strategically relevant activities to understand its composite behaviour. Inventory Mgt to Logistics Mgt to Supply Chain Mgt (SCM). Competitive advantage arises not from an individual activity but a stream of inter-related activities. kaizen or internal customer). Substantial cost reductions also follow. A VC is often compared with a relay team. faster product launches.e. and enhanced customer tracking – higher market share.
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. – Second order fit occurs when activities are reinforcing amongst them. 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. Operational effectiveness is not strategy. A high fit involving a complex chain of activities drives both competitive advantage and its sustainability.STRATEGIC FIT – THE PORTER WAY The sustainability of the value chain depends on the degree of fit between the activities. – Third order fit refers to optimization of effort. 129 .
. It should satisfy the following conditions – Contributes significantly to customer benefits. It forms the very basis of competitive advantage. A core competence usually has its roots in technology. but not necessarily. Core competence has a high degree of external and 130 internal causal ambiguity embedded in it. – Can be leveraged across businesses. 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. – Can be sustained even in the long run. – Cannot be easily imitated or substituted.
only global leaders possess a core competence.CORE COMPETENCE A competitive advantage does not necessarily imply a core competence. a core competence is sustainable even in the long-term. a core competence always implies a competitive advantage. A competitive advantage manifests from a function. 131 . a core competence usually does. A competitive advantage is sustainable in the shortmedium term. A competitive advantage may or may not lead to superior performance. Majority of the firms have competitive advantage. a core competence has its roots in a set of skills.
Here the magnitude of gain offsets the magnitude of loss equally. However. illustrations depicting a win-win situation. each of whom wants to win. This is known as a zero-sum game. 132 . In fact there are no. A game is a contest involving two or more players. Subsequent work on game theory by John Nash led him to win the Nobel prize in 1994. the stringent assumptions of game theory and difficulty in ascertaining of pay-offs makes game theory application difficult in business.GAME THEORY The game theory was developed in 1944 by Oscar Morgenstern. In a game (similar to a business) one players win is always another's loss.
Firm Y’s Strategy Use Radio Use Radio +2 +6 Use Newspaper +7 -4 133 Firm X’s Strategy Use Newspaper Firm X’s Pay-Off Matrix .BIASED AND UNBIASED GAME A game is said to be biased when one of the players have a disproportionate chance of winning. An unbiased game is one where both the players have equal chances of winning.
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 .
Coke Vs Pepsi). collaboration or cooption. Repeated Games – In this situation the players interact repeatedly with each other sub-optimizing the outcome possibilities.e. iteration) rather than through collusion (E. there is likely to be temptation by any of the players to try to steal the advantage over the other by breaking the rules of the game (Eg. It represents the classical “prisoner’s dilemma”. This is usually through learning by “experience or observation” (i.TYPES OF GAMES Simultaneous Games – This is a situation where the players have an option to choose to cooperate or not through collusion. 135 .g. However. Yahoo Vs Microsoft).
Game theory relies on the principle of rationality. – Making pricing more transparent. but 136 players do not always behave rationally.CHANGING THE RULES OF THE GAME In a situation where a player is unable to compete with the existing rules of the game may attempt to change the rules of the game altogether. 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.
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.
– Changing the rules of the game. – Better strategic and operational control. – Unlearning & learning of new skill sets. 143 . A high strategic fit (co alignment) is useful because it enables – – Appropriate and timely response. – Development of capabilities & competencies. internal strategic fit (strategy – dominant logic) is critical to strategy implementation. – Resource commitment from top management. While external strategic fit (strategy – environment) is relevant for strategy formulation.IMPORTANCE OF STRATEGIC FIT Strategic fit has a central role to play in strategic management.
formulation & implementation can occur simultaneously. effective strategies are better crafted when there is a subtle overlapping between the two (i. In such a situation. emergent strategy vis-à-vis intended & realized).e. 144 . learning levels are very high. In such a situation. According to Mintzberg. while control is very effective. In fact.FORMULATION Vs IMPLEMENTATION Traditionally. Some of the key strategic learning's exists at the contact point between the organization and its customer. learning levels are very low. at the cost of sacrificing a lesser degree of control. strategy formulation and implementation has been perceived to be distinct & independent.
A transactional leader is usually confined to allocating tasks & responsibilities and extracting performance.ROLE OF TOP MANAGEMENT To bring about change and to implement strategies successfully. companies depend more on transformational leaders than transactional leaders. In contrast. bring about transparency. He should be an agent of change. transformational leaders go one step beyond – Design a well crafted and designed strategic intent of the organization. Install a system of shared beliefs and values. Pragmatism is the ability to make things happen. 145 . shift from compliance to commitment.
skills) also includes complex resources like capabilities and competencies. machines) referred to as threshold resources (i.e. Performance Budget – SBU managers need to justify the distinctive resources in terms of the opportunity it is pursuing yields the highest possible pay-offs. Intangible resources (Eg.RESOURCE ALLOCATION Resources allocation includes tangible resources (Eg. land. minimum requirement). Zero Based Budget – In this case the budget of a SBU has to be worked out right from the scratch. 146 . patents. brands. labour. The various methods of resource allocation includes Historical Budget – The budgets framed by HQ for a particular SBU keeping in mind past trends.
convergence of multiple streams of technologies at the product – market level is becoming increasingly evident (Eg. Mobiles). Due to causal ambiguity (complexity). though not necessarily in the case of emerging markets. Distinctive capabilities helps in stretching and leveraging resources thereby overcoming two major constraints involved in strategy implementation – times & costs. Distinctive capabilities are complex set of skills woven around technologies. 147 . Moreover. Flat Screen Displays. these capabilities are sustainable even in the medium to long term.CAPABILITIES & COMPETENCIES Technology and business are slowly becoming in – separable.
Once the structure is in place. processes become people independent. A firm in several related businesses usually employs a divisional structure. 148 . A firm in several unrelated businesses usually employs a SBU structure. The level of centralization and decentralization is decisive.STRATEGY & STRUCTURE It is a framework within which individual efforts are coordinated to bring synergy. A single product or a dominant business firm usually employs a functional structure. An appropriate organization structure & adequate control systems are essential to implement strategies and achieve stated goals.
based on skills and competencies. or geographical locations. Marketing. disbanded subsequently. Finance).TYPES OF STRUCTURES Functional Structure – Activities grouped together by a common function (Eg.Technology. Virtual Structure – A boundary less or hollow organization. Divisional Structure – Units grouped together in terms of products. Project / Matrix Structure – A formal but temporary framework initiated for the completion of a particular project/crisis. 149 . with team members having dual line of control. processes. SBU Structure – Businesses segregated in terms of strategic dissimilarities (Eg. Team Structure – An informal group formed for a crisis. Output). Inputs .
150 . structures are becoming flatter and more simpler. leading to a tall structure. It includes the desire for independence. Environment & People – Economic and political conditions have a major bearing on structure coupled with the attitude and aspirations of the people in the organization. assuming responsibility.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. Technology – With more and more convergence of technologies in business. as span is broader. facing challenges & crises.
Common sources of 151 inertia – complacency with past successes. Changes in top management and unlearning helps overcome inertia. co0ntinuity). Inertia acts as an impediment in strategy implementation. Inertia is a characteristic of a firm that endures status quo (i.e. .INERTIA When a firm has been operating in a certain fashion for a long time. there is a tendency to continue along the same lines. Top managers resist change. irrespective whether it is from worse to good or good to worse. Most firms undergo periods of strategic continuity rather than strategic discontinuity.
Deviation of fit is detrimental to performance and may lead to strategic failure. strategies need to be evaluated on an ongoing basis to prevent deviations of fit. Since the internal and external environment is in a state of continuous flux.STRATEGY EVALUATION Strategy evaluation centers around assessment of strategic fit. . certain authors propose misfit as a source of superior 152 performance. To prevent deviation of fit. firms should move beyond financial performance to strategic performance as organization systems are becoming complex. However.
. It attempts to answer the following questions – Is the strategic intent appropriate to the changing context? Are the organizations capabilities still holding good. competitive advantages becoming disadvantages? Has the company acquired any new competency? Has the company been able to overcome the 153 environmental threats. detecting changes in the external and internal environment and taking corrective action wherever necessary.STRATEGY CONTROL It is concerned with trafficking a strategy as it is being implemented.
It involves assessing – strategic thrusts and milestones. checking every premise is costly as well as difficult.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. Implementation Control – It aims at assessing whether key activities are proceeding as per schedule. Premise Control – Checking the validity of the assumptions on which a strategy was based. However.
difficult to translate into practice. low strategic fit due to consultants intervention. 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. Strategy not linked to resource allocation & capabilities – Lacking commitment of top management. Performance measures are defective – What to evaluate against? How to measure the 155 construct? As a saying goes. “If you cannot .
the relative importance of each factor may vary over time and context. to be sure of successful implementation of a strategy. On top of that. important or not they're all interdependent. this may effect all others as well.7S FRAMEWORK OF Mc KINSEY The 7-S Framework of McKinsey is a management model that describes 7 factors to organize a company in an holistic and effective way. Managers should take into account all seven of these factors. Large or small. so if one fails to pay proper attention to one of them. Together these factors determine the way in which a corporation operates. 156 . Today it is considered one of the most powerful tools for strategy implementation determining success or failure.
157 . They had been investigating how Japanese industry had been so successful. The 7-S model was born at a meeting of these four authors in 1982. and was taken up as a basic tool by the global management consultancy company McKinsey. It appeared also in "In Search of Excellence" by Peters and Waterman. At around the same time in the US Tom Peters and Robert Waterman were exploring what made a company excellent. Since then it is known as their 7-S model and is extensively used by corporations worldwide to implement their strategies.BACKGROUND & ORIGIN The 7-S Framework was first mentioned in "The Art Of Japanese Management" by Richard Pascale and Anthony Athos in 1981.
Systems – The procedures. formal & informal . processes and routines that characterize how work should be done. over time. 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. Style – The way in which the top management influences the functioning of an organization.THE 7’S Shared Values – It represents what the organization stands for and what the top management believes in. 158 . to reach identified & stated goals. Skills – An organizations capabilities and competencies. Staff – Human inter-relationships.
STRATEGIC FIT Strategy Structure Shared Values Systems Skills Staff Style 1st Order Fit 2nd Order Fit 3rd Order Fit 159 .
Ineffective in case of a virtual company. While the American co’s focuses on the hard S’s. staff. the soft S’s (skill. 160 . Consider the 4P’s of marketing or 3R’s of SCM. In contrast. their Japanese counterparts focus more on the soft S’s for their early success and sustainability. A choice of an alphabet often limits the scope and skews the interpretation of a model.A CRITIC OF THE 7S MODEL While the hard S’s (strategy. because most often they are culturally embedded and often neglected. shared values) are very malleable and comparatively more difficult to identify & influence. systems) are comparatively easy to identify and influence. style. structure.
Low Take Overs 161 .High Organic Growth Strategic Alliance Joint Venture Mergers & Acquisition Strategic Fit .STRATEGY IMPLEMENTATION ROUTES Strategic Fit .
and markets.ORGANIC GROWTH Here a firm builds up its facilities right from the scratch and continues to do so without any external participation. i. (Eg. . soft loans. Reliance Industries). green-field projects. SEZ’s. technologies. subsidized power). (Eg.e. Govt. tax holidays. The entire infra-structural facilities are set up afresh having its own gestation and break-even. the entire value chain. It has complete control over inputs. Long gestation leads to delayed market entry.e. concessions are available for green-field projects. 162 Risk of cost and time overruns. i.
Alliances are usually in the areas of technologies or markets (Eg.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). 163 It is a form of competitive collaboration. There is no funding or equity participation from the alliance partner & both the firms continue to operate independently. Alliances are usually short-lived and disbanded once the purpose is achieved. It has limited intervention power and usually lacks holistic commitment from the alliance partner. It touches upon a limited aspects of a firms value chain.
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 .Honda). It is a win-win situation for both the companies. (Eg. Degree and extent of management control must be clearly 164 laid down. Selecting the right partner is critical for success. Dominant logic of both the companies should be complimentary. leaving minimum scope of overlapping. A comprehensive MOU is essential. Tata – AIG.
Acquisition is an outright purchase of a firm assets by another independent entity (Eg. Coca Cola – Thums Up). 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. Integration of assets and other financial resources. ITC Tribeni Tissues. Integrated distribution channel leads to better market penetration and overall synergy. 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.
Corus). Tata Steel . Most countries have stringent laws that prevents hostile take over. Make a public offer of not less than . often the new firm is “left alone”. Instant access to capacities and markets. Inform SEBI / Stock Exchange after 5% stake is 166 acquired.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. Larger geo-graphical diversity.
MANAGEMENT TOOLS IN STRATEGY 167 .
168 . every time. Balanced Scorecard – Tracking strategy 3600. The past is ceasing to be an indication of the future. Radical change is superseding incremental change. or better still create next practices Reengineering – Redesigning work processes right from the scratch.WHY MANAGEMENT TOOLS? Change is becoming pertinent in the business environment. Some tools to ensure that – Benchmarking – Adopt certain best practices. Change provides enormous opportunities. it is also a source of potential threat. Companies therefore need to ensure competitive advantages doesn’t become competitive disadvantages. TQM – Doing the right thing the first time.
A best practice is defined as an activity performed by a company in a particular domain or function which distinguishes it from others and making them world-class. These exemplary practices involves the stakeholders of the company and helps achieve its strategic intent. Best practices centers around looking at a different way to satisfy various stakeholders. Benchmarking involves the identification, understanding and adapting of certain best practices and implementing them to enhance performance. Firms are moving towards next practices as best practices make firms look more and more homogeneous.
SOME BEST PRACTICES
Dell: Customized configuration of computers. Caterpillar: 48 hours delivery anywhere in the world. Citi Bank : Priority banking services. Maruti: Certified “true value” pre-owned cars. Microsoft: ESOP to employees. Infosys: Customized work-stations. TCS: Referencing potential new recruits. ITC: Shareholders factory visit. AmEx: Outsourcing data warehousing mining. MARG: Set-top box to study viewing patterns. Honda: CEO’s visit to dealers.
TYPES OF BENCHMARKING
Functional – Used by companies to improve a particular management activity. Eg. Motorola learnt delivery scheduling from Domino’s. Process – Improving specific key processes and operations from experiences in similar businesses. Eg. Ford adopting assembly lay-out plan of Toyota. Competitive – It involves assessing the sources of competitive advantage and imitating them. Eg. Samsung leveraging miniaturization skills of Sony. Strategic – It involves assessing business models and replicating them in a different market. Eg. Reliance replicating AT&T business model.
HOW TO BENCHMARK?
Phase 1: Planning – What to benchmark? Whom to benchmark? – Identify key performance indicators & Data source. Phase 2: Analysis – Assessment of performance gaps. – Predict future performance levels. Phase 3: Integration – Communicate findings and gain acceptance. – Establish functional goals and its implementation. Phase 4: Action – Implement and monitor progress. – Measure results against stakeholder wants and needs. – Recalibrate or outperform benchmarks.
WHOM TO BENCHMARK?
Selecting the benchmarking partner is critical to solving the problem. Firms should generally avoid selecting the industry leader, because it may not always adopt the best practices for every process or activity. Benchmarking partners may also be from different industries. Types – – Internal – It involves benchmarking against its own branches, divisions, SBU’s. Proximity to data and cooperation is taken care of automatically. – External – It involves benchmarking against firms that succeeded on account of their best practices. It may also involve benchmarking against world-class firms. Friction may arise due to presence in competing industries.
BENCHMARKING - ADVANTAGES
Finding better ways of meeting stakeholder needs. Organizational learning comes from internal as well as external sources. Establishing goals based on formal assessment of external conditions. Defining effective measure of indicators, facilitate comparison, adopt from other organizations. Ensuring a continuous learning organization. Reducing competitive disadvantage. Organizational turnaround, especially effective in case of a wide strategic drift when differentiation strategies fail to work. 174
BENCHMARKING . . While strategy is all about differentiation and not looking alike. the more similar they end up looking. Benchmarking merely reorients profits in the hands of few to profits in the hands in the hands of many (i. Benchmarking is useful for bringing about operational efficiency.e. Strategy is more of creating best practices rather than copying them.LIMITATIONS More and more companies benchmark. but it cannot be used as a strategic decision making tool. It can at best complement it. It does not shifts the growth 175 trajectory of the industry as a whole. clustering).
The task demands a total change in organisational 176 culture and mindset.e.RE-ENGINEERING Redesigning leads to identification of superfluous activities or product features (i. Re-engineering involves complete reconstruction and overhauling of job descriptions from the scratch (i.g. . clean sheet). Windows 95 to 97).g. Re-engineering attempts to radically change an organizational products or process by challenging the basic assumptions surrounding it. DOS to Windows). process mapping) and eliminating or improving them (E.e. for achieving performance improvement (E.
than people driven Innovative Vs Traditional Customer centric Vs Organisational centric 177 .REENGINEERING – KEY TENETS Ambition Focus Attitude Enabler Performance Large scale improvement by questioning basic assumptions about how work is done Micro Vs Macro Business Processes Vs Organisational Processes Starting right from the scratch Not historical More IT driven.
Strategic – It looks into the process of strategic planning.REENGINEERING .e. products. etc) and supports the organization for the present.LEVELS Reengineering can be successfully leveraged at all levels of an organization with varying degree of results. Business – It looks into markets. resource allocation and prepares the organization for the future through a reorientation of the entire strategic architecture. structures. . It can be of the following types – Functional – It looks into the flow of operations (i. processes.e. customers and suppliers and protects the organization from the future (i. 178 . BPR).
protection can be had in the following ways – – Patenting. However. – High cost and time acts as a deterrent.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. – Early entry advantages. 179 . It generally acts as a threat to innovation. Cheaper versions of Intel chips and mother-boards manufactured in Taiwan. While traditional manufacturing is a bottom-up approach. – Causal Ambiguity. Indonesia). with an intention to copy it (Eg. reverse engineering is a top-bottom approach. learning curve advantage.
Introduction – Launching the product in the market. Actualization – Obtaining and dismantling of the product to assess how it functions. cost and effort necessary for the purpose of reverse engineering. Implementation – Developing of a prototype.STAGES IN REVERSE ENGINEERING Awareness – Recognizing whether the product is found to be worth the time. Usually in such cases segmentation and pricing is different from the original innovator. 180 . designing facilities.e. nano-technology). machine tools to convert ideas into a marketable product (i. Inaccurate assessment at this stage may lead to a failure of the entire project.
More and more companies are moving towards meeting implied rather than stated needs.WHAT IS QUALITY? It involves the totality of a product or service in meeting certain stated or implied needs. 181 . of service stations. Air bags. It has eight dimensions (Eg. – Features – Anti-lock braking systems. – Conformance – Emission standards . – Aesthetics – Appeal in design. – Durability – 1980 manufactured cars still on road. – Reliability – Consistency in mileage. Car) – – Performance – Mileage of 14 kms to a litre of fuel.Euro IV. – Serviceability – Large no. – Perception – Customer notions.
TOTAL QUALITY MANAGEMENT Objective – Management of quality ensures conformance to certain pre-set standards. zero defects. Management of quality was traditionally inspect it . touching upon a limited aspect of a value chain. It had little impact on improving overall productivity.fix it in nature. . It is deeply embedded as an aspect of 182 organisational life & culture. which ensures good market standing. TQM is a way of creating an organization culture committed to the continuous improvement of work processes – Deming.
the first time – From reactively fixing error in products to proactively preventing errors from occurring at the first place (Juran). Looking at quality as an endless journey. not a final destination. provided with all relevant information and best possible tools. 183 . Empowerment – It takes place when employees are properly trained. Be customer centric – Generate the concept of internal customer (Ishikawa). fully involved in decision-making and fairly rewarded for results.TQM – KEY TENETS Do it right. Kaizen – Make continuous improvement a way of life.
e. of units meet preset standards (Eg. equal participation).TQM . SQC – It is a process used to determine how many units of a product should be inspected to calculate a probability that the total no.STRATEGIES Outsourcing – It is the process of self-contracting services and operations which are routine and mundane. It is based on the principles of MBO (i. 184 . 6-Sigma). saving precious top management time. Quality Circles – It a small group of shop-floor employees who meet periodically to take decisions regarding operational problems and crises. enabling the firm to concentrate on core activities essential to customer satisfaction.
.... Source: Fortune Magazine Why CEO’s fail? 185 ...... – In the majority of failures – we estimate 70% – the real problem isn’t (bad strategy) .. strategy implementation has never been more important. it’s bad execution. – Less than 10% of strategies effectively formulated are effectively executed... – Efficiency and effectiveness is passé.BALANCED SCORE CARD Some interesting comments .
rather than effects. Organizations need to move from financial to strategic performance.BSC . In today’s context when organizational systems have become complex and multi-directional we need to have a holistic view of performance to cut the lag effects. Most managers tend to rely on traditional measures of performance having its origin in finance as they are well tried and tested. Focus more on causes.CONCEPTUALISATION A company’s performance depends on how it measures performance. 186 . These measures worked well when organizational systems were simple and unidirectional and more importantly the environment was static.
The most critical element of a BSC is to measure these four dimensions. It has four dimensions – – How do customers see us? – What must we excel at? – Can we continue to improve and create value? – How do we look to shareholders? Firms more often have problems.BSC – KAPLAN & NORTON (1992) A BSC helps a manager to track and communicate the different elements of company’s strategy. 187 . and distinguish strategic problems from operational ones. because they have too many.
e.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. ageing schedule) % of key customer transactions Ranking of key customer accounts No. of visits or calls made % of NPA’s 188 .
of new product launches Vs competition Product pricing Vs competition 189 . of times covered in media No.BUSINESS PERSPECTIVE GOALS Skills Excellence Exposure Introduction MEASURES New capabilities and competencies Implementation & gestation period Bank and supplier credit limits & PLR Unit Costs / Conversion Ratio / Defect Ratio No.
LEARNING PERSPECTIVE GOALS Technology Manufacturing Focus Timing MEASURES No. of new patents registered Time to develop next generation products Average and spread in operating cycle % of products that equal 2/3 sales No. of product innovations 190 .
FINANCIAL PERSPECTIVE GOALS Survival Success Prosper Divestment MEASURES Cash flows Growth in Sales and Profits EPS. Return on Investment Market Capitalization / PE ratio 191 .
STRATEGY MAPPING 192 .
BSC .IMPLEMENTATION 2 Translate strategy into operational terms 1 Mobilize change through effective leadership 5 STRATEGY Make strategy a continual process 3 Align the organization to the strategy 4 Make strategy everyone’s job 193 .
ADVANTAGES Most often top managers face information overload. The BSC brings together the different elements of a company’s strategy at a glance.BSC .e.what they don’t know. 194 performance will automatically follow. As a result. sharing of vision). Seek excellence. .e. Focus on cause not effects. doing right things instead of doing things right). Modern managers should be poised to ask the right questions. It helps translating strategy into practice (i. they don’t know . Shift from control to strategy (i.
EFFICIENCY Vs EFFECTIVENESS Ineffective Effective Inefficient Goes out of Business quickly Survives Efficient Dies Slowly Thrives 195 .
. but also sustains it.Michael E. not only thrives.EFFECTIVENESS + STRATEGY A company which is effective as well as strategic. Porter 196 .
CORPORATE RESTRUCTURING 197 .
.. firms use restructuring strategies.CORPORATE RESTRUCTURING The only thing constant in today's business environment is change. Strategic variety brings paradigm shift. As Peter Drucker pointed out. “every organization must be prepared to abandon everything it does. Radical change brings about strategic variety.. Tata Group).. to survival of the most adaptable. To adapt to the changing environment. from survival of the fittest .. Restructuring involves consciously driving significant changes in the way an organizations thinks and looks (Eg. Strategic variety may be caused by changes in the as external well as internal environment..” 198 .
downscoping).e. . Walkman. Core Business – Company’s should introspect – What business are we in? Business evolved out of opportunism or myopia should be divested. Instead. downsizing or rightsizing). etc).e. Structural Changes – Conventional hierarchical structures should be disbanded in favour of more 199 flexible ones (i. Internal customers should also not be neglected.RESTRUCTURING – BASIC TENETS Customer Focus – Restructuring ideally begins and ends with the customer. they should strive to provide unimaginable value ahead of its time (Eg. Company’s should go beyond just asking what he expects. Fax. and dividing the core businesses into SBU’s (i. ATM.
) Reliance dismantled their industrial embassies . Kumar Birla today is more dependent on professionals. Ratan Tata now drives the point the group means business..) The Aditya Birla group typically relied on the “marwari” community for key management positions . 200 ... It is created and institutionalized by the top management.. .... During the times of JRD.... Restructuring also requires cultural reorientation. started focusing on their capabilities.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..
Use the reach of networking technologies. Communicating to the media about organization efforts to deliver quality products.” 201 . Getting feedback & addressing customer complaints.MOVING CLOSER TO THE CUSTOMER As companies evolve. Organizing customer and supplier meets. they tend to move away from the customer. Carry out PR campaigns. Publicizing welfare projects to demonstrate CSR. Honda’s ad says. “ … one reason our customers are satisfied is that we aren’t. Restructuring provides a platform to close this gap.
It may include brands as well. Further spin-off can be classified as split-off and split-up. Tata – Corus) or hostile (Eg. including its intangibles – Mergers – It may be vertical. spin-off and equity carve. or conglo-merate. Asset Swaps – It entails divesting and acquisition simultaneously by two companies. 202 . it may be smooth (Eg. It can have two forms. Hive Off – It involves siphoning of assets under control. where the difference in valuation is settled off through cash or equity (Eg. horizontal. Glaxo – Heinz). Mittal – Arcelor) and can take various forms.ASSET RESTRUCTURING Asset Restructuring – The asset composition of a firm undergoes a major change. Further.
Equity Carve – It involves selling a minority stake to a third party while retaining control (Eg. in which the equity is allotted amongst the existing shareholders on a pro-rata basis (Eg. 203 . Most of these practices are not in consonance with Indian laws.HIVE OFF Spin-Off – A spin off is the creation of a new entity. the existing shareholders receive equity in the subsidiary in exchange for the stocks of the parent company. – Split-Off – In a split-off. Reliance Ent). Tata Industries selling 20% stake to Jardine Matheson). the entire parent company loses its identity after being split into a number of subsidiaries. – Split-Up – In a split-up.
DIVESTITURE It involves the sale of a brand or a division of a company to a third party. Parle sold its Thums Up brand to Coke for $40 million apprehending fierce competition. In 1995. – Poor performance. In 2005. 204 . A complete sell-out is known as divestment (TOMCO). Generic motives include – – Raise working capital. strategic misfit. Selling out in phases is called disinvestment (IPCL). L&T sold its cements division to Aditya Birla group. for a specified market or in general with full management control. repay long-term debts. but retained its engineering division.
Wipro). Tatas take-over of Corus for US $11.The internal & external liability composition undergoes a major change – LBO – Acquiring control over a substantially larger company through borrowed funds (Eg. Share Buyback – It is a process of cancellation of shares out of free reserves to the extent of 25% of paid-up capital (Eg. 205 . It provides greater leverage as well as management control. involving 608 pence per share).3 billion. Conversion – Replacing debt with equity or vice-versa or costlier with cheaper debt or cross currency debt.CAPITAL RESTRUCTURING Capital Restructuring .
99 cr Tata Power – Rs.BUSINESS RESTRUCTURING – TATAS Divestments Lakme – Rs. 1439 cr 206 Tata Timken – Rs 120 cr Tata Telecom – Rs. 42 cr Voltas . 1890 cr CMC – Rs.Rs. 1170 cr Goodlass Nerolac – Rs. 120 cr Tata AIG – Rs. 150 cr VSNL – Rs. 1700 cr Trent – Rs. 230 cr Diversifications Tata Motors – Rs.Rs. 1860 cr . 950 cr Merind . 250 cr Tata Tetley – Rs. 256 cr ACC – Rs.
Downscoping – It involves reducing the business and/or geographical scope of a firm (Aditya Birla group). of a firm’s employees and sometimes in the no. usually as a result external turbulence. of operating units. keeping the composition of business intact (Jet Airways). Survival is the primary motive. Rightsizing – It is phasing of excess and redundant employees resulted out of faulty internal planning (SAIL). 207 . It can be carried out in the following ways – Downsizing – It is a systematic one-time reduction in the no. Turnaround is the primary motive.ORGANIZATIONAL RESTRUCTURING Organizational structure and systems calls for a change when strategic variety is apparent.
Dominant logic becomes deep-rooted in organizational contexts depending on the period it is in place (tenure of the CEO). The dominant logic represents the perceptions and biases (i.e.e. The longer the period. inertia). the more difficult it becomes to uproot the paradigm (i. thumb rules) of the top management.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. Strategy change is unviable without a preceding change in its dominant logics. as strategies are based on such beliefs and biases. 208 .
FORCES AGAINST STRATEGIC CHANGE The problem with strategic change is that the whole burden typically rests on few people (i. In most organizations. 20% of the people carry out 80% of the changes). Companies achieve real agility only when people at every level rise above the ordinary to face the challenges – revitalization or transformation. 209 . Successful transformation requires – incorporating employees fully into the process – leading from a different place so as to maintain employee involvement – instill mental disciplines that will enable employees to behave differently.e. the factor that stifled change & performance was – culture.
process ownership. Encourage uncompromising straight talk. Questioning every basic action of the organization. Understand and deliver the quid pro quo.SUCCESSFUL TRANSFORMATION Build an intricate understanding of the business model at all levels of the organization. Promote inventive accountability. it is not about winning but about learning. never take no for an answer. Manage from the future. Harness setbacks. The best way is to alter the institutional point of view. 210 . Create relentless discomfort with the status quo.
Aspects of current culture which needs to be overcome. also known as cultural-web.FORCE-FIELD ANALYSIS A force-field analysis provides an initial overview of change problems that needs to tackled. 211 . It involves identifying – Aspects of current culture which needs to be reinforced. Identify and implement facilitators of cultural change. that can be both enablers and blockages to change and restructuring. It involves diagnosing a change situation – systems & structures. by identifying forces for and against change. Culture and style of management are two main impediments in force-field analysis.
RESTRUCTURING .OUTCOMES Alternatives Organizational Short .Term Loss of human capital Lower performance Higher performance Capital .Term Reduced labour costs Reduced debt costs Emphasis on strategic control Business High debt costs Higher risk 212 Long .
focuses on reengineering. 213 .NUMERATOR & DENOMINATOR MGT Most firms across emerging markets undergo strategic discontinuity and as a result are forced to restructure their businesses. down-scoping or asset stripping. In order to put back the company on the right track they are resort to – Denominator – It assumes that turnover cannot be increased. hence go in for downsizing. While the first strategy produces results instantaneously. Numerator – It assumes that turnover is not a barrier or constraint. the second one is a more viable strategy and sustainable option in the long run. reverse engineering and regenerating.
TURNAROUND MANAGEMENT 214 .
– Less than 10% of the Fortune 500 companies as first published in 1955. .... still exist as on 2005. and that the thirty-two of the country’s largest business groups in 1969 are no longer among the top fifty today. Source: Why do firms atrophy? (Business Today... 215 (Govindarajan and Trimble.WHY TURN AROUND MANAGEMENT? Some interesting insights . January 1997).. – Only seven of the first fifty Indian business groups in 1947 were even in business by the turn of this century.
and capabilities. process focuses on – A logic to explain a causal relationship between intervening variables. Both content (what) and process (how) are equally important for a successful turnaround.e. A category of underlying principles and concepts. Stage Theory). 216 . and achieves sustainable performance recovery. As a sequence of events describing how things change and why they change (i. While content focuses on endogenous and exogenous variables. ends the threat with a combination of strategies. systems.TURN AROUND MANAGEMENT A turnaround is said to occur when a firm perseveres through an existence threatening performance decline. skills.
suppliers and bankers. 217 . leading to lack of acceptability from distributors and customers. especially in key positions. Some indicators Continuous cash flow crises as a result of dwindling market-share and profits.TURNAROUND INDICATORS Most firms atrophy simply because they fail to diagnose the indicators that acts as threat to organizational existence. Low stakeholder confidence. Rising input costs. Substantial shifts in consumer preferences. Uncompetitive products or services. Low employee morale leading to high employee attrition at all levels. unavailability or radical lowering of substitute costs or technological obsolescence.
Common approaches adopted Change in key positions.. they adopt surface level measures (disprin popping) which most often fail. consider extension. liquidating dead assets. Revamp product portfolio. prune work-force.TURNAROUND ILLUSION The first step to a successful turnaround is the basic acceptance of the fact that …. Emphasis on advertising and market penetration. Product redesigning or reengineering. Recalibrate prices. based on elasticity. Extending work hours. Hence. be more customer centric. focus on power brands. which most top managers fail to appreciate. 218 . “all is not well”.
TURNAROUND STAGE THEORY Stage 1 Decline Stage 2 Stage 3 Stage 4 Outcome Response Transition Performance Equilibrium Line Success Failure Indeterminate Nadir Time 219 .
It has its origin in “resource led stretch” and subscribes to the view that a firm has substantial power to override the context. primarily dwindling resources and capabilities are responsible for decline. 220 .DECLINE Decline is the first stage in the turnaround process. Identification of the stimulus leads to the arrest of the downfall. It involves the identification of the theoretical perspectives that explains performance decline – K-Extinction – It suggests that macro economic and industry wide factors are responsible for decline. It has its origin in “environment led fit” that subscribes to the view that a firm has little control over external factors. R-Extinction – It suggests that organization factors.
221 . the response should be operational. diversification. Strategic responses focus on changing or adjusting the business the firm is engaged in through long term moves such as – integration. If the underlying cause is internal efficiency. If the decline stems from structural shifts. the response should be strategic. asset reduction. Operating responses typically focuses on the way the firm conducts business and involves tactics geared towards – cost cutting and process redesigning (BPR). The response must match the cause of the decline. new market initiatives.RESPONSE INITIATION Turnaround responses are typically categorized as operating or strategic.
Scope – A diversified conglomerate may acquire a distressed business to turn it around and gain valuable synergies. Contour – It is easier to reverse decline in the earlier stages through operational measures.RESPONSE DICHOTOMY The response initiation is somewhat dichotomous and cannot be universally applicable. which may be unavailable to a focused firm. Similarly new market initiatives is feasible only for multi-product firms. 222 . Untangling this question brings into focus three events – Domain – Many of the strategic cures have limited applicability for an affiliated firm. when decline deepens shifts in strategic position becomes essential.
Effective levers of transition. Sustenance is the key factor in this stage. confidence building measures. role model. 223 . consensus). transparency. Support from all the stake holders through resource commitment.TRANSITION Transition usually reflects the first signs of recovery.7 years with a range of (4-16) years. Empirical studies show that average time is 7. The top management has a key role to play through empowerment. substantial amount of time usually passes before results begin to show (i. many a times early signs of recovery fades out. lead – lag). However. However. participative management (i.e.e.
224 .OUTCOME Outcome is said to be successful when a firm breaches the equilibrium performance level. Supplier and banker confidence. Regaining lost market share and distributor confidence. Instead of focusing on financial parameters alone. Failure is an indication that initial momentum was not sustainable characterized by irreversibility. Share price indications and media coverage. Commanding a premium in the market. Cut off points must be unequivocal. Revival of key customers and new product launches. it should adopt a holistic approach.
COOPERATIVE STRATEGIES & ALLIANCES 225 .
licensing. the commitment and the involvement between the firms increases manifold. technology. In the cooperative strategy continuum as firms move up the value order. 226 . strategic alliance. More and more companies worldwide are moving away from competition to co-option to leverage their resources and enhance bargaining power. supply-chain partnership. consortia. Any cooperative strategy maybe between firms within the same country or cross border as well. It can assume any of the following forms – franchising.COOPERATIVE STRATEGIES Cooperative strategies are a logical and timely response to changes in business dynamics. and globalization . or joint venture.
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. owners of the brand Tanishq allows its franchisees to sell its jewellery products. Titan Inds. Switz Foods. Branding is critical to franchising. 227 . owners of the brand Monginis allows its franchisees to sell its confectionary products. It is an effective strategy to penetrate markets in a shortest possible time at a minimum cost.
Develop a product through its crude stage. 228 . refine processes and adopt necessary technologies (SKD). 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. HM manufacturing GM range of cars in India with a buy-back arrangement is a perfect example of CBU. as in Tata Indica.
Tata. Hyundai). Airbus – Boeing). 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. Cross Holdings – A maze of equity holdings through centralised control to ensure earnings stability & threshold resources for critical mass (Eg.CONSORTIA Consortia – They are defined as large inter-locking relationships & cross holdings between businesses in a similar industry. enabling them to increase prices (Eg. Coke – Pepsi). 229 . Collusion – Few firms in a matured industry collude to reduce industry output below the equilibrium level.
SUPPLY CHAIN PARTNERSHIP It is a pro-active & collaborative arrangement between supplier and customer aimed at achieving better control over the value chain (Eg. It usually provides a platform to sort out differences between conceptualization and implementation to suit local market needs. Continuous sharing of knowledge is critical to the success of a supply chain partnership. link their capabilities to create value for end users. otherwise it 230 becomes routine outsourcing. Companies in different industries with different but complimentary skills. Tata Motors – IDEA). .
enter newer markets. Generic motives involved are . instead of hurrying into a relationship. Despite their popularity (50-60)% of the alliances fail to accomplish their stated objectives. effective R&D management. design next generation products. preempt competition. 231 .STRATEGIC ALLIANCE It is an short to medium term understanding between two or more firms to share knowledge and risk. Firm’s should undertake a long courtship with potential partners. Reliance – Du Pont). Tata Motors – Fiat. enhance credibility. Partner selection is one of the critical success factors.learning organization. to gain knowledge and to obtain access to new markets (Eg.
Bootstrap – An alliance between a weak and a strong company with an intention to acquire it. Coke – Pepsi). Bajaj – Castrol).STRATEGIC ALLIANCE . Alliances of the Weak – An alliance is entered into to preempt competition (Eg. Maruti). 232 . Airbus – Boeing).TYPES Collusion – Tacit top management understanding to neutralize price wars (Eg. Whirlpool – Tide. Backward – An alliance (quasi or tapered) with a supplier of critical components seeking commitment (Eg. Complementary Equals – Two firms mutually promoting each others complimentary products (Eg.
Firms from developed markets seek access to markets and firms from emerging markets seeking access to technology. Cultural orientation has been found to have a profound effect on top management’s strategic orientation (Eg. Differences in level of economic development can produce differences in alliances motives. Too much stress on financials & structure be avoided.PARTNER SELECTION CRITERIA It is likely that partners will not have complete consent on alliance objectives because the institutional context in which the alliance embedded varies from country to country. 233 . – Japan Vs US).
Experience related to previous alliances. Unique Resources – Abilities or skills which cannot be easily duplicated. Managerial capabilities. Dominant Logic’s – Similarity in beliefs & biases. Willingness to share knowledge and skills. including ability to provide quality products and services. Partner’s ability to acquire fresh skills. 234 . Intangible Assets – Move beyond the financials of the firm.PARTNER CHARACTERISTICS Complimentarity of Capabilities – The degree to which partners resources can be used in conjunction.
incorporating clear signs of continuing independence for all partners. Setting up the housekeeping. differences not anticipated earlier. Changing within. vows to include commitment to expand the relationship. Learning to collaborate – strategic. Selection & Courtship – It involves self analyzing. Getting Engaged – It should incorporate a specific joint activity. degree of compatibility. understanding the chemistry. operational & cultural integration. partners should nurture it. instead of focusing controlling the relationship. 235 . the value chain.MANAGING ALLIANCES Alliances are more than just a deal.
.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. whilst the partners continue to operate independently. combining parts). There are substantial linkages in the value-chain.e. a joint venture is a selection among modes by which two or more firms can transact. Conceptually. separation is very 236 bitter. It aims at creating new value (i. synergy) rather than mere exchange (i. It lasts till the vision is reached.e.
in addition to a high degree of asset specificity. It may also be linked to deterring entry or eroding competitors position. 237 . Strategic Behaviour – Firms may override transaction costs.JOINT VENTURE – GENERIC MOTIVES Transaction Cost – The situational characteristics best suited for a JV are high performance uncertainty. though more profitable alternative to other choices. The market fails as sellers are unwilling to reveal their technology and buyers are unwilling to purchase in the absence of inspection. Organizational Learning – It is a means through which a firm learns or seeks to retain their capabilities.
– Eg. Define future industry standards. – Eg. Maruti – Suzuki. Daimler – Chrysler (Premium Cars) 238 . Endorsement from government authorities. Renault – Nissan (Minivans – Cars). – Eg. Learning new technologies. – Eg. – Eg. Yamaha – Escorts. Eli Lily – Ranbaxy. Sharing of resources. – Eg.OTHER MOTIVES Entry into newer markets. TVS – Suzuki (4-Stroke Engines) Fill gaps in existing product lines. Essar – Hutch (Vodafone).
Century . Risk of brain (i. – Eg. Risk of over dependence.e. LML – Piaggio Differences in size and resource base. Tata – Aditya Birla in Idea Cellular 239 . Modi – Telstra What after exit (parenting disadvantage)? – Eg.Enka. PAL – Fiat If the cost of continuing exceeds the exit costs? – Eg. – Maruti – Suzuki. technology) drain. – Godrej – Procter & Gamble. – Eg.RISKS INVOLVED Incompatibility – Differences in cultural background.
Flexibility – Sufficient space to breathe and adjust. respect.PRE-REQUISITES FOR SUCCESS Commitment – Mutual trust. Inertia – Differences in age and evolution patterns. Equality – Lack of dominance. Incompatibility – Performance expectations. Partner – Avoid duplication of skills and capabilities. Costs – Other modes of transaction becomes cheaper. Focus – Avoid strategic myopia. 240 . Agreement – Clarity on operational control. Culture – Reconcile gaps. time sharing. Objectives – Shared vision.
MERGERS & ACQUISITION 241 .
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. Ranbaxy . Mittal Arcelor). An acquisition is the purchase of a firm by a firm (of larger size. Brooke Bond – Lipton).Daichi) and hostile if it is without the consent of the management (Eg. The larger objective is to leverage on size. An acquisition is said be smooth if it is with the consent of the management (Eg. reverses are also taking place through LBO) with a view to acquire conglomerate power and induce synergy (Eg. however. 242 . SEBI Takeover Code. 2002). HLL – Tomco). Most countries have stringent laws that prevents hostile takeovers (Eg.
2002 Promoter – A person who has a clear control of atleast 51% of the voting rights of the company and confidence of all the major stakeholders.e. Preferential – A preferential allottee ending up acquiring 5% stake also comes under its purview.SEBI TAKEOVER CODE. creeping acquisition). . Control – A special resolution of 75% of the share 243 holders approving the change of guard. Acquirer – Someone (individual or firm) who picks up an atleast 5% stake without mandatory disclosure having an intention to wrest management control (i. Hike – An acquirer who has already picked up a 5% has to make a mandatory disclosure for every additional 1% stake that it acquires.
SEBI – In case of a hostile take over. Grasim – L&T Cement. Gujarat Ambuja – ACC). whichever is higher as an exit route (Eg. the SEBI can intervene and block share transfers if: the acquirer has ulterior motives (i. 244 . asset stripping). 2002 Pricing – Acquirers will have to offer minority shareholders (at least 20%) the past 26 weeks or past 2 weeks average price.e. Disclosure – All acquirers have to inform the respective stock exchanges where it is listed and SEBI upon acquiring the basic limit and upon every incremental limit thereon. credentials or track record is at stake.SEBI TAKEOVER CODE. and/or does not enjoy the confidence of the different stake holders.
Horizontal – It involves integration of two highly related businesses (Eg.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.Kelvinator). ITC). 245 . Conglomerate – It involves integration of two distinctly unrelated businesses. Electrolux . The type of merger is depends on the degree of relatedness (strategic) between the two businesses. Godrej. Reliance). Vertical – It involves complimentarily (partially related) in terms of supply of inputs or marketing activities (Eg. usually opportunistic (Eg.
Global image (Eg. Coinsurance effect – Higher debt raising capability. Mittal – Arcelor).e. Tax benefits (Eg. ICICI –ITC Classic). Reduced gestation (i. Reduction in risk. Economies of size. Tata Steel – Corus). Acquiring assets or capabilities (Eg. 246 .MOTIVES Increased market / conglomerate power. Avoiding risk of new product development.MERGERS & ACQUISITION . Asset Stripping – Shaw Wallace). scale and scope. Ulterior motives – (Eg. Access to newer segments (Eg. quick access). Overcoming entry barriers (Eg. ITC Bhadrachalam). Ranbaxy – Crosslands).
Merging of organisational structures. Managing over-diversification. neglecting core business. Top management overtly focused on due diligence exercise and negotiations. 247 . Managing size. Overvaluation is often as a result of an ego drive and substantially affects future returns.MERGERS & ACQUISITIONS PITFALLS Cultural differences (Eg. while the ultimate acquisition was made at 607 pence/share). their initial offer was around 420 pence/share. When Tata Steel started negotiations with Corus. Overvaluation of buying firms (Eg. Inability to achieve synergy. Tata – Corus).
248 . Maturity – A larger firm acquires a smaller firm with an objective to achieve economies of scale and experience curve effects (Eg. Brooke Bond – Lipton).MERGER TYPE & PLC Introduction – A larger firm may acquire a newly formed entity with an objective to preempt new competition or acquire its license (Eg. Decline – Horizontal mergers are undertaken to ensure survival. Growth – This stage may witness parallel merger of two firms of similar size. Tata Steel – Corus). Kingfisher – Air Deccan). with an objective to reinforce its growth trajectory or to take on the might of a comparatively larger player (Eg. vertical to save transactions costs.
An acquisition just for the sake of it or reputation yields very little value in the long term. A common shared vision. Strong differences may stifle plans and its execution. Immediate attempts to super impose structure and culture may cause bottle necks. Left alone syndrome. active top management intervention in phases.FRAMEWORK Positive contribution to the acquired company. Blanket promotions across entities and confidence building exercises needs to be practiced. A concern of respect and trust for the business of the acquired company. 249 .INTERNATIONAL M&A .
Integrating work processes. They can carry the message to the various stake holders. Decide upon management control systems. . Decide on the new hierarchy. It will enable focus on customers and key people. Shift attention from business portfolio to people and processes. promptly. Redefine responsibilities and authority. 250 Do not ignore the “people factor”.INTEGRATION . Determine business strategy.BLUEPRINT Take the media into confidence.
M&A . Financial motives – Undervaluation relative to true value. While under valuation may be a significant opportunity. Valuation decisions are arrived through a due diligence process when the prospective acquirer gets access to the books of accounts of acquiring company. The process takes (6-12) months. – Market for corporate control.VALUATION The process of valuation is central to M&A. – Unstated reasons – Personal self interest and hubris. 251 .e. operational & financial). over valuation can become a curse. – Synergy – Potential value gain from combining operations (i.
Synergy can be negative as well. 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. Innovative product – Good distribution network).VALUING OPERATIONAL SYNERGY Synergy – It refers to the potential value gain where the whole is greater than the sum of the parts. 252 . – Vertical Synergy – Gains come from controlling the supplychain and savings in transaction costs. – Conglomerate Synergy – Gains come when one firm complements the resources or capabilities of another (Eg. when the “fit” between the two entities is very poor.
shareholders can accomplish the same at a much lesser cost. but availed after being merged with a profitable firm (Eg. ITC – Bhadrachalam Paper).VALUING FINANCIAL SYNERGY Diversification – Reduce variability in earnings by diversifying into unrelated industries. However. 253 . Hotmail). Cash Slack – It reduces asymmetry between cash starved firms with deserving projects and cash cows with no investment opportunities. and without paying take-over premiums. Synergy comes from projects which would not have been undertaken if the two firms stayed apart (Eg. Tax Benefits – Tax benefits may accrue from tax entitlements and depreciation benefits unutilized by a loss making firm.
– Coupon rates may also be negotiated at lower rates. hence better performance. 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. higher leverage.VALUING FINANCIAL SYNERGY Co-Insurance Effect – If the cash flows of the two firms are less than perfectly correlated. It relates to the concept of diversification. This will induce higher debt capacity. as risky debt is spread across the new firm's operations. the cash flow the merged firm will be less variable than the individual firms. – Default risk comes down and credit rating improves.
The value of control can be substantial for firms that are operating well below optimal value. While value of corporate control is negligible for firms that are operating close to their optimal value.VALUING CORPORATE CONTROL Premium of M&A are often justified to control the management of the firm. The value of wrestling control is inversely proportional to the perceived quality of that management. since a restructuring can lead to significant increase in value. Assessment of perceived quality is critical. – – Value of Control = Value of firm after restructuring Value of firm before restructuring. 255 .
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. 256 . It is a very costly and risky proposition. The assets of the acquired company are used as collateral for the borrowed capital. 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.e. sometimes in combination with the assets of the acquiring company.
The increased benefit showed in the following way – reduced costs and increased revenue. 257 . liquidity. – The need to satisfy analysts and shareholders. A research study showed that 30% of the publicly listed firms reported above average returns after going private. the advantages of going public includes . However. – Separation of ownership from management.access to financial markets. – Increased information needs. on-going valuation.TO GO PUBLIC OR NOT? However. off-late many publicly traded firms have gone private keeping in mind the following – – The fear of LBO.
– Cost of debt coming down (i. – Cash trapped company unable to utilize opportunities. – 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). 258 . 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).e.
Therefore. As the firm liquidates / pledges assets and pays off debt. – Increase equity valuation. Any discounting has to reflect these changing cost of capital.EFFECT OF HIGH LEVERAGE Increases the riskiness of dividend flows to shareholders by increasing the interest cost to debt holders. Lack of sufficient cash flows to repay costly debts resulting in a possible debt trap. 259 . A LBO has to pass two tests to be viable – – Restructuring to pay-off increased debt. initial rise in leverage is anticipated. leverage is expected to decrease over time.
Objectives – – Traditional route of filing prospectus and undergoing an IPO is costly. allowing the private company to bypass the usually lengthy and complex process of going public. or costly. 260 . – Automatic listing in major exchanges. which has discontinued its operations (i. – Tax shelter. time-barred. shell company) by a private company.REVERSE MERGER Reverse Merger – The acquisition of a public company. – Facilitates better valuation and forthcoming offerings. – Prevents dilution of equity.e. small in size but having a promising business.
Most target firms are taken over within (6090) days. – Merger announcements reported 20% excess returns. – Takeover announcements reported 30% excess returns.EFFECT OF TAKE-OVER ANNOUNCEMENT The shareholders of target firms are the clear winners. During bearish periods excess returns were 19%. 261 . However. and 35% during bullish periods. takeover failures have only initial negative effects on stock prices. Initial anomaly in stock prices usually normalizes over a period of time (6-12) months. Excess returns also vary across time periods.
EFFECT OF TAKE-OVER ANNOUNCEMENT The effect of take-over announcement on bidder firm’s stock prices are not clear cut. Desai. 1983. 1983. and Kim. in the event of take-over failure negative returns to the extent of 5% on bidder firm stock prices is reflected. – However. over time. – However. and Netter. 1988 . Bradley. 262 Jarrel. as stock markets become more and more perfect such anomalies would reduce Source: Jensen and Ruback. Brickley. – Most studies reported insignificant excess returns around take-over offers or merger announcements.
Asset Stripping – The targeted company hives off its key assets to another subsidiary.DEFENSIVE STRATEGIES Golden Parachute – An employment contract that compensates top managers for loss of jobs as a result of change in management control. Poison Put – Premature retirement of bonds at attractive rates to pour surplus cash and make target investment unattractive. Rights). so that nothing is left for the raider to strip off. 263 . Poison Pill – An offer to existing shareholders to buy shares at a substantial discount to increase their voting rights (Eg.
DEFENSIVE STRATEGIES White Knight – It is the placing of stocks to a cash rich investor and bargaining for protection in return. thus thwarting the raider company’s attention. 264 . Green Mail – The targeted company buys large blocks from holders either through premium or through pressure tactics (Eg. Pac Man – The target company makes a counter bid to take over the raider company. East India Hotels – Reliance Industries – ITC). Shapoorji Pallonji). Gray Knight – The target company takes the help of friendly company to buy the shares of the raiding company. But often the White Knight turns a betrayer himself (Eg.
COMPETING FOR THE FUTURE 265 .
Honda overpowering Volkswagen. Compaq overpowering IBM. The reverse was true for the companies overpowering.GETTING OFF THE TREADMILL Canon overpowering Xerox. What went wrong???? What were they doing with the present? What were they pre-occupied with? 266 . Hitachi overpowering Westinghouse. British Air overpowering Pan Am. Wal-Mart overpowering Sears. were spending 99% of their precious time dealing with present. Nokia overpowering Motorola. Honda overpowering GM. Most companies were too preoccupied with the present than the future? 99% of the companies overpowered.
Thus efficiency was grievously hurt. declining margins. CEO’s brutally pick up the knife and ruthlessly carve away layers of corporate flab (delayering. 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 . decluttering. downsizing).THE PAST OF COMPETITION Beyond Restructuring – When a competitiveness become inescapable problem (stagnant growth. Not knowing when to stop. falling market share). most often they ended up cutting corporate muscle as well and became anorexic.
but not of the future. but forging ahead in competition. ensuring only survival of the present. On the contrary only 20% of Japanese managers believed that quality will be a source of competitive advantage of the future. However. incrementalism or nominal innovation has almost reached a plateau. top managers believed that quality will be a source of competitive advantage of the future. 268 .THE PRESENT OF COMPETITION Beyond Reengineering – Numerator based managers (innovation) at least offers some hope. A poll in circa 2000 revealed that 80% of the U. The future is not about catching up with competition.S.
It involves Dream about the company’s future. Create a potential gap. not the other way. and regenerate its strategies (breaking its – managerial frames). 269 . Empower from bottom to top. as important as these may be. they are not enough to get a company to the future. Transform the industry. faster. don’t predict. It is based on deep insights into trends in technology. aspirations and resources. reinvent its industry.THE FUTURE OF COMPETITION Regenerating – Leaner. better. Creating the future requires industry foresight. demographics and lifestyles. Companies need to fundamentally reconcieve itself. not just the organization.
ABOUT THE DREAM Which customers will you be serving? What will the potential customer look like? Who will be your future competitors? What will be the basis of your competitive advantage? Where would your margins come from? What will be your future competencies? Which end product markets would you cater? 270 .
It is about deliberately creating a strategic misfit. Therefore. hence do not fall sick in the first place. It drives a hunger and a passion to transform. Create entirely new industries (i.ABOUT THE TRANSFORMATION The future does not belong to those who take the industry for granted. Successful companies have a complete grip over the industry.e. Redraw the boundaries between industries. Change in at least one fundamental way the rules of engagement in an industry. they do not need to restructure. 271 . blue oceans). by converging technologies complex.
ABOUT THE EMPOWERMENT Bring about a revolution (a paradigm shift) in the organization. More importantly. Transformational leaders merely lead the way. 272 . The middle management plays a strong moderating role. the revolution must start at the bottom and spread in all directions of the organization. A revolution that is thrust upon from the top seldom sustains. Such a process is called institutionalization (from people centric to organisational centric). Most successful revolutions (Gandhi to Mandela) rose from the dispossessed.
Companies need to strategize (think ahead of times). It requires a lot of common sense and a little bit of out of the box thinking. An ability to energize the company. 273 . Apple – iphone). South West Airlines – LCC. What does it take to get to the future first? Understanding how competition for the future is different. without taking undue risk. A process for finding and gaining insight into tomorrows opportunities (Eg. Toshiba – LCD. Apply the 40 – 30 – 20 principle.THE FUTURE OF STRATEGY A company must get to the future not only first but also for less. Get to the future first.
as on their aspirations. We are in the midst of a 3600 vacuum. As there is no one future. 274 . is the ability to imagine in a different way what the future could be.HOW DOES THE FUTURE LOOK LIKE? There is no rule which says that for every leader there will be a follower. Companies of the future will be not based so much on the strength of their resources. The farther one can see in this endless space. each point in space represents a unique business opportunity. What distinguishes a leader from a laggard. greatness from mediocrity. but hundreds. the farther it will be away from competition.
THE EMERGING STRATEGY PARADIGM Not Only Reengineering Processes But Also Regenerating Strategy The Competitive Challenge Organizational Transformation Industry Transformation Competing for Market Share Competing for Opportunity Share Finding the Future Strategy as Learning Strategy as Positioning Strategy as Engineering Strategy as Unlearning Strategy as Dream Strategy as Architecture 275 .
THE EMERGING STRATEGY PARADIGM Not Only But Also Mobilising for the Future Strategic Fit Resource Allocation Strategic Misfit Resource Stretch & Leverage Getting to the Future First Existing Industry Structure Product Leadership Single Entity Product Hits & Timing Future Industry Structure Competency Leadership Dominant Coalitions / Co-option Market Learning & Preemption 276 .
Learning Curve t1 t2 t3 Time t4 t5 277 . 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.
It represents the collective learning's of an organization centering around diverse streams of technologies. It cannot be matched even by its closest competitors. Leverage – They are the gateways to future markets. It is characterized by the following – Unique – It provides unimaginable customer value ahead of its times. 278 . Inimitable & Insubstitutable – A high degree causal ambiguity between these skills yield sustainable competitive advantage.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.
Canon – imaging. Toyota – lean manufacturing. Core competencies are the roots of the organization. Honda – engines. A core competency cannot be outsourced. Wal-Mart – logistics. Most companies around the world do not possess one. it gets more refined and valuable through use.MORE ABOUT CORE COMPETENCE Sony – miniaturization. Although a core competence may lose value over time. leaders have one. it is deeply embedded in the heart of the organization. Nike – designing. 279 . Coca Cola – brand. SKF – antifriction and precision. at the most three to four. Intel – nano-electronics. Toshiba – flat screen displays.
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 .
288 .e. Therefore. Korea. Therefore focused strategies based on core competence may not be suitable for emerging markets (Khanna & Palepu. strategies suited for the developed markets may not be appropriate for emerging markets. and high transaction costs. high levels of market imperfection).EMERGING MARKETS Emerging markets (India. Diversified groups in operating in emerging markets therefore benefit from unrelated diversification. Chile) provide a different context (i. institutional gaps. 1997). Emerging markets are characterised by infrastructural bottlenecks. China.
et al. Size & Scale. Optimum level of diversification Performance Diversity is initially positively related with performance. Concentric. Entropy). subsequently negatively related across developed markets. Experience Strategic Fit Diversity Palich.DIVERSITY . Synergy. (2000) 289 .PERFORMANCE (I) Diversity attempts to measure the degree and extent of diversification (Herfindahl.
Huge initial investment. subsequently positively related across emerging markets. 2001) 290 . conglomerate power Threshold level of diversification Performance Diversity (Khanna & Palepu.PERFORMANCE (II) Diversity is initially negatively related with performance.DIVERSITY . brand building Risk diversification.
291 . Characteristics – It should have a spread of affiliates or subsidiaries. revenues and profits. It should have a spread of manufacturing facilities. HSBC). It should have a spread of interest groups / stake holders. It should have a spread of assets. It should think globally.INTERNATIONAL IDENTITY MNC’s consciously engage in FDI in different parts of the globe to forge resource diversity as a distinct competitive advantage. act locally (Eg.
high feminity index in developed markets and vice versa for emerging markets). Group Scale .It reflects the disparities in women in workforce (Eg. Feminity Index . Risk Profile – It reflects the risk attitude of the top management (Eg. 292 .It reflects the relative role of team building (Eg. low group scale in developed markets and vice versa for emerging markets).GLOBAL BUSINESS ENVIRONMENT Power Distance – It reflects the disparities in income and intellectual development (Eg. low risk profile in developed markets and vice versa for emerging markets). low power distance in developed markets and vice versa for emerging markets).
Country Risk – It reflects the political and economic risk (Eg. time value. inflation. terrorism (9/11). credit rating. high cultural adaptability in developed markets and vice versa for emerging markets). judiciary) of doing business in a particular country (Eg. political stability.culture. corruption. code of conduct. way of life. flexibility (Eg. interest rates. FOREX reserves. 293 . attitude. currency. dress sense.GLOBAL BUSINESS ENVIRONMENT Cultural Adaptability – It reflects the adaptive ability to a changing environment . low country risk in developed markets and vice versa for emerging markets). customs.
294 . and vice-versa. however. time-zones.GLOBAL BUSINESS ENVIRONMENT Time Sensitiveness – Developed country managers regard time as precious. Ethnocentrism – Developed country managers tend to regard their own culture as superior. Language Barriers – Developed country managers expect foreign partners to communicate in their languages. in most emerging markets meetings are delayed and lasts unusually long. High levels of ethnocentrism usually has a negative effect on business. in most emerging markets use of an interpreter may be a standard protocol. Other factors – local celebrations.
copyrights. It also initiated provisions on anti-dumping. trademarks). The 1999 (Seattle Round) saw a lot of protest amidst bringing agriculture under the purview of TRIPS. It focused largely on TRIPS (patents. BRIC).GATT GATT was a bi-lateral treaty initiated between US and some member countries in 1947 to promote free trade. The 2001 (Doha Round) focused on power blocks (NAFTA. It a multi-lateral treaty with 143 (as on 2002) member countries to reduce tariff and non-tariff (quota) barriers. 295 . In 1995 (Uruguay Round) GATT was renamed to WTO. It also highlighted the nexus between US & WTO. ASEAN.
Sterling .EURO – SINGLE CURRENCY In 1999 twelve member countries in Europe joined hands to move over to a single currency (i. primarily the OPEC countries. the Dollar still remains the most preferred currency globally. the Euro slowly started outperforming the Dollar. However. 296 . The notable exception was Great Britain which still continues with its local currency (i.e. three countries joined in 2002 increasing it to fifteen members as of 2008. Euro).e. However with current recession in the US 2002 onwards.Pound). The Euro was significantly devalued against the Dollar till 2002.
Rate Uncertainty – A single currency eliminates the risk of competitive devaluations. Trade Block – It will strengthen the EU identity which would not have been possible otherwise. a multiple currency is preferable where the business cycles of member nations are different.SINGLE Vs MULTIPLE CURRENCY Transaction Costs – Though the initial cost of introduction of a single currency is very complicated and costly. However. 297 . it helps avoiding transaction costs associated with a multiple currency. but it may have spill-over effects. Transparency – A single currency is transparent and competitive.
hot money). Neo classical economists believe that foreign investment may in fact be a win-win game. the gain of one country is loss of another). – FDI (transfer of tangible resources) is slow but steady for the purpose of economic growth.FII Vs FDI INVESTMENT Classical economists believed that foreign investment (in any form) is basically a zero sum game (i. It is long term with high levels of commitment. It is short-medium term with comparatively low levels of commitment. – FII (transfer of intangible resources) is fast but may have strong repercussions (i.e. 298 .e.
usage (talk time). technology (microchip). Distribution – It depends on the market characteristics (fragmented – concentrated). buying patterns (spread). . lifestyle (petroleum 299 outlets – departmental stores). promotion (surrogate advertising). economic (middle class buying power).INTERNATION MARKETING Product – The various attributes of a product may receive different degrees of emphasis depending on differences in .culture (food habits). customer awareness (microwaves). Pricing – It depends on the competitive structure (PLC – Kellogg's).
equity is cheap in India).India) may be different from that another trading country (US – GAAP or IRS). debt is cheap in US. Leverage – The leverage may vary across countries depending upon money and capital market conditions (Eg. Cost Structure – Companies in India need to investment in fixed costs due to poor infra-structure 300 compared to developed markets. .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. Accounting Norms – The accounting norms of one country (AS .
in most cases it is not desirable nor practiced. technology (convergence. labour laws. Compensation – Differential pay packages exists because of differences in purchasing power. Training – It is a pre-requisite for international business to reduce language. Recruitment – In local recruitment. however. social security. shortened life cycles). 301 . and cultural barriers (language) vis-à-vis emerging markets. skills are more important that cultural fit and vice-versa. double taxation.INTERNATIONAL HR An uniform HR policy is idealistic to enable parity in performance appraisal.
Outsourcing – A company having a core competence may be the source of global outsourcing (Eg. reduce power costs) vis-à-vis infrastructural bottlenecks. Technology – The cost to be evaluated in terms of latest technology (Euro VI) vis-à-vis effective cost of appropriate technology (Euro II). SCM – Use of ERP to network the extended enterprise 302 across the globe. 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.
CONTEMPORARY TOPICS 303 .
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. Innovation is all about staying ahead of competition. it has destructive effects as well. Innovation is the most preferred strategy today to maintain competitive advantage in the present turbulent business environment. innovation is the first attempt to carry it out in practice. but has inherent risks involved as well. 304 . While innovation typically adds value for organizations.
process innovation is necessary to sustain the competitive advantage of product innovation. Process innovation usually follows product innovation. Strategic innovation has the potential to change the rules of the game. However. Tangible impact of product innovation on performance is significantly higher than process innovation. While product innovations are typically customer driven. 305 .TYPES OF INNOVATION A key challenge is maintaining a balance between process and product innovations. process innovations are organizational driven.
Innovations are the back-bone of successful business models .BUSINESS MODEL It is a simplified description and representation of a complex real world. putting an idea into practice). about how an organization makes money (i. Medical Surgery (Lasik). Data Storage (Pen Drives). Telecom (CDMA Technology). Disruptive business models brings in a new frame of reference (i. 306 . It leads to a shift in the price – performance envelope.e.e. a paradigm shift). Drug Development (Bio Chemicals). Processors (Pentium).
The key partners involved in the activities. The revenue streams generated by the activities. 307 . The channels to reach out to the clients. The key resources and capabilities required. The cost structure resulting from the business model. The segment(s) of clients to be addressed. The proposed relationships established with clients. The key activities / processes necessary for execution.NINE BUILDING BLOCKS Value proposition offered to the market.
BUSINESS MODEL FRAMEWORK 308 .
With the rapid erosion of certain industries (IT.REVENUE MODEL Positioning is just not sufficient. It is just one piece of the puzzle. Real Estate) companies need to untangle and understand the intricacies of their business model. 309 . Investment Banking. The revenue model described here are the means to generate revenues. It involves – Product Visualization – Product Prototype – Product Test – Capacity – Pricing – Distribution. innovative companies to carve out unique business models to fend off competition.
Have a lean and a flat organization structure. Promote the culture of experimentation. 310 . Allow the management sufficient slack to be future oriented.HOW TO MAKE INNOVATIVE CO’S Innovative company’s are a matter of culture and aspirations rather than tangible resources. Provide reasonable incentives (not necessarily monetary). Promote the grape-vine. A favourable intellectual property (IP) climate. Allow the workforce idiosyncrasies for their errors.
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. Collusion with the judiciary is also another distinct possibility in emerging markets. In most emerging markets where the IP climate is not so favorable. however that possibility is slowly atrophying. companies are increasingly relying on internal protection to sustain innovation effects. 311 311 .
In fact the principles of corporate governance implies that managers go beyond in satisfying the stated and unstated needs of the multiple stakeholders. 312 312 .CORPORATE GOVERNANCE The basic theme of corporate governance is to ensure that professional managers are identified and made accountable in terms of clear business processes or activities and held responsible through adequate mechanisms & control systems for channelizing their decisions for the benefit of stakeholders at large. Corporate governance aims to reduce the principal-agent problem present in most professional managed organizations through appropriate forms of accountability and control mechanisms.
This exposes the shareholders to additional risks and higher costs. However.AGENCY THEORY The root of Corporate Governance goes back to the Agency Theory. From the strategic point of view managers tend to diversify into unrelated businesses as it provides higher returns hence a more favourable appraisal. According to the agency theory top managers and shareholders interests are usually conflicting in nature and tend to pull in opposite directions. also known as the principal-agent problem or agency dilemma. shareholders can diversify their portfolio at a much lesser risk and cost. not present in portfolio diversifications. 313 .
2002 to restore public confidence in corporate governance. various laws were enacted to ensure proper usage of these funds. defines corporate governance (headed by Kumar Mangalam Birla) as the acceptance by management of the inalienable rights of shareholders as the true owners of the corporation and of their own role as trustees on behalf of the 314 shareholders. . the US government passed the Sarbanes – Oxley Act. SEBI Report – 2005. After the Enron downfall.ORIGIN & CONTEXT Since the early 20th century since a large part of public funds were held by publicly traded firms in the US.
including the society at large.GOVERNANCE PRINCIPLES Rights and equitable treatment of shareholders: Help shareholders exercise their rights by effectively communicating information in transparent ways that is understandable and accessible and encouraging shareholders to participate in general meetings. 315 . Interests of other stakeholders: Recognize the legal and other obligations of all legitimate stakeholders. Role and responsibilities of the board: It deals with issues about an appropriate mix of executive and nonexecutive directors. The key roles of chairperson and CEO should not be held by the same person and their offices be clearly separated.
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. They should also implement systems to independently verify and safeguard the integrity of the company's financial reporting. 316 316 . assessment and mitigation of risks and retirement by rotation over a fixed period of time.. Disclosure and transparency: Disclosure of information should be timely and balanced to ensure that investors have clear access to data and facts.
a person benefitting from a decision should abstain from it. Remuneration: Performance-based remuneration is designed to relate some proportion of salary to individual performance. 317 . Balance of power: The simplest balance of power is very common. Regular board meetings allow potential problems to be identified.GOVERNANCE STRATEGIES Monitoring by the board of directors: The board of directors. safeguards invested capital. fire and compensate top management. However. they should provide no mechanism or scope for opportunistic behaviour. with its legal authority to hire. discussed and resolved.
undertook formal evaluation of its directors. They defined a well-governed company as one that had mostly out-side directors.GOVERNANCE & PERFORMANCE In its “Global Investor Opinion Survey” of over 200 institutional investors in 2002. Egypt and Russia) to around 40% for Canadian & European companies. and was responsive to investors' requests for information on governance issues. The size of the premium varied by market. McKinsey found that 80% of the respondents would pay a premium for wellgoverned companies. from 10% for companies where the regulatory backdrop was least certain (those in Morocco. 318 . who had no management ties.
Therefore. the short-term view of profit maximisation gave way to a more broader and mediumterm view wealth maximisation of the shareholders. Over a period of time. However. corporate philanthropy should be a part of every corporate mission. The basic premise is that firms cannot exist in vacuum. 319 . today economic institutions are considered as a major drivers of improvement in quality of life in general and therefore needs to include multiple stakeholders.SHAREHODER – STAKE HOLDER THEORY Till the early part of the 20th the basic objective of modern organizations was to provide goods and services for public consumption for profit maximisation.
the debate on CRS still continues whether firms should detract its focus from its business? 320 . Therefore. economic and social responsibilities cannot be mutually exclusive. However. giving a very important message that one cannot exist without the other.CORPORATE SOCIAL RESPONSIBILITY As Peter Drucker rightly pointed out that. “a healthy business cannot exist in a sick and impoverished society”. CSR can be defined as. “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. Therefore.
Fear of government interference: Excessive quench for profits may lead to build up of adverse public opinion compelling the government to intervene (Eg. people are becoming increasingly aware of their right to a decent and healthy life.GROWING CONCERN FOR CSR Awareness due to education: With growing literacy. MRTP). 321 . Public image: Entrepreneurs are increasingly relying on public image as a source of competitive advantage and a higher financial discounting. The role of media: The media and various consumer organizations have come up in protecting consumer rights and exposing mal-practices.
Exide – Product take back). and extended producer responsibility (Eg. designing eco-friendly products. 322 . Cement . Literacy & Training Programs – (Eg. Refrigerators – CFC. Education. Tata Steel – Life Line Express).Paper packaging. Aditya Birla Research Centre – LBS). eco efficiency. Health & Hygiene – Attending the health hazards due to wastes and by-products to employees and society in proximity (Eg.CSR STRATEGIES Green Supply Chain Management: It includes environmentally preferable purchasing.
C.BOTTOM OF THE PYRAMID With the market across most developed markets including the US getting saturated. Strategic innovations leading to disruptive business models can show the way out. K. In turn companies by serving these markets. across the world's billions of poor people having immense untapped buying power. 323 . Prahalad notes that future markets exist collectively. They represent an enormous opportunity for companies who learn how to serve them. they're helping millions of the world's poorest people to escape poverty.
BLUE OCEAN STRATEGY 324 .
TWO WORLDS 325 .MARKETSPACE .
one companies gain is always at the 326 cost of another companies loss. . profitable growth. where most industries are saturated. In today’s red oceans.WHAT IS RED OCEAN? Companies have long engaged in head-to-head competition in search of sustained. battled over market-share. They have fought for profits. Yet in today’s overcrowded industries. competing head on results in nothing but a bloody red ocean of rivals fighting over a shrinking profit pool. and struggled for differentiation (cost or product).
It is only the frames of the . rendering rivals obsolete and unleashing new demand. Such strategic moves are possible through the pursuit of product differentiation and low cost simultaneously.WHAT IS BLUE OCEAN? Tomorrow’s leading companies will succeed not by battling in red oceans. Blue Ocean’s have existed in the past. but by creating blue oceans of uncontested market space ripe for growth . It helps in creating powerful leaps in value for both the firm and its buyers. it will exist 327 in the future as well.
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 .
information imperfections atrophy instantly. of European nations.BLUE OCEAN STRATEGY IMPERATIVES Prospects in most established market spaces – red oceans – are shrinking steadily. Technological advances have substantially 329 improved industrial productivity. Niche markets & monopoly havens are continuing to disappear. Population shrinkage across a no. . As trade barriers between nations & regions fall. Demand across developed markets reaching a plateau.
CONCEPTUAL UNDERPINNINGS Blue oceans have existed in the past and will exist in the future as well. History indicates that blue oceans exist in three basic industries – automobiles (how people get to work) – computers (what people use at work) – entertainment (what people do after work). managerial moves are. the underlying technology was often already in existence. They are not necessarily about technology. Incumbents often create blue oceans within the ambit of their core business. . Company & industry are the wrong units of 330 strategic analysis.
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. . Citibank – Automated teller machines & credit 333 cards.SOME GLARING EXAMPLES In the last century authors Kim and Mauborgne have documented the creation of more than 150 blue ocean creations across 30 industries – Virgin Atlantic: Fractional jet ownership or travel to space.
334 . According to this view managers need not be constrained to act within the confines of their industry. Off late emerging views in strategy having its origin in (Organization Theory) led to a paradigm shift to what is called the – reconstructionist view. According to this view. greater than themselves. companies & managers are largely at the mercy of economic forces. All they need to do is change their managerial frames.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.
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