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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
STRATEGIC MANAGEMENT . It is irreversible. It is long-term in nature. It is all about creativity and innovation. It is about adaptation and response to the same. 7 . It involves substantial resource outlay. It requires full commitment of the top management.FEATURES It forms the core activity of the top management. It provides broad guidelines. It is a holistic and integrated approach.
It is about a definite formula. It a bundle of techniques or even tricks. It attempts to minimize risk. It is fool-proof in nature.STRATEGIC MANAGEMENT – MYTHS It involves short-cuts. It involves only the top management. It is about forecasting. It involves nitty-gritty's. 8 . It is rocket science. It brings instant success. It about mere data and facts.
scale and scope. 9 To develop core–competencies.STRATEGIC MANAGEMENT IMPERATIVES To be continuously alert. . rather than reactive. To be insulated against environmental threats. To assimilate change faster. To be future oriented. To be proactive. again and again ……. To gain expertise in technologies. To innovate. To leverage size. To generate large resource pool. To tap markets across boundaries.
10 .ORIGIN The word strategy has its origin from the Greek word strategia meaning Military Commander. In the ancient days battles were won not by virtue of size of the army or armory. Even in today’s markets. It is an old wine in a new bottle. today's battles are fought over markets. whose origin can be traced to some of the greatest battles fought in the ancient days. obsession.STRATEGY . and more importantly . but by virtue of their courage. In contrast. but with a lot a rigour and robustness.strategies. 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.
– Toyota’s entry in the US. Napoleon’s attack on Russia – Strategy: Waiting for the right time. 11 . Allied Forces Vs Germany (WW-II) – Strategy: Forging alliances. US attack of Morocco to capture Germany – Strategy: Pin-hole strategy – Wal-Mart challenging Sears by entering small towns.SOME PARALLELS Japan’s attack on Pearl Harbour – Strategy: Attack where it hurts the most. challenging GM and Ford. – Yahoo and Microsoft challenging Google. – Reliance’s entry into telecom.
12 . 1910).Industrial Revolution. The first major discontinuity in the history of global business environment was the . – Mass Production Organization Size – Complicated Processes – Complex Structures Evolving of an emerging paradigm – survival of the fittest (Fayol & Taylor. The things happening around the firm when totally disconnected from the past leads to a paradigm shift. A paradigm is a dominant belief about how the business and its environment operates. a radical change in the business environment brings about discontinuity.EVOLUTION OF MANAGEMENT As Peter Drucker refers to it.
From uniform performance. push to pull). The question of outperforming the benchmark became the new buzzword.e. – Global market place. Efficiency and effectiveness are no longer sufficient. Survival of the most adaptable becomes a new management paradigm (Ansoff. – Changes in the technology fore-front. – Affluence of the new customer (i. 13 .EVOLUTION OF STRATEGIC MANAGEMENT The second major discontinuity in the history of global economic environment – World War II. performance across firms became differentiated. – Homogeneous to heterogeneous products. 1960).
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 .
– Biases and prejudices has a very little role to play in strategic choices pursued by managers. – The choice of strategy is primarily concerned with external ones rather than internal ones. – The choice of product-market mix is based on conscious evaluation of risk – return factors. Ansoff (1960) – Strategy can be segregated into certain mutually exclusive and inter-related components aimed at managing the growth of an organization. Learning always begin on a clean sheet of paper. 15 . – It is primarily the top management’s prerogative.APPROACHES TO STRATEGY Analytical Approach – Igor H.
– Organization structure will precede and cause changes in strategy. The organization initially decides which industry to enter. everything else follows.APPROACHES TO STRATEGY Design Approach – Alfred Chandler (1970) – Structure follows strategy. Successful organizations align authority and responsibility of various departments in way to reach overall objectives. Once the control systems are in place. – Management control systems has a dominating role in influencing firm performance. 16 . – The top managers then decide on the type of organization structure & systems to be in place. how it will compete. who will be the top managers.
17 . – The organization will outperform the industry where environmental forces are weak and vice-versa. substitutes. Porter (1980) – Choose a consumer segment and position your product accordingly. – A firms performance is inversely related with the bargaining power of environmental forces to which it is exposed. – The environmental forces comprises of – supplier. – An organization is seldom in a position to influence the larger business environment. customer. new entrant. competitors.APPROACHES TO STRATEGY Positioning Approach – Michael E.
APPROACHES TO STRATEGY Core Competence – C. Prahalad (1990) – The key to superior performance is not doing the same as other organizations. 18 . locating in most attractive industries and pursuing the same strategy. K. – It enables a firm to deliver unimaginable value ahead of time. but exploiting the resource differences among them. They are complex resources and undermines a firms competitive advantage. – Organizations can significantly alter the way an industry functions. – Core competencies are a set of skills that are unique and can be leveraged.
STRATEGIC MANAGEMENT PROCESS Strategic Intent Strategic Planning Strategic Gap – Environmental Scanning – Internal Appraisal of the Firm Strategy Formulation – Corporate Strategy – Business Strategy Strategic Choices – Functional Strategy Strategy Implementation Strategy Performance Strategy Evaluation & Control 19 .
TOP MANAGEMENT PERSPECTIVE 20 .
It provides a sense of direction and destiny. It’s a philosophy that distinguishes it from its competitors. A substantial gap between its resources and aspirations. It implies a significant stretch. It is the cornerstone of an organizations strategic architecture reflecting its desired future state or its aspirations. A strategic intent is a statement of purpose of existence.STRATEGIC INTENT If you cannot see the future. A gap that consciously manages between stagnation and atrophy. It involves an obsession to be the best or outperform the best. you cannot reach there. 21 .
HIERARCHY Integrativ e m Do an in Visio n Mission Dominant Objective s Goal s Plans Lo g ic Single Specifi c Man y 22 t .STRATEGIC INTENT .
23 . 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. strategic variety) is apparent.e.DOMINANT LOGIC A dominant logic can be defined as the way in which the top management team conceptualizes its various businesses and make critical resource allocation decisions. It is core to the strategic intent of the firm. when radical changes in the internal and external environment (i. To put it more simply. Dominant logic changes.
but achievable aspirations. It provides an unity of purpose amidst diversity of personal goals. 24 . It is a combination of three basic elements – – An organizations fundamental reason for existence. beyond just making money. – 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.VISION It is a dream (not a forecast) about what the company wants to become in the foreseeable future. It enables the top management to remain focused.
Reachable – It should be within a reasonable target in the known future. In Reliance when a new project becomes operational top managers hand over charge to the SBU heads and move on to a new project. Empathy – It should reflect the company’s beliefs to which it is sensitive. and memorizable. Clarity – Vividly descriptive image of what the company wants to be known for in the future. Brevity – It should be short. 25 . clear. not an utopian dream. Sharing – The company across all hierarchies should have faith in it.CHARACTERISTICS Reliance – Where growth is a way of life.VISION .
It fosters risk taking and experimentation. It makes strategic alignment easier. It facilitates development of skills & capabilities. It gives enlightment. To prevent the fall in a activity trap.VISION . 26 . It gives the impression of a forward-looking organisation. It provides a holistic picture. It lends integrity and genuineness.ADVANTAGES To stay focused on the right track. It gives a shared platform.
its reason for existence. It enables the firm to define its business landscape and identify its competitive forces. 27 . Although the purpose may change over time. It serves as a road map to reach the vision. A broad mission statement helps in fending competitors.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.
…………………. …………………. We offer strength. – We do not offer software's. We offer security. Some other examples – We do not offer shoes. though some may seem unrelated in nature. We offer comfort. …………………. All the businesses of the company are strongly integrated with their main business. – We do not offer steel.MISSION – SOME IDEAS Reliance – We are in the business of integration. We offer solutions. – We do not offer insurance. …………………. 28 .
– It lends direction – time frame in the medium term. – It helps identifying key success factors. It is an end result (quantifiable) something a firm aims and tries to reach in a time bound frame. 29 . It provides a quantitative feel to an abstract proposition. – It provides a benchmark for evaluation.100K crore company by the year 2005. – It is based on Management by Objectives (MBO).GOALS & OBJECTIVES Reliance – We want to become a Rs. – It prevents deviation. – It adds legitimacy and motivation. – It keeps the mid management pre-occupied.
– Use price-elasticity to break market barriers. – Compress project times. It is specific to a particular business. and gaining access to desired markets to achieve the desired goals and objectives. – Acquire a market share of indomitable position. 30 . – Leverage economies of size and scale. coordinating appropriate technologies.PLANS Reliance – Desire to invest 25K crore in telecom business by circa 2010. It is the process of garnering necessary inputs. The details of the plan Reliance Telecom adopted were – Backward integrate process technologies.
equilibrium is maintained. This tendency to restore continuity is known as inertia (resistance to change). 31 . However. radical change may lead to disequilibrium. strategies lose touch with the emerging realities. It often leads to an organizational crisis. In such a context. past strategies tend to have a bearing on future strategies. When changes in the environment is incremental. Historical studies have shown that most organizations tend to continue with their existing strategies.STRATEGIC DRIFT Due to top management commitment. This state of affairs is known as strategic drift.
STRATEGIC DRIFT FRAMEWORK Environmental Change Degree of change Strategic Change Radical Change Incremental Change State of Flux Continuity Stage of Transformation Strategic Drift Stage of Atrophy Time 32 .
– Developing a platform of support. – Hiding vulnerability. – Creating obligations of reciprocity. – Creating a favourable image. 33 . – Using covert tactics to pursue self interests.ORGANIZATIONAL POLITICS Strategic drift often leads to organizational politics. Some instances of organizational politics – Formation of powerful groups or coteries. – Distorting information to gain mileage. Organizational politics involves intentional acts of influence to enhance or protect the self-interest of individuals or groups over organizational goals.
Usually there is wide gap between the two when organizational politics is evident. – Persons responsible for strategy conceptualization and implementation are34 divergent. – The environment context has changed. Other causes – – The plans are unworkable and utopian.INTENDED & REALISED STRATEGIES An intended strategy is an expression of interest of a desired strategic direction. A realized strategy is what the top management actually translates into practice. . – Influential stake-holders back out.
Strategy formulation and implementation are linked together in a continuous improvement cycle. Learning is an integral part of logical incrementalism. but as a defensible response to the complexities of a large organization that mitigate against publicizing goals. They simply unfold the particulars of the sub-system in stages. However.LOGICAL INCREMENTALISM According to the incrementalism approach (contrary to integrated approach) practitioners simply do not arrive at goals and announce them in crafted and well defined packages. 35 . but the master scheme of the rational comprehensive scheme is not apparent. this is not to be treated as “muddling”.
Leveraging Crisis – A sudden crisis or an opportunity should be used as a trigger to facilitate acceptance and implementation of change. 36 . Agent of Change – Formal ratification of a change plan through MBO.IMPLEMENTING INCREMENTALISM General Concern – A vaguely felt awareness of an issue or opportunity. Adaptation – As implementation progresses. The broader objective should serve the overall interest of the organization. Macro Broadcasting – The broad idea is floated without details to invite pros and cons leading to finer refinements.
Strategic transformation becomes smooth through a change in top leadership. Tampering with surface level factors often leads to atrophy.STRATEGIC TRANSFORMATION Strategic transformation (a complete overhauling of the strategic architecture) becomes inevitable whenever a strategic drift takes place. Dominant logic’s are the cornerstones of change when strategic transformation is apparent. It creates blinders. As it brings 37 with it a different dominant logic. . Dominant logic’s are very rigid and sticky and prone to inertia.
Factors that fosters a learning organization – Pluralistic – An environment where different and even conflicting ideas are welcome. 38 . A learning organization must continuously focus on unlearning as well. It helps prevent a strategic drift from occurring at the first place. and skills that fosters experimentation and questioning and challenge around a shared purpose. – Organisational Slack – Enough free space. – Experimentation – Fosters a culture of risk taking. – Constructive Bargaining – Agree to disagree. experience. – Informal Networks – Emerging of new ideas.LEARNING ORGANIZATION A learning organization is capable of continual regeneration from knowledge.
ENVIRONMENTAL CONDITIONS Dynamic Scenario Planning Learning Organization Static Forecasting Decentralization Simple Complex 39 .
ANALYZING BUSINESS ENVIRONMENT 40 .
It is based on the assumption of radical change. It points to a position of superiority with relation to competition. It is pro-active in nature. 41 . Competitive advantage provides the surest way to fulfill the strategic gap.e. It is reactive in nature. It requires a quantum leap (i. Strategic gap basically points towards a vacuum of where the organisation wants to be and where it is. It is based on the assumption of incremental change. Strategic planning is a function of discounting the future.PLANNING & STRATEGIC PLANNING Formal planning is a function of extrapolating the past. gap analysis).
resources and ideas move unhindered. Environmental scanning is very important component of strategic planning. and influences that affect an organizations way of doing things. 42 . not guided by any boundaries. The segments of the environment a top manager scans selectively depends upon his dominant logics. Environmental factors can be external as well as internal to the organization. The world is flat. events. It is exploratory in nature.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.
but also to analyze the complex linkages across them. 43 . It is important not only to identify the structural drivers of change. It is not intended to be used as an exhaustive list. which may be different from the past impact. It is particularly important that PESTEL be used to look at the future impact of environmental factors. for which a holistic picture is required. Understanding the composite effect is critical.PESTEL PESTEL attempts to provide a broad framework on how the broader environmental forces affects an organization and influences the way it practices strategy.
Economic – GDP. Monsoon & Food Grains Reserves.PESTEL FRAMEWORK Political – Government Stability. Fiscal Deficit. Licensing & Quotas. Social – Population Diversity. Savings & Investment. Government Attitude. Literacy Levels. Language Barriers. FDI Inflows. Economic Cycles. Capital Market & Forex Reserves. Social Values. Central – State Co-alignment. Currency Stability. Religious Sentiments. 44 . Infra-Structural Investments. Subsidies & Protection. Income & Age Distribution. Economic Model. Inflation & Interest Rates.
Pollution Control Laws. Research & Development. Non-Fossil & Alternative Fuels. Environmentally Preferable Purchasing. Technological Convergence. Environmental – Global Warming & CSR. Legal – Monopolies Legislation. ERP. 45 .PESTEL FRAMEWORK Technological – Innovation. Direct & Indirect Taxes. Employment Laws. Consumer Protection Laws. Patents. Obsolescence Rate. Extended Producer Responsibility. Product Safety & Health Hazards. Waste Disposal & Emissions. Patent Laws. Product Design. Carbon Credits.
Banking Sector Reforms. FERA Liberalization. Abolition of import licenses. Curtailment of PSU’s. Exit Policy. Rupee convertibility. 46 .VRS. Dismantling price controls.ECONOMIC LIBERALISATION New Industrial Policy (NIP) – Liberalizing industrial licensing. PSU Disinvestments. New Trade Policy (NTP) – Lowering import tariffs. Structural Adjustments – Phasing out subsidies. Capital Market Reforms. Encouraging FDI. Economic Reforms – Fiscal & Monetary Reforms. Encouraging exports. MRTP Liberalization.
DISCONTINUITY Destabilization due to entrepreneurial freedom – Cocoon of protection disappears – Diversification spree – Existing notions of size shaken – Industry structures change radically – Economic Darwinism . Mergers & Acquisitions 47 .Survival of the fittest MNC Onslaught – Enhancing stakes – Power Equation – Joint Ventures – Technological Alliances – Take-over threat.
DISCONTINUITY Hyper Competition – MNC’s .Globalization – Cheap Imports & Dumping – Push to Pull Marketing Buyers exacting demands – Shortage to surplus – Price competition – Life-style changes – Stress on quality. Consumerism Challenges on the technology front – Competencies become technology based – Investment in R&D become inescapable 48 .
DISCONTINUITY Compulsion to find export markets – Identifying competitive advantage – Technological gap – Global presence – Depreciating currency – Exports Corporate vulnerability – It is no longer business as usual – Capital inadequacy – Lack of product clout and brand power – One product syndrome – Loss of monopoly 49 .
FIVE FORCES MODEL .PORTER Threat of New Entrants Bargainin g power of Suppliers Competition from Existing Players Bargainin gBargainin power g of power of Suppliers Customer s Threat of Substitutes 50 .
e.FIVE FORCES MODEL ASSUMPTIONS The model is to be used at the SBU level and not at the industry level. It depicts the attractiveness of an industry (i. 51 . The model should not be used as a snapshot in time. profit potential) per se. The five forces have strong cross-linkages. It is even wiser to apply the same at the product – market level. It should not only be used to understand the forces. incremental or otherwise. the forces are subject to changes. but also used to understand how they can be countered and overcome.
Resource profile & fear of retaliation. Threat of Customers – Buyer concentration and volumes. Unimportance of product quality. Presence of substitutes or unorganized sector.PORTERS FIVE FORCES ANALYSIS Threat to Entry – Economies of size and scale. Low customer switching costs. Undifferentiated product. Access to distribution channels. Scope for backward integration. Government policy. Learning curve advantages. Low relative importance of the segment. Low margins & stagnancy. Capital requirements. High switching costs. 52 . Product differentiation through proprietary technology or brand power. Industry stagnation.
Low relative importance of the segment. High customer switching costs. Diversity of players. Scope for forward integration. Intermittent overcapacity. Differentiated inputs. Produced by industries earning high profits. Piracy and counterfeits.PORTERS FIVE FORCES ANALYSIS Threat of Suppliers – Supplier monopoly. Jockeying for position – Fragmented market. High exit barriers. Threat of Substitutes – Improvement in price -performance trade-off. Industry stagnancy. Lack of substitute inputs. Buyer’s propensity to substitute. Low level of differentiation. 53 . Unorganised sector. Product perishability.
Cohesiveness – Degree of bonding existing across affiliated firms. Business Scope – The intention whether the firm wants to be in a single. Tata). Resource Profile – It highlights the capabilities (generic) or competencies (business specific) of the firm. dominant or related diversified or unrelated diversified businesses (Infosys.FIRM ENVIRONMENT Size and Scale of Operations – It is a very important component of competitiveness in today's global context (Bharti – MTN. Reliance). Inertia – Excessive commitment to past strategies prevents firms from tapping emerging opportunities. 54 .
leverage it as a competitive advantage. However. With lower costs. 55 . which further reduces costs. Matured firms will always be positioned advantageously on the ECurve than new entrants. experience teaches better and more effective way of doing things. it can price its products more competitively. The E-Curve thus enables organisations to build entry barriers. an E-Curve can prove to be futile during discontinuity. Experience curve has strong linkages with performance.EXPERIENCE CURVE The cost of performing an activity declines on per-unit basis as a firm becomes more efficient. and with lower prices it can increase its sales volume.
EXPERIENCE CURVE Cost per unit of output Decreases at an increasing rate Point of inflexion Decreases at a constant rate Decreases at a decreasing rate Production / Volume 56 .
TRADITIONAL VIEW Efficiency = Lower Costs 2 3 1 Experience = Efficiency Lower Costs = Higher Sales Entry Barrier = Better Performance 4 6 5 Higher Sales = Lower Costs Lower Costs = Entry Barrier 57 .EXPERIENCE CURVE .
EXPERIENCE CURVE .STRATEGIC VIEW Inertia = Limited Growth Experience = Inertia 2 3 1 Limited Growth = Diversification Strategic Failure = Poor Performance 6 5 4 Diversification = New Experience New Experience ≠ Old Experience 58 .
Customers. Suppliers. Interviews. . 59 Analysts. Business Intelligence – Bankers. Press Clippings & Interviews. Case Studies – Structured Questionnaires. Observation. It is one of the earliest models in environmental scanning.VULNERABILITY ANALYSIS . Competitors. A SWOT audit involves – Company Records – Annual Reports.SWOT The framework was originally conceptualized by Kenneth Andrews in 1970. Websites. Acronym for Strengths – Weaknesses – Opportunities – Threats. It helps an organisation to capitalize on the opportunities by maximizing its strengths and neutralizing the threats minimizing the weaknesses.
FRAMEWORK Opportunities Nullify weaknesses which prevents you from exploiting opportunities Leverage strengths to make use of opportunities Weaknesses Minimize weaknesses which prevents you from countering threats Strengths Threats Utilise strengths to counter threats (?) 60 .SWOT ANALYSIS .
Tata. Ranbaxy. Reddy’s. Infosys. Honda. Dr. Tata Steel.SOURCES OF STRENGTH Strong brand identity – Eg. Caterpillar. Infosys. Economies of scale – Eg. Toyota. Strong after sales & service network – Eg. Siemens. Good credit rating – Eg. HUL. Reliance. Engineering Skills – Eg. ITC. Volkswagen. High quality products – Eg. Large resource pool – Eg. Reliance. SBI. Sony. Excellent penetration – Eg. Aditya Birla. Motivated employees & cordial industrial relations – Eg. 61 . Biocon. Strong R&D base – Eg.
CESC. J. CMC (Tata Group) 62 . K. SAIL. Single product syndrome – Eg. Bijoligrill. Inertia – Eg. B. Group . Lack of product / brand clout – Eg. Excessive diversification – Eg. Hindustan Motors. Narrow business scope – Eg.Raymond. Tatas. Procter & Gamble.SOURCES OF WEAKNESSES Outdated technology – Eg. Inefficient top management – Eg. K. Strategic myopia – Eg. Nirma. Organizational Politics – Eg. Lacking experimentation culture – Eg. Modi Group. Excess manpower – Eg. Ballarpur Inds.
63 . Collaborations & Joint Ventures – Bharti & WalMart. Fertilizer. Fertilizers. Free pricing – Eg. ECB’s. Exit Policy – Eg. Maruti. Market driven Interest rates – Eg. Sugar. Life style changes – Eg.SOURCES OF OPPORTUNITIES Delicensing of Industries – Eg. Middle-class buying power. Telecom. Sugar. Banking. Capital market reforms – Eg. GDR’s. VRS. Abolishing MRTP – Eg. Growing population – Eg. Retailing.Tata Motors. Globalization – Eg. Abolishing CCI. Insurance. Market driven Pricing – Eg.
Natural disaster – Eg. Land acquisition . Group disintegration – Eg. Earth Quake. Nationalisation – Eg. 26/11. Lack of Corporate Governance – Eg. (1985–1990). Tsunami. Economic recession – Eg.Social activism – Eg. Satyam. Onida. (2008).SOURCES OF THREATS Political instability – Eg. Hostile take-over – Eg. Dumping from China. 11/9. Bajoria – Bombay Dyeing. Foreign Direct Investment (FDI) – Eg. Tata Steel. Reliance. Import relaxation – Eg. Terrorist attacks – Eg. 64 . Singur SEZ.
e. time series. scenario analysis). Delphi's technique. It represents a summary picture of the external environmental factors and their likely impact on the organization. Forecasting – Predict the future (i.ETOP Acronym for Environment – Threat – Opportunity – Profile. Holistic view – Prepare a complete overall picture. Assess the extent of impact of the factors. 65 . Stages in ETOP analysis – List the aspects of the environment that has a bearing on the organization. Strategic responses (including adaptation) to opportunities and threats is critical for survival and success.
PROFIT IMPACT OF MARKET STRATEGY PIMS is a database model developed by GE and later extended by HBS to examine the impact of a wide range of strategy variables on business performance. An organization can draw upon the experience of its peers in similar situations. . It is also a form of assessing vulnerability through longitudinal analysis. Relative attractiveness of the market. selectively. High investment intensity acts as a drag. 66 Vertical integration is a powerful strategy. Some key findings on major performance drivers that explains 75% deviations in performance – Product quality and relative market share.
– Contexts may vary over time.PIMS . As every organization is unique in its own way. Authenticity of data is of prime importance – Contexts drawn across one organization may not be applicable to another. when radical changes in the economy takes place. Managers should be particularly cautious while referring to such data during times of discontinuity as it makes past patterns futile.LIMITATIONS The analysis is based on historical data and it does not take care of future challenges. . – Contexts may vary across countries. therefore 67 validity may be a question.
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. KSF helps organizations spot early opportunities and convert them into value adding business propositions. It enables the top management to draw focus. 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 .
IDENTIFYING ALTERNATIVE STRATEGIES 69 .
It reflects the customer needs it intends to satisfy. national. global) of a firm and deals with choices of allocating resources across them. It provides broad direction to the groups vision and mission. 70 .CORPORATE . unrelated) and geographical scope (local. dominant. A corporate strategy identifies and fixes the strategic gap it proposes to fill. related. It indicates the quality of growth an organization is looking for. It determines the locus a firm encounters with internal and external environment.GRAND STRATEGY It is concerned with the overall business scope (single.
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. Hindustan Motors). – To stop for a while and assess past records.STABILITY It involves maintaining status-quo or growing in a slow and selective manner. – Why disturb the existing equilibrium set up? – Limited resource position. Stability however. 72 . The reasons for stability strategy – – Lack of attractive opportunities. (Eg. does not relate to do-nothing (Eg. Even during adverse times firms need to adopt a strategy to sustain current performance levels. – The firm may not be willing to take additional risk associated with new projects. The scale and scope of present operations remains almost intact.
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 .
(Eg. Britannia). direct non-users to users. 74 . within a well defined market segment. – Elongated product life-cycle. Ujjala. – The company carries a risk of product obsolescence. – Helps firms which are not comfortable with unfamiliar terrain.MARKET PENETRATION It is a strategy where a firm directs its entire resources to the growth of a single product or a closely knit product set. convert competitors customers. Market penetration can be achieved by – increasing sales to current customers. Nirma. – Suitable for industries where scope for technological breakthrough is limited.
Du Pont – Nylon: parachutes. carpets. – Immense customer reach & flexible advertising. tyres.…… or Teflon: aircraft technologies to cutlery to paints or Raytheon Corp – Microwaves: radars to kitchen appliances). 75 . – Stretches product life cycles. – Unconventional and flexible distribution channels. upholstery. socks & stockings. fabrics. (Eg. – Creativity and innovation – thinking out of the box. – Moves across geographical boundaries.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.
PRODUCT DEVELOPMENT It is a strategy where a firm tries to achieve growth through a radical new product (Eg. – Areas of product improvement – performance. durability. Close Up: Fluoride – Gel toothpaste or VIP . features. conformance. reliability. Refills) 76 . aesthetics. 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. – Leveraging through – innovation. perception.Strolleys). – Substitutes that serve the same needs (Eg. serviceability. – Leverage on customer and brand loyalty.
DIVERSIFICATION It marks the entry of a firm into newer markets with new products. From the traditional point of view. industrial embassies). – Internal capital market. dominance). – High transaction costs and institutional gaps. licenses (i. Why do firms diversify in the Indian context? – Shift the growth trajectory or opportunistic. – Conglomerate or market power (i. 77 . – Risk reduction. thereby creating a new business. From the modern point of view they are strategically dissimilar.e. the new business is distinct from the existing business in terms of – inputs – technologies – markets.e. – Permits: quotas.
the ice-cream business would register a return of 30%. If on the other hand. while the coffee business would register a return of 30%. while the coffee business would register a return of 10%. Let us assume that there are two businesses constituting the entire market – coffee and icecream. What would be your ideal diversification strategy through optimization? 78 . in which a given year is either under hot or cold wave. If the hot wave dominates the planet.HOW DIVERSIFICATION REDUCES RISK? Consider a hypothetical planet. either of which is equally likely to prevail. ice-cream business would register a return of 10%. 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.
Usually the firm concentrates on its core activities. and out-sources the noncore activities (Eg. Tapered integration . Reliance). Maruti – Sona Steering). Ranbaxy.QUASI & TAPERED INTEGRATION Full Integration .Where one firm has full ownership and control over all the stages of a value-chain in the manufacturing of a product (Eg. Quasi-integration .A firm produces part of its own requirements and buys the rest from outside suppliers with a variable degree of ownership and control.A firm gets most of its requirements from one or more outside suppliers that is under its partial control through value chain partnerships (Eg. Dr. 85 . Reddy’s).
A CASE OF TAPERED INTEGRATION Partial Ownershi p Transmission Engine Design Electricals Steering 86 Seats & Carpets Windscreen Ordinary Components Zero Ownership Very Critical Component s Full Ownership Critical Component s .
CONGLOMERATE DIVERSIFICATION It relates to entry of firms into businesses which are distinct in terms of – inputs – technologies – markets. lack of strategic intent.e. and are also strategically dissimilar.e. – Cost of neglect (i.e. myopia). – Cost of ignorance (i. synergies pulling in opposite directions). core business). – Cost of dysynergy (i. Firms usually engage in conglomerate diversification when emerging opportunities are very attractive and offers potential growth opportunities.e. lack of knowledge of competitive forces). Drawbacks of unrelated diversification – – Cost of failure (i. 87 .
CONGLOMERATE DIVERSIFICATION Paper & Packaging Edible Oils Tobacco Hotels Food & Confectionary 88 .
e. It taken into account when performance is disappointing (i. (Eg. Tata Pharma. It is may also be a pro-active strategy. L&TCement Division to Aditya Birla Group) technically known as divestiture or a product (Eg. 89 . where a company simply exits because the business no longer contribute to or fit its dominant logic. Tata Press). Tatas sale of Goodlass Nerolac.DIVESTMENT Divestment is a defensive strategy involving the sale of entire stake (Eg. In strategy there is no scope for sentimentality with divestment. ACC) in full to an independent entity. Glaxo’s “Glucon-D” to Heinz). reactive) and survival is at stake and the firm does not have resources to fend off competitive forces. It may also involve a SBU (Eg.
1956 does not permit this mode. Sale of Diamond Beverages to Coca-Cola for US $ 40 million).3 billion. Tatas buy-out of Corus for US $ 11. (Eg.DIVESTMENT .ROUTES Outright Sale – Popularly known as the asset route. (Eg. Hive-Off – A hive off is the creation of a new entity followed by transfer of assets. 90 . where 100% of the assets (including intangibles) are valued and paid for. the Companies Act. involving 608 pence per share). where the equity is allotted amongst the existing shareholders on a pro-rata basis. Leveraged Buy-Out (LBO) – Here the company’s shareholders are bought out through a negotiated deal using borrowed funds. However.
There can be no ideal strategy for every business. growth. joint ventures). developing facilities right from the scratch) or through brown-field projects (i. 91 .e. A combination strategy can be implemented through green-field projects (i.COMBINATION STRATEGY It is a mixture of stability.e. mergers and acquisition. because every business has its own unique external and internal environment. It is usually pursued by a business group with diverse interests across multiple industries. and divestment strategies applied simultaneously or sequentially for a portfolio of businesses.
STRATEGY CHOICE & PORTFOLIO ANALYSIS 92 .
Dominant logic enables top managers to selectively scan the environment and make trade-offs. What then is the magical number? 93 .STRATEGIC CHOICE A strategic choice seeks to determine the alternative courses of action available before top managers to achieve its strategic intent. 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.
The key task before a top manager is to identify the right problems. 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 . if addressed. To identify the right problems. They must choose problems which will lead to the right kind of opportunities. nor is to a define a problem for others to solve. will help the firm achieve its intent.SELECTIVITY IS THE KEY The role of a top manager is not to solve a problem. managers need to ask the right questions.
Proximity to the corridors of power (i. BRC). Licenses & Quotas. 95 Succession planning is critical to continuity.DEFINITION A business group is known by various names in various countries – guanxique in China. formal and informal ties. Resource sharing. business houses in India. Managing Agency). Their roots can be traced to a single family or clan and share broad similarities. .e. chaebols in Korea.BUSINESS GROUP . Their origins can be traced back to market imperfections existing in an economy (MRTP Laws. High degree of centralized control (GEO. embassies). keiretsus in Japan.
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. sometimes impossible. Power and resources often goes hand in hand. there are high costs associated with entry and exit. Relatedness across resources are difficult to realize. Rules of the game are different.PORTFOLIO ANALYSIS Resource allocation across a portfolio of businesses is an important strategic choice. Redeployment of resources upsets the established power bases of a group. Investing in emerging businesses may not actually be so simple as it appears to be. 99 . Why? Businesses are not about liquid assets. therefore.
BCG GROWTH MODEL Relative Market Share (%) Industry Growth (%) Low High High Low Stars Question Mark ? Cash Cow Dogs 100 .
Tata Telecom. 101 .BUSINESS ANALYSIS – TATA GROUP Question Marks – They have potentials in the long term.e. which remains a big? These businesses are net users of resources. Tata Steel). provided the company is able to build up on its market-share (i. These businesses are also net users of resources (Eg. product development).e. Stars – They achievers in the near term. market penetration. but to larger extent than a question mark. TCS. market development. diversification). provided the industry growth rate continues and the company is able to maintain its growth (i. Tata-AIG). and their risk profile is high (Eg. Trent.
102 .e. harvest. Nelco. and the company dominates the industry ahead of competition (i.e. divest) as achieving a dominant position in these businesses is a difficult task. stability). and they lack on competencies to take on competition and are basically cash traps (Eg. Tata Motors.BUSINESS ANALYSIS – TATA GROUP Cash Cow – These are matured businesses. Given that the growth potential in the business is low. Tata Chemicals). Indian Hotels. Tata Pharma. Tata Tea. Dogs – They are a drag on the group. they are generators of resources. However. Tata Press). cash cows may also need to invest provided the industry takes an upswing (Eg. Groups prefer to dispose off such businesses (i.
Cash cows may actually need substantial investments to retain their market position (Eg. Cartier. Data may be prohibitive.BCG . Mercedes Benz. 103 . factors are limited.e. Certain businesses in the low market share category may be the result of a conscious strategy (i. Armani).LIMITATIONS It does not address the concerns of a business which is in the average category (usually the majority). The model does not provide specific solutions within a particular category. niche – Rolex. HUL). The terminologies used are somewhat prohibitive. neither in high or low.
-) 104 .MATRIX Distinctive Capabilities Strong High Medium Weak Stability Industry Attractiveness Diversify (++) Intensify (+) Med Intensify(+) Stability Harvest (-) Low Stability Harvest (-) Divest (.GE .
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 .
BCG – Boston Consulting Group. SBU – A business unit which is strategically different from another and also shares a different SIC code. 107 .TERMINOLOGIES Harvest – It entails minimizing investments while trying to maximize short-run profits and cash flow with the intention to exit the business in the near future. Disinvestment involves selling in phases. Divest – Selling a part or the entire business at one go. Portfolio – An organization is perceived as a portfolio of businesses. Gap Analysis – It emphasizes what a firm wants to achieve.
BUSINESS STRATEGY & COMPETITION 108 .
COMPETITIVE STRATEGY A competitive strategy deals with how a firm competes in a particular business or product-market segment. The strength of a firm in a particular business usually stems from its competitive advantage. rent).e. Competitive advantage is the back-bone of strategy. Competitive advantage refers to a firms resources or activities in which it is way ahead of competition. Such resources or activities should be distinctive and sustainable over time. building market-share. and earning super-normal profits (i. 109 . The principal focus is on meeting competition.
leveraging (Prahalad). 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. involving harmonizing and integrating multiple streams of technologies. Delta Lock In – Two dominant players co-opt to selfreinforce and create or escalate an entry barrier. developing competitive advantage (Porter). 110 .BUSINESS STRATEGY FRAMEWORKS How to be distinctive and yet sustainable – Differentiation – Understanding of the dynamics of competition. preventing new entry and/or competition (Hax & Wilde).
proprietary technology. Nirma. T-Series). Locational or early entry advantage. backward integration. Sources of cost advantage are varied and depends on the structure of the industry – Economies of size. Compress project duration through crashing. The firm may retain the benefits of cost advantage by enjoying higher margins (Eg. 111 .PORTERS – COST LEADERSHIP Cost Leadership – It is a strategy that focuses on making a firm more competitive by producing its products more cheaply than its competitors. Reliance) or may pass it to customers to increase market-share (Eg. preferential access to raw materials. Ayur. Steep experience curve effects.
(Eg. Rayban). It selects one or more attributes that buyers perceive as important. Means of product differentiation are peculiar to each industry. undeterred attention to quality. Intel. innovation and out of the box thinking.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. Sony. Culture of experimentation. Creativity. Focus on brand loyalty. Successful product differentiation is often followed by premium pricing. 112 . avoiding brand dilution. and sufficient slack. Feeling the pulse of the customer.
Mont-Blanc. The target segment must have unusual needs or the delivery system catering to this segment must be unique. A focuser seeks to achieve a competitive advantage in its target segment. 113 .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. Cartier. Armani). coupled with fear of structural erosion. Sub optimization alone may not be a source of superior performance. though it may not possess an overall competitive advantage. Rolex. They are poorly served by mainstream players. Maybach.
COMPETITIVE POSITIONS Competitive Advantage Cost Differentiation Product Differentiation Competitive Scope Broad Cost Leadership (Toyota) Product Differentiation (General Motors) Narrow Cost Focus (Hyundai) Differentiation Focus (Mercedes) 114 .
HYBRID STRATEGY A hybrid strategy is the simultaneous pursuit of cost leadership and differentiation. in a hyper competitive context the two strategies need not be mutually exclusive.e. Reducing cost does not always involve a sacrifice in differentiation. Firms focusing on a hybrid strategy typically aim at shifting the productivity frontier and recreating a new product-market segment altogether (Eg. Tata Nano). similarly differentiation may not always lead to rising costs (i. jugaad or frugal engineering). 115 . Though cost leadership and differentiation are inconsistent. and usually outperforms a stand alone generic strategy.
Industry maturity will usually widen the gap. The positioning therefore gets – blurred. It is usually the result of a firm not willing to make trade offs. but achieves none. It tries to compete through every means. It will have a competitive disadvantage vis-à-vis a clearly positioned generic player.stuck in the middle. unless such a player is capable of discovering a profitable segment. leading to what is called – straddling.STUCK IN THE MIDDLE A firm that engages in a hybrid strategy and fails to achieve a competitive advantage because it was ill conceived will be . 116 .
changing customer needs.radical environmental changes. Nano technology.) Excessive turbulence in the dynamics of the environment. There is a lot of scope to define the rules of competition. (Eg. leading to a blurred productivity frontier and steep learning curve. 117 . Market segmentation not well defined. Eg. It is characterized by – High level of technological uncertainty. ending in a differential cost economics. Consumer behaviour pattern unstable and evolving. 3D imaging. technological innovations.EMERGING INDUSTRY Emerging Industry – An evolving industry characterized by . Speech recognition software's. coupled with low penetration levels. First-time buyers. Artificial intelligence).
because of lack of economies of size and scale. leading to clear fragmentation. Air Conditioning. Government regulations in the form Eg. Eg. Retail and telecom. Scope for players to change the rules of the game. Paints. Eg. High exit barriers because of huge investment in CAPEX. 118 . Consumer durables. MRTP may also cause fragmentation. Eg. Diverse customer needs.GROWTH / FRAGMENTED INDUSTRY Growth Industry – An industry characterized by high growth potential in the long run and where no firm has a significant market share (an edge over another). IT. It is characterized by – Low entry barriers.
Limited scope for innovation . established industry dynamics.technological maturity. Firms are rule takers in the segment as productivity frontier is well defined. Cartel among existing players through collusion. distribution networks. Strong entry barriers. because of economies of size and learning curve effects. well defined consumer behavioral patterns and imperfect competition leading to near monopoly. technological maturity. early entry and location advantages. 119 .MATURED INDUSTRY Matured Industry – An industry characterized by saturation in growth rates. collaboration and co-option.
Nature of competition extremely high. backed by corporate espionage. 120 . scooters. (Eg. Typewriters. 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. dot-matrix printers). and costly price wars.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. with little or no signs of recovery. Firms facing a declining phase are characterized by inertia and slow to react to environmental changes.
Locate a defendable position. 121 . increasing scope. assess and overcome fragmentation. strictly product differentiation and not standardization. focus more on product differentiation or even a hybrid one. or else exit the segment. move beyond boundaries. process innovation. premium pricing. branding and promotion. Fragmented Industry – Identify. Declining Industry – Redesign. regenerate.COMPETITIVE STRATEGIES Emerging Industry – Set benchmarks. mergers and acquisition. strictly cost differentiation. Matured Industry – Sophisticated cost analysis. aggressive building of distribution networks. recreate new markets. reengineer. strike alliances.
They are a standard in nature.RESOURCE BASED VIEW Differentiation based on cost or products saturates and ceases to exist beyond the medium term. and complex learning experiences in integrating and harmonizing technologies (distinctive capabilities) that play an important role in delivering competitive advantage through “causal ambiguity”. 122 . brands. patents. Intangible – These refer to goodwill. However. A firms resources can be classified into – Tangible – These refer to real assets. positions based on resources which are unique and inimitable are far more sustainable even in the long term. hence very rarely confer competitive advantage as can be easily acquired or replicated.
They play a very critical role in shaping competitive advantage.e. There is a high degree of internal and external causal ambiguity involved in it. 123 . Hence. Therefore firms should concentrate on developing complex resources that forms the very basis of differentiation. Capabilities can be generic (i. they are woven around technologies. differentiation based on capabilities can be sustained even in the long run. Typically. but not necessarily. can be leveraged across businesses) or specific to a particular business.CAPABILITIES & COPMPETENCIES These include a complex combinations of tangible and intangible resources that organizations use to convert inputs to outputs.
COMPETITIVE ADVANTAGE 124 .
COMPETITIVE ADVANTAGE A competitive advantage is a position of superiority relative (i. Success of a strategy critically depends on SAP. Strategy drives competitive advantage. It results in a distinct differentiation advantage or a cost advantage or hybrid as well. and results in well springs of new business development. competitive advantage subsequently becomes the back bone for a competitive strategy.e. It enlarges the scope of an organization. 125 . not absolute) to competition. A portfolio of competitive advantage comprises strategic advantage profile (SAP).
Internal strategic fit between its strategy and dominant logics is essential for the top management to stretch and leverage SAP. Most successful organizations around the world have a well balanced SAP. Identification of SAP is critical for and stretching and leveraging of resources. In today's world of discontinuity. SAP changes from time to time.STRATEGIC ADVANTAGE PROFILE (SAP) Organizations have to systematically and continuously conduct exercises to identify its SAP. In most cases SAP is hidden and dormant. 126 .
each of the players need to be efficient backed by sufficient coordination at the contact points (i. A VC is often compared with a relay team. Substantial cost reductions also follow.VALUE CHAIN ANALYSIS A value-chain segregates a firm into strategically relevant activities to understand its composite behaviour.e. 127 . kaizen or internal customer). and enhanced customer tracking – higher market share. Inventory Mgt to Logistics Mgt to Supply Chain Mgt (SCM). faster product launches. Today SCM is integrated with greening the environment as CSR practices. Competitive advantage arises not from an individual activity but a stream of inter-related activities. VC pay-offs: better product availability.
THE VALUE CHAIN Support Infrastructure n gi ar M Human Resource Management Technology Development Procurement Out Logistics Mktg & Sales In Logistics Operations Primary Service M ar gi n 128 .
Fit is important because discrete activities result in negative synergy and can also be easily copied by competitors. A learning organization helps create strategic fit. – Second order fit occurs when activities are reinforcing amongst them. Operational effectiveness is not strategy. A high fit involving a complex chain of activities drives both competitive advantage and its sustainability. – First order fit refers to simple consistency between each activity and the overall strategy. 129 .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.
A core competence usually has its roots in technology. Core competence has a high degree of external and 130 internal causal ambiguity embedded in it. – Cannot be easily imitated or substituted. – Can be leveraged across businesses. It should satisfy the following conditions – Contributes significantly to customer benefits. It forms the very basis of competitive advantage. – Can be sustained even in the long run. . These skills results in distinctive activities and processes. but not necessarily.CORE COMPETENCE A core competence represents the collective learning's of an organization around diverse streams of technologies.
A competitive advantage may or may not lead to superior performance. 131 . Majority of the firms have competitive advantage. A competitive advantage manifests from a function.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 is sustainable in the shortmedium term. a core competence usually does. a core competence has its roots in a set of skills. only global leaders possess a core competence.
Subsequent work on game theory by John Nash led him to win the Nobel prize in 1994. In a game (similar to a business) one players win is always another's loss. Here the magnitude of gain offsets the magnitude of loss equally. A game is a contest involving two or more players.GAME THEORY The game theory was developed in 1944 by Oscar Morgenstern. 132 . illustrations depicting a win-win situation. each of whom wants to win. the stringent assumptions of game theory and difficulty in ascertaining of pay-offs makes game theory application difficult in business. This is known as a zero-sum game. In fact there are no. However.
BIASED AND UNBIASED GAME A game is said to be biased when one of the players have a disproportionate chance of winning. Firm Y’s Strategy Use Radio Use Radio +2 +6 Use Newspaper +7 -4 133 Firm X’s Strategy Use Newspaper Firm X’s Pay-Off Matrix . An unbiased game is one where both the players have equal chances of winning.
Firm Y’s Strategy Use Radio +3 +1 Use Newspaper +7 -2 134 Firm X’s Strategy Saddle Point Use Radio Use Newspaper Firm X’s Pay-Off Matrix .PURE STRATEGY GAME The strategy each player follows will always be the same regardless of the other players strategy. A saddle point is a situation where both the players are facing pure strategies.
135 . Repeated Games – In this situation the players interact repeatedly with each other sub-optimizing the outcome possibilities.TYPES OF GAMES Simultaneous Games – This is a situation where the players have an option to choose to cooperate or not through collusion. Coke Vs Pepsi). collaboration or cooption. However. 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. iteration) rather than through collusion (E.e. Yahoo Vs Microsoft). It represents the classical “prisoner’s dilemma”.g. This is usually through learning by “experience or observation” (i.
– Making pricing more transparent. Game theory relies on the principle of rationality. In a market dominated by price-based differentiation one may attempt to change the rules of the game by/when – – Bases of differentiation dependent on clear identification of what customer wants or value. It results in a shift in the productivity frontier. – Building incentives for customer loyalty. but 136 players do not always behave rationally. .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.
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.
– Unlearning & learning of new skill sets. internal strategic fit (strategy – dominant logic) is critical to strategy implementation. – Development of capabilities & competencies. – Changing the rules of the game. A high strategic fit (co alignment) is useful because it enables – – Appropriate and timely response. – Better strategic and operational control. – Resource commitment from top management.IMPORTANCE OF STRATEGIC FIT Strategic fit has a central role to play in strategic management. While external strategic fit (strategy – environment) is relevant for strategy formulation. 143 .
Some of the key strategic learning's exists at the contact point between the organization and its customer. 144 . strategy formulation and implementation has been perceived to be distinct & independent. According to Mintzberg. learning levels are very high. In such a situation. formulation & implementation can occur simultaneously. effective strategies are better crafted when there is a subtle overlapping between the two (i. at the cost of sacrificing a lesser degree of control. In such a situation.e. while control is very effective. learning levels are very low. emergent strategy vis-à-vis intended & realized).FORMULATION Vs IMPLEMENTATION Traditionally. In fact.
transformational leaders go one step beyond – Design a well crafted and designed strategic intent of the organization. 145 .ROLE OF TOP MANAGEMENT To bring about change and to implement strategies successfully. shift from compliance to commitment. Install a system of shared beliefs and values. companies depend more on transformational leaders than transactional leaders. In contrast. Pragmatism is the ability to make things happen. A transactional leader is usually confined to allocating tasks & responsibilities and extracting performance. bring about transparency. He should be an agent of change.
Intangible resources (Eg. Zero Based Budget – In this case the budget of a SBU has to be worked out right from the scratch.RESOURCE ALLOCATION Resources allocation includes tangible resources (Eg. minimum requirement). Performance Budget – SBU managers need to justify the distinctive resources in terms of the opportunity it is pursuing yields the highest possible pay-offs. machines) referred to as threshold resources (i. labour. land. skills) also includes complex resources like capabilities and competencies.e. patents. brands. 146 . The various methods of resource allocation includes Historical Budget – The budgets framed by HQ for a particular SBU keeping in mind past trends.
these capabilities are sustainable even in the medium to long term. Due to causal ambiguity (complexity). Flat Screen Displays. though not necessarily in the case of emerging markets. Moreover. Distinctive capabilities are complex set of skills woven around technologies. convergence of multiple streams of technologies at the product – market level is becoming increasingly evident (Eg. 147 . Mobiles). Distinctive capabilities helps in stretching and leveraging resources thereby overcoming two major constraints involved in strategy implementation – times & costs.CAPABILITIES & COMPETENCIES Technology and business are slowly becoming in – separable.
A firm in several related businesses usually employs a divisional structure. Once the structure is in place. The level of centralization and decentralization is decisive.STRATEGY & STRUCTURE It is a framework within which individual efforts are coordinated to bring synergy. A firm in several unrelated businesses usually employs a SBU structure. 148 . A single product or a dominant business firm usually employs a functional structure. processes become people independent. An appropriate organization structure & adequate control systems are essential to implement strategies and achieve stated goals.
149 .Technology. Output). with team members having dual line of control. or geographical locations. based on skills and competencies. disbanded subsequently. processes. 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. Inputs . SBU Structure – Businesses segregated in terms of strategic dissimilarities (Eg. Finance). Virtual Structure – A boundary less or hollow organization.TYPES OF STRUCTURES Functional Structure – Activities grouped together by a common function (Eg. Marketing. Team Structure – An informal group formed for a crisis.
leading to a tall structure. as span is broader. structures are becoming flatter and more simpler. It includes the desire for independence. 150 . Environment & People – Economic and political conditions have a major bearing on structure coupled with the attitude and aspirations of the people in the organization. facing challenges & crises.FACTORS INFLUENCING STRUCTURE Size – As an organizations size increases there is more specialization and differentiation leading to the top management moving away from operational issues and control. assuming responsibility. Technology – With more and more convergence of technologies in business.
irrespective whether it is from worse to good or good to worse. Common sources of 151 inertia – complacency with past successes. Inertia acts as an impediment in strategy implementation. .INERTIA When a firm has been operating in a certain fashion for a long time. Top managers resist change. co0ntinuity). Most firms undergo periods of strategic continuity rather than strategic discontinuity. Inertia is a characteristic of a firm that endures status quo (i.e. Changes in top management and unlearning helps overcome inertia. there is a tendency to continue along the same lines.
firms should move beyond financial performance to strategic performance as organization systems are becoming complex.STRATEGY EVALUATION Strategy evaluation centers around assessment of strategic fit. certain authors propose misfit as a source of superior 152 performance. Since the internal and external environment is in a state of continuous flux. strategies need to be evaluated on an ongoing basis to prevent deviations of fit. However. Deviation of fit is detrimental to performance and may lead to strategic failure. To prevent deviation of fit. .
competitive advantages becoming disadvantages? Has the company acquired any new competency? Has the company been able to overcome the 153 environmental threats. . It attempts to answer the following questions – Is the strategic intent appropriate to the changing context? Are the organizations capabilities still holding good. 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 is open-ended as well as . checking every premise is costly as well as difficult.STRATEGY CONTROL IMPLEMENTATION It involves steering the company towards its original growth trajectory & stated goals. Implementation Control – It aims at assessing whether key activities are proceeding as per schedule. It involves assessing – strategic thrusts and milestones. Special Alert Control – It intends to uncover unanticipated information having critical impact 154 on strategies. However. Premise Control – Checking the validity of the assumptions on which a strategy was based.
Strategy intent not linked with goals and objectives – Lack of coordination at lower levels leading to negative synergy. low strategic fit due to consultants intervention.BARRIERS TO STRATEGY EXECUTION Vision and strategy not actionable – Utopian ideas. “If you cannot . Strategy not linked to resource allocation & capabilities – Lacking commitment of top management. Performance measures are defective – What to evaluate against? How to measure the 155 construct? As a saying goes. difficult to translate into practice.
Together these factors determine the way in which a corporation operates. Today it is considered one of the most powerful tools for strategy implementation determining success or failure. On top of that. Managers should take into account all seven of these factors. the relative importance of each factor may vary over time and context. important or not they're all interdependent. this may effect all others as well.7S FRAMEWORK OF Mc KINSEY The 7-S Framework of McKinsey is a management model that describes 7 factors to organize a company in an holistic and effective way. 156 . so if one fails to pay proper attention to one of them. Large or small. to be sure of successful implementation of a strategy.
They had been investigating how Japanese industry had been so successful. It appeared also in "In Search of Excellence" by Peters and Waterman. and was taken up as a basic tool by the global management consultancy company McKinsey. 157 . 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. The 7-S model was born at a meeting of these four authors in 1982.BACKGROUND & ORIGIN The 7-S Framework was first mentioned in "The Art Of Japanese Management" by Richard Pascale and Anthony Athos in 1981.
Skills – An organizations capabilities and competencies. to reach identified & stated goals. Systems – The procedures. Strategy – Trade-offs for the allocation of a firms scarce resources. Staff – Human inter-relationships. formal & informal . over time. Style – The way in which the top management influences the functioning of an organization. 158 . Structure – The way in which the organization's units relate to each other in terms of their commonalities.THE 7’S Shared Values – It represents what the organization stands for and what the top management believes in. processes and routines that characterize how work should be done.
STRATEGIC FIT Strategy Structure Shared Values Systems Skills Staff Style 1st Order Fit 2nd Order Fit 3rd Order Fit 159 .
structure.A CRITIC OF THE 7S MODEL While the hard S’s (strategy. While the American co’s focuses on the hard S’s. systems) are comparatively easy to identify and influence. the soft S’s (skill. 160 . staff. In contrast. A choice of an alphabet often limits the scope and skews the interpretation of a model. their Japanese counterparts focus more on the soft S’s for their early success and sustainability. style. Consider the 4P’s of marketing or 3R’s of SCM. Ineffective in case of a virtual company. shared values) are very malleable and comparatively more difficult to identify & influence. because most often they are culturally embedded and often neglected.
STRATEGY IMPLEMENTATION ROUTES Strategic Fit .Low Take Overs 161 .High Organic Growth Strategic Alliance Joint Venture Mergers & Acquisition Strategic Fit .
e. and markets. (Eg. SEZ’s. green-field projects. concessions are available for green-field projects.ORGANIC GROWTH Here a firm builds up its facilities right from the scratch and continues to do so without any external participation. Govt. the entire value chain.e. Long gestation leads to delayed market entry. technologies. The entire infra-structural facilities are set up afresh having its own gestation and break-even. . Reliance Industries). soft loans. tax holidays. subsidized power). 162 Risk of cost and time overruns. i. It has complete control over inputs. i. (Eg.
STRATEGIC ALLIANCE It involves a pro-active collaboration between two or more firms on a particular domain or function for mutual gain. 163 It is a form of competitive collaboration. It has limited intervention power and usually lacks holistic commitment from the alliance partner. Alliances are usually in the areas of technologies or markets (Eg. . Tata Motors & Fiat). It touches upon a limited aspects of a firms value chain. 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.
Tata – AIG. leaving minimum scope of overlapping. It is a win-win situation for both the companies. A comprehensive MOU is essential. Dominant logic of both the companies should be complimentary. (Eg. . Hero .Honda). Selecting the right partner is critical for success.JOINT VENTURES A joint venture involves an equivalent equity participation between two firms usually of similar strategic intent and comparable size to enter a particular market through a newly formed entity. Degree and extent of management control must be clearly 164 laid down.
Integration of assets and other financial resources. Integrated distribution channel leads to better market penetration and overall synergy. Economies in scale leading to lowering of costs. Acquisition is an outright purchase of a firm assets by another independent entity (Eg. Coca Cola – Thums Up). Revival of a sick-unit through better management practices is a major motive behind an acquisition 165 strategy. ITC Tribeni Tissues. . 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.
often the new firm is “left alone”. Consolidation in a fragmented industry. Inform SEBI / Stock Exchange after 5% stake is 166 acquired. Larger geo-graphical diversity. Make a public offer of not less than .Corus).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. Integration of organization structure & cultures is difficult. Instant access to capacities and markets. Most countries have stringent laws that prevents hostile take over. Tata Steel .
MANAGEMENT TOOLS IN STRATEGY 167 .
Radical change is superseding incremental change. The past is ceasing to be an indication of the future.WHY MANAGEMENT TOOLS? Change is becoming pertinent in the business environment. it is also a source of potential threat. TQM – Doing the right thing the first time. or better still create next practices Reengineering – Redesigning work processes right from the scratch. Some tools to ensure that – Benchmarking – Adopt certain best practices. 168 . Companies therefore need to ensure competitive advantages doesn’t become competitive disadvantages. Balanced Scorecard – Tracking strategy 3600. every time. Change provides enormous opportunities.
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
e. Benchmarking merely reorients profits in the hands of few to profits in the hands in the hands of many (i. It does not shifts the growth 175 trajectory of the industry as a whole. Benchmarking is useful for bringing about operational efficiency.LIMITATIONS More and more companies benchmark. the more similar they end up looking. . clustering). Strategy is more of creating best practices rather than copying them. It can at best complement it. but it cannot be used as a strategic decision making tool. While strategy is all about differentiation and not looking alike.BENCHMARKING .
g.g.e. . process mapping) and eliminating or improving them (E. The task demands a total change in organisational 176 culture and mindset. clean sheet). Windows 95 to 97). Re-engineering involves complete reconstruction and overhauling of job descriptions from the scratch (i. Re-engineering attempts to radically change an organizational products or process by challenging the basic assumptions surrounding it.RE-ENGINEERING Redesigning leads to identification of superfluous activities or product features (i.e. for achieving performance improvement (E. DOS to Windows).
REENGINEERING – KEY TENETS Ambition Focus Attitude Enabler Performance Large scale improvement by questioning basic assumptions about how work is done Micro Vs Macro Business Processes Vs Organisational Processes Starting right from the scratch Not historical More IT driven. than people driven Innovative Vs Traditional Customer centric Vs Organisational centric 177 .
It can be of the following types – Functional – It looks into the flow of operations (i.LEVELS Reengineering can be successfully leveraged at all levels of an organization with varying degree of results.e. etc) and supports the organization for the present.REENGINEERING . BPR). structures. products. resource allocation and prepares the organization for the future through a reorientation of the entire strategic architecture. customers and suppliers and protects the organization from the future (i.e. processes. Strategic – It looks into the process of strategic planning. . 178 . Business – It looks into markets.
– Causal Ambiguity. It generally acts as a threat to innovation. Cheaper versions of Intel chips and mother-boards manufactured in Taiwan. – High cost and time acts as a deterrent. However. 179 . with an intention to copy it (Eg. reverse engineering is a top-bottom approach. – Early entry advantages.REVERSE ENGINEERING It is a process by which a product is dismantled and analyzed in order to understand how the product was designed and manufactured. Indonesia). While traditional manufacturing is a bottom-up approach. learning curve advantage. protection can be had in the following ways – – Patenting.
Introduction – Launching the product in the market. cost and effort necessary for the purpose of reverse engineering. 180 . machine tools to convert ideas into a marketable product (i. designing facilities. Inaccurate assessment at this stage may lead to a failure of the entire project.STAGES IN REVERSE ENGINEERING Awareness – Recognizing whether the product is found to be worth the time. Actualization – Obtaining and dismantling of the product to assess how it functions. Usually in such cases segmentation and pricing is different from the original innovator. Implementation – Developing of a prototype. nano-technology).e.
Air bags. – Perception – Customer notions. – Aesthetics – Appeal in design. – Durability – 1980 manufactured cars still on road. – Serviceability – Large no. More and more companies are moving towards meeting implied rather than stated needs. – Reliability – Consistency in mileage. – Conformance – Emission standards . Car) – – Performance – Mileage of 14 kms to a litre of fuel. of service stations.WHAT IS QUALITY? It involves the totality of a product or service in meeting certain stated or implied needs. – Features – Anti-lock braking systems. It has eight dimensions (Eg. 181 .Euro IV.
. Management of quality was traditionally inspect it . It is deeply embedded as an aspect of 182 organisational life & culture.fix it in nature.TOTAL QUALITY MANAGEMENT Objective – Management of quality ensures conformance to certain pre-set standards. which ensures good market standing. TQM is a way of creating an organization culture committed to the continuous improvement of work processes – Deming. touching upon a limited aspect of a value chain. zero defects. It had little impact on improving overall productivity.
TQM – KEY TENETS Do it right. Be customer centric – Generate the concept of internal customer (Ishikawa). not a final destination. Looking at quality as an endless journey. the first time – From reactively fixing error in products to proactively preventing errors from occurring at the first place (Juran). 183 . Empowerment – It takes place when employees are properly trained. provided with all relevant information and best possible tools. fully involved in decision-making and fairly rewarded for results. Kaizen – Make continuous improvement a way of life.
184 . Quality Circles – It a small group of shop-floor employees who meet periodically to take decisions regarding operational problems and crises.TQM .e.STRATEGIES Outsourcing – It is the process of self-contracting services and operations which are routine and mundane. saving precious top management time. 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. of units meet preset standards (Eg. equal participation). It is based on the principles of MBO (i. 6-Sigma). enabling the firm to concentrate on core activities essential to customer satisfaction.
.. – Less than 10% of strategies effectively formulated are effectively executed... – Efficiency and effectiveness is passé.... it’s bad execution..... Source: Fortune Magazine Why CEO’s fail? 185 .. strategy implementation has never been more important.BALANCED SCORE CARD Some interesting comments . – In the majority of failures – we estimate 70% – the real problem isn’t (bad strategy) .
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. rather than effects. Focus more on causes. Most managers tend to rely on traditional measures of performance having its origin in finance as they are well tried and tested. Organizations need to move from financial to strategic performance. These measures worked well when organizational systems were simple and unidirectional and more importantly the environment was static.CONCEPTUALISATION A company’s performance depends on how it measures performance. 186 .
and distinguish strategic problems from operational ones. It has four dimensions – – How do customers see us? – What must we excel at? – Can we continue to improve and create value? – How do we look to shareholders? Firms more often have problems. The most critical element of a BSC is to measure these four dimensions. 187 .BSC – KAPLAN & NORTON (1992) A BSC helps a manager to track and communicate the different elements of company’s strategy. because they have too many.
of visits or calls made % of NPA’s 188 . ageing schedule) % of key customer transactions Ranking of key customer accounts No.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.
of times covered in media No.BUSINESS PERSPECTIVE GOALS Skills Excellence Exposure Introduction MEASURES New capabilities and competencies Implementation & gestation period Bank and supplier credit limits & PLR Unit Costs / Conversion Ratio / Defect Ratio No. of new product launches Vs competition Product pricing Vs competition 189 .
of product innovations 190 .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.
FINANCIAL PERSPECTIVE GOALS Survival Success Prosper Divestment MEASURES Cash flows Growth in Sales and Profits EPS. Return on Investment Market Capitalization / PE ratio 191 .
STRATEGY MAPPING 192 .
IMPLEMENTATION 2 Translate strategy into operational terms 1 Mobilize change through effective leadership 5 STRATEGY Make strategy a continual process 3 Align the organization to the strategy 4 Make strategy everyone’s job 193 .BSC .
ADVANTAGES Most often top managers face information overload. Seek excellence. . Shift from control to strategy (i. doing right things instead of doing things right). sharing of vision). The BSC brings together the different elements of a company’s strategy at a glance.BSC . As a result. It helps translating strategy into practice (i. 194 performance will automatically follow.e.what they don’t know. Focus on cause not effects. Modern managers should be poised to ask the right questions. they don’t know .e.
EFFICIENCY Vs EFFECTIVENESS Ineffective Effective Inefficient Goes out of Business quickly Survives Efficient Dies Slowly Thrives 195 .
.EFFECTIVENESS + STRATEGY A company which is effective as well as strategic.Michael E. but also sustains it. not only thrives. Porter 196 .
CORPORATE RESTRUCTURING 197 .
Strategic variety brings paradigm shift. to survival of the most adaptable.. Tata Group)..” 198 . To adapt to the changing environment. As Peter Drucker pointed out. from survival of the fittest ... firms use restructuring strategies. Strategic variety may be caused by changes in the as external well as internal environment. “every organization must be prepared to abandon everything it does. Radical change brings about strategic variety..CORPORATE RESTRUCTURING The only thing constant in today's business environment is change.. Restructuring involves consciously driving significant changes in the way an organizations thinks and looks (Eg.
e. downsizing or rightsizing). Structural Changes – Conventional hierarchical structures should be disbanded in favour of more 199 flexible ones (i. Core Business – Company’s should introspect – What business are we in? Business evolved out of opportunism or myopia should be divested. etc). Instead. .e. 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.RESTRUCTURING – BASIC TENETS Customer Focus – Restructuring ideally begins and ends with the customer. Walkman. Internal customers should also not be neglected. ATM. downscoping).
.... the Tatas were considered a benevolent and charitable organization.RESTRUCTURING – BASIC TENETS Cultural Changes – A culture represents the values and beliefs of the people about the organization. Kumar Birla today is more dependent on professionals.) Reliance dismantled their industrial embassies . 200 .. During the times of JRD... Ratan Tata now drives the point the group means business..) The Aditya Birla group typically relied on the “marwari” community for key management positions . started focusing on their capabilities..... It is created and institutionalized by the top management. . Restructuring also requires cultural reorientation.
they tend to move away from the customer. Honda’s ad says. Organizing customer and supplier meets.” 201 . Communicating to the media about organization efforts to deliver quality products. “ … one reason our customers are satisfied is that we aren’t. Use the reach of networking technologies. Getting feedback & addressing customer complaints. Carry out PR campaigns. Restructuring provides a platform to close this gap. Publicizing welfare projects to demonstrate CSR.MOVING CLOSER TO THE CUSTOMER As companies evolve.
Tata – Corus) or hostile (Eg. 202 . spin-off and equity carve. Glaxo – Heinz). where the difference in valuation is settled off through cash or equity (Eg.ASSET RESTRUCTURING Asset Restructuring – The asset composition of a firm undergoes a major change. It may include brands as well. horizontal. including its intangibles – Mergers – It may be vertical. Mittal – Arcelor) and can take various forms. Further spin-off can be classified as split-off and split-up. it may be smooth (Eg. It can have two forms. Hive Off – It involves siphoning of assets under control. Asset Swaps – It entails divesting and acquisition simultaneously by two companies. or conglo-merate. Further.
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. Equity Carve – It involves selling a minority stake to a third party while retaining control (Eg. the entire parent company loses its identity after being split into a number of subsidiaries. 203 . in which the equity is allotted amongst the existing shareholders on a pro-rata basis (Eg. – Split-Off – In a split-off. Reliance Ent). Tata Industries selling 20% stake to Jardine Matheson). Most of these practices are not in consonance with Indian laws. – Split-Up – In a split-up.
but retained its engineering division. A complete sell-out is known as divestment (TOMCO).DIVESTITURE It involves the sale of a brand or a division of a company to a third party. In 1995. for a specified market or in general with full management control. 204 . In 2005. L&T sold its cements division to Aditya Birla group. Selling out in phases is called disinvestment (IPCL). repay long-term debts. – Poor performance. Parle sold its Thums Up brand to Coke for $40 million apprehending fierce competition. Generic motives include – – Raise working capital. strategic misfit.
3 billion. Conversion – Replacing debt with equity or vice-versa or costlier with cheaper debt or cross currency debt. It provides greater leverage as well as management control. 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. 205 . Share Buyback – It is a process of cancellation of shares out of free reserves to the extent of 25% of paid-up capital (Eg. involving 608 pence per share).CAPITAL RESTRUCTURING Capital Restructuring .
1700 cr Trent – Rs. 1170 cr Goodlass Nerolac – Rs. 99 cr Tata Power – Rs. 250 cr Tata Tetley – Rs. 1860 cr . 1439 cr 206 Tata Timken – Rs 120 cr Tata Telecom – Rs.BUSINESS RESTRUCTURING – TATAS Divestments Lakme – Rs.Rs. 256 cr ACC – Rs. 150 cr VSNL – Rs. 1890 cr CMC – Rs. 950 cr Merind . 120 cr Tata AIG – Rs.Rs. 230 cr Diversifications Tata Motors – Rs. 42 cr Voltas .
Turnaround is the primary motive.ORGANIZATIONAL RESTRUCTURING Organizational structure and systems calls for a change when strategic variety is apparent. Survival is the primary motive. 207 . It can be carried out in the following ways – Downsizing – It is a systematic one-time reduction in the no. keeping the composition of business intact (Jet Airways). usually as a result external turbulence. of a firm’s employees and sometimes in the no. of operating units. Downscoping – It involves reducing the business and/or geographical scope of a firm (Aditya Birla group). Rightsizing – It is phasing of excess and redundant employees resulted out of faulty internal planning (SAIL).
e.STRATEGIC CHANGE One of the most difficult components of organization restructuring is the mindset of the top management represented through its dominant logic and its shared values reflected in cultural orientation. inertia). as strategies are based on such beliefs and biases. Dominant logic becomes deep-rooted in organizational contexts depending on the period it is in place (tenure of the CEO). Strategy change is unviable without a preceding change in its dominant logics. The longer the period.e. 208 . The dominant logic represents the perceptions and biases (i. thumb rules) of the top management. the more difficult it becomes to uproot the paradigm (i.
In most organizations. 20% of the people carry out 80% of the changes). 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. Companies achieve real agility only when people at every level rise above the ordinary to face the challenges – revitalization or transformation.FORCES AGAINST STRATEGIC CHANGE The problem with strategic change is that the whole burden typically rests on few people (i. the factor that stifled change & performance was – culture. 209 .e.
Create relentless discomfort with the status quo. process ownership. Manage from the future.SUCCESSFUL TRANSFORMATION Build an intricate understanding of the business model at all levels of the organization. Promote inventive accountability. The best way is to alter the institutional point of view. Questioning every basic action of the organization. never take no for an answer. Harness setbacks. Encourage uncompromising straight talk. 210 . it is not about winning but about learning. Understand and deliver the quid pro quo.
Aspects of current culture which needs to be overcome. also known as cultural-web. It involves diagnosing a change situation – systems & structures. Identify and implement facilitators of cultural change. that can be both enablers and blockages to change and restructuring. 211 . by identifying forces for and against change.FORCE-FIELD ANALYSIS A force-field analysis provides an initial overview of change problems that needs to tackled. It involves identifying – Aspects of current culture which needs to be reinforced. Culture and style of management are two main impediments in force-field analysis.
OUTCOMES Alternatives Organizational Short .Term Reduced labour costs Reduced debt costs Emphasis on strategic control Business High debt costs Higher risk 212 Long .RESTRUCTURING .Term Loss of human capital Lower performance Higher performance Capital .
hence go in for downsizing. the second one is a more viable strategy and sustainable option in the long run. Numerator – It assumes that turnover is not a barrier or constraint. down-scoping or asset stripping. In order to put back the company on the right track they are resort to – Denominator – It assumes that turnover cannot be increased. 213 .NUMERATOR & DENOMINATOR MGT Most firms across emerging markets undergo strategic discontinuity and as a result are forced to restructure their businesses. reverse engineering and regenerating. While the first strategy produces results instantaneously. focuses on reengineering.
TURNAROUND MANAGEMENT 214 .
– Less than 10% of the Fortune 500 companies as first published in 1955...WHY TURN AROUND MANAGEMENT? Some interesting insights . Source: Why do firms atrophy? (Business Today. 215 (Govindarajan and Trimble.. and that the thirty-two of the country’s largest business groups in 1969 are no longer among the top fifty today. still exist as on 2005. January 1997). . – Only seven of the first fifty Indian business groups in 1947 were even in business by the turn of this century....
systems. While content focuses on endogenous and exogenous variables. A category of underlying principles and concepts. and achieves sustainable performance recovery. Stage Theory).TURN AROUND MANAGEMENT A turnaround is said to occur when a firm perseveres through an existence threatening performance decline. Both content (what) and process (how) are equally important for a successful turnaround. As a sequence of events describing how things change and why they change (i. ends the threat with a combination of strategies.e. skills. 216 . and capabilities. process focuses on – A logic to explain a causal relationship between intervening variables.
Low stakeholder confidence. 217 . Some indicators Continuous cash flow crises as a result of dwindling market-share and profits. especially in key positions. leading to lack of acceptability from distributors and customers. Uncompetitive products or services. suppliers and bankers.TURNAROUND INDICATORS Most firms atrophy simply because they fail to diagnose the indicators that acts as threat to organizational existence. Low employee morale leading to high employee attrition at all levels. unavailability or radical lowering of substitute costs or technological obsolescence. Substantial shifts in consumer preferences. Rising input costs.
liquidating dead assets.TURNAROUND ILLUSION The first step to a successful turnaround is the basic acceptance of the fact that …. Product redesigning or reengineering. 218 . Revamp product portfolio. focus on power brands. Hence. be more customer centric. Extending work hours. “all is not well”. Recalibrate prices. prune work-force. based on elasticity. Common approaches adopted Change in key positions. consider extension. Emphasis on advertising and market penetration. which most top managers fail to appreciate.. they adopt surface level measures (disprin popping) which most often fail.
TURNAROUND STAGE THEORY Stage 1 Decline Stage 2 Stage 3 Stage 4 Outcome Response Transition Performance Equilibrium Line Success Failure Indeterminate Nadir Time 219 .
220 . Identification of the stimulus leads to the arrest of the downfall. It has its origin in “resource led stretch” and subscribes to the view that a firm has substantial power to override the context. It has its origin in “environment led fit” that subscribes to the view that a firm has little control over external factors. primarily dwindling resources and capabilities are responsible for decline. 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.DECLINE Decline is the first stage in the turnaround process. R-Extinction – It suggests that organization factors.
If the decline stems from structural shifts. diversification. Operating responses typically focuses on the way the firm conducts business and involves tactics geared towards – cost cutting and process redesigning (BPR). Strategic responses focus on changing or adjusting the business the firm is engaged in through long term moves such as – integration. asset reduction. 221 .RESPONSE INITIATION Turnaround responses are typically categorized as operating or strategic. the response should be operational. the response should be strategic. If the underlying cause is internal efficiency. new market initiatives. The response must match the cause of the decline.
Similarly new market initiatives is feasible only for multi-product firms. Contour – It is easier to reverse decline in the earlier stages through operational measures. Scope – A diversified conglomerate may acquire a distressed business to turn it around and gain valuable synergies. which may be unavailable to a focused firm. when decline deepens shifts in strategic position becomes essential. 222 .RESPONSE DICHOTOMY The response initiation is somewhat dichotomous and cannot be universally applicable. Untangling this question brings into focus three events – Domain – Many of the strategic cures have limited applicability for an affiliated firm.
TRANSITION Transition usually reflects the first signs of recovery. The top management has a key role to play through empowerment.e. 223 . Support from all the stake holders through resource commitment. confidence building measures. Sustenance is the key factor in this stage.7 years with a range of (4-16) years. However. participative management (i. transparency. substantial amount of time usually passes before results begin to show (i. lead – lag). many a times early signs of recovery fades out.e. Effective levers of transition. However. consensus). Empirical studies show that average time is 7. role model.
Share price indications and media coverage. Regaining lost market share and distributor confidence. Supplier and banker confidence. it should adopt a holistic approach. Failure is an indication that initial momentum was not sustainable characterized by irreversibility. Commanding a premium in the market. Cut off points must be unequivocal.OUTCOME Outcome is said to be successful when a firm breaches the equilibrium performance level. 224 . Revival of key customers and new product launches. Instead of focusing on financial parameters alone.
COOPERATIVE STRATEGIES & ALLIANCES 225 .
or joint venture. It can assume any of the following forms – franchising.COOPERATIVE STRATEGIES Cooperative strategies are a logical and timely response to changes in business dynamics. 226 . technology. strategic alliance. licensing. More and more companies worldwide are moving away from competition to co-option to leverage their resources and enhance bargaining power. Any cooperative strategy maybe between firms within the same country or cross border as well. In the cooperative strategy continuum as firms move up the value order. the commitment and the involvement between the firms increases manifold. and globalization . consortia. supply-chain partnership.
owners of the brand Monginis allows its franchisees to sell its confectionary products. Switz Foods. It is an effective strategy to penetrate markets in a shortest possible time at a minimum cost. Branding is critical to franchising. 227 . Titan Inds.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.
LICENSING Licensing – It is a contractual agreement between two legally independent firms whereby the licensor grants the right to the licensee to manufacture the licensor’s product and do business under its brand-name in a given location for a specified period of time for a consideration. refine processes and adopt necessary technologies (SKD). Become a systems integrator (CKD). HM manufacturing GM range of cars in India with a buy-back arrangement is a perfect example of CBU. Different levels of licensing Manufacturing without embracing any technology (CBU). as in Tata Indica. 228 . Develop a product through its crude stage.
Collusion – Few firms in a matured industry collude to reduce industry output below the equilibrium level. Tata. It can be of the following types – Multipartner – Intends to share an underlying technology or asset. Hyundai).CONSORTIA Consortia – They are defined as large inter-locking relationships & cross holdings between businesses in a similar industry. Airbus – Boeing). enabling them to increase prices (Eg. leverage upon size to preempt competition by escalating entry barriers (Eg. Coke – Pepsi). Cross Holdings – A maze of equity holdings through centralised control to ensure earnings stability & threshold resources for critical mass (Eg. 229 .
SUPPLY CHAIN PARTNERSHIP It is a pro-active & collaborative arrangement between supplier and customer aimed at achieving better control over the value chain (Eg. Continuous sharing of knowledge is critical to the success of a supply chain partnership. It usually provides a platform to sort out differences between conceptualization and implementation to suit local market needs. . otherwise it 230 becomes routine outsourcing. Companies in different industries with different but complimentary skills. link their capabilities to create value for end users. Tata Motors – IDEA).
Reliance – Du Pont). design next generation products.STRATEGIC ALLIANCE It is an short to medium term understanding between two or more firms to share knowledge and risk. effective R&D management.learning organization. instead of hurrying into a relationship. Firm’s should undertake a long courtship with potential partners. to gain knowledge and to obtain access to new markets (Eg. preempt competition. Tata Motors – Fiat. Partner selection is one of the critical success factors. Generic motives involved are . enhance credibility. Despite their popularity (50-60)% of the alliances fail to accomplish their stated objectives. 231 . enter newer markets.
Whirlpool – Tide. Coke – Pepsi). Complementary Equals – Two firms mutually promoting each others complimentary products (Eg. Maruti). Airbus – Boeing). 232 . Backward – An alliance (quasi or tapered) with a supplier of critical components seeking commitment (Eg.TYPES Collusion – Tacit top management understanding to neutralize price wars (Eg.STRATEGIC ALLIANCE . Bajaj – Castrol). Alliances of the Weak – An alliance is entered into to preempt competition (Eg. Bootstrap – An alliance between a weak and a strong company with an intention to acquire it.
Differences in level of economic development can produce differences in alliances motives.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. Too much stress on financials & structure be avoided. – Japan Vs US). Cultural orientation has been found to have a profound effect on top management’s strategic orientation (Eg. Firms from developed markets seek access to markets and firms from emerging markets seeking access to technology. 233 .
Dominant Logic’s – Similarity in beliefs & biases. Intangible Assets – Move beyond the financials of the firm. Partner’s ability to acquire fresh skills. including ability to provide quality products and services. Managerial capabilities. Experience related to previous alliances.PARTNER CHARACTERISTICS Complimentarity of Capabilities – The degree to which partners resources can be used in conjunction. 234 . Unique Resources – Abilities or skills which cannot be easily duplicated. Willingness to share knowledge and skills.
Learning to collaborate – strategic. degree of compatibility.MANAGING ALLIANCES Alliances are more than just a deal. partners should nurture it. Getting Engaged – It should incorporate a specific joint activity. the value chain. vows to include commitment to expand the relationship. Selection & Courtship – It involves self analyzing. Setting up the housekeeping. operational & cultural integration. incorporating clear signs of continuing independence for all partners. Changing within. differences not anticipated earlier. understanding the chemistry. 235 . instead of focusing controlling the relationship.
It aims at creating new value (i. separation is very 236 bitter. It lasts till the vision is reached. whilst the partners continue to operate independently. .e. a joint venture is a selection among modes by which two or more firms can transact.JOINT VENTURE A joint venture is a long term association between two equal partners to create an independent firm (SPV) by complementing their resources and capabilities to explore newer businesses or markets for achieving a shared vision. Conceptually. synergy) rather than mere exchange (i.e. combining parts). There are substantial linkages in the value-chain.
The market fails as sellers are unwilling to reveal their technology and buyers are unwilling to purchase in the absence of inspection. 237 . in addition to a high degree of asset specificity. though more profitable alternative to other choices. It may also be linked to deterring entry or eroding competitors position. Organizational Learning – It is a means through which a firm learns or seeks to retain their capabilities.JOINT VENTURE – GENERIC MOTIVES Transaction Cost – The situational characteristics best suited for a JV are high performance uncertainty. Strategic Behaviour – Firms may override transaction costs.
– Eg.OTHER MOTIVES Entry into newer markets. – Eg. TVS – Suzuki (4-Stroke Engines) Fill gaps in existing product lines. Define future industry standards. Learning new technologies. Eli Lily – Ranbaxy. Essar – Hutch (Vodafone). – Eg. Sharing of resources. – Eg. Maruti – Suzuki. – Eg. Yamaha – Escorts. Renault – Nissan (Minivans – Cars). Endorsement from government authorities. – Eg. Daimler – Chrysler (Premium Cars) 238 .
RISKS INVOLVED Incompatibility – Differences in cultural background. – Eg.e. Modi – Telstra What after exit (parenting disadvantage)? – Eg. – Maruti – Suzuki. Tata – Aditya Birla in Idea Cellular 239 . Risk of over dependence. Century . – Godrej – Procter & Gamble.Enka. LML – Piaggio Differences in size and resource base. PAL – Fiat If the cost of continuing exceeds the exit costs? – Eg. technology) drain. – Eg. Risk of brain (i.
Agreement – Clarity on operational control. time sharing. Focus – Avoid strategic myopia.PRE-REQUISITES FOR SUCCESS Commitment – Mutual trust. Incompatibility – Performance expectations. Inertia – Differences in age and evolution patterns. Partner – Avoid duplication of skills and capabilities. Culture – Reconcile gaps. respect. Flexibility – Sufficient space to breathe and adjust. Costs – Other modes of transaction becomes cheaper. 240 . Equality – Lack of dominance. Objectives – Shared vision.
MERGERS & ACQUISITION 241 .
242 .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 . SEBI Takeover Code. HLL – Tomco). 2002). An acquisition is the purchase of a firm by a firm (of larger size. An acquisition is said be smooth if it is with the consent of the management (Eg. Mittal Arcelor).Daichi) and hostile if it is without the consent of the management (Eg. Brooke Bond – Lipton). The larger objective is to leverage on size. Most countries have stringent laws that prevents hostile takeovers (Eg. however. reverses are also taking place through LBO) with a view to acquire conglomerate power and induce synergy (Eg.
Control – A special resolution of 75% of the share 243 holders approving the change of guard.e. creeping acquisition). Acquirer – Someone (individual or firm) who picks up an atleast 5% stake without mandatory disclosure having an intention to wrest management control (i. 2002 Promoter – A person who has a clear control of atleast 51% of the voting rights of the company and confidence of all the major stakeholders.SEBI TAKEOVER CODE. Preferential – A preferential allottee ending up acquiring 5% stake also comes under its purview. . Hike – An acquirer who has already picked up a 5% has to make a mandatory disclosure for every additional 1% stake that it acquires.
Gujarat Ambuja – ACC). and/or does not enjoy the confidence of the different stake holders. 244 .e. the SEBI can intervene and block share transfers if: the acquirer has ulterior motives (i. Disclosure – All acquirers have to inform the respective stock exchanges where it is listed and SEBI upon acquiring the basic limit and upon every incremental limit thereon. credentials or track record is at stake. asset stripping). Grasim – L&T Cement.SEBI TAKEOVER CODE. SEBI – In case of a hostile take over. whichever is higher as an exit route (Eg. 2002 Pricing – Acquirers will have to offer minority shareholders (at least 20%) the past 26 weeks or past 2 weeks average price.
usually opportunistic (Eg. Reliance).Kelvinator). Vertical – It involves complimentarily (partially related) in terms of supply of inputs or marketing activities (Eg. The type of merger is depends on the degree of relatedness (strategic) between the two businesses. Conglomerate – It involves integration of two distinctly unrelated businesses. Godrej.TYPES OF MERGERS A business is an activity that involves procuring of desired inputs to transform it to an output by using appropriate technologies and thereby creating value for its stake holders in the process. Horizontal – It involves integration of two highly related businesses (Eg. Electrolux . 245 . ITC).
scale and scope. Tax benefits (Eg. Tata Steel – Corus). Asset Stripping – Shaw Wallace). Economies of size. Ulterior motives – (Eg. Reduced gestation (i. Avoiding risk of new product development. Mittal – Arcelor). Ranbaxy – Crosslands). Reduction in risk. Access to newer segments (Eg.e. ITC Bhadrachalam). 246 .MOTIVES Increased market / conglomerate power. Overcoming entry barriers (Eg.MERGERS & ACQUISITION . Global image (Eg. Coinsurance effect – Higher debt raising capability. ICICI –ITC Classic). quick access). Acquiring assets or capabilities (Eg.
their initial offer was around 420 pence/share.MERGERS & ACQUISITIONS PITFALLS Cultural differences (Eg. Tata – Corus). while the ultimate acquisition was made at 607 pence/share). 247 . When Tata Steel started negotiations with Corus. Inability to achieve synergy. Overvaluation is often as a result of an ego drive and substantially affects future returns. neglecting core business. Overvaluation of buying firms (Eg. Top management overtly focused on due diligence exercise and negotiations. Managing size. Merging of organisational structures. Managing over-diversification.
Kingfisher – Air Deccan). Tata Steel – Corus).MERGER TYPE & PLC Introduction – A larger firm may acquire a newly formed entity with an objective to preempt new competition or acquire its license (Eg. with an objective to reinforce its growth trajectory or to take on the might of a comparatively larger player (Eg. Brooke Bond – Lipton). Decline – Horizontal mergers are undertaken to ensure survival. 248 . Maturity – A larger firm acquires a smaller firm with an objective to achieve economies of scale and experience curve effects (Eg. Growth – This stage may witness parallel merger of two firms of similar size. vertical to save transactions costs.
FRAMEWORK Positive contribution to the acquired company. A common shared vision. Blanket promotions across entities and confidence building exercises needs to be practiced. Immediate attempts to super impose structure and culture may cause bottle necks. 249 . An acquisition just for the sake of it or reputation yields very little value in the long term. A concern of respect and trust for the business of the acquired company. active top management intervention in phases. Left alone syndrome. Strong differences may stifle plans and its execution.INTERNATIONAL M&A .
Integrating work processes.BLUEPRINT Take the media into confidence. 250 Do not ignore the “people factor”. . They can carry the message to the various stake holders.INTEGRATION . Decide on the new hierarchy. Determine business strategy. Shift attention from business portfolio to people and processes. promptly. It will enable focus on customers and key people. Redefine responsibilities and authority. Decide upon management control systems.
Valuation decisions are arrived through a due diligence process when the prospective acquirer gets access to the books of accounts of acquiring company.M&A . over valuation can become a curse.e. – Synergy – Potential value gain from combining operations (i. operational & financial). 251 . – Market for corporate control. The process takes (6-12) months. – Unstated reasons – Personal self interest and hubris.VALUATION The process of valuation is central to M&A. While under valuation may be a significant opportunity. Financial motives – Undervaluation relative to true value.
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. Innovative product – Good distribution network). or from increased market power which increases sales and margins. – Conglomerate Synergy – Gains come when one firm complements the resources or capabilities of another (Eg. Synergy can be negative as well. when the “fit” between the two entities is very poor. Sources of operational synergy – Horizontal Synergy – Gains come from economies of scale which reduces costs.
shareholders can accomplish the same at a much lesser cost. Tax Benefits – Tax benefits may accrue from tax entitlements and depreciation benefits unutilized by a loss making firm.VALUING FINANCIAL SYNERGY Diversification – Reduce variability in earnings by diversifying into unrelated industries. ITC – Bhadrachalam Paper). but availed after being merged with a profitable firm (Eg. and without paying take-over premiums. Synergy comes from projects which would not have been undertaken if the two firms stayed apart (Eg. Hotmail). Cash Slack – It reduces asymmetry between cash starved firms with deserving projects and cash cows with no investment opportunities. 253 . However.
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. 254 . – Coupon rates may also be negotiated at lower rates. This will induce higher debt capacity.VALUING FINANCIAL SYNERGY Co-Insurance Effect – If the cash flows of the two firms are less than perfectly correlated. the cash flow the merged firm will be less variable than the individual firms. – Default risk comes down and credit rating improves. It relates to the concept of diversification. hence better performance. higher leverage. as risky debt is spread across the new firm's operations.
since a restructuring can lead to significant increase in value. The value of control can be substantial for firms that are operating well below optimal value. While value of corporate control is negligible for firms that are operating close to their optimal value. The value of wrestling control is inversely proportional to the perceived quality of that management. – – Value of Control = Value of firm after restructuring Value of firm before restructuring. 255 .VALUING CORPORATE CONTROL Premium of M&A are often justified to control the management of the firm. Assessment of perceived quality is critical.
256 . 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.e. sometimes in combination with the assets of the acquiring company. It is a very costly and risky proposition. Confidence of investment bankers and the international financial community is essential.LEVERAGE BUYOUT (LBO) The basic difference between a take-over and a LBO is the high inherent leverage (i. debt component) at the time of buyout and rapid changes in capital structure over time.
257 . – The need to satisfy analysts and shareholders. However. – Separation of ownership from management. on-going valuation. the advantages of going public includes . off-late many publicly traded firms have gone private keeping in mind the following – – The fear of LBO.TO GO PUBLIC OR NOT? However. liquidity. A research study showed that 30% of the publicly listed firms reported above average returns after going private. – Increased information needs. The increased benefit showed in the following way – reduced costs and increased revenue.access to financial markets.
co-insurance effect). – Managers cannot be trusted to invest free cash flows wisely. – Cost of debt coming down (i. – It is a temporary phenomenon. – Cash trapped company unable to utilize opportunities. – Debts repaid off from increased value after successful restructuring and wresting management control. 258 .e. which disappears once assets are liquidated and significant portion of debt is paid off.RATIONALE FOR HIGH LEVERAGE The high leverage in a LBO can be justified by – – If the target firm has too little debt (relative to its optimal capital structure).
EFFECT OF HIGH LEVERAGE Increases the riskiness of dividend flows to shareholders by increasing the interest cost to debt holders. A LBO has to pass two tests to be viable – – Restructuring to pay-off increased debt. As the firm liquidates / pledges assets and pays off debt. 259 . – Increase equity valuation. Therefore. leverage is expected to decrease over time. initial rise in leverage is anticipated. Any discounting has to reflect these changing cost of capital. Lack of sufficient cash flows to repay costly debts resulting in a possible debt trap.
260 . – Prevents dilution of equity. – Tax shelter. time-barred.REVERSE MERGER Reverse Merger – The acquisition of a public company. or costly. 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.e. – Automatic listing in major exchanges. shell company) by a private company. – Facilitates better valuation and forthcoming offerings. which has discontinued its operations (i. small in size but having a promising business.
During bearish periods excess returns were 19%. – Merger announcements reported 20% excess returns. Excess returns also vary across time periods. However. – Takeover announcements reported 30% excess returns. and 35% during bullish periods. 261 . takeover failures have only initial negative effects on stock prices. Most target firms are taken over within (6090) days.EFFECT OF TAKE-OVER ANNOUNCEMENT The shareholders of target firms are the clear winners. Initial anomaly in stock prices usually normalizes over a period of time (6-12) months.
in the event of take-over failure negative returns to the extent of 5% on bidder firm stock prices is reflected. 262 Jarrel. and Netter. over time. as stock markets become more and more perfect such anomalies would reduce Source: Jensen and Ruback. 1988 .EFFECT OF TAKE-OVER ANNOUNCEMENT The effect of take-over announcement on bidder firm’s stock prices are not clear cut. – However. Desai. 1983. – However. Brickley. – Most studies reported insignificant excess returns around take-over offers or merger announcements. 1983. and Kim. Bradley.
Poison Pill – An offer to existing shareholders to buy shares at a substantial discount to increase their voting rights (Eg.DEFENSIVE STRATEGIES Golden Parachute – An employment contract that compensates top managers for loss of jobs as a result of change in management control. so that nothing is left for the raider to strip off. Rights). 263 . Poison Put – Premature retirement of bonds at attractive rates to pour surplus cash and make target investment unattractive. Asset Stripping – The targeted company hives off its key assets to another subsidiary.
But often the White Knight turns a betrayer himself (Eg.DEFENSIVE STRATEGIES White Knight – It is the placing of stocks to a cash rich investor and bargaining for protection in return. Pac Man – The target company makes a counter bid to take over the raider company. Gray Knight – The target company takes the help of friendly company to buy the shares of the raiding company. Green Mail – The targeted company buys large blocks from holders either through premium or through pressure tactics (Eg. thus thwarting the raider company’s attention. East India Hotels – Reliance Industries – ITC). Shapoorji Pallonji). 264 .
COMPETING FOR THE FUTURE 265 .
Compaq overpowering IBM. Nokia overpowering Motorola. Hitachi overpowering Westinghouse. British Air overpowering Pan Am. Wal-Mart overpowering Sears. were spending 99% of their precious time dealing with present.GETTING OFF THE TREADMILL Canon overpowering Xerox. Honda overpowering GM. Honda overpowering Volkswagen. Most companies were too preoccupied with the present than the future? 99% of the companies overpowered. What went wrong???? What were they doing with the present? What were they pre-occupied with? 266 . The reverse was true for the companies overpowering.
THE PAST OF COMPETITION Beyond Restructuring – When a competitiveness become inescapable problem (stagnant growth. CEO’s brutally pick up the knife and ruthlessly carve away layers of corporate flab (delayering. most often they ended up cutting corporate muscle as well and became anorexic. Thus efficiency was grievously hurt. declining margins. falling market share). Not knowing when to stop. downsizing). decluttering. 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 .
On the contrary only 20% of Japanese managers believed that quality will be a source of competitive advantage of the future.S. The future is not about catching up with competition. A poll in circa 2000 revealed that 80% of the U. However. top managers believed that quality will be a source of competitive advantage of the future. 268 . incrementalism or nominal innovation has almost reached a plateau. but not of the future. but forging ahead in competition. ensuring only survival of the present.THE PRESENT OF COMPETITION Beyond Reengineering – Numerator based managers (innovation) at least offers some hope.
Creating the future requires industry foresight. not the other way. better. they are not enough to get a company to the future. don’t predict. Companies need to fundamentally reconcieve itself. faster. It involves Dream about the company’s future. It is based on deep insights into trends in technology. demographics and lifestyles. Transform the industry. aspirations and resources.THE FUTURE OF COMPETITION Regenerating – Leaner. not just the organization. 269 . as important as these may be. Create a potential gap. and regenerate its strategies (breaking its – managerial frames). reinvent its industry. Empower from bottom to top.
ABOUT THE DREAM Which customers will you be serving? What will the potential customer look like? Who will be your future competitors? What will be the basis of your competitive advantage? Where would your margins come from? What will be your future competencies? Which end product markets would you cater? 270 .
they do not need to restructure.ABOUT THE TRANSFORMATION The future does not belong to those who take the industry for granted. hence do not fall sick in the first place. Create entirely new industries (i. Therefore. blue oceans). It drives a hunger and a passion to transform. Change in at least one fundamental way the rules of engagement in an industry. Redraw the boundaries between industries. by converging technologies complex. 271 . It is about deliberately creating a strategic misfit. Successful companies have a complete grip over the industry.e.
The middle management plays a strong moderating role. A revolution that is thrust upon from the top seldom sustains. Transformational leaders merely lead the way.ABOUT THE EMPOWERMENT Bring about a revolution (a paradigm shift) in the organization. Most successful revolutions (Gandhi to Mandela) rose from the dispossessed. the revolution must start at the bottom and spread in all directions of the organization. 272 . Such a process is called institutionalization (from people centric to organisational centric). More importantly.
It requires a lot of common sense and a little bit of out of the box thinking. Apply the 40 – 30 – 20 principle. South West Airlines – LCC. A process for finding and gaining insight into tomorrows opportunities (Eg. without taking undue risk. Apple – iphone).THE FUTURE OF STRATEGY A company must get to the future not only first but also for less. Companies need to strategize (think ahead of times). Toshiba – LCD. What does it take to get to the future first? Understanding how competition for the future is different. Get to the future first. An ability to energize the company. 273 .
274 . the farther it will be away from competition. greatness from mediocrity. but hundreds.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. We are in the midst of a 3600 vacuum. as on their aspirations. is the ability to imagine in a different way what the future could be. each point in space represents a unique business opportunity. What distinguishes a leader from a laggard. As there is no one future.
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.
278 . It is characterized by the following – Unique – It provides unimaginable customer value ahead of its times. Leverage – They are the gateways to future markets. It cannot be matched even by its closest competitors.CORE COMPETENCE A core competence relates to a bundle of skills (not an asset or a business) that revolves around activities or processes and critically underpins a firm’s competitive advantage. It represents the collective learning's of an organization centering around diverse streams of technologies. Inimitable & Insubstitutable – A high degree causal ambiguity between these skills yield sustainable competitive advantage.
Coca Cola – brand. Nike – designing. Toshiba – flat screen displays. Canon – imaging. SKF – antifriction and precision. A core competency cannot be outsourced. at the most three to four. it is deeply embedded in the heart of the organization. it gets more refined and valuable through use. Core competencies are the roots of the organization.MORE ABOUT CORE COMPETENCE Sony – miniaturization. Wal-Mart – logistics. Intel – nano-electronics. Most companies around the world do not possess one. Honda – engines. Although a core competence may lose value over time. 279 . leaders have one. Toyota – lean manufacturing.
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 .
institutional gaps. Korea. Therefore. 1997). China. Emerging markets are characterised by infrastructural bottlenecks. high levels of market imperfection).EMERGING MARKETS Emerging markets (India. and high transaction costs. strategies suited for the developed markets may not be appropriate for emerging markets. Diversified groups in operating in emerging markets therefore benefit from unrelated diversification. 288 .e. Therefore focused strategies based on core competence may not be suitable for emerging markets (Khanna & Palepu. Chile) provide a different context (i.
Synergy. subsequently negatively related across developed markets.PERFORMANCE (I) Diversity attempts to measure the degree and extent of diversification (Herfindahl. Concentric. (2000) 289 . Optimum level of diversification Performance Diversity is initially positively related with performance. Entropy). Experience Strategic Fit Diversity Palich. Size & Scale. et al.DIVERSITY .
subsequently positively related across emerging markets.PERFORMANCE (II) Diversity is initially negatively related with performance. 2001) 290 . conglomerate power Threshold level of diversification Performance Diversity (Khanna & Palepu. Huge initial investment.DIVERSITY . brand building Risk diversification.
act locally (Eg.INTERNATIONAL IDENTITY MNC’s consciously engage in FDI in different parts of the globe to forge resource diversity as a distinct competitive advantage. It should think globally. revenues and profits. Characteristics – It should have a spread of affiliates or subsidiaries. It should have a spread of manufacturing facilities. It should have a spread of interest groups / stake holders. It should have a spread of assets. HSBC). 291 .
high feminity index in developed markets and vice versa for emerging markets). low power distance in developed markets and vice versa for emerging markets). 292 . low risk profile in developed markets and vice versa for emerging markets).It reflects the relative role of team building (Eg. Group Scale . Feminity Index .It reflects the disparities in women in workforce (Eg. Risk Profile – It reflects the risk attitude of the top management (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.
political stability. terrorism (9/11). Country Risk – It reflects the political and economic risk (Eg. customs. interest rates. judiciary) of doing business in a particular country (Eg.GLOBAL BUSINESS ENVIRONMENT Cultural Adaptability – It reflects the adaptive ability to a changing environment . inflation. 293 . code of conduct. credit rating. time value. currency. flexibility (Eg. low country risk in developed markets and vice versa for emerging markets). way of life. attitude. FOREX reserves. high cultural adaptability in developed markets and vice versa for emerging markets). dress sense.culture. corruption.
Ethnocentrism – Developed country managers tend to regard their own culture as superior. 294 .GLOBAL BUSINESS ENVIRONMENT Time Sensitiveness – Developed country managers regard time as precious. High levels of ethnocentrism usually has a negative effect on business. and vice-versa. however. Language Barriers – Developed country managers expect foreign partners to communicate in their languages. time-zones. in most emerging markets meetings are delayed and lasts unusually long. Other factors – local celebrations. in most emerging markets use of an interpreter may be a standard protocol.
In 1995 (Uruguay Round) GATT was renamed to WTO. The 2001 (Doha Round) focused on power blocks (NAFTA. It also initiated provisions on anti-dumping. 295 . ASEAN. copyrights. BRIC). It a multi-lateral treaty with 143 (as on 2002) member countries to reduce tariff and non-tariff (quota) barriers. trademarks). It focused largely on TRIPS (patents. It also highlighted the nexus between US & WTO.GATT GATT was a bi-lateral treaty initiated between US and some member countries in 1947 to promote free trade. The 1999 (Seattle Round) saw a lot of protest amidst bringing agriculture under the purview of TRIPS.
three countries joined in 2002 increasing it to fifteen members as of 2008. Euro). primarily the OPEC countries. the Euro slowly started outperforming the Dollar. However.EURO – SINGLE CURRENCY In 1999 twelve member countries in Europe joined hands to move over to a single currency (i.e.e.Pound). However with current recession in the US 2002 onwards. Sterling . The Euro was significantly devalued against the Dollar till 2002. The notable exception was Great Britain which still continues with its local currency (i. 296 . the Dollar still remains the most preferred currency globally.
Rate Uncertainty – A single currency eliminates the risk of competitive devaluations. it helps avoiding transaction costs associated with a multiple currency.SINGLE Vs MULTIPLE CURRENCY Transaction Costs – Though the initial cost of introduction of a single currency is very complicated and costly. but it may have spill-over effects. a multiple currency is preferable where the business cycles of member nations are different. However. 297 . Trade Block – It will strengthen the EU identity which would not have been possible otherwise. Transparency – A single currency is transparent and competitive.
Neo classical economists believe that foreign investment may in fact be a win-win game.e. – FII (transfer of intangible resources) is fast but may have strong repercussions (i. the gain of one country is loss of another). 298 . It is long term with high levels of commitment.e. – FDI (transfer of tangible resources) is slow but steady for the purpose of economic growth. It is short-medium term with comparatively low levels of commitment.FII Vs FDI INVESTMENT Classical economists believed that foreign investment (in any form) is basically a zero sum game (i. hot money).
Distribution – It depends on the market characteristics (fragmented – concentrated). .culture (food habits). Pricing – It depends on the competitive structure (PLC – Kellogg's). customer awareness (microwaves). technology (microchip). lifestyle (petroleum 299 outlets – departmental stores). economic (middle class buying power). usage (talk time).INTERNATION MARKETING Product – The various attributes of a product may receive different degrees of emphasis depending on differences in . buying patterns (spread). promotion (surrogate advertising).
.INTERNATION FINANCE Currency Risk – Many Indian IT companies (Rs) having business in US (Dollar) are asking for quotes in (Euro) or are shifting bases out of US to avoid risk of devaluation of Dollar. Leverage – The leverage may vary across countries depending upon money and capital market conditions (Eg.India) may be different from that another trading country (US – GAAP or IRS). equity is cheap in India). Accounting Norms – The accounting norms of one country (AS . Cost Structure – Companies in India need to investment in fixed costs due to poor infra-structure 300 compared to developed markets. debt is cheap in US.
in most cases it is not desirable nor practiced. and cultural barriers (language) vis-à-vis emerging markets. labour laws. Recruitment – In local recruitment. technology (convergence. however. Training – It is a pre-requisite for international business to reduce language. shortened life cycles). 301 . double taxation. Compensation – Differential pay packages exists because of differences in purchasing power. social security.INTERNATIONAL HR An uniform HR policy is idealistic to enable parity in performance appraisal. skills are more important that cultural fit and vice-versa.
INTERNATIONAL OPERATIONS Location Incentives – FDI in emerging markets should explore options for SEZ’s to explore benefits (tax holidays. reduce power costs) vis-à-vis infrastructural bottlenecks. Bosch spark plugs are used by car manufacturers worldwide). . Outsourcing – A company having a core competence may be the source of global outsourcing (Eg. SCM – Use of ERP to network the extended enterprise 302 across the globe. Technology – The cost to be evaluated in terms of latest technology (Euro VI) vis-à-vis effective cost of appropriate technology (Euro II).
CONTEMPORARY TOPICS 303 .
but has inherent risks involved as well. Innovation is all about staying ahead of competition. Innovations typically paves the way for more secured and improved lifestyle for consumers in general. While innovation typically adds value for organizations. 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. it has destructive effects as well.INNOVATION An invention is the first occurrence of an idea for a new product or process. 304 .
305 . Tangible impact of product innovation on performance is significantly higher than process innovation. Process innovation usually follows product innovation. process innovation is necessary to sustain the competitive advantage of product innovation. While product innovations are typically customer driven. process innovations are organizational driven. However.TYPES OF INNOVATION A key challenge is maintaining a balance between process and product innovations. Strategic innovation has the potential to change the rules of the game.
Medical Surgery (Lasik). putting an idea into practice). Data Storage (Pen Drives). Disruptive business models brings in a new frame of reference (i. a paradigm shift). Processors (Pentium). It leads to a shift in the price – performance envelope. Innovations are the back-bone of successful business models .BUSINESS MODEL It is a simplified description and representation of a complex real world. Telecom (CDMA Technology).e.e. Drug Development (Bio Chemicals). 306 . about how an organization makes money (i.
The revenue streams generated by the activities. 307 . The key partners involved in the activities. The channels to reach out to the clients. The proposed relationships established with clients. The cost structure resulting from the business model. The key resources and capabilities required. The key activities / processes necessary for execution.NINE BUILDING BLOCKS Value proposition offered to the market. The segment(s) of clients to be addressed.
BUSINESS MODEL FRAMEWORK 308 .
Real Estate) companies need to untangle and understand the intricacies of their business model.REVENUE MODEL Positioning is just not sufficient. With the rapid erosion of certain industries (IT. Investment Banking. innovative companies to carve out unique business models to fend off competition. 309 . The revenue model described here are the means to generate revenues. It involves – Product Visualization – Product Prototype – Product Test – Capacity – Pricing – Distribution. It is just one piece of the puzzle.
Allow the management sufficient slack to be future oriented. Promote the culture of experimentation. Promote the grape-vine. Allow the workforce idiosyncrasies for their errors. Provide reasonable incentives (not necessarily monetary). 310 .HOW TO MAKE INNOVATIVE CO’S Innovative company’s are a matter of culture and aspirations rather than tangible resources. A favourable intellectual property (IP) climate. Have a lean and a flat organization structure.
companies are increasingly relying on internal protection to sustain innovation effects. Collusion with the judiciary is also another distinct possibility in emerging markets. In most emerging markets where the IP climate is not so favorable. 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. 311 311 . however that possibility is slowly atrophying.
Corporate governance aims to reduce the principal-agent problem present in most professional managed organizations through appropriate forms of accountability and control mechanisms.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. 312 312 . In fact the principles of corporate governance implies that managers go beyond in satisfying the stated and unstated needs of the multiple stakeholders.
This exposes the shareholders to additional risks and higher costs. From the strategic point of view managers tend to diversify into unrelated businesses as it provides higher returns hence a more favourable appraisal. shareholders can diversify their portfolio at a much lesser risk and cost. 313 . not present in portfolio diversifications. According to the agency theory top managers and shareholders interests are usually conflicting in nature and tend to pull in opposite directions.AGENCY THEORY The root of Corporate Governance goes back to the Agency Theory. However. also known as the principal-agent problem or agency dilemma.
the US government passed the Sarbanes – Oxley Act. . 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. 2002 to restore public confidence in corporate governance. SEBI Report – 2005. defines corporate governance (headed by Kumar Mangalam Birla) as the acceptance by management of the inalienable rights of shareholders as the true owners of the corporation and of their own role as trustees on behalf of the 314 shareholders. various laws were enacted to ensure proper usage of these funds.
GOVERNANCE PRINCIPLES Rights and equitable treatment of shareholders: Help shareholders exercise their rights by effectively communicating information in transparent ways that is understandable and accessible and encouraging shareholders to participate in general meetings. Role and responsibilities of the board: It deals with issues about an appropriate mix of executive and nonexecutive directors. including the society at large. 315 . The key roles of chairperson and CEO should not be held by the same person and their offices be clearly separated. Interests of other stakeholders: Recognize the legal and other obligations of all legitimate stakeholders.
assessment and mitigation of risks and retirement by rotation over a fixed period of time..GOVERNANCE PRINCIPLES Integrity and ethical behaviour: Organizations should develop a code of conduct for their top management that promotes ethical and responsible decision making. Independence of the entity's auditors: Identification. They should also implement systems to independently verify and safeguard the integrity of the company's financial reporting. Disclosure and transparency: Disclosure of information should be timely and balanced to ensure that investors have clear access to data and facts. 316 316 .
with its legal authority to hire. 317 . However. Balance of power: The simplest balance of power is very common. Remuneration: Performance-based remuneration is designed to relate some proportion of salary to individual performance.GOVERNANCE STRATEGIES Monitoring by the board of directors: The board of directors. fire and compensate top management. they should provide no mechanism or scope for opportunistic behaviour. discussed and resolved. a person benefitting from a decision should abstain from it. safeguards invested capital. Regular board meetings allow potential problems to be identified.
undertook formal evaluation of its directors. 318 .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. from 10% for companies where the regulatory backdrop was least certain (those in Morocco. The size of the premium varied by market. and was responsive to investors' requests for information on governance issues. They defined a well-governed company as one that had mostly out-side directors. McKinsey found that 80% of the respondents would pay a premium for wellgoverned companies. who had no management ties.
corporate philanthropy should be a part of every corporate mission. However. the short-term view of profit maximisation gave way to a more broader and mediumterm view wealth maximisation of the shareholders. The basic premise is that firms cannot exist in vacuum.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. Over a period of time. today economic institutions are considered as a major drivers of improvement in quality of life in general and therefore needs to include multiple stakeholders. Therefore. 319 .
“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. CSR can be defined as. economic and social responsibilities cannot be mutually exclusive.CORPORATE SOCIAL RESPONSIBILITY As Peter Drucker rightly pointed out that. the debate on CRS still continues whether firms should detract its focus from its business? 320 . giving a very important message that one cannot exist without the other. Therefore. Therefore. However. “a healthy business cannot exist in a sick and impoverished society”.
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. 321 . MRTP).GROWING CONCERN FOR CSR Awareness due to education: With growing literacy. Public image: Entrepreneurs are increasingly relying on public image as a source of competitive advantage and a higher financial discounting. The role of media: The media and various consumer organizations have come up in protecting consumer rights and exposing mal-practices.
322 . Refrigerators – CFC. Tata Steel – Life Line Express). Cement . Exide – Product take back). Aditya Birla Research Centre – LBS). Education.CSR STRATEGIES Green Supply Chain Management: It includes environmentally preferable purchasing.Paper packaging. Literacy & Training Programs – (Eg. and extended producer responsibility (Eg. Health & Hygiene – Attending the health hazards due to wastes and by-products to employees and society in proximity (Eg. eco efficiency. designing eco-friendly products.
Prahalad notes that future markets exist collectively. 323 . C. they're helping millions of the world's poorest people to escape poverty. They represent an enormous opportunity for companies who learn how to serve them. In turn companies by serving these markets. across the world's billions of poor people having immense untapped buying power. Strategic innovations leading to disruptive business models can show the way out. K.BOTTOM OF THE PYRAMID With the market across most developed markets including the US getting saturated.
BLUE OCEAN STRATEGY 324 .
TWO WORLDS 325 .MARKETSPACE .
WHAT IS RED OCEAN? Companies have long engaged in head-to-head competition in search of sustained. and struggled for differentiation (cost or product). profitable growth. one companies gain is always at the 326 cost of another companies loss. In today’s red oceans. battled over market-share. . competing head on results in nothing but a bloody red ocean of rivals fighting over a shrinking profit pool. They have fought for profits. where most industries are saturated. Yet in today’s overcrowded industries.
WHAT IS BLUE OCEAN? Tomorrow’s leading companies will succeed not by battling in red oceans. rendering rivals obsolete and unleashing new demand. but by creating blue oceans of uncontested market space ripe for growth . Blue Ocean’s have existed in the past. Such strategic moves are possible through the pursuit of product differentiation and low cost simultaneously. It helps in creating powerful leaps in value for both the firm and its buyers. It is only the frames of the . 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 .
BLUE OCEAN STRATEGY IMPERATIVES Prospects in most established market spaces – red oceans – are shrinking steadily. Technological advances have substantially 329 improved industrial productivity. information imperfections atrophy instantly. Population shrinkage across a no. Niche markets & monopoly havens are continuing to disappear. . As trade barriers between nations & regions fall. of European nations. Demand across developed markets reaching a plateau.
Incumbents often create blue oceans within the ambit of their core business. managerial moves are. History indicates that blue oceans exist in three basic industries – automobiles (how people get to work) – computers (what people use at work) – entertainment (what people do after work).CONCEPTUAL UNDERPINNINGS Blue oceans have existed in the past and will exist in the future as well. They are not necessarily about technology. the underlying technology was often already in existence. Company & industry are the wrong units of 330 strategic analysis. .
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 .
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. Southwest Airlines: Pioneering the concept of LCC. . Sony Play Station: Redefining machine-human interface in entertainment and targeting an altogether new user base.
companies & managers are largely at the mercy of economic forces. Off late emerging views in strategy having its origin in (Organization Theory) led to a paradigm shift to what is called the – reconstructionist view. All they need to do is change their managerial frames. greater than themselves. According to this view.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. 334 . According to this view managers need not be constrained to act within the confines of their industry.
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