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Course Code: 611 & 612 Dr. Subir Sen – Faculty Member, IBS
E-Mail: email@example.com, 9830697368 1) Crafting & Executing Strategy – Thompson & Strickland. 2) Strategic Management – Pearce & Robinson. 3) Strategic Management – Fred. R. David. 4) Exploring Corporate Strategy – Johnson & Scholes. 5) Competitive Advantage – Michael E. Porter. 6) HBR – Articles & Case Studies.
STRATEGY - DEFINITION
Strategy is all about making trade-offs between what to do and more importantly what not to do; consciously choosing to differentiate. It reflects a congruence between external opportunities and internal capabilities. Types of strategies – Corporate Strategies – It is all about making choices across various businesses and allocating resources among them. Business Strategies – It is all about developing leveraging and sustaining competitive advantage. Functional Strategies – It is all about finding newer ways to perform existing processes, or 3 better still adopting new processes altogether.
STRATEGIC MANAGEMENT DEFINITION
Strategic management attempts to integrate the traditional management functions and align the organization as a whole with the broader environment to make resource allocations in a way to achieve the strategic intent of the organization. This alignment is called strategic fit. It serves as a road-map for the organization in its growth trajectory. It provides the direction – extent – pace – timing. It depends on the turbulence of the environment and the aggressiveness of the organization. It distinguishes the winners from the losers.
PILLARS OF STRATEGIC MANAGEMENT
Differentiation – Differentiation of key inputs and technologies helps a firm to consciously move away from homogeneous to heterogeneous markets enabling them to earn super-normal profits from normal profits. Integration – Whenever dealing with a complex task of managing a business (i.e. involving a no. of variables with cross linkages) it is in the interest of simplicity that the task be broken up in smaller components. However, for effective control, integration is essential. Alignment – Since differentiation is prone to replication, it is in the interest of the firm to differentiate continuously by aligning the resources with environmental opportunities.
STRATEGIC MANAGEMENT FRAMEWORK
Economic al Strategic Finance Fit Political Strategic Intent Fit Political Marketin g Manageme nt Social & Cultural
7 . It is a holistic and integrated approach. It is irreversible. It is about adaptation and response to the same.STRATEGIC MANAGEMENT .FEATURES It forms the core activity of the top management. It requires full commitment of the top management. It provides broad guidelines. It is long-term in nature. It is all about creativity and innovation. It involves substantial resource outlay.
It involves nitty-gritty's. It is fool-proof in nature. It is about forecasting. It about mere data and facts. It is rocket science. It attempts to minimize risk.STRATEGIC MANAGEMENT – MYTHS It involves short-cuts. It involves only the top management. It is about a definite formula. 8 . It a bundle of techniques or even tricks. It brings instant success.
To leverage size. To assimilate change faster. rather than reactive.STRATEGIC MANAGEMENT IMPERATIVES To be continuously alert. again and again ……. To innovate. To gain expertise in technologies. scale and scope. To be proactive. To generate large resource pool. To be insulated against environmental threats. . 9 To develop core–competencies. To tap markets across boundaries. To be future oriented.
In contrast.ORIGIN The word strategy has its origin from the Greek word strategia meaning Military Commander. but with a lot a rigour and robustness. and more importantly . whose origin can be traced to some of the greatest battles fought in the ancient days. battles fought on the market front are won by companies by virtue of their obsession & strategies. obsession. In the ancient days battles were fought over land. Even in today’s markets.strategies. but by virtue of their courage. It is an old wine in a new bottle.STRATEGY . In the ancient days battles were won not by virtue of size of the army or armory. 10 . today's battles are fought over markets.
Allied Forces Vs Germany (WW-II) – Strategy: Forging alliances. – Reliance’s entry into telecom. – Toyota’s entry in the US.SOME PARALLELS Japan’s attack on Pearl Harbour – Strategy: Attack where it hurts the most. US attack of Morocco to capture Germany – Strategy: Pin-hole strategy – Wal-Mart challenging Sears by entering small towns. challenging GM and Ford. 11 . Napoleon’s attack on Russia – Strategy: Waiting for the right time. – Yahoo and Microsoft challenging Google.
The things happening around the firm when totally disconnected from the past leads to a paradigm shift.Industrial Revolution. A paradigm is a dominant belief about how the business and its environment operates.EVOLUTION OF MANAGEMENT As Peter Drucker refers to it. 12 . The first major discontinuity in the history of global business environment was the . 1910). a radical change in the business environment brings about discontinuity. – Mass Production Organization Size – Complicated Processes – Complex Structures Evolving of an emerging paradigm – survival of the fittest (Fayol & Taylor.
push to pull).EVOLUTION OF STRATEGIC MANAGEMENT The second major discontinuity in the history of global economic environment – World War II. 1960). performance across firms became differentiated. – Affluence of the new customer (i. – Global market place.e. 13 . The question of outperforming the benchmark became the new buzzword. From uniform performance. Efficiency and effectiveness are no longer sufficient. Survival of the most adaptable becomes a new management paradigm (Ansoff. – Changes in the technology fore-front. – Homogeneous to heterogeneous products.
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 .
Learning always begin on a clean sheet of paper. – It is primarily the top management’s prerogative. – 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. 15 .APPROACHES TO STRATEGY Analytical Approach – Igor H. – Biases and prejudices has a very little role to play in strategic choices pursued by managers.
how it will compete. – Organization structure will precede and cause changes in strategy. 16 . – Management control systems has a dominating role in influencing firm performance. who will be the top managers.APPROACHES TO STRATEGY Design Approach – Alfred Chandler (1970) – Structure follows strategy. everything else follows. Once the control systems are in place. The organization initially decides which industry to enter. – The top managers then decide on the type of organization structure & systems to be in place. Successful organizations align authority and responsibility of various departments in way to reach overall objectives.
substitutes.APPROACHES TO STRATEGY Positioning Approach – Michael E. new entrant. customer. – The environmental forces comprises of – supplier. – The organization will outperform the industry where environmental forces are weak and vice-versa. competitors. 17 . – An organization is seldom in a position to influence the larger business environment. – A firms performance is inversely related with the bargaining power of environmental forces to which it is exposed. Porter (1980) – Choose a consumer segment and position your product accordingly.
– It enables a firm to deliver unimaginable value ahead of time. 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. 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. K.APPROACHES TO STRATEGY Core Competence – C.
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’s a philosophy that distinguishes it from its competitors. 21 . you cannot reach there.STRATEGIC INTENT If you cannot see the future. It provides a sense of direction and destiny. It implies a significant stretch. A gap that consciously manages between stagnation and atrophy. It is the cornerstone of an organizations strategic architecture reflecting its desired future state or its aspirations. A strategic intent is a statement of purpose of existence. It involves an obsession to be the best or outperform the best. A substantial gap between its resources and aspirations.
HIERARCHY Integrativ e m Do an in Visio n Mission Dominant Objective s Goal s Plans Lo g ic Single Specifi c Man y 22 t .STRATEGIC INTENT .
Dominant logic changes. when radical changes in the internal and external environment (i. it can be perceived as a set of working rules (similar to thumb rules) that enables the top management to decide what can be done and more importantly what cannot be done.DOMINANT LOGIC A dominant logic can be defined as the way in which the top management team conceptualizes its various businesses and make critical resource allocation decisions. To put it more simply. strategic variety) is apparent. 23 .e. It is core to the strategic intent of the firm.
VISION It is a dream (not a forecast) about what the company wants to become in the foreseeable future. 24 . beyond just making money. – It represents the company’s audacious. but achievable aspirations. 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. It enables the top management to remain focused. It is a combination of three basic elements – – An organizations fundamental reason for existence. It provides an unity of purpose amidst diversity of personal goals.
Brevity – It should be short. Clarity – Vividly descriptive image of what the company wants to be known for in the future. 25 . not an utopian dream. clear.VISION . and memorizable.CHARACTERISTICS Reliance – Where growth is a way of life. 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. Sharing – The company across all hierarchies should have faith in it. Reachable – It should be within a reasonable target in the known future.
It lends integrity and genuineness.VISION . It makes strategic alignment easier. It gives enlightment. To prevent the fall in a activity trap. It gives the impression of a forward-looking organisation. It facilitates development of skills & capabilities. It provides a holistic picture. It gives a shared platform. 26 .ADVANTAGES To stay focused on the right track. It fosters risk taking and experimentation.
its reason for existence. Although the purpose may change over time. A broad mission statement helps in fending competitors. It serves as a road map to reach the vision. It enables the firm to define its business landscape and identify its competitive forces. 27 .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.
All the businesses of the company are strongly integrated with their main business. …………………. – We do not offer insurance. …………………. …………………. We offer comfort. 28 .MISSION – SOME IDEAS Reliance – We are in the business of integration. We offer solutions. We offer strength. – We do not offer steel. Some other examples – We do not offer shoes. though some may seem unrelated in nature. – We do not offer software's. We offer security. ………………….
29 . It provides a quantitative feel to an abstract proposition. It is an end result (quantifiable) something a firm aims and tries to reach in a time bound frame. – It helps identifying key success factors.GOALS & OBJECTIVES Reliance – We want to become a Rs. – It is based on Management by Objectives (MBO). – It keeps the mid management pre-occupied. – It provides a benchmark for evaluation. – It adds legitimacy and motivation. – It prevents deviation. – It lends direction – time frame in the medium term.100K crore company by the year 2005.
– Acquire a market share of indomitable position. – Use price-elasticity to break market barriers.PLANS Reliance – Desire to invest 25K crore in telecom business by circa 2010. coordinating appropriate technologies. It is the process of garnering necessary inputs. 30 . and gaining access to desired markets to achieve the desired goals and objectives. It is specific to a particular business. – Leverage economies of size and scale. The details of the plan Reliance Telecom adopted were – Backward integrate process technologies. – Compress project times.
Historical studies have shown that most organizations tend to continue with their existing strategies. It often leads to an organizational crisis. However. radical change may lead to disequilibrium. past strategies tend to have a bearing on future strategies. This state of affairs is known as strategic drift. equilibrium is maintained. In such a context. 31 . This tendency to restore continuity is known as inertia (resistance to change). strategies lose touch with the emerging realities. When changes in the environment is incremental.STRATEGIC DRIFT Due to top management commitment.
STRATEGIC DRIFT FRAMEWORK Environmental Change Degree of change Strategic Change Radical Change Incremental Change State of Flux Continuity Stage of Transformation Strategic Drift Stage of Atrophy Time 32 .
ORGANIZATIONAL POLITICS Strategic drift often leads to organizational politics. Organizational politics involves intentional acts of influence to enhance or protect the self-interest of individuals or groups over organizational goals. – Hiding vulnerability. – Developing a platform of support. – Creating obligations of reciprocity. – Using covert tactics to pursue self interests. – Creating a favourable image. – Distorting information to gain mileage. Some instances of organizational politics – Formation of powerful groups or coteries. 33 .
A realized strategy is what the top management actually translates into practice. – Persons responsible for strategy conceptualization and implementation are34 divergent. . Other causes – – The plans are unworkable and utopian. – Influential stake-holders back out. – The environment context has changed. Usually there is wide gap between the two when organizational politics is evident.INTENDED & REALISED STRATEGIES An intended strategy is an expression of interest of a desired strategic direction.
35 . 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. but as a defensible response to the complexities of a large organization that mitigate against publicizing goals. this is not to be treated as “muddling”. Strategy formulation and implementation are linked together in a continuous improvement cycle. They simply unfold the particulars of the sub-system in stages. but the master scheme of the rational comprehensive scheme is not apparent. Learning is an integral part of logical incrementalism.
IMPLEMENTING INCREMENTALISM General Concern – A vaguely felt awareness of an issue or opportunity. Agent of Change – Formal ratification of a change plan through MBO. Macro Broadcasting – The broad idea is floated without details to invite pros and cons leading to finer refinements. Adaptation – As implementation progresses. Leveraging Crisis – A sudden crisis or an opportunity should be used as a trigger to facilitate acceptance and implementation of change. The broader objective should serve the overall interest of the organization. 36 .
Tampering with surface level factors often leads to atrophy. Strategic transformation becomes smooth through a change in top leadership.STRATEGIC TRANSFORMATION Strategic transformation (a complete overhauling of the strategic architecture) becomes inevitable whenever a strategic drift takes place. . Dominant logic’s are the cornerstones of change when strategic transformation is apparent. It creates blinders. Dominant logic’s are very rigid and sticky and prone to inertia. As it brings 37 with it a different dominant logic.
LEARNING ORGANIZATION A learning organization is capable of continual regeneration from knowledge. It helps prevent a strategic drift from occurring at the first place. experience. – Informal Networks – Emerging of new ideas. – Experimentation – Fosters a culture of risk taking. Factors that fosters a learning organization – Pluralistic – An environment where different and even conflicting ideas are welcome. A learning organization must continuously focus on unlearning as well. – Organisational Slack – Enough free space. and skills that fosters experimentation and questioning and challenge around a shared purpose. – Constructive Bargaining – Agree to disagree. 38 .
ENVIRONMENTAL CONDITIONS Dynamic Scenario Planning Learning Organization Static Forecasting Decentralization Simple Complex 39 .
ANALYZING BUSINESS ENVIRONMENT 40 .
It requires a quantum leap (i. gap analysis). It is based on the assumption of radical change. It is based on the assumption of incremental change. Competitive advantage provides the surest way to fulfill the strategic gap. It points to a position of superiority with relation to competition. 41 .e. Strategic gap basically points towards a vacuum of where the organisation wants to be and where it is. Strategic planning is a function of discounting the future.PLANNING & STRATEGIC PLANNING Formal planning is a function of extrapolating the past. It is pro-active in nature. It is reactive 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. Environmental factors can be external as well as internal to the organization. and influences that affect an organizations way of doing things. not guided by any boundaries. The segments of the environment a top manager scans selectively depends upon his dominant logics. resources and ideas move unhindered. It is exploratory in nature. events. The world is flat. 42 . Environmental scanning is very important component of strategic planning.
It is not intended to be used as an exhaustive list.PESTEL PESTEL attempts to provide a broad framework on how the broader environmental forces affects an organization and influences the way it practices strategy. Understanding the composite effect is critical. but also to analyze the complex linkages across them. 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. 43 . It is important not only to identify the structural drivers of change.
Literacy Levels. FDI Inflows.PESTEL FRAMEWORK Political – Government Stability. Social Values. Economic Cycles. Social – Population Diversity. Licensing & Quotas. Currency Stability. Subsidies & Protection. Government Attitude. Language Barriers. Central – State Co-alignment. Infra-Structural Investments. Economic – GDP. Fiscal Deficit. Religious Sentiments. Economic Model. Income & Age Distribution. Inflation & Interest Rates. Monsoon & Food Grains Reserves. Savings & Investment. 44 . Capital Market & Forex Reserves.
Patent Laws. Patents. Extended Producer Responsibility. Obsolescence Rate. Carbon Credits. Research & Development. Consumer Protection Laws. Environmental – Global Warming & CSR. Product Safety & Health Hazards. Non-Fossil & Alternative Fuels. Product Design. 45 . Waste Disposal & Emissions. Environmentally Preferable Purchasing. Legal – Monopolies Legislation. Pollution Control Laws.PESTEL FRAMEWORK Technological – Innovation. Technological Convergence. Employment Laws. ERP. Direct & Indirect Taxes.
PSU Disinvestments. Abolition of import licenses.ECONOMIC LIBERALISATION New Industrial Policy (NIP) – Liberalizing industrial licensing. Encouraging exports. Rupee convertibility. 46 . Exit Policy. Encouraging FDI. New Trade Policy (NTP) – Lowering import tariffs. Banking Sector Reforms.VRS. Structural Adjustments – Phasing out subsidies. Curtailment of PSU’s. Capital Market Reforms. Dismantling price controls. Economic Reforms – Fiscal & Monetary Reforms. MRTP Liberalization. FERA Liberalization.
Survival of the fittest MNC Onslaught – Enhancing stakes – Power Equation – Joint Ventures – Technological Alliances – Take-over threat.DISCONTINUITY Destabilization due to entrepreneurial freedom – Cocoon of protection disappears – Diversification spree – Existing notions of size shaken – Industry structures change radically – Economic Darwinism . Mergers & Acquisitions 47 .
Globalization – Cheap Imports & Dumping – Push to Pull Marketing Buyers exacting demands – Shortage to surplus – Price competition – Life-style changes – Stress on quality.DISCONTINUITY Hyper Competition – MNC’s . Consumerism Challenges on the technology front – Competencies become technology based – Investment in R&D become inescapable 48 .
DISCONTINUITY Compulsion to find export markets – Identifying competitive advantage – Technological gap – Global presence – Depreciating currency – Exports Corporate vulnerability – It is no longer business as usual – Capital inadequacy – Lack of product clout and brand power – One product syndrome – Loss of monopoly 49 .
FIVE FORCES MODEL .PORTER Threat of New Entrants Bargainin g power of Suppliers Competition from Existing Players Bargainin gBargainin power g of power of Suppliers Customer s Threat of Substitutes 50 .
profit potential) per se. incremental or otherwise.FIVE FORCES MODEL ASSUMPTIONS The model is to be used at the SBU level and not at the industry level. 51 . The five forces have strong cross-linkages. but also used to understand how they can be countered and overcome.e. The model should not be used as a snapshot in time. It depicts the attractiveness of an industry (i. It is even wiser to apply the same at the product – market level. the forces are subject to changes. It should not only be used to understand the forces.
Industry stagnation. Government policy. Low margins & stagnancy. Low relative importance of the segment. Access to distribution channels. Presence of substitutes or unorganized sector. Capital requirements. Unimportance of product quality. Low customer switching costs. 52 . Learning curve advantages.PORTERS FIVE FORCES ANALYSIS Threat to Entry – Economies of size and scale. Product differentiation through proprietary technology or brand power. Scope for backward integration. Threat of Customers – Buyer concentration and volumes. High switching costs. Undifferentiated product. Resource profile & fear of retaliation.
Jockeying for position – Fragmented market. 53 . Buyer’s propensity to substitute. Industry stagnancy. Lack of substitute inputs. Differentiated inputs. Unorganised sector. Scope for forward integration. Produced by industries earning high profits. Product perishability. Low level of differentiation. High customer switching costs. Piracy and counterfeits. Diversity of players. Low relative importance of the segment. Intermittent overcapacity.PORTERS FIVE FORCES ANALYSIS Threat of Suppliers – Supplier monopoly. High exit barriers. Threat of Substitutes – Improvement in price -performance trade-off.
FIRM ENVIRONMENT Size and Scale of Operations – It is a very important component of competitiveness in today's global context (Bharti – MTN. dominant or related diversified or unrelated diversified businesses (Infosys. Business Scope – The intention whether the firm wants to be in a single. Resource Profile – It highlights the capabilities (generic) or competencies (business specific) of the firm. Reliance). Cohesiveness – Degree of bonding existing across affiliated firms. Inertia – Excessive commitment to past strategies prevents firms from tapping emerging opportunities. 54 . Tata).
However.EXPERIENCE CURVE The cost of performing an activity declines on per-unit basis as a firm becomes more efficient. an E-Curve can prove to be futile during discontinuity. leverage it as a competitive advantage. which further reduces costs. and with lower prices it can increase its sales volume. experience teaches better and more effective way of doing things. With lower costs. Matured firms will always be positioned advantageously on the ECurve than new entrants. it can price its products more competitively. 55 . Experience curve has strong linkages with performance. The E-Curve thus enables organisations to build entry barriers.
EXPERIENCE CURVE Cost per unit of output Decreases at an increasing rate Point of inflexion Decreases at a constant rate Decreases at a decreasing rate Production / Volume 56 .
TRADITIONAL VIEW Efficiency = Lower Costs 2 3 1 Experience = Efficiency Lower Costs = Higher Sales Entry Barrier = Better Performance 4 6 5 Higher Sales = Lower Costs Lower Costs = Entry Barrier 57 .EXPERIENCE CURVE .
STRATEGIC VIEW Inertia = Limited Growth Experience = Inertia 2 3 1 Limited Growth = Diversification Strategic Failure = Poor Performance 6 5 4 Diversification = New Experience New Experience ≠ Old Experience 58 .EXPERIENCE CURVE .
Interviews.SWOT The framework was originally conceptualized by Kenneth Andrews in 1970. Suppliers. Business Intelligence – Bankers.VULNERABILITY ANALYSIS . It helps an organisation to capitalize on the opportunities by maximizing its strengths and neutralizing the threats minimizing the weaknesses. Competitors. 59 Analysts. It is one of the earliest models in environmental scanning. Observation. A SWOT audit involves – Company Records – Annual Reports. Acronym for Strengths – Weaknesses – Opportunities – Threats. Customers. Websites. . Case Studies – Structured Questionnaires. Press Clippings & Interviews.
SWOT ANALYSIS .FRAMEWORK Opportunities Nullify weaknesses which prevents you from exploiting opportunities Leverage strengths to make use of opportunities Weaknesses Minimize weaknesses which prevents you from countering threats Strengths Threats Utilise strengths to counter threats (?) 60 .
Economies of scale – Eg. Motivated employees & cordial industrial relations – Eg. ITC. Good credit rating – Eg. Toyota. Honda. Engineering Skills – Eg. Reddy’s. Siemens. High quality products – Eg. Tata Steel. 61 . Excellent penetration – Eg. Dr. Volkswagen. Infosys. Large resource pool – Eg. Reliance. Reliance. Ranbaxy. Strong R&D base – Eg. Caterpillar. Infosys.SOURCES OF STRENGTH Strong brand identity – Eg. Strong after sales & service network – Eg. Aditya Birla. Tata. SBI. Biocon. HUL. Sony.
Procter & Gamble. B. CESC. K. Hindustan Motors.Raymond. Excessive diversification – Eg. Lacking experimentation culture – Eg. CMC (Tata Group) 62 . Bijoligrill. Group . Inefficient top management – Eg. Lack of product / brand clout – Eg. Tatas. Modi Group. Inertia – Eg. Nirma. Single product syndrome – Eg. Narrow business scope – Eg. J. K. Excess manpower – Eg.SOURCES OF WEAKNESSES Outdated technology – Eg. Ballarpur Inds. SAIL. Organizational Politics – Eg. Strategic myopia – Eg.
Life style changes – Eg. Market driven Interest rates – Eg. Telecom. Exit Policy – Eg. Sugar. Maruti. Growing population – Eg. Abolishing MRTP – Eg. Banking. Fertilizers.SOURCES OF OPPORTUNITIES Delicensing of Industries – Eg. GDR’s. Capital market reforms – Eg. Free pricing – Eg. 63 . Sugar. Insurance. Fertilizer. Middle-class buying power. Retailing. Abolishing CCI. VRS. Collaborations & Joint Ventures – Bharti & WalMart. Market driven Pricing – Eg. Globalization – Eg.Tata Motors. ECB’s.
Land acquisition . 64 . Lack of Corporate Governance – Eg. Natural disaster – Eg. Terrorist attacks – Eg. Import relaxation – Eg. Bajoria – Bombay Dyeing. Nationalisation – Eg. (2008). Economic recession – Eg. Tsunami.SOURCES OF THREATS Political instability – Eg. Foreign Direct Investment (FDI) – Eg.Social activism – Eg. Hostile take-over – Eg. 11/9. Earth Quake. 26/11. Dumping from China. Satyam. Singur SEZ. Group disintegration – Eg. Tata Steel. Reliance. Onida. (1985–1990).
Assess the extent of impact of the factors. Strategic responses (including adaptation) to opportunities and threats is critical for survival and success. It represents a summary picture of the external environmental factors and their likely impact on the organization. 65 . scenario analysis). Holistic view – Prepare a complete overall picture.e. time series. Stages in ETOP analysis – List the aspects of the environment that has a bearing on the organization.ETOP Acronym for Environment – Threat – Opportunity – Profile. Delphi's technique. Forecasting – Predict the future (i.
High investment intensity acts as a drag. It is also a form of assessing vulnerability through longitudinal analysis. selectively. Some key findings on major performance drivers that explains 75% deviations in performance – Product quality and relative market share. . An organization can draw upon the experience of its peers in similar situations. 66 Vertical integration is a powerful strategy. Relative attractiveness of the market.PROFIT IMPACT OF MARKET STRATEGY PIMS is a database model developed by GE and later extended by HBS to examine the impact of a wide range of strategy variables on business performance.
Managers should be particularly cautious while referring to such data during times of discontinuity as it makes past patterns futile. when radical changes in the economy takes place. – Contexts may vary over time. 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.PIMS . – Contexts may vary across countries.LIMITATIONS The analysis is based on historical data and it does not take care of future challenges. 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. It enables the top management to draw focus. KSF helps organizations spot early opportunities and convert them into value adding business propositions. It involves a three-stage process – Identify KSF – What does it take to be successful in a business? Drawing KSF – What should be the organizations response to the same? Benchmarking KSF – How do we evaluate organization success on this factor? 68 .
IDENTIFYING ALTERNATIVE STRATEGIES 69 .
It reflects the customer needs it intends to satisfy.CORPORATE . A corporate strategy identifies and fixes the strategic gap it proposes to fill. It determines the locus a firm encounters with internal and external environment. It provides broad direction to the groups vision and mission.GRAND STRATEGY It is concerned with the overall business scope (single. related. dominant. unrelated) and geographical scope (local. global) of a firm and deals with choices of allocating resources across them. national. It indicates the quality of growth an organization is looking for. 70 .
CORPORATE STRATEGY MATRIX Corporate Strategy Stability Stability Growth Growth Combination Diversification Divestment Intensification Market Penetration Related Vertical Market Development Product Development Unrelated Horizontal 71 .
The reasons for stability strategy – – Lack of attractive opportunities. Stability however. Hindustan Motors). – To stop for a while and assess past records. (Eg. erosion of capabilities. The scale and scope of present operations remains almost intact. – Why disturb the existing equilibrium set up? – Limited resource position. does not relate to do-nothing (Eg.STABILITY It involves maintaining status-quo or growing in a slow and selective manner. – The firm may not be willing to take additional risk associated with new projects. Citibank). 72 . Even during adverse times firms need to adopt a strategy to sustain current performance levels.
ANSOFF’S MODEL New Product Existing Product Existing Market Market Penetration (+) Product Development (++) New Market Market Development (++) Diversificatio n (+++) Note: (+) indicates degree of growth and risk involved. 73 .GROWTH .
MARKET PENETRATION It is a strategy where a firm directs its entire resources to the growth of a single product or a closely knit product set. Nirma. – Suitable for industries where scope for technological breakthrough is limited. 74 . convert competitors customers. (Eg. Market penetration can be achieved by – increasing sales to current customers. within a well defined market segment. – Helps firms which are not comfortable with unfamiliar terrain. Ujjala. – Elongated product life-cycle. direct non-users to users. Britannia). – The company carries a risk of product obsolescence.
socks & stockings. carpets. – Moves across geographical boundaries. 75 . tyres. – Stretches product life cycles.MARKET DEVELOPMENT It is a strategy where a firm tries to achieve growth by finding new uses of existing products or its close variants and tap a new potential customer base altogether. – Creativity and innovation – thinking out of the box. fabrics. – Unconventional and flexible distribution channels. – Immense customer reach & flexible advertising.…… or Teflon: aircraft technologies to cutlery to paints or Raytheon Corp – Microwaves: radars to kitchen appliances). (Eg. upholstery. Du Pont – Nylon: parachutes.
PRODUCT DEVELOPMENT It is a strategy where a firm tries to achieve growth through a radical new product (Eg. conformance. Microsoft: DOS to Windows) or a substantial improved version (incremental) of an existing product to repeatedly enter the same market (Eg. – Leveraging through – innovation. – Leverage on customer and brand loyalty. Refills) 76 . Close Up: Fluoride – Gel toothpaste or VIP . perception. aesthetics. durability. reliability. features.Strolleys). – Areas of product improvement – performance. – Substitutes that serve the same needs (Eg. – Deliverable through – redesigning or reengineering. serviceability.
From the modern point of view they are strategically dissimilar.DIVERSIFICATION It marks the entry of a firm into newer markets with new products. 77 .e. licenses (i. thereby creating a new business. dominance).e. – Conglomerate or market power (i. – Permits: quotas. – High transaction costs and institutional gaps. Why do firms diversify in the Indian context? – Shift the growth trajectory or opportunistic. – Internal capital market. the new business is distinct from the existing business in terms of – inputs – technologies – markets. From the traditional point of view. industrial embassies). – Risk reduction.
while the coffee business would register a return of 30%. while the coffee business would register a return of 10%. If on the other hand. cold wave dominates the planet. If the hot wave dominates the planet. ice-cream business would register a return of 10%.HOW DIVERSIFICATION REDUCES RISK? Consider a hypothetical planet. either of which is equally likely to prevail. What would be your ideal diversification strategy through optimization? 78 . the ice-cream business would register a return of 30%. in which a given year is either under hot or cold wave. Let us assume that there are two businesses constituting the entire market – coffee and icecream.
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.
Dr.Where one firm has full ownership and control over all the stages of a value-chain in the manufacturing of a product (Eg. Ranbaxy.QUASI & TAPERED INTEGRATION Full Integration .A firm produces part of its own requirements and buys the rest from outside suppliers with a variable degree of ownership and control. Quasi-integration . and out-sources the noncore activities (Eg. Maruti – Sona Steering). Usually the firm concentrates on its core activities. Tapered integration .A firm gets most of its requirements from one or more outside suppliers that is under its partial control through value chain partnerships (Eg. 85 . Reliance). 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 .
e. synergies pulling in opposite directions). – Cost of ignorance (i. core business). Firms usually engage in conglomerate diversification when emerging opportunities are very attractive and offers potential growth opportunities.CONGLOMERATE DIVERSIFICATION It relates to entry of firms into businesses which are distinct in terms of – inputs – technologies – markets. Drawbacks of unrelated diversification – – Cost of failure (i. lack of strategic intent. and are also strategically dissimilar. lack of knowledge of competitive forces).e. myopia).e. – Cost of neglect (i. – Cost of dysynergy (i.e. 87 .
CONGLOMERATE DIVERSIFICATION Paper & Packaging Edible Oils Tobacco Hotels Food & Confectionary 88 .
Glaxo’s “Glucon-D” to Heinz). Tata Pharma. L&TCement Division to Aditya Birla Group) technically known as divestiture or a product (Eg. It may also involve a SBU (Eg.e.DIVESTMENT Divestment is a defensive strategy involving the sale of entire stake (Eg. It taken into account when performance is disappointing (i. reactive) and survival is at stake and the firm does not have resources to fend off competitive forces. (Eg. It is may also be a pro-active strategy. ACC) in full to an independent entity. Tata Press). 89 . where a company simply exits because the business no longer contribute to or fit its dominant logic. Tatas sale of Goodlass Nerolac. In strategy there is no scope for sentimentality with divestment.
1956 does not permit this mode. the Companies Act.3 billion. Hive-Off – A hive off is the creation of a new entity followed by transfer of assets. where 100% of the assets (including intangibles) are valued and paid for. Tatas buy-out of Corus for US $ 11.ROUTES Outright Sale – Popularly known as the asset route. Leveraged Buy-Out (LBO) – Here the company’s shareholders are bought out through a negotiated deal using borrowed funds.DIVESTMENT . (Eg. where the equity is allotted amongst the existing shareholders on a pro-rata basis. However. (Eg. involving 608 pence per share). 90 . Sale of Diamond Beverages to Coca-Cola for US $ 40 million).
e. It is usually pursued by a business group with diverse interests across multiple industries. and divestment strategies applied simultaneously or sequentially for a portfolio of businesses. joint ventures). because every business has its own unique external and internal environment. 91 . developing facilities right from the scratch) or through brown-field projects (i. mergers and acquisition.COMBINATION STRATEGY It is a mixture of stability. A combination strategy can be implemented through green-field projects (i.e. growth. There can be no ideal strategy for every business.
STRATEGY CHOICE & PORTFOLIO ANALYSIS 92 .
What then is the magical number? 93 . 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.STRATEGIC CHOICE A strategic choice seeks to determine the alternative courses of action available before top managers to achieve its strategic intent. Dominant logic enables top managers to selectively scan the environment and make trade-offs.
if addressed. For an optimal choice the following four issues need to be resolved – Is the strategy clearly identifiable? Is it consistent with the resources of the firm? Will it be able to exploit the opportunities in full? Is it in tune with the values and beliefs of the firm? 94 . nor is to a define a problem for others to solve. To identify the right problems. They must choose problems which will lead to the right kind of opportunities. managers need to ask the right questions.SELECTIVITY IS THE KEY The role of a top manager is not to solve a problem. The key task before a top manager is to identify the right problems. will help the firm achieve its intent.
BUSINESS GROUP . chaebols in Korea. business houses in India. Their roots can be traced to a single family or clan and share broad similarities. Resource sharing. Managing Agency). Proximity to the corridors of power (i. Their origins can be traced back to market imperfections existing in an economy (MRTP Laws.DEFINITION A business group is known by various names in various countries – guanxique in China. . 95 Succession planning is critical to continuity. BRC). embassies). Licenses & Quotas.e. formal and informal ties. keiretsus in Japan. High degree of centralized control (GEO.
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 .
Why? Businesses are not about liquid assets. next only to choice of business. Rules of the game are different. sometimes impossible. there are high costs associated with entry and exit.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 . Power and resources often goes hand in hand. therefore. Relatedness across resources are difficult to realize.
BCG GROWTH MODEL Relative Market Share (%) Industry Growth (%) Low High High Low Stars Question Mark ? Cash Cow Dogs 100 .
Tata Steel).e. which remains a big? These businesses are net users of resources. These businesses are also net users of resources (Eg. Tata Telecom. market penetration. market development.BUSINESS ANALYSIS – TATA GROUP Question Marks – They have potentials in the long term. Trent. product development). provided the industry growth rate continues and the company is able to maintain its growth (i. 101 . provided the company is able to build up on its market-share (i. and their risk profile is high (Eg. Tata-AIG). Stars – They achievers in the near term. but to larger extent than a question mark.e. diversification). TCS.
cash cows may also need to invest provided the industry takes an upswing (Eg. and the company dominates the industry ahead of competition (i. 102 . Tata Tea. Tata Press). Given that the growth potential in the business is low. Groups prefer to dispose off such businesses (i. Tata Chemicals).BUSINESS ANALYSIS – TATA GROUP Cash Cow – These are matured businesses. they are generators of resources. Nelco. harvest. and they lack on competencies to take on competition and are basically cash traps (Eg. Tata Pharma. However. Tata Motors. Indian Hotels. Dogs – They are a drag on the group. divest) as achieving a dominant position in these businesses is a difficult task.e.e. stability).
Cash cows may actually need substantial investments to retain their market position (Eg. neither in high or low. The terminologies used are somewhat prohibitive. HUL). The model does not provide specific solutions within a particular category. niche – Rolex. factors are limited. Mercedes Benz. Certain businesses in the low market share category may be the result of a conscious strategy (i. Cartier. 103 .LIMITATIONS It does not address the concerns of a business which is in the average category (usually the majority). Data may be prohibitive.e. Armani).BCG .
MATRIX Distinctive Capabilities Strong High Medium Weak Stability Industry Attractiveness Diversify (++) Intensify (+) Med Intensify(+) Stability Harvest (-) Low Stability Harvest (-) Divest (.-) 104 .GE .
ARTHUR’ D. LITTLE Inception Dominant Strong Favourable Tenable Weak Growth Maturity Decline Improve Selective Niche Abandon Industry Life-Cycle Divest Harvest 105 Competitive Position Invest Consolidate Hold .
SHELL – DIRECTIONAL POLICY MATRIX Business Sector Prospects Attractive Average Unattractive Generate Cash Phased Withdrawal Distinctive Capabilities Strong Market Leadership Try Harder Double Or Quit Growth Average Custodial Weak Phased Expand Withdrawal Divest 106 .
Gap Analysis – It emphasizes what a firm wants to achieve. Divest – Selling a part or the entire business at one go. Portfolio – An organization is perceived as a portfolio of businesses. BCG – Boston Consulting Group. 107 . SBU – A business unit which is strategically different from another and also shares a different SIC code. Disinvestment involves selling in phases.TERMINOLOGIES Harvest – It entails minimizing investments while trying to maximize short-run profits and cash flow with the intention to exit the business in the near future.
BUSINESS STRATEGY & COMPETITION 108 .
and earning super-normal profits (i. The strength of a firm in a particular business usually stems from its competitive advantage.COMPETITIVE STRATEGY A competitive strategy deals with how a firm competes in a particular business or product-market segment. building market-share. Competitive advantage is the back-bone of strategy. rent). Such resources or activities should be distinctive and sustainable over time. 109 .e. The principal focus is on meeting competition. Competitive advantage refers to a firms resources or activities in which it is way ahead of competition.
110 . Resource Based View – Obsession with competence building. Blue Ocean – Consciously moving away from overcrowded industries to uncharted territories and making competition irrelevant (Kim & Mauborgne). Delta Lock In – Two dominant players co-opt to selfreinforce and create or escalate an entry barrier.BUSINESS STRATEGY FRAMEWORKS How to be distinctive and yet sustainable – Differentiation – Understanding of the dynamics of competition. developing competitive advantage (Porter). leveraging (Prahalad). involving harmonizing and integrating multiple streams of technologies. identifying critical success factors. preventing new entry and/or competition (Hax & Wilde).
Compress project duration through crashing. proprietary technology. preferential access to raw materials. Reliance) or may pass it to customers to increase market-share (Eg. Locational or early entry advantage. The firm may retain the benefits of cost advantage by enjoying higher margins (Eg. Nirma. Ayur. Sources of cost advantage are varied and depends on the structure of the industry – Economies of size. backward integration.PORTERS – COST LEADERSHIP Cost Leadership – It is a strategy that focuses on making a firm more competitive by producing its products more cheaply than its competitors. Steep experience curve effects. 111 . T-Series).
avoiding brand dilution. Rayban). Creativity. Focus on brand loyalty. Feeling the pulse of the customer. Means of product differentiation are peculiar to each industry. Intel. Successful product differentiation is often followed by premium pricing.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. 112 . Sony. innovation and out of the box thinking. undeterred attention to quality. (Eg. Culture of experimentation. and sufficient slack. It selects one or more attributes that buyers perceive as important.
Mont-Blanc. coupled with fear of structural erosion. A focuser seeks to achieve a competitive advantage in its target segment. Cartier. 113 . Armani). They are poorly served by mainstream players.PORTERS NICHE OR FOCUS Focus / Niche – It is a variant strategy of cost leadership or product differentiation targeting a specific market or buyer sub-segment with the exclusion of others (Eg. though it may not possess an overall competitive advantage. The target segment must have unusual needs or the delivery system catering to this segment must be unique. Maybach. Sub optimization alone may not be a source of superior performance. Rolex.
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 .
Firms focusing on a hybrid strategy typically aim at shifting the productivity frontier and recreating a new product-market segment altogether (Eg. jugaad or frugal engineering). Reducing cost does not always involve a sacrifice in differentiation. 115 . Tata Nano). similarly differentiation may not always lead to rising costs (i. and usually outperforms a stand alone generic strategy.e.HYBRID STRATEGY A hybrid strategy is the simultaneous pursuit of cost leadership and differentiation. Though cost leadership and differentiation are inconsistent. in a hyper competitive context the two strategies need not be mutually exclusive.
It will have a competitive disadvantage vis-à-vis a clearly positioned generic player. It is usually the result of a firm not willing to make trade offs.stuck in the middle. unless such a player is capable of discovering a profitable segment. but achieves none. 116 . Industry maturity will usually widen the gap. The positioning therefore gets – blurred. It tries to compete through every means.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 . leading to what is called – straddling.
Eg. Market segmentation not well defined. There is a lot of scope to define the rules of competition. changing customer needs. Speech recognition software's. 3D imaging. 117 .EMERGING INDUSTRY Emerging Industry – An evolving industry characterized by .) Excessive turbulence in the dynamics of the environment. Artificial intelligence). ending in a differential cost economics. First-time buyers. coupled with low penetration levels. (Eg.radical environmental changes. Nano technology. It is characterized by – High level of technological uncertainty. technological innovations. leading to a blurred productivity frontier and steep learning curve. Consumer behaviour pattern unstable and evolving.
Paints.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). 118 . leading to clear fragmentation. It is characterized by – Low entry barriers. IT. Diverse customer needs. because of lack of economies of size and scale. MRTP may also cause fragmentation. Eg. Eg. Scope for players to change the rules of the game. Eg. Retail and telecom. Air Conditioning. Government regulations in the form Eg. High exit barriers because of huge investment in CAPEX. Consumer durables.
technological maturity. established industry dynamics. Limited scope for innovation . Cartel among existing players through collusion.technological maturity. 119 . distribution networks. because of economies of size and learning curve effects. Strong entry barriers.MATURED INDUSTRY Matured Industry – An industry characterized by saturation in growth rates. Firms are rule takers in the segment as productivity frontier is well defined. early entry and location advantages. well defined consumer behavioral patterns and imperfect competition leading to near monopoly. collaboration and co-option.
scooters. Firms facing a declining phase are characterized by inertia and slow to react to environmental changes. Exit barriers are extremely high because of limited prospective buyers. Nature of competition extremely high. (Eg. Learning abilities have been stunted and firms adverse to investment in R&D and make fresh investments. with little or no signs of recovery. Typewriters.DECLINING INDUSTRY Declining Industry – An industry which has outlived its utility due to the entry of close substitutes and or radical product innovations which results in a shift of the productivity frontier. and costly price wars. dot-matrix printers). 120 . backed by corporate espionage.
assess and overcome fragmentation. branding and promotion. premium pricing. Locate a defendable position. process innovation. recreate new markets. regenerate. mergers and acquisition. 121 . increasing scope.COMPETITIVE STRATEGIES Emerging Industry – Set benchmarks. reengineer. strike alliances. move beyond boundaries. or else exit the segment. focus more on product differentiation or even a hybrid one. strictly cost differentiation. aggressive building of distribution networks. Matured Industry – Sophisticated cost analysis. strictly product differentiation and not standardization. Fragmented Industry – Identify. Declining Industry – Redesign.
RESOURCE BASED VIEW Differentiation based on cost or products saturates and ceases to exist beyond the medium term. They are a standard in nature. patents. Intangible – These refer to goodwill. hence very rarely confer competitive advantage as can be easily acquired or replicated. 122 . 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. However. brands. and complex learning experiences in integrating and harmonizing technologies (distinctive capabilities) that play an important role in delivering competitive advantage through “causal ambiguity”.
There is a high degree of internal and external causal ambiguity involved in it. 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. 123 . they are woven around technologies. differentiation based on capabilities can be sustained even in the long run. Capabilities can be generic (i. They play a very critical role in shaping competitive advantage. Therefore firms should concentrate on developing complex resources that forms the very basis of differentiation.e. Hence. Typically.
COMPETITIVE ADVANTAGE 124 .
COMPETITIVE ADVANTAGE A competitive advantage is a position of superiority relative (i. Strategy drives competitive advantage. A portfolio of competitive advantage comprises strategic advantage profile (SAP). competitive advantage subsequently becomes the back bone for a competitive strategy. and results in well springs of new business development.e. It results in a distinct differentiation advantage or a cost advantage or hybrid as well. It enlarges the scope of an organization. not absolute) to competition. Success of a strategy critically depends on SAP. 125 .
In most cases SAP is hidden and dormant. Internal strategic fit between its strategy and dominant logics is essential for the top management to stretch and leverage SAP. Identification of SAP is critical for and stretching and leveraging of resources. SAP changes from time to time.STRATEGIC ADVANTAGE PROFILE (SAP) Organizations have to systematically and continuously conduct exercises to identify its SAP. 126 . Most successful organizations around the world have a well balanced SAP. In today's world of discontinuity.
each of the players need to be efficient backed by sufficient coordination at the contact points (i. Today SCM is integrated with greening the environment as CSR practices.e. Substantial cost reductions also follow. Competitive advantage arises not from an individual activity but a stream of inter-related activities.VALUE CHAIN ANALYSIS A value-chain segregates a firm into strategically relevant activities to understand its composite behaviour. Inventory Mgt to Logistics Mgt to Supply Chain Mgt (SCM). and enhanced customer tracking – higher market share. VC pay-offs: better product availability. 127 . kaizen or internal customer). A VC is often compared with a relay team. faster product launches.
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 .
A learning organization helps create strategic fit.STRATEGIC FIT – THE PORTER WAY The sustainability of the value chain depends on the degree of fit between the activities. – First order fit refers to simple consistency between each activity and the overall strategy. Fit is important because discrete activities result in negative synergy and can also be easily copied by competitors. Operational effectiveness is not strategy. – Second order fit occurs when activities are reinforcing amongst them. – Third order fit refers to optimization of effort. 129 . A high fit involving a complex chain of activities drives both competitive advantage and its sustainability.
CORE COMPETENCE A core competence represents the collective learning's of an organization around diverse streams of technologies. It should satisfy the following conditions – Contributes significantly to customer benefits. Core competence has a high degree of external and 130 internal causal ambiguity embedded in it. – Can be leveraged across businesses. A core competence usually has its roots in technology. but not necessarily. These skills results in distinctive activities and processes. – Can be sustained even in the long run. – Cannot be easily imitated or substituted. . It forms the very basis of competitive advantage.
a core competence always implies a competitive advantage. Majority of the firms have competitive advantage. A competitive advantage may or may not lead to superior performance. A competitive advantage is sustainable in the shortmedium term. only global leaders possess a core competence. a core competence is sustainable even in the long-term. 131 . a core competence usually does.CORE COMPETENCE A competitive advantage does not necessarily imply a core competence. a core competence has its roots in a set of skills. A competitive advantage manifests from a function.
In fact there are no. illustrations depicting a win-win situation. each of whom wants to win. 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.GAME THEORY The game theory was developed in 1944 by Oscar Morgenstern. 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. However. 132 . A game is a contest involving two or more players. Subsequent work on game theory by John Nash led him to win the Nobel prize in 1994.
An unbiased game is one where both the players have equal chances of winning.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 .
PURE STRATEGY GAME The strategy each player follows will always be the same regardless of the other players strategy. A saddle point is a situation where both the players are facing pure strategies. Firm Y’s Strategy Use Radio +3 +1 Use Newspaper +7 -2 134 Firm X’s Strategy Saddle Point Use Radio Use Newspaper Firm X’s Pay-Off Matrix .
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. Yahoo Vs Microsoft).e.g. This is usually through learning by “experience or observation” (i. Repeated Games – In this situation the players interact repeatedly with each other sub-optimizing the outcome possibilities. It represents the classical “prisoner’s dilemma”. However. 135 .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. iteration) rather than through collusion (E.
In a market dominated by price-based differentiation one may attempt to change the rules of the game by/when – – Bases of differentiation dependent on clear identification of what customer wants or value. but 136 players do not always behave rationally.CHANGING THE RULES OF THE GAME In a situation where a player is unable to compete with the existing rules of the game may attempt to change the rules of the game altogether. Game theory relies on the principle of rationality. It results in a shift in the productivity frontier. – Making pricing more transparent. . – Building incentives for customer loyalty.
DELTA MODEL & LOCK-IN
Its a systematic approach where-in two or more industry majors, who by default has achieved a proprietary position (Microsoft – Software / IBM – Computers) which are not necessarily best-products in the industry, co-opt to create a lock-in. A lock-in implies that other players has to conform or relate to that standard in order to prosper. Becoming the industry standard requires – strong brand, causal ambiguity, and close relationship with other companies offering complimentary services. Lock-in is self reinforcing and escalating (i.e. accelerating effect).
THE THREE STRATEGIC POSITIONS
System Economics Market Dominance Complementary Share
Enabled through effective use of technology
Total Customer Solutions
Customer Economics Cooperation Customer Share
Product Economics Rivalry Product Share 138
Bill Gates is the richest man in the world not necessarily because he has developed the world’s best software's or excels at customer satisfaction; but he has got an army of people working for him who are not on his payroll – all the application software providers who are writing programs based on “Windows” compatible operating platform. Once you create the lock-in it is sustainable because of the “network effects”; which creates the proverbial “virtuous cycle” – customers want to buy the computer with largest set of applications and software developers want to write programs for the computers with the largest installed base.
The proponents (Hax & Wilde) believe that every organization has the ability to create and sustain a “lock-in” positioning (though in varying degree). This “system lock-in” is referred to as “delta” – delta being the Greek letter that stands for transformation and change amongst the players. The lock-in once created becomes very difficult for a firm to penetrate, and becomes a distinct entry barrier. The model is based on the belief that it compliments Porter’s differentiation model and RBV framework instead of contradicting them. In a lock-in strategy the performance outcomes are dependent on the success of another.
It relates to translating strategy formulations into practice. Performance realization of a strategy depends on the implementation effort. Successful implementation also depends on the appropriateness of the strategy. Since strategy implementation is a time bound process, alignment (i.e. strategic fit) is a key variable during times of radical change. Some of the other levers of successful strategy implementation are – Transformational leadership and motivating power. Resource allocation; its stretching and leveraging. Compatible organization structure & control systems. Inertia & resistance to change.
IMPORTANCE OF STRATEGIC FIT Strategic fit has a central role to play in strategic management. – Changing the rules of the game. internal strategic fit (strategy – dominant logic) is critical to strategy implementation. – Better strategic and operational control. While external strategic fit (strategy – environment) is relevant for strategy formulation. – Development of capabilities & competencies. – Unlearning & learning of new skill sets. 143 . – Resource commitment from top management. A high strategic fit (co alignment) is useful because it enables – – Appropriate and timely response.
effective strategies are better crafted when there is a subtle overlapping between the two (i. In such a situation. emergent strategy vis-à-vis intended & realized). at the cost of sacrificing a lesser degree of control.e. learning levels are very low. learning levels are very high. formulation & implementation can occur simultaneously. In fact. while control is very effective. According to Mintzberg. In such a situation. strategy formulation and implementation has been perceived to be distinct & independent. Some of the key strategic learning's exists at the contact point between the organization and its customer.FORMULATION Vs IMPLEMENTATION Traditionally. 144 .
transformational leaders go one step beyond – Design a well crafted and designed strategic intent of the organization. Pragmatism is the ability to make things happen. companies depend more on transformational leaders than transactional leaders. 145 .ROLE OF TOP MANAGEMENT To bring about change and to implement strategies successfully. He should be an agent of change. A transactional leader is usually confined to allocating tasks & responsibilities and extracting performance. bring about transparency. In contrast. shift from compliance to commitment. Install a system of shared beliefs and values.
skills) also includes complex resources like capabilities and competencies. patents. 146 . Zero Based Budget – In this case the budget of a SBU has to be worked out right from the scratch. Intangible resources (Eg. Performance Budget – SBU managers need to justify the distinctive resources in terms of the opportunity it is pursuing yields the highest possible pay-offs.e. minimum requirement). brands. machines) referred to as threshold resources (i. labour. land.RESOURCE ALLOCATION Resources allocation includes tangible resources (Eg. The various methods of resource allocation includes Historical Budget – The budgets framed by HQ for a particular SBU keeping in mind past trends.
Distinctive capabilities are complex set of skills woven around technologies. Moreover. 147 . convergence of multiple streams of technologies at the product – market level is becoming increasingly evident (Eg. Flat Screen Displays. though not necessarily in the case of emerging markets. these capabilities are sustainable even in the medium to long term. Distinctive capabilities helps in stretching and leveraging resources thereby overcoming two major constraints involved in strategy implementation – times & costs. Mobiles).CAPABILITIES & COMPETENCIES Technology and business are slowly becoming in – separable. Due to causal ambiguity (complexity).
A firm in several related businesses usually employs a divisional structure. 148 .STRATEGY & STRUCTURE It is a framework within which individual efforts are coordinated to bring synergy. An appropriate organization structure & adequate control systems are essential to implement strategies and achieve stated goals. A firm in several unrelated businesses usually employs a SBU structure. Once the structure is in place. A single product or a dominant business firm usually employs a functional structure. The level of centralization and decentralization is decisive. processes become people independent.
TYPES OF STRUCTURES Functional Structure – Activities grouped together by a common function (Eg. processes. Project / Matrix Structure – A formal but temporary framework initiated for the completion of a particular project/crisis.Technology. Divisional Structure – Units grouped together in terms of products. Team Structure – An informal group formed for a crisis. Marketing. Virtual Structure – A boundary less or hollow organization. Finance). Output). Inputs . based on skills and competencies. SBU Structure – Businesses segregated in terms of strategic dissimilarities (Eg. 149 . or geographical locations. with team members having dual line of control. disbanded subsequently.
Technology – With more and more convergence of technologies in business. 150 . facing challenges & crises. assuming responsibility. It includes the desire for independence. leading to a tall structure. Environment & People – Economic and political conditions have a major bearing on structure coupled with the attitude and aspirations of the people in the organization. as span is broader.FACTORS INFLUENCING STRUCTURE Size – As an organizations size increases there is more specialization and differentiation leading to the top management moving away from operational issues and control. structures are becoming flatter and more simpler.
there is a tendency to continue along the same lines. Inertia acts as an impediment in strategy implementation.INERTIA When a firm has been operating in a certain fashion for a long time. Most firms undergo periods of strategic continuity rather than strategic discontinuity. Changes in top management and unlearning helps overcome inertia. co0ntinuity).e. Common sources of 151 inertia – complacency with past successes. . Top managers resist change. Inertia is a characteristic of a firm that endures status quo (i. irrespective whether it is from worse to good or good to worse.
Since the internal and external environment is in a state of continuous flux. However. Deviation of fit is detrimental to performance and may lead to strategic failure. certain authors propose misfit as a source of superior 152 performance. strategies need to be evaluated on an ongoing basis to prevent deviations of fit. firms should move beyond financial performance to strategic performance as organization systems are becoming complex.STRATEGY EVALUATION Strategy evaluation centers around assessment of strategic fit. To prevent deviation of fit. .
detecting changes in the external and internal environment and taking corrective action wherever necessary. competitive advantages becoming disadvantages? Has the company acquired any new competency? Has the company been able to overcome the 153 environmental threats.STRATEGY CONTROL It is concerned with trafficking a strategy as it is being implemented. It attempts to answer the following questions – Is the strategic intent appropriate to the changing context? Are the organizations capabilities still holding good. .
checking every premise is costly as well as difficult. Special Alert Control – It intends to uncover unanticipated information having critical impact 154 on strategies. It is open-ended as well as .STRATEGY CONTROL IMPLEMENTATION It involves steering the company towards its original growth trajectory & stated goals. Premise Control – Checking the validity of the assumptions on which a strategy was based. Implementation Control – It aims at assessing whether key activities are proceeding as per schedule. It involves assessing – strategic thrusts and milestones. However.
Strategy intent not linked with goals and objectives – Lack of coordination at lower levels leading to negative synergy. “If you cannot . difficult to translate into practice. Performance measures are defective – What to evaluate against? How to measure the 155 construct? As a saying goes.BARRIERS TO STRATEGY EXECUTION Vision and strategy not actionable – Utopian ideas. Strategy not linked to resource allocation & capabilities – Lacking commitment of top management. low strategic fit due to consultants intervention.
this may effect all others as well. to be sure of successful implementation of a strategy. so if one fails to pay proper attention to one of them. Large or small. On top of that. important or not they're all interdependent.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. Today it is considered one of the most powerful tools for strategy implementation determining success or failure. Managers should take into account all seven of these factors. 156 . the relative importance of each factor may vary over time and context. Together these factors determine the way in which a corporation operates.
They had been investigating how Japanese industry had been so successful. The 7-S model was born at a meeting of these four authors in 1982. At around the same time in the US Tom Peters and Robert Waterman were exploring what made a company excellent. It appeared also in "In Search of Excellence" by Peters and Waterman. 157 . and was taken up as a basic tool by the global management consultancy company McKinsey.BACKGROUND & ORIGIN The 7-S Framework was first mentioned in "The Art Of Japanese Management" by Richard Pascale and Anthony Athos in 1981. Since then it is known as their 7-S model and is extensively used by corporations worldwide to implement their strategies.
Style – The way in which the top management influences the functioning of an organization. 158 . to reach identified & stated goals. Staff – Human inter-relationships. formal & informal . 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. over time. processes and routines that characterize how work should be done. Strategy – Trade-offs for the allocation of a firms scarce resources. Systems – The procedures. Skills – An organizations capabilities and competencies.
STRATEGIC FIT Strategy Structure Shared Values Systems Skills Staff Style 1st Order Fit 2nd Order Fit 3rd Order Fit 159 .
Consider the 4P’s of marketing or 3R’s of SCM.A CRITIC OF THE 7S MODEL While the hard S’s (strategy. shared values) are very malleable and comparatively more difficult to identify & influence. staff. 160 . the soft S’s (skill. Ineffective in case of a virtual company. While the American co’s focuses on the hard S’s. In contrast. structure. their Japanese counterparts focus more on the soft S’s for their early success and sustainability. because most often they are culturally embedded and often neglected. systems) are comparatively easy to identify and influence. A choice of an alphabet often limits the scope and skews the interpretation of a model. style.
Low Take Overs 161 .High Organic Growth Strategic Alliance Joint Venture Mergers & Acquisition Strategic Fit .STRATEGY IMPLEMENTATION ROUTES Strategic Fit .
Reliance Industries).e. soft loans. concessions are available for green-field projects. i. SEZ’s. and markets. the entire value chain. (Eg. Govt. technologies. Long gestation leads to delayed market entry. . (Eg. subsidized power). The entire infra-structural facilities are set up afresh having its own gestation and break-even. i.ORGANIC GROWTH Here a firm builds up its facilities right from the scratch and continues to do so without any external participation.e. green-field projects. 162 Risk of cost and time overruns. tax holidays. It has complete control over inputs.
163 It is a form of competitive collaboration. It has limited intervention power and usually lacks holistic commitment from the alliance partner. . Tata Motors & Fiat).STRATEGIC ALLIANCE It involves a pro-active collaboration between two or more firms on a particular domain or function for mutual gain. Alliances are usually in the areas of technologies or markets (Eg. There is no funding or equity participation from the alliance partner & both the firms continue to operate independently. Alliances are usually short-lived and disbanded once the purpose is achieved. It touches upon a limited aspects of a firms value chain.
leaving minimum scope of overlapping. (Eg. Hero . It is a win-win situation for both the companies. Tata – AIG. Degree and extent of management control must be clearly 164 laid down.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. .Honda). A comprehensive MOU is essential. Selecting the right partner is critical for success. Dominant logic of both the companies should be complimentary.
. Economies in scale leading to lowering of costs. Coca Cola – Thums Up).MERGERS & ACQUISITION It refers to the fusion of two or more firms into a single entity. Integration of assets and other financial resources. Revival of a sick-unit through better management practices is a major motive behind an acquisition 165 strategy. Acquisition is an outright purchase of a firm assets by another independent entity (Eg. Brooke Bond & Lipton). Integrated distribution channel leads to better market penetration and overall synergy. with the individual firms ceasing to exist any more (Eg. ITC Tribeni Tissues.
Inform SEBI / Stock Exchange after 5% stake is 166 acquired.TAKE OVERS It refers to the acquisition of significant management control by buying out majority stake in a firm through due diligence or hostility (Eg. Consolidation in a fragmented industry. Tata Steel .Corus). Most countries have stringent laws that prevents hostile take over. Make a public offer of not less than . Integration of organization structure & cultures is difficult. often the new firm is “left alone”. Instant access to capacities and markets. Larger geo-graphical diversity.
MANAGEMENT TOOLS IN STRATEGY 167 .
every time. it is also a source of potential threat. Change provides enormous opportunities. The past is ceasing to be an indication of the future. Companies therefore need to ensure competitive advantages doesn’t become competitive disadvantages. Radical change is superseding incremental change. Balanced Scorecard – Tracking strategy 3600. or better still create next practices Reengineering – Redesigning work processes right from the scratch. 168 . TQM – Doing the right thing the first time.WHY MANAGEMENT TOOLS? Change is becoming pertinent in the business environment. Some tools to ensure that – Benchmarking – Adopt certain best practices.
A best practice is defined as an activity performed by a company in a particular domain or function which distinguishes it from others and making them world-class. These exemplary practices involves the stakeholders of the company and helps achieve its strategic intent. Best practices centers around looking at a different way to satisfy various stakeholders. Benchmarking involves the identification, understanding and adapting of certain best practices and implementing them to enhance performance. Firms are moving towards next practices as best practices make firms look more and more homogeneous.
SOME BEST PRACTICES
Dell: Customized configuration of computers. Caterpillar: 48 hours delivery anywhere in the world. Citi Bank : Priority banking services. Maruti: Certified “true value” pre-owned cars. Microsoft: ESOP to employees. Infosys: Customized work-stations. TCS: Referencing potential new recruits. ITC: Shareholders factory visit. AmEx: Outsourcing data warehousing mining. MARG: Set-top box to study viewing patterns. Honda: CEO’s visit to dealers.
TYPES OF BENCHMARKING
Functional – Used by companies to improve a particular management activity. Eg. Motorola learnt delivery scheduling from Domino’s. Process – Improving specific key processes and operations from experiences in similar businesses. Eg. Ford adopting assembly lay-out plan of Toyota. Competitive – It involves assessing the sources of competitive advantage and imitating them. Eg. Samsung leveraging miniaturization skills of Sony. Strategic – It involves assessing business models and replicating them in a different market. Eg. Reliance replicating AT&T business model.
HOW TO BENCHMARK?
Phase 1: Planning – What to benchmark? Whom to benchmark? – Identify key performance indicators & Data source. Phase 2: Analysis – Assessment of performance gaps. – Predict future performance levels. Phase 3: Integration – Communicate findings and gain acceptance. – Establish functional goals and its implementation. Phase 4: Action – Implement and monitor progress. – Measure results against stakeholder wants and needs. – Recalibrate or outperform benchmarks.
WHOM TO BENCHMARK?
Selecting the benchmarking partner is critical to solving the problem. Firms should generally avoid selecting the industry leader, because it may not always adopt the best practices for every process or activity. Benchmarking partners may also be from different industries. Types – – Internal – It involves benchmarking against its own branches, divisions, SBU’s. Proximity to data and cooperation is taken care of automatically. – External – It involves benchmarking against firms that succeeded on account of their best practices. It may also involve benchmarking against world-class firms. Friction may arise due to presence in competing industries.
BENCHMARKING - ADVANTAGES
Finding better ways of meeting stakeholder needs. Organizational learning comes from internal as well as external sources. Establishing goals based on formal assessment of external conditions. Defining effective measure of indicators, facilitate comparison, adopt from other organizations. Ensuring a continuous learning organization. Reducing competitive disadvantage. Organizational turnaround, especially effective in case of a wide strategic drift when differentiation strategies fail to work. 174
the more similar they end up looking. but it cannot be used as a strategic decision making tool. While strategy is all about differentiation and not looking alike. clustering). It can at best complement it.LIMITATIONS More and more companies benchmark. .BENCHMARKING . Benchmarking merely reorients profits in the hands of few to profits in the hands in the hands of many (i.e. Strategy is more of creating best practices rather than copying them. Benchmarking is useful for bringing about operational efficiency. It does not shifts the growth 175 trajectory of the industry as a whole.
Re-engineering attempts to radically change an organizational products or process by challenging the basic assumptions surrounding it. for achieving performance improvement (E.g.e. clean sheet).g. . The task demands a total change in organisational 176 culture and mindset. Re-engineering involves complete reconstruction and overhauling of job descriptions from the scratch (i. DOS to Windows).RE-ENGINEERING Redesigning leads to identification of superfluous activities or product features (i. Windows 95 to 97). process mapping) and eliminating or improving them (E.e.
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 .
processes. BPR). etc) and supports the organization for the present. resource allocation and prepares the organization for the future through a reorientation of the entire strategic architecture.e.e. products. structures. It can be of the following types – Functional – It looks into the flow of operations (i. . Business – It looks into markets. customers and suppliers and protects the organization from the future (i.LEVELS Reengineering can be successfully leveraged at all levels of an organization with varying degree of results. Strategic – It looks into the process of strategic planning. 178 .REENGINEERING .
– Early entry advantages. However. While traditional manufacturing is a bottom-up approach. protection can be had in the following ways – – Patenting. Cheaper versions of Intel chips and mother-boards manufactured in Taiwan. 179 . learning curve advantage. It generally acts as a threat to innovation.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. with an intention to copy it (Eg. Indonesia). – High cost and time acts as a deterrent. – Causal Ambiguity. reverse engineering is a top-bottom approach.
e. machine tools to convert ideas into a marketable product (i. Inaccurate assessment at this stage may lead to a failure of the entire project. Introduction – Launching the product in the market. Usually in such cases segmentation and pricing is different from the original innovator.STAGES IN REVERSE ENGINEERING Awareness – Recognizing whether the product is found to be worth the time. Implementation – Developing of a prototype. Actualization – Obtaining and dismantling of the product to assess how it functions. designing facilities. nano-technology). cost and effort necessary for the purpose of reverse engineering. 180 .
of service stations. 181 . More and more companies are moving towards meeting implied rather than stated needs. – Serviceability – Large no. – Aesthetics – Appeal in design. – Conformance – Emission standards . – Durability – 1980 manufactured cars still on road. – Reliability – Consistency in mileage. Car) – – Performance – Mileage of 14 kms to a litre of fuel. – Features – Anti-lock braking systems. – Perception – Customer notions. Air bags.Euro IV. It has eight dimensions (Eg.WHAT IS QUALITY? It involves the totality of a product or service in meeting certain stated or implied needs.
Management of quality was traditionally inspect it . TQM is a way of creating an organization culture committed to the continuous improvement of work processes – Deming. It had little impact on improving overall productivity.fix it in nature. touching upon a limited aspect of a value chain. .TOTAL QUALITY MANAGEMENT Objective – Management of quality ensures conformance to certain pre-set standards. It is deeply embedded as an aspect of 182 organisational life & culture. which ensures good market standing. zero defects.
fully involved in decision-making and fairly rewarded for results. Kaizen – Make continuous improvement a way of life. 183 . provided with all relevant information and best possible tools. Empowerment – It takes place when employees are properly trained. the first time – From reactively fixing error in products to proactively preventing errors from occurring at the first place (Juran). Looking at quality as an endless journey.TQM – KEY TENETS Do it right. Be customer centric – Generate the concept of internal customer (Ishikawa). not a final destination.
TQM . 6-Sigma). saving precious top management time.e. 184 . It is based on the principles of MBO (i.STRATEGIES Outsourcing – It is the process of self-contracting services and operations which are routine and mundane. enabling the firm to concentrate on core activities essential to customer satisfaction. SQC – It is a process used to determine how many units of a product should be inspected to calculate a probability that the total no. of units meet preset standards (Eg. equal participation). Quality Circles – It a small group of shop-floor employees who meet periodically to take decisions regarding operational problems and crises.
Source: Fortune Magazine Why CEO’s fail? 185 .. strategy implementation has never been more important........ – Efficiency and effectiveness is passé.. it’s bad execution. – Less than 10% of strategies effectively formulated are effectively executed.BALANCED SCORE CARD Some interesting comments .... – In the majority of failures – we estimate 70% – the real problem isn’t (bad strategy) .
CONCEPTUALISATION A company’s performance depends on how it measures performance. rather than effects. Most managers tend to rely on traditional measures of performance having its origin in finance as they are well tried and tested. 186 .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. 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. Focus more on causes.
because they have too many.BSC – KAPLAN & NORTON (1992) A BSC helps a manager to track and communicate the different elements of company’s strategy. It has four dimensions – – How do customers see us? – What must we excel at? – Can we continue to improve and create value? – How do we look to shareholders? Firms more often have problems. and distinguish strategic problems from operational ones. The most critical element of a BSC is to measure these four dimensions. 187 .
e.CUSTOMER PERSPECTIVE GOALS Products Supply Preference Relationship MEASURES Relative market share (%) % of sales from new Vs proprietary products Timely deliveries and service Customer credit analysis (i. ageing schedule) % of key customer transactions Ranking of key customer accounts No. of visits or calls made % of NPA’s 188 .
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 times covered in media No. of new product launches Vs competition Product pricing Vs competition 189 .
LEARNING PERSPECTIVE GOALS Technology Manufacturing Focus Timing MEASURES No. of product innovations 190 . of new patents registered Time to develop next generation products Average and spread in operating cycle % of products that equal 2/3 sales No.
Return on Investment Market Capitalization / PE ratio 191 .FINANCIAL PERSPECTIVE GOALS Survival Success Prosper Divestment MEASURES Cash flows Growth in Sales and Profits EPS.
STRATEGY MAPPING 192 .
IMPLEMENTATION 2 Translate strategy into operational terms 1 Mobilize change through effective leadership 5 STRATEGY Make strategy a continual process 3 Align the organization to the strategy 4 Make strategy everyone’s job 193 .BSC .
what they don’t know. . As a result. Modern managers should be poised to ask the right questions. It helps translating strategy into practice (i. Focus on cause not effects.BSC . doing right things instead of doing things right). Shift from control to strategy (i. they don’t know .e.ADVANTAGES Most often top managers face information overload. 194 performance will automatically follow.e. The BSC brings together the different elements of a company’s strategy at a glance. Seek excellence. sharing of vision).
EFFICIENCY Vs EFFECTIVENESS Ineffective Effective Inefficient Goes out of Business quickly Survives Efficient Dies Slowly Thrives 195 .
Porter 196 . . not only thrives. but also sustains it.Michael E.EFFECTIVENESS + STRATEGY A company which is effective as well as strategic.
CORPORATE RESTRUCTURING 197 .
As Peter Drucker pointed out. firms use restructuring strategies.. to survival of the most adaptable. Strategic variety may be caused by changes in the as external well as internal environment... Tata Group).CORPORATE RESTRUCTURING The only thing constant in today's business environment is change. Strategic variety brings paradigm shift. To adapt to the changing environment.. “every organization must be prepared to abandon everything it does.. Restructuring involves consciously driving significant changes in the way an organizations thinks and looks (Eg. Radical change brings about strategic variety.” 198 .. from survival of the fittest .
Company’s should go beyond just asking what he expects. Instead. Internal customers should also not be neglected. Walkman. Fax.RESTRUCTURING – BASIC TENETS Customer Focus – Restructuring ideally begins and ends with the customer. Structural Changes – Conventional hierarchical structures should be disbanded in favour of more 199 flexible ones (i. downscoping).e.e. they should strive to provide unimaginable value ahead of its time (Eg. Core Business – Company’s should introspect – What business are we in? Business evolved out of opportunism or myopia should be divested. downsizing or rightsizing). and dividing the core businesses into SBU’s (i. ATM. . etc).
.. Restructuring also requires cultural reorientation........) Reliance dismantled their industrial embassies .. . It is created and institutionalized by the top management. Kumar Birla today is more dependent on professionals. started focusing on their capabilities. 200 . Ratan Tata now drives the point the group means business.) The Aditya Birla group typically relied on the “marwari” community for key management positions .. During the times of JRD. 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.
Publicizing welfare projects to demonstrate CSR. Honda’s ad says. Organizing customer and supplier meets. they tend to move away from the customer.MOVING CLOSER TO THE CUSTOMER As companies evolve. “ … one reason our customers are satisfied is that we aren’t. Communicating to the media about organization efforts to deliver quality products. Use the reach of networking technologies. Getting feedback & addressing customer complaints.” 201 . Carry out PR campaigns. Restructuring provides a platform to close this gap.
including its intangibles – Mergers – It may be vertical.ASSET RESTRUCTURING Asset Restructuring – The asset composition of a firm undergoes a major change. 202 . It can have two forms. it may be smooth (Eg. Glaxo – Heinz). Hive Off – It involves siphoning of assets under control. It may include brands as well. horizontal. Further. spin-off and equity carve. Further spin-off can be classified as split-off and split-up. Mittal – Arcelor) and can take various forms. where the difference in valuation is settled off through cash or equity (Eg. Asset Swaps – It entails divesting and acquisition simultaneously by two companies. or conglo-merate. Tata – Corus) or hostile (Eg.
HIVE OFF Spin-Off – A spin off is the creation of a new entity. Tata Industries selling 20% stake to Jardine Matheson). Most of these practices are not in consonance with Indian laws. Reliance Ent). 203 . in which the equity is allotted amongst the existing shareholders on a pro-rata basis (Eg. Equity Carve – It involves selling a minority stake to a third party while retaining control (Eg. the entire parent company loses its identity after being split into a number of subsidiaries. the existing shareholders receive equity in the subsidiary in exchange for the stocks of the parent company. – Split-Up – In a split-up. – Split-Off – In a split-off.
DIVESTITURE It involves the sale of a brand or a division of a company to a third party. for a specified market or in general with full management control. A complete sell-out is known as divestment (TOMCO). Parle sold its Thums Up brand to Coke for $40 million apprehending fierce competition. Selling out in phases is called disinvestment (IPCL). L&T sold its cements division to Aditya Birla group. Generic motives include – – Raise working capital. repay long-term debts. but retained its engineering division. In 1995. strategic misfit. – Poor performance. In 2005. 204 .
Wipro). It provides greater leverage as well as management control. Conversion – Replacing debt with equity or vice-versa or costlier with cheaper debt or cross currency debt. Share Buyback – It is a process of cancellation of shares out of free reserves to the extent of 25% of paid-up capital (Eg. 205 .The internal & external liability composition undergoes a major change – LBO – Acquiring control over a substantially larger company through borrowed funds (Eg. involving 608 pence per share).CAPITAL RESTRUCTURING Capital Restructuring . Tatas take-over of Corus for US $11.3 billion.
1170 cr Goodlass Nerolac – Rs.Rs. 1700 cr Trent – Rs. 250 cr Tata Tetley – Rs. 120 cr Tata AIG – Rs. 150 cr VSNL – Rs. 230 cr Diversifications Tata Motors – Rs. 99 cr Tata Power – Rs. 1439 cr 206 Tata Timken – Rs 120 cr Tata Telecom – Rs. 256 cr ACC – Rs. 42 cr Voltas . 1860 cr . 950 cr Merind .Rs. 1890 cr CMC – Rs.BUSINESS RESTRUCTURING – TATAS Divestments Lakme – Rs.
Downscoping – It involves reducing the business and/or geographical scope of a firm (Aditya Birla group). Turnaround is the primary motive. Survival is the primary motive. usually as a result external turbulence. It can be carried out in the following ways – Downsizing – It is a systematic one-time reduction in the no.ORGANIZATIONAL RESTRUCTURING Organizational structure and systems calls for a change when strategic variety is apparent. of operating units. of a firm’s employees and sometimes in the no. 207 . Rightsizing – It is phasing of excess and redundant employees resulted out of faulty internal planning (SAIL). keeping the composition of business intact (Jet Airways).
e. The longer the period.e. The dominant logic represents the perceptions and biases (i. inertia). thumb rules) of the top management. 208 .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. Dominant logic becomes deep-rooted in organizational contexts depending on the period it is in place (tenure of the CEO). the more difficult it becomes to uproot the paradigm (i. Strategy change is unviable without a preceding change in its dominant logics. as strategies are based on such beliefs and biases.
209 . Successful transformation requires – incorporating employees fully into the process – leading from a different place so as to maintain employee involvement – instill mental disciplines that will enable employees to behave differently.e.FORCES AGAINST STRATEGIC CHANGE The problem with strategic change is that the whole burden typically rests on few people (i. In most organizations. the factor that stifled change & performance was – culture. Companies achieve real agility only when people at every level rise above the ordinary to face the challenges – revitalization or transformation. 20% of the people carry out 80% of the changes).
SUCCESSFUL TRANSFORMATION Build an intricate understanding of the business model at all levels of the organization. Promote inventive accountability. Questioning every basic action of the organization. it is not about winning but about learning. The best way is to alter the institutional point of view. never take no for an answer. Encourage uncompromising straight talk. Understand and deliver the quid pro quo. Manage from the future. Create relentless discomfort with the status quo. process ownership. Harness setbacks. 210 .
It involves diagnosing a change situation – systems & structures. also known as cultural-web. It involves identifying – Aspects of current culture which needs to be reinforced. 211 . Aspects of current culture which needs to be overcome. Identify and implement facilitators of cultural change. that can be both enablers and blockages to change and restructuring. 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. Culture and style of management are two main impediments in force-field analysis.
Term Reduced labour costs Reduced debt costs Emphasis on strategic control Business High debt costs Higher risk 212 Long .OUTCOMES Alternatives Organizational Short .RESTRUCTURING .Term Loss of human capital Lower performance Higher performance Capital .
focuses on reengineering. 213 . the second one is a more viable strategy and sustainable option in the long run.NUMERATOR & DENOMINATOR MGT Most firms across emerging markets undergo strategic discontinuity and as a result are forced to restructure their businesses. While the first strategy produces results instantaneously. Numerator – It assumes that turnover is not a barrier or constraint. down-scoping or asset stripping. reverse engineering and regenerating. hence go in for downsizing. In order to put back the company on the right track they are resort to – Denominator – It assumes that turnover cannot be increased.
TURNAROUND MANAGEMENT 214 .
– Less than 10% of the Fortune 500 companies as first published in 1955..WHY TURN AROUND MANAGEMENT? Some interesting insights .... January 1997). 215 (Govindarajan and Trimble. still exist as on 2005. – Only seven of the first fifty Indian business groups in 1947 were even in business by the turn of this century.. Source: Why do firms atrophy? (Business Today. .. and that the thirty-two of the country’s largest business groups in 1969 are no longer among the top fifty today.
While content focuses on endogenous and exogenous variables. systems.e. As a sequence of events describing how things change and why they change (i.TURN AROUND MANAGEMENT A turnaround is said to occur when a firm perseveres through an existence threatening performance decline. ends the threat with a combination of strategies. Both content (what) and process (how) are equally important for a successful turnaround. A category of underlying principles and concepts. process focuses on – A logic to explain a causal relationship between intervening variables. 216 . Stage Theory). skills. and capabilities. and achieves sustainable performance recovery.
suppliers and bankers. 217 . Substantial shifts in consumer preferences. Rising input costs. leading to lack of acceptability from distributors and customers.TURNAROUND INDICATORS Most firms atrophy simply because they fail to diagnose the indicators that acts as threat to organizational existence. especially in key positions. Some indicators Continuous cash flow crises as a result of dwindling market-share and profits. Uncompetitive products or services. Low employee morale leading to high employee attrition at all levels. unavailability or radical lowering of substitute costs or technological obsolescence. Low stakeholder confidence.
“all is not well”. Hence. prune work-force. Recalibrate prices.TURNAROUND ILLUSION The first step to a successful turnaround is the basic acceptance of the fact that …. consider extension. based on elasticity. Emphasis on advertising and market penetration. which most top managers fail to appreciate. focus on power brands.. 218 . be more customer centric. Revamp product portfolio. they adopt surface level measures (disprin popping) which most often fail. liquidating dead assets. Extending work hours. Product redesigning or reengineering. Common approaches adopted Change in key positions.
TURNAROUND STAGE THEORY Stage 1 Decline Stage 2 Stage 3 Stage 4 Outcome Response Transition Performance Equilibrium Line Success Failure Indeterminate Nadir Time 219 .
It 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. 220 . It has its origin in “resource led stretch” and subscribes to the view that a firm has substantial power to override the context. Identification of the stimulus leads to the arrest of the downfall. primarily dwindling resources and capabilities are responsible for decline. It has its origin in “environment led fit” that subscribes to the view that a firm has little control over external factors. R-Extinction – It suggests that organization factors.
asset reduction. Strategic responses focus on changing or adjusting the business the firm is engaged in through long term moves such as – integration. the response should be operational. Operating responses typically focuses on the way the firm conducts business and involves tactics geared towards – cost cutting and process redesigning (BPR).RESPONSE INITIATION Turnaround responses are typically categorized as operating or strategic. diversification. If the decline stems from structural shifts. The response must match the cause of the decline. the response should be strategic. 221 . If the underlying cause is internal efficiency. new market initiatives.
RESPONSE DICHOTOMY The response initiation is somewhat dichotomous and cannot be universally applicable. Similarly new market initiatives is feasible only for multi-product firms. Scope – A diversified conglomerate may acquire a distressed business to turn it around and gain valuable synergies. 222 . Contour – It is easier to reverse decline in the earlier stages through operational measures. when decline deepens shifts in strategic position becomes essential. which may be unavailable to a focused firm. Untangling this question brings into focus three events – Domain – Many of the strategic cures have limited applicability for an affiliated firm.
participative management (i. Support from all the stake holders through resource commitment.7 years with a range of (4-16) years. many a times early signs of recovery fades out. The top management has a key role to play through empowerment.e. However. role model. lead – lag).e. 223 .TRANSITION Transition usually reflects the first signs of recovery. Empirical studies show that average time is 7. confidence building measures. However. consensus). Effective levers of transition. substantial amount of time usually passes before results begin to show (i. transparency. Sustenance is the key factor in this stage.
224 . Regaining lost market share and distributor confidence. Commanding a premium in the market. Instead of focusing on financial parameters alone. it should adopt a holistic approach. Failure is an indication that initial momentum was not sustainable characterized by irreversibility. Cut off points must be unequivocal. Revival of key customers and new product launches.OUTCOME Outcome is said to be successful when a firm breaches the equilibrium performance level. Supplier and banker confidence. Share price indications and media coverage.
COOPERATIVE STRATEGIES & ALLIANCES 225 .
or joint venture. licensing. More and more companies worldwide are moving away from competition to co-option to leverage their resources and enhance bargaining power. In the cooperative strategy continuum as firms move up the value order. It can assume any of the following forms – franchising. supply-chain partnership. strategic alliance. consortia. the commitment and the involvement between the firms increases manifold.COOPERATIVE STRATEGIES Cooperative strategies are a logical and timely response to changes in business dynamics. technology. Any cooperative strategy maybe between firms within the same country or cross border as well. 226 . and globalization .
owners of the brand Monginis allows its franchisees to sell its confectionary products. Titan Inds. Switz Foods. It is an effective strategy to penetrate markets in a shortest possible time at a minimum cost.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. 227 . Branding is critical to franchising.
Become a systems integrator (CKD).LICENSING Licensing – It is a contractual agreement between two legally independent firms whereby the licensor grants the right to the licensee to manufacture the licensor’s product and do business under its brand-name in a given location for a specified period of time for a consideration. Different levels of licensing Manufacturing without embracing any technology (CBU). HM manufacturing GM range of cars in India with a buy-back arrangement is a perfect example of CBU. 228 . refine processes and adopt necessary technologies (SKD). as in Tata Indica. Develop a product through its crude stage.
Hyundai).CONSORTIA Consortia – They are defined as large inter-locking relationships & cross holdings between businesses in a similar industry. Collusion – Few firms in a matured industry collude to reduce industry output below the equilibrium level. Coke – Pepsi). leverage upon size to preempt competition by escalating entry barriers (Eg. 229 . Tata. It can be of the following types – Multipartner – Intends to share an underlying technology or asset. Airbus – Boeing). Cross Holdings – A maze of equity holdings through centralised control to ensure earnings stability & threshold resources for critical mass (Eg. enabling them to increase prices (Eg.
. link their capabilities to create value for end users. Companies in different industries with different but complimentary skills. otherwise it 230 becomes routine outsourcing. It usually provides a platform to sort out differences between conceptualization and implementation to suit local market needs. Tata Motors – IDEA).SUPPLY CHAIN PARTNERSHIP It is a pro-active & collaborative arrangement between supplier and customer aimed at achieving better control over the value chain (Eg. Continuous sharing of knowledge is critical to the success of a supply chain partnership.
Despite their popularity (50-60)% of the alliances fail to accomplish their stated objectives. 231 . preempt competition. design next generation products. Generic motives involved are . Reliance – Du Pont). effective R&D management. enhance credibility. Firm’s should undertake a long courtship with potential partners.STRATEGIC ALLIANCE It is an short to medium term understanding between two or more firms to share knowledge and risk. to gain knowledge and to obtain access to new markets (Eg. Tata Motors – Fiat.learning organization. instead of hurrying into a relationship. enter newer markets. Partner selection is one of the critical success factors.
Airbus – Boeing). Whirlpool – Tide. 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. Maruti).STRATEGIC ALLIANCE . 232 . Coke – Pepsi). Complementary Equals – Two firms mutually promoting each others complimentary products (Eg. Bootstrap – An alliance between a weak and a strong company with an intention to acquire it. Alliances of the Weak – An alliance is entered into to preempt competition (Eg. Bajaj – Castrol).
Cultural orientation has been found to have a profound effect on top management’s strategic orientation (Eg. Differences in level of economic development can produce differences in alliances motives. Firms from developed markets seek access to markets and firms from emerging markets seeking access to technology. – Japan Vs US). 233 . Too much stress on financials & structure be avoided.PARTNER SELECTION CRITERIA It is likely that partners will not have complete consent on alliance objectives because the institutional context in which the alliance embedded varies from country to country.
Partner’s ability to acquire fresh skills. Willingness to share knowledge and skills.PARTNER CHARACTERISTICS Complimentarity of Capabilities – The degree to which partners resources can be used in conjunction. Experience related to previous alliances. Dominant Logic’s – Similarity in beliefs & biases. 234 . including ability to provide quality products and services. Intangible Assets – Move beyond the financials of the firm. Managerial capabilities. Unique Resources – Abilities or skills which cannot be easily duplicated.
Selection & Courtship – It involves self analyzing. understanding the chemistry. operational & cultural integration. differences not anticipated earlier. 235 . incorporating clear signs of continuing independence for all partners. the value chain. Getting Engaged – It should incorporate a specific joint activity.MANAGING ALLIANCES Alliances are more than just a deal. partners should nurture it. Changing within. degree of compatibility. Learning to collaborate – strategic. instead of focusing controlling the relationship. Setting up the housekeeping. vows to include commitment to expand the relationship.
e. separation is very 236 bitter. . a joint venture is a selection among modes by which two or more firms can transact. It aims at creating new value (i. There are substantial linkages in the value-chain. whilst the partners continue to operate independently.JOINT VENTURE A joint venture is a long term association between two equal partners to create an independent firm (SPV) by complementing their resources and capabilities to explore newer businesses or markets for achieving a shared vision. synergy) rather than mere exchange (i. combining parts).e. Conceptually. It lasts till the vision is reached.
237 . Organizational Learning – It is a means through which a firm learns or seeks to retain their capabilities. Strategic Behaviour – Firms may override transaction costs. though more profitable alternative to other choices. It may also be linked to deterring entry or eroding competitors position. The market fails as sellers are unwilling to reveal their technology and buyers are unwilling to purchase in the absence of inspection. in addition to a high degree of asset specificity.JOINT VENTURE – GENERIC MOTIVES Transaction Cost – The situational characteristics best suited for a JV are high performance uncertainty.
Learning new technologies. Essar – Hutch (Vodafone). – Eg. Endorsement from government authorities. Renault – Nissan (Minivans – Cars). Eli Lily – Ranbaxy. – Eg. Daimler – Chrysler (Premium Cars) 238 . Sharing of resources. – Eg. Define future industry standards. – Eg. Yamaha – Escorts. Maruti – Suzuki. – Eg. TVS – Suzuki (4-Stroke Engines) Fill gaps in existing product lines. – Eg.OTHER MOTIVES Entry into newer markets.
technology) drain.RISKS INVOLVED Incompatibility – Differences in cultural background.Enka. PAL – Fiat If the cost of continuing exceeds the exit costs? – Eg. – Eg. – Eg. Risk of brain (i. – Maruti – Suzuki. LML – Piaggio Differences in size and resource base. Tata – Aditya Birla in Idea Cellular 239 .e. – Godrej – Procter & Gamble. Century . Modi – Telstra What after exit (parenting disadvantage)? – Eg. Risk of over dependence.
Partner – Avoid duplication of skills and capabilities. Costs – Other modes of transaction becomes cheaper. respect. Incompatibility – Performance expectations. Equality – Lack of dominance. Objectives – Shared vision. Culture – Reconcile gaps. Agreement – Clarity on operational control. Inertia – Differences in age and evolution patterns. time sharing. Focus – Avoid strategic myopia.PRE-REQUISITES FOR SUCCESS Commitment – Mutual trust. 240 . Flexibility – Sufficient space to breathe and adjust.
MERGERS & ACQUISITION 241 .
An acquisition is said be smooth if it is with the consent of the management (Eg. An acquisition is the purchase of a firm by a firm (of larger size. SEBI Takeover Code. Brooke Bond – Lipton). The larger objective is to leverage on size. 2002). Ranbaxy . Most countries have stringent laws that prevents hostile takeovers (Eg. 242 . Mittal Arcelor). reverses are also taking place through LBO) with a view to acquire conglomerate power and induce synergy (Eg. however.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. HLL – Tomco).Daichi) and hostile if it is without the consent of the management (Eg.
Control – A special resolution of 75% of the share 243 holders approving the change of guard. Hike – An acquirer who has already picked up a 5% has to make a mandatory disclosure for every additional 1% stake that it acquires. creeping acquisition). 2002 Promoter – A person who has a clear control of atleast 51% of the voting rights of the company and confidence of all the major stakeholders. Preferential – A preferential allottee ending up acquiring 5% stake also comes under its purview.e. Acquirer – Someone (individual or firm) who picks up an atleast 5% stake without mandatory disclosure having an intention to wrest management control (i. .SEBI TAKEOVER CODE.
SEBI TAKEOVER CODE.e. Grasim – L&T Cement. Disclosure – All acquirers have to inform the respective stock exchanges where it is listed and SEBI upon acquiring the basic limit and upon every incremental limit thereon. Gujarat Ambuja – ACC). 2002 Pricing – Acquirers will have to offer minority shareholders (at least 20%) the past 26 weeks or past 2 weeks average price. whichever is higher as an exit route (Eg. SEBI – In case of a hostile take over. and/or does not enjoy the confidence of the different stake holders. 244 . credentials or track record is at stake. the SEBI can intervene and block share transfers if: the acquirer has ulterior motives (i. asset stripping).
Conglomerate – It involves integration of two distinctly unrelated businesses. Electrolux . The type of merger is depends on the degree of relatedness (strategic) between the two businesses. usually opportunistic (Eg. Horizontal – It involves integration of two highly related businesses (Eg. Reliance). Godrej. 245 .Kelvinator). ITC). Vertical – It involves complimentarily (partially related) in terms of supply of inputs or marketing activities (Eg.TYPES OF MERGERS A business is an activity that involves procuring of desired inputs to transform it to an output by using appropriate technologies and thereby creating value for its stake holders in the process.
ITC Bhadrachalam). Overcoming entry barriers (Eg. Avoiding risk of new product development. scale and scope. Tata Steel – Corus). 246 . Economies of size.MERGERS & ACQUISITION .MOTIVES Increased market / conglomerate power.e. Access to newer segments (Eg. Coinsurance effect – Higher debt raising capability. Asset Stripping – Shaw Wallace). Reduced gestation (i. Ulterior motives – (Eg. Acquiring assets or capabilities (Eg. Tax benefits (Eg. ICICI –ITC Classic). Mittal – Arcelor). quick access). Ranbaxy – Crosslands). Reduction in risk. Global image (Eg.
Overvaluation is often as a result of an ego drive and substantially affects future returns. neglecting core business. 247 . while the ultimate acquisition was made at 607 pence/share). Overvaluation of buying firms (Eg. Managing over-diversification. When Tata Steel started negotiations with Corus. Tata – Corus). Top management overtly focused on due diligence exercise and negotiations. their initial offer was around 420 pence/share. Inability to achieve synergy. Managing size.MERGERS & ACQUISITIONS PITFALLS Cultural differences (Eg. Merging of organisational structures.
with an objective to reinforce its growth trajectory or to take on the might of a comparatively larger player (Eg. Kingfisher – Air Deccan). Decline – Horizontal mergers are undertaken to ensure survival.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. vertical to save transactions costs. Maturity – A larger firm acquires a smaller firm with an objective to achieve economies of scale and experience curve effects (Eg. Tata Steel – Corus). Brooke Bond – Lipton). Growth – This stage may witness parallel merger of two firms of similar size. 248 .
Strong differences may stifle plans and its execution. A concern of respect and trust for the business of the acquired company. An acquisition just for the sake of it or reputation yields very little value in the long term. Left alone syndrome. A common shared vision.FRAMEWORK Positive contribution to the acquired company. 249 . active top management intervention in phases.INTERNATIONAL M&A . Immediate attempts to super impose structure and culture may cause bottle necks. Blanket promotions across entities and confidence building exercises needs to be practiced.
Redefine responsibilities and authority. Shift attention from business portfolio to people and processes. . They can carry the message to the various stake holders. Decide upon management control systems. Integrating work processes. Decide on the new hierarchy.INTEGRATION . Determine business strategy.BLUEPRINT Take the media into confidence. 250 Do not ignore the “people factor”. promptly. It will enable focus on customers and key people.
– Unstated reasons – Personal self interest and hubris. Valuation decisions are arrived through a due diligence process when the prospective acquirer gets access to the books of accounts of acquiring company.VALUATION The process of valuation is central to M&A. The process takes (6-12) months. Financial motives – Undervaluation relative to true value. – Market for corporate control.M&A . operational & financial). While under valuation may be a significant opportunity. 251 . over valuation can become a curse. – Synergy – Potential value gain from combining operations (i.e.
or from increased market power which increases sales and margins. Synergy can be negative as well. – Conglomerate Synergy – Gains come when one firm complements the resources or capabilities of another (Eg. when the “fit” between the two entities is very poor.VALUING OPERATIONAL SYNERGY Synergy – It refers to the potential value gain where the whole is greater than the sum of the parts. 252 . Sources of operational synergy – Horizontal Synergy – Gains come from economies of scale which reduces costs. Innovative product – Good distribution network). – Vertical Synergy – Gains come from controlling the supplychain and savings in transaction costs.
253 . However. Synergy comes from projects which would not have been undertaken if the two firms stayed apart (Eg.VALUING FINANCIAL SYNERGY Diversification – Reduce variability in earnings by diversifying into unrelated industries. 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. Hotmail). and without paying take-over premiums. Cash Slack – It reduces asymmetry between cash starved firms with deserving projects and cash cows with no investment opportunities. ITC – Bhadrachalam Paper). but availed after being merged with a profitable firm (Eg.
higher leverage. 254 . hence better performance. as risky debt is spread across the new firm's operations. – Coupon rates may also be negotiated at lower rates. It relates to the concept of diversification.VALUING FINANCIAL SYNERGY Co-Insurance Effect – If the cash flows of the two firms are less than perfectly correlated. 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. This will induce higher debt capacity. the cash flow the merged firm will be less variable than the individual firms. – Default risk comes down and credit rating improves.
– – Value of Control = Value of firm after restructuring Value of firm before restructuring. The value of control can be substantial for firms that are operating well below optimal value. Assessment of perceived quality is critical. The value of wrestling control is inversely proportional to the perceived quality of that management. While value of corporate control is negligible for firms that are operating close to their optimal value.VALUING CORPORATE CONTROL Premium of M&A are often justified to control the management of the firm. since a restructuring can lead to significant increase in value. 255 .
It is a very costly and risky proposition.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.e. Confidence of investment bankers and the international financial community is essential. The assets of the acquired company are used as collateral for the borrowed capital. sometimes in combination with the assets of the acquiring company. 256 . LBO facilitates a relatively smaller firm to bid for a comparatively larger firm in the bid for management control.
257 . A research study showed that 30% of the publicly listed firms reported above average returns after going private.access to financial markets. However. – Increased information needs. The increased benefit showed in the following way – reduced costs and increased revenue. liquidity. off-late many publicly traded firms have gone private keeping in mind the following – – The fear of LBO. – The need to satisfy analysts and shareholders. on-going valuation. – Separation of ownership from management. the advantages of going public includes .TO GO PUBLIC OR NOT? However.
– Cost of debt coming down (i. co-insurance effect). – Managers cannot be trusted to invest free cash flows wisely. 258 . which disappears once assets are liquidated and significant portion of debt is paid off.e. – Debts repaid off from increased value after successful restructuring and wresting management control.RATIONALE FOR HIGH LEVERAGE The high leverage in a LBO can be justified by – – If the target firm has too little debt (relative to its optimal capital structure). – Cash trapped company unable to utilize opportunities. – It is a temporary phenomenon.
– Increase equity valuation. leverage is expected to decrease over time. A LBO has to pass two tests to be viable – – Restructuring to pay-off increased debt. Lack of sufficient cash flows to repay costly debts resulting in a possible debt trap. 259 . initial rise in leverage is anticipated. Any discounting has to reflect these changing cost of capital.EFFECT OF HIGH LEVERAGE Increases the riskiness of dividend flows to shareholders by increasing the interest cost to debt holders. As the firm liquidates / pledges assets and pays off debt. Therefore.
small in size but having a promising business. – Prevents dilution of equity.e. – Tax shelter. time-barred. which has discontinued its operations (i. or costly. 260 .REVERSE MERGER Reverse Merger – The acquisition of a public company. allowing the private company to bypass the usually lengthy and complex process of going public. – Automatic listing in major exchanges. Objectives – – Traditional route of filing prospectus and undergoing an IPO is costly. shell company) by a private company. – Facilitates better valuation and forthcoming offerings.
takeover failures have only initial negative effects on stock prices. During bearish periods excess returns were 19%. Excess returns also vary across time periods. – Merger announcements reported 20% excess returns. – Takeover announcements reported 30% excess returns. However. Most target firms are taken over within (6090) days. Initial anomaly in stock prices usually normalizes over a period of time (6-12) months. 261 .EFFECT OF TAKE-OVER ANNOUNCEMENT The shareholders of target firms are the clear winners. and 35% during bullish periods.
and Kim. 262 Jarrel. as stock markets become more and more perfect such anomalies would reduce Source: Jensen and Ruback.EFFECT OF TAKE-OVER ANNOUNCEMENT The effect of take-over announcement on bidder firm’s stock prices are not clear cut. – However. Bradley. 1988 . and Netter. Brickley. 1983. Desai. 1983. – Most studies reported insignificant excess returns around take-over offers or merger announcements. – However. in the event of take-over failure negative returns to the extent of 5% on bidder firm stock prices is reflected. over time.
DEFENSIVE STRATEGIES Golden Parachute – An employment contract that compensates top managers for loss of jobs as a result of change in management control. 263 . Rights). so that nothing is left for the raider to strip off. Poison Put – Premature retirement of bonds at attractive rates to pour surplus cash and make target investment unattractive. Poison Pill – An offer to existing shareholders to buy shares at a substantial discount to increase their voting rights (Eg. Asset Stripping – The targeted company hives off its key assets to another subsidiary.
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. Pac Man – The target company makes a counter bid to take over the raider company. East India Hotels – Reliance Industries – ITC).DEFENSIVE STRATEGIES White Knight – It is the placing of stocks to a cash rich investor and bargaining for protection in return. But often the White Knight turns a betrayer himself (Eg. Shapoorji Pallonji). thus thwarting the raider company’s attention. 264 .
COMPETING FOR THE FUTURE 265 .
GETTING OFF THE TREADMILL Canon overpowering Xerox. Honda overpowering GM. Wal-Mart overpowering Sears. Nokia overpowering Motorola. British Air overpowering Pan Am. Hitachi overpowering Westinghouse. 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. Most companies were too preoccupied with the present than the future? 99% of the companies overpowered. were spending 99% of their precious time dealing with present. Compaq overpowering IBM. Honda overpowering Volkswagen.
downsizing). falling market share). declining margins. Not knowing when to stop. decluttering. Thus efficiency was grievously hurt.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. 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 . most often they ended up cutting corporate muscle as well and became anorexic.
incrementalism or nominal innovation has almost reached a plateau. 268 . On the contrary only 20% of Japanese managers believed that quality will be a source of competitive advantage of the future. but not of the future. ensuring only survival of the present.THE PRESENT OF COMPETITION Beyond Reengineering – Numerator based managers (innovation) at least offers some hope.S. The future is not about catching up with competition. A poll in circa 2000 revealed that 80% of the U. However. but forging ahead in competition. top managers believed that quality will be a source of competitive advantage of the future.
It is based on deep insights into trends in technology. Empower from bottom to top. as important as these may be. not just the organization. not the other way. It involves Dream about the company’s future. Creating the future requires industry foresight.THE FUTURE OF COMPETITION Regenerating – Leaner. Transform the industry. don’t predict. demographics and lifestyles. reinvent its industry. Companies need to fundamentally reconcieve itself. and regenerate its strategies (breaking its – managerial frames). better. 269 . Create a potential gap. faster. aspirations and resources. they are not enough to get a company to the future.
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 .
hence do not fall sick in the first place. Create entirely new industries (i. Redraw the boundaries between industries. Therefore. blue oceans). Successful companies have a complete grip over the industry.e. they do not need to restructure.ABOUT THE TRANSFORMATION The future does not belong to those who take the industry for granted. 271 . It is about deliberately creating a strategic misfit. Change in at least one fundamental way the rules of engagement in an industry. It drives a hunger and a passion to transform. by converging technologies complex.
Most successful revolutions (Gandhi to Mandela) rose from the dispossessed. Transformational leaders merely lead the way. A revolution that is thrust upon from the top seldom sustains. More importantly.ABOUT THE EMPOWERMENT Bring about a revolution (a paradigm shift) in the organization. the revolution must start at the bottom and spread in all directions of the organization. Such a process is called institutionalization (from people centric to organisational centric). 272 . The middle management plays a strong moderating role.
An ability to energize the company. South West Airlines – LCC. What does it take to get to the future first? Understanding how competition for the future is different. It requires a lot of common sense and a little bit of out of the box thinking. Apply the 40 – 30 – 20 principle. Toshiba – LCD. Apple – iphone). 273 .THE FUTURE OF STRATEGY A company must get to the future not only first but also for less. A process for finding and gaining insight into tomorrows opportunities (Eg. Get to the future first. Companies need to strategize (think ahead of times). without taking undue risk.
HOW DOES THE FUTURE LOOK LIKE? There is no rule which says that for every leader there will be a follower. The farther one can see in this endless space. but hundreds. What distinguishes a leader from a laggard. 274 . We are in the midst of a 3600 vacuum. As there is no one future. Companies of the future will be not based so much on the strength of their resources. the farther it will be away from competition. each point in space represents a unique business opportunity. as on their aspirations. greatness from mediocrity. is the ability to imagine in a different way what the future could be.
THE EMERGING STRATEGY PARADIGM Not Only Reengineering Processes But Also Regenerating Strategy The Competitive Challenge Organizational Transformation Industry Transformation Competing for Market Share Competing for Opportunity Share Finding the Future Strategy as Learning Strategy as Positioning Strategy as Engineering Strategy as Unlearning Strategy as Dream Strategy as Architecture 275 .
THE EMERGING STRATEGY PARADIGM Not Only But Also Mobilising for the Future Strategic Fit Resource Allocation Strategic Misfit Resource Stretch & Leverage Getting to the Future First Existing Industry Structure Product Leadership Single Entity Product Hits & Timing Future Industry Structure Competency Leadership Dominant Coalitions / Co-option Market Learning & Preemption 276 .
LEARNING TO FORGET P1: The degree of learning in current period is directly proportional to the degree of unlearning in the previous period. 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.
It is characterized by the following – Unique – It provides unimaginable customer value ahead of its times.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. Inimitable & Insubstitutable – A high degree causal ambiguity between these skills yield sustainable competitive advantage. It cannot be matched even by its closest competitors. Leverage – They are the gateways to future markets. It represents the collective learning's of an organization centering around diverse streams of technologies. 278 .
Core competencies are the roots of the organization. Toshiba – flat screen displays. it is deeply embedded in the heart of the organization. Wal-Mart – logistics. SKF – antifriction and precision. at the most three to four. Nike – designing. it gets more refined and valuable through use. A core competency cannot be outsourced. Honda – engines. Intel – nano-electronics. 279 .MORE ABOUT CORE COMPETENCE Sony – miniaturization. leaders have one. Most companies around the world do not possess one. Toyota – lean manufacturing. Although a core competence may lose value over time. Canon – imaging. Coca Cola – brand.
ROOTS OF COMPETITIVENESS End Products 1 2 3 4 5 6 7 8 9 10 Core Businesses Core Business 1 Core Business 2 Core Business 3 Core Business 4 Core Product 2 Core Products Core Competencies Core Product 1 Competence 1 Competence 2 Competence 3 Competence 4 280 .
RESOURCE STRETCH & LEVERAGE
Initial resource position is a very poor indicator of future performance. It leads to atrophy and stagnation. Successful companies consciously create a potential gap between aspirations and resources. Resource crunch is a common factor among firms that faces a wealthy rival, and outperforms them. Leveraging what a company already has, rather than allocating it is a more creative response to scarcity. – By concentrating existing resources. – By accumulating existing resources. – By complementing existing resources. – By conserving existing resources. – By recovering existing resources.
Concentrating – It involves effectively directing portfolio of resources on key strategic goals in which individual efforts converge over time. It is a balance between individual mediocrity and collective brilliance. It is achieved through – Converging – Redirecting multiple diverging (i.e. fragmented) short term goals into one long term goal. It is then resources can be stretched over time. Focusing – Making trade-offs and preventing dilution of resources at a particular point of time. Targeting – Focusing on the right innovations that are likely to have the biggest impact on customer value.
Accumulating – Using existing reservoir of resources to build new resources. Each and every individual is a rich & potential source of learning, discover better ways of doing things. It is achieved through Mining – Extracting learning experiences from existing body of each additional experience (i.e. success or failure). It is an attitude that can be acquired, but never learnt. It leads to a substantial jump in the experience curve. Borrowing – Utilizing resources outside the firm through licensing, alliances, joint ventures. A firms absorptive capacity is as important as its inventive capacity.
Complementing – Using resources of one type with another that aligns smoothly to create higher order value. In a way it produces an accelerating effect on each individual resource. It is achieved through – Blending – Interweaving discrete capabilities to create world class technologies (GM – Honda) through integration and imagination. Different functional skills can also be blended to create a world class end products (Yamaha – Keyboard). Balancing – An ability to exploit excellence in one area is never imperiled by mediocrity in another (GE acquiring the CT scanning rights from EMI because of its inadequate market reach).
Conserving – Sustaining competencies over time through frequent usage. Resources are never abandoned; they are always preserved for future use. Recycling – Increasing the velocity of use of a competencies over time. As a result core competencies can be leveraged across an array of products (Sony - Betamax). It includes brand extensions as well. Co-Opting – Enticing resources of potential competitors to exercise influence in an industry (Fujitsu – IBM). Shielding – It involves identifying competitors blind spots and then attacking without having the fear of retaliation.
Recovering - It is the process of reducing the elapsed time between investing in resources and the recovery of those resources in the form of revenues via the market. Speeding – Prior to the 1980’s Detroit’s majors took an average of 8 years to develop an entirely new model; the Japanese reduced it to less than 4.5 years, with major new variants in 2 years. This envisaged Japanese players in giving customers more opportunities to switch allegiance and loyalty (Toyota). Protecting – It uses competitors strength to one’s own advantage, by deflecting it, rather than absorbing it as practiced in Judo.
INTERNATIONAL BUSINESS ENVIRONMENT 287 .
and high transaction costs. Therefore focused strategies based on core competence may not be suitable for emerging markets (Khanna & Palepu. 1997). Korea. Diversified groups in operating in emerging markets therefore benefit from unrelated diversification. 288 .EMERGING MARKETS Emerging markets (India. Chile) provide a different context (i. China. Emerging markets are characterised by infrastructural bottlenecks. Therefore. strategies suited for the developed markets may not be appropriate for emerging markets. high levels of market imperfection). institutional gaps.e.
(2000) 289 . Synergy. subsequently negatively related across developed markets. Size & Scale. Optimum level of diversification Performance Diversity is initially positively related with performance. Concentric.PERFORMANCE (I) Diversity attempts to measure the degree and extent of diversification (Herfindahl. Experience Strategic Fit Diversity Palich. Entropy).DIVERSITY . et al.
DIVERSITY . conglomerate power Threshold level of diversification Performance Diversity (Khanna & Palepu. 2001) 290 . brand building Risk diversification. Huge initial investment.PERFORMANCE (II) Diversity is initially negatively related with performance. subsequently positively related across emerging markets.
HSBC). Characteristics – It should have a spread of affiliates or subsidiaries. It should have a spread of manufacturing facilities. It should have a spread of assets. It should have a spread of interest groups / stake holders. act locally (Eg. It should think globally. revenues and profits. 291 .INTERNATIONAL IDENTITY MNC’s consciously engage in FDI in different parts of the globe to forge resource diversity as a distinct competitive advantage.
high feminity index in developed markets and vice versa for emerging markets). low power distance in developed markets and vice versa for emerging markets). low group scale in developed markets and vice versa for emerging markets). Risk Profile – It reflects the risk attitude of the top management (Eg.It reflects the relative role of team building (Eg. Group Scale .GLOBAL BUSINESS ENVIRONMENT Power Distance – It reflects the disparities in income and intellectual development (Eg. 292 . low risk profile in developed markets and vice versa for emerging markets). Feminity Index .It reflects the disparities in women in workforce (Eg.
culture. credit rating. judiciary) of doing business in a particular country (Eg. corruption. terrorism (9/11). inflation. political stability.GLOBAL BUSINESS ENVIRONMENT Cultural Adaptability – It reflects the adaptive ability to a changing environment . attitude. 293 . flexibility (Eg. currency. FOREX reserves. Country Risk – It reflects the political and economic risk (Eg. customs. high cultural adaptability in developed markets and vice versa for emerging markets). way of life. code of conduct. low country risk in developed markets and vice versa for emerging markets). time value. dress sense. interest rates.
in most emerging markets use of an interpreter may be a standard protocol. in most emerging markets meetings are delayed and lasts unusually long. High levels of ethnocentrism usually has a negative effect on business. however. 294 . Other factors – local celebrations. Language Barriers – Developed country managers expect foreign partners to communicate in their languages. and vice-versa. Ethnocentrism – Developed country managers tend to regard their own culture as superior. time-zones.GLOBAL BUSINESS ENVIRONMENT Time Sensitiveness – Developed country managers regard time as precious.
It also initiated provisions on anti-dumping. The 1999 (Seattle Round) saw a lot of protest amidst bringing agriculture under the purview of TRIPS.GATT GATT was a bi-lateral treaty initiated between US and some member countries in 1947 to promote free trade. The 2001 (Doha Round) focused on power blocks (NAFTA. ASEAN. In 1995 (Uruguay Round) GATT was renamed to WTO. 295 . It a multi-lateral treaty with 143 (as on 2002) member countries to reduce tariff and non-tariff (quota) barriers. BRIC). copyrights. It also highlighted the nexus between US & WTO. trademarks). It focused largely on TRIPS (patents.
EURO – SINGLE CURRENCY In 1999 twelve member countries in Europe joined hands to move over to a single currency (i. three countries joined in 2002 increasing it to fifteen members as of 2008. The Euro was significantly devalued against the Dollar till 2002. The notable exception was Great Britain which still continues with its local currency (i. the Euro slowly started outperforming the Dollar. primarily the OPEC countries. Euro).e. the Dollar still remains the most preferred currency globally.Pound). However. Sterling .e. However with current recession in the US 2002 onwards. 296 .
297 . 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. Trade Block – It will strengthen the EU identity which would not have been possible otherwise. However. Transparency – A single currency is transparent and competitive. Rate Uncertainty – A single currency eliminates the risk of competitive devaluations. a multiple currency is preferable where the business cycles of member nations are different. but it may have spill-over effects.
hot money). – FDI (transfer of tangible resources) is slow but steady for the purpose of economic growth.e. It is short-medium term with comparatively low levels of commitment. 298 . – FII (transfer of intangible resources) is fast but may have strong repercussions (i. It is long term with high levels of commitment. Neo classical economists believe that foreign investment may in fact be a win-win game.FII Vs FDI INVESTMENT Classical economists believed that foreign investment (in any form) is basically a zero sum game (i.e. the gain of one country is loss of another).
culture (food habits). lifestyle (petroleum 299 outlets – departmental stores). customer awareness (microwaves). usage (talk time). economic (middle class buying power). Pricing – It depends on the competitive structure (PLC – Kellogg's). promotion (surrogate advertising). Distribution – It depends on the market characteristics (fragmented – concentrated).INTERNATION MARKETING Product – The various attributes of a product may receive different degrees of emphasis depending on differences in . buying patterns (spread). technology (microchip). .
Accounting Norms – The accounting norms of one country (AS .India) may be different from that another trading country (US – GAAP or IRS). debt is cheap in US. Leverage – The leverage may vary across countries depending upon money and capital market conditions (Eg. equity is cheap in India). .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. Cost Structure – Companies in India need to investment in fixed costs due to poor infra-structure 300 compared to developed markets.
labour laws. technology (convergence. however.INTERNATIONAL HR An uniform HR policy is idealistic to enable parity in performance appraisal. skills are more important that cultural fit and vice-versa. and cultural barriers (language) vis-à-vis emerging markets. in most cases it is not desirable nor practiced. Recruitment – In local recruitment. social security. 301 . Compensation – Differential pay packages exists because of differences in purchasing power. Training – It is a pre-requisite for international business to reduce language. double taxation. shortened life cycles).
Bosch spark plugs are used by car manufacturers worldwide).INTERNATIONAL OPERATIONS Location Incentives – FDI in emerging markets should explore options for SEZ’s to explore benefits (tax holidays. Technology – The cost to be evaluated in terms of latest technology (Euro VI) vis-à-vis effective cost of appropriate technology (Euro II). . SCM – Use of ERP to network the extended enterprise 302 across the globe. Outsourcing – A company having a core competence may be the source of global outsourcing (Eg. reduce power costs) vis-à-vis infrastructural bottlenecks.
CONTEMPORARY TOPICS 303 .
While innovation typically adds value for organizations.INNOVATION An invention is the first occurrence of an idea for a new product or process. innovation is the first attempt to carry it out in practice. 304 . Innovation is all about staying ahead of competition. it has destructive effects as well. Innovation is the most preferred strategy today to maintain competitive advantage in the present turbulent business environment. but has inherent risks involved as well. Innovations typically paves the way for more secured and improved lifestyle for consumers in general.
process innovation is necessary to sustain the competitive advantage of product innovation. While product innovations are typically customer driven. 305 . Strategic innovation has the potential to change the rules of the game. Process innovation usually follows product innovation. However.TYPES OF INNOVATION A key challenge is maintaining a balance between process and product innovations. Tangible impact of product innovation on performance is significantly higher than process innovation. process innovations are organizational driven.
Disruptive business models brings in a new frame of reference (i. about how an organization makes money (i. Innovations are the back-bone of successful business models . putting an idea into practice). Data Storage (Pen Drives). 306 . Medical Surgery (Lasik). Drug Development (Bio Chemicals).BUSINESS MODEL It is a simplified description and representation of a complex real world. Telecom (CDMA Technology). It leads to a shift in the price – performance envelope. Processors (Pentium).e.e. a paradigm shift).
NINE BUILDING BLOCKS Value proposition offered to the market. The segment(s) of clients to be addressed. The key resources and capabilities required. The key partners involved in the activities. The cost structure resulting from the business model. The proposed relationships established with clients. The channels to reach out to the clients. The key activities / processes necessary for execution. 307 . The revenue streams generated by the activities.
BUSINESS MODEL FRAMEWORK 308 .
Real Estate) companies need to untangle and understand the intricacies of their business model. With the rapid erosion of certain industries (IT. The revenue model described here are the means to generate revenues. innovative companies to carve out unique business models to fend off competition. It is just one piece of the puzzle.REVENUE MODEL Positioning is just not sufficient. 309 . It involves – Product Visualization – Product Prototype – Product Test – Capacity – Pricing – Distribution. Investment Banking.
310 . Allow the workforce idiosyncrasies for their errors. A favourable intellectual property (IP) climate. Have a lean and a flat organization structure. Provide reasonable incentives (not necessarily monetary). Allow the management sufficient slack to be future oriented. Promote the grape-vine. Promote the culture of experimentation.HOW TO MAKE INNOVATIVE CO’S Innovative company’s are a matter of culture and aspirations rather than tangible resources.
Collusion with the judiciary is also another distinct possibility in emerging markets. companies are increasingly relying on internal protection to sustain innovation effects. In most emerging markets where the IP climate is not so favorable. however that possibility is slowly atrophying. 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 .
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. Corporate governance aims to reduce the principal-agent problem present in most professional managed organizations through appropriate forms of accountability and control mechanisms.
not present in portfolio diversifications.AGENCY THEORY The root of Corporate Governance goes back to the Agency Theory. 313 . 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. According to the agency theory top managers and shareholders interests are usually conflicting in nature and tend to pull in opposite directions. This exposes the shareholders to additional risks and higher costs. also known as the principal-agent problem or agency dilemma. However.
After the Enron downfall. the US government passed the Sarbanes – Oxley Act. various laws were enacted to ensure proper usage of these funds. . SEBI Report – 2005. 2002 to restore public confidence in corporate governance.ORIGIN & CONTEXT Since the early 20th century since a large part of public funds were held by publicly traded firms in the US. 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.
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. including the society at large. The key roles of chairperson and CEO should not be held by the same person and their offices be clearly separated. Interests of other stakeholders: Recognize the legal and other obligations of all legitimate stakeholders. 315 . Role and responsibilities of the board: It deals with issues about an appropriate mix of executive and nonexecutive directors.
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. Independence of the entity's auditors: Identification.GOVERNANCE PRINCIPLES Integrity and ethical behaviour: Organizations should develop a code of conduct for their top management that promotes ethical and responsible decision making. assessment and mitigation of risks and retirement by rotation over a fixed period of time.. 316 316 .
Remuneration: Performance-based remuneration is designed to relate some proportion of salary to individual performance. with its legal authority to hire. a person benefitting from a decision should abstain from it.GOVERNANCE STRATEGIES Monitoring by the board of directors: The board of directors. However. safeguards invested capital. Balance of power: The simplest balance of power is very common. Regular board meetings allow potential problems to be identified. fire and compensate top management. discussed and resolved. 317 . they should provide no mechanism or scope for opportunistic behaviour.
The size of the premium varied by market. from 10% for companies where the regulatory backdrop was least certain (those in Morocco. Egypt and Russia) to around 40% for Canadian & European companies. McKinsey found that 80% of the respondents would pay a premium for wellgoverned companies. 318 .GOVERNANCE & PERFORMANCE In its “Global Investor Opinion Survey” of over 200 institutional investors in 2002. 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. who had no management ties. undertook formal evaluation of its directors.
corporate philanthropy should be a part of every corporate mission. today economic institutions are considered as a major drivers of improvement in quality of life in general and therefore needs to include multiple stakeholders. However.SHAREHODER – STAKE HOLDER THEORY Till the early part of the 20th the basic objective of modern organizations was to provide goods and services for public consumption for profit maximisation. Therefore. 319 . The basic premise is that firms cannot exist in vacuum. Over a period of time. the short-term view of profit maximisation gave way to a more broader and mediumterm view wealth maximisation of the shareholders.
CORPORATE SOCIAL RESPONSIBILITY As Peter Drucker rightly pointed out that. giving a very important message that one cannot exist without the other. Therefore. “a healthy business cannot exist in a sick and impoverished society”. However. the debate on CRS still continues whether firms should detract its focus from its business? 320 . “an enterprises decisions and actions being taken for reasons at least partially beyond its immediate economic interests”. in fact a large part of it is significantly overlapping. economic and social responsibilities cannot be mutually exclusive. CSR can be defined as. Therefore.
The role of media: The media and various consumer organizations have come up in protecting consumer rights and exposing mal-practices. Fear of government interference: Excessive quench for profits may lead to build up of adverse public opinion compelling the government to intervene (Eg. Public image: Entrepreneurs are increasingly relying on public image as a source of competitive advantage and a higher financial discounting. 321 . people are becoming increasingly aware of their right to a decent and healthy life.GROWING CONCERN FOR CSR Awareness due to education: With growing literacy. MRTP).
and extended producer responsibility (Eg. Aditya Birla Research Centre – LBS). Refrigerators – CFC. eco efficiency.Paper packaging. designing eco-friendly products. Tata Steel – Life Line Express). Education. 322 . Cement . Literacy & Training Programs – (Eg. Health & Hygiene – Attending the health hazards due to wastes and by-products to employees and society in proximity (Eg.CSR STRATEGIES Green Supply Chain Management: It includes environmentally preferable purchasing. Exide – Product take back).
K. Prahalad notes that future markets exist collectively. they're helping millions of the world's poorest people to escape poverty. C. 323 . In turn companies by serving these markets.BOTTOM OF THE PYRAMID With the market across most developed markets including the US getting saturated. They represent an enormous opportunity for companies who learn how to serve them. 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.
BLUE OCEAN STRATEGY 324 .
TWO WORLDS 325 .MARKETSPACE .
They have fought for profits.WHAT IS RED OCEAN? Companies have long engaged in head-to-head competition in search of sustained. one companies gain is always at the 326 cost of another companies loss. battled over market-share. where most industries are saturated. In today’s red oceans. . profitable growth. competing head on results in nothing but a bloody red ocean of rivals fighting over a shrinking profit pool. and struggled for differentiation (cost or product). Yet in today’s overcrowded industries.
It helps in creating powerful leaps in value for both the firm and its buyers. It is only the frames of the . but by creating blue oceans of uncontested market space ripe for growth . it will exist 327 in the future as well. Blue Ocean’s have existed in the past.WHAT IS BLUE OCEAN? Tomorrow’s leading companies will succeed not by battling in red oceans. rendering rivals obsolete and unleashing new demand. Such strategic moves are possible through the pursuit of product differentiation and low cost simultaneously.
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 .
Technological advances have substantially 329 improved industrial productivity. information imperfections atrophy instantly.BLUE OCEAN STRATEGY IMPERATIVES Prospects in most established market spaces – red oceans – are shrinking steadily. Niche markets & monopoly havens are continuing to disappear. Population shrinkage across a no. . Demand across developed markets reaching a plateau. of European nations. As trade barriers between nations & regions fall.
managerial moves are. Incumbents often create blue oceans within the ambit of their core business. Company & industry are the wrong units of 330 strategic analysis. 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.
BLUE OCEAN .IMPLEMENTATION Reduce Which factors to be reduced below the industry standard Eliminate Which of the industry factors that the industry takes for granted should be eliminated Create VI Which factors should be created that the industry has not offered Raise Which of the factors should be raised above the industry’s standard 331 .
IMPLEMENTATION SEQUENCE Buyer Utility (1) Is there exceptional buyer utility in your business idea? Price (2) Is your price easily accessible to the mass of buyers? Blue Ocean Strategy Adoption (4) What are the adoption hurdles in actualizing your business idea? Are you addressing them up front? Cost (3) Can you attain your cost target to profit at your strategic price? 332 .
SOME GLARING EXAMPLES In the last century authors Kim and Mauborgne have documented the creation of more than 150 blue ocean creations across 30 industries – Virgin Atlantic: Fractional jet ownership or travel to space. Southwest Airlines: Pioneering the concept of LCC. Citibank – Automated teller machines & credit 333 cards. . Sony Play Station: Redefining machine-human interface in entertainment and targeting an altogether new user base.
334 . All they need to do is change their managerial frames. companies & managers are largely at the mercy of economic forces. Off late emerging views in strategy having its origin in (Organization Theory) led to a paradigm shift to what is called the – reconstructionist view.WHAT THEN IS THE HANDICAP? Most of the traditional views in strategy having its origin in (Economic Theory) led to what is called the – structuralist paradigm. greater than themselves. According to this view. According to this view managers need not be constrained to act within the confines of their industry.
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