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Course Code: 611 & 612 Dr. Subir Sen – Faculty Member, IBS
E-Mail: firstname.lastname@example.org, 9830697368 1) Crafting & Executing Strategy – Thompson & Strickland. 2) Strategic Management – Pearce & Robinson. 3) Strategic Management – Fred. R. David. 4) Exploring Corporate Strategy – Johnson & Scholes. 5) Competitive Advantage – Michael E. Porter. 6) HBR – Articles & Case Studies.
STRATEGY - DEFINITION
Strategy is all about making trade-offs between what to do and more importantly what not to do; consciously choosing to differentiate. It reflects a congruence between external opportunities and internal capabilities. Types of strategies – Corporate Strategies – It is all about making choices across various businesses and allocating resources among them. Business Strategies – It is all about developing leveraging and sustaining competitive advantage. Functional Strategies – It is all about finding newer ways to perform existing processes, or 3 better still adopting new processes altogether.
STRATEGIC MANAGEMENT DEFINITION
Strategic management attempts to integrate the traditional management functions and align the organization as a whole with the broader environment to make resource allocations in a way to achieve the strategic intent of the organization. This alignment is called strategic fit. It serves as a road-map for the organization in its growth trajectory. It provides the direction – extent – pace – timing. It depends on the turbulence of the environment and the aggressiveness of the organization. It distinguishes the winners from the losers.
PILLARS OF STRATEGIC MANAGEMENT
Differentiation – Differentiation of key inputs and technologies helps a firm to consciously move away from homogeneous to heterogeneous markets enabling them to earn super-normal profits from normal profits. Integration – Whenever dealing with a complex task of managing a business (i.e. involving a no. of variables with cross linkages) it is in the interest of simplicity that the task be broken up in smaller components. However, for effective control, integration is essential. Alignment – Since differentiation is prone to replication, it is in the interest of the firm to differentiate continuously by aligning the resources with environmental opportunities.
STRATEGIC MANAGEMENT FRAMEWORK
Economic al Strategic Finance Fit Political Strategic Intent Fit Political Marketin g Manageme nt Social & Cultural
It is long-term in nature. It is irreversible. It is a holistic and integrated approach. It requires full commitment of the top management. It is all about creativity and innovation. It is about adaptation and response to the same.STRATEGIC MANAGEMENT .FEATURES It forms the core activity of the top management. It involves substantial resource outlay. 7 . It provides broad guidelines.
It involves nitty-gritty's. It involves only the top management. It about mere data and facts. It brings instant success. It is about a definite formula. It is rocket science.STRATEGIC MANAGEMENT – MYTHS It involves short-cuts. It is about forecasting. It attempts to minimize risk. 8 . It a bundle of techniques or even tricks. It is fool-proof in nature.
scale and scope. To innovate. To be proactive. rather than reactive. To be insulated against environmental threats. To leverage size. . again and again ……. To tap markets across boundaries. To be future oriented. To gain expertise in technologies. To assimilate change faster. 9 To develop core–competencies. To generate large resource pool.STRATEGIC MANAGEMENT IMPERATIVES To be continuously alert.
In contrast. battles fought on the market front are won by companies by virtue of their obsession & strategies. and more importantly .ORIGIN The word strategy has its origin from the Greek word strategia meaning Military Commander. today's battles are fought over markets. Even in today’s markets. but by virtue of their courage. In the ancient days battles were fought over land. but with a lot a rigour and robustness.STRATEGY . obsession. 10 . In the ancient days battles were won not by virtue of size of the army or armory. It is an old wine in a new bottle. whose origin can be traced to some of the greatest battles fought in the ancient days.strategies.
– Yahoo and Microsoft challenging Google. – Toyota’s entry in the US. US attack of Morocco to capture Germany – Strategy: Pin-hole strategy – Wal-Mart challenging Sears by entering small towns.SOME PARALLELS Japan’s attack on Pearl Harbour – Strategy: Attack where it hurts the most. Allied Forces Vs Germany (WW-II) – Strategy: Forging alliances. Napoleon’s attack on Russia – Strategy: Waiting for the right time. 11 . challenging GM and Ford. – Reliance’s entry into telecom.
Industrial Revolution. 12 .EVOLUTION OF MANAGEMENT As Peter Drucker refers to it. The things happening around the firm when totally disconnected from the past leads to a paradigm shift. A paradigm is a dominant belief about how the business and its environment operates. – Mass Production Organization Size – Complicated Processes – Complex Structures Evolving of an emerging paradigm – survival of the fittest (Fayol & Taylor. 1910). a radical change in the business environment brings about discontinuity. The first major discontinuity in the history of global business environment was the .
push to pull). – Affluence of the new customer (i.EVOLUTION OF STRATEGIC MANAGEMENT The second major discontinuity in the history of global economic environment – World War II. – Homogeneous to heterogeneous products. – Changes in the technology fore-front. Efficiency and effectiveness are no longer sufficient.e. 1960). Survival of the most adaptable becomes a new management paradigm (Ansoff. From uniform performance. The question of outperforming the benchmark became the new buzzword. 13 . – Global market place. performance across firms became differentiated.
ENVIRONMENTAL CHANGE Phase IV: Horizon of Scenarios 2 1 Phase I: Extrapolation of the past 1 3 1990 onwards 1 2 1 3 1A 1B 2A Prior to 1950 Phase II: Discrete Scenarios Phase III: Range of Scenarios 1970 to 1990 2 2B 1950 to 1970 14 .
– The choice of product-market mix is based on conscious evaluation of risk – return factors. Learning always begin on a clean sheet of paper. – It is primarily the top management’s prerogative. – Biases and prejudices has a very little role to play in strategic choices pursued by managers. – The choice of strategy is primarily concerned with external ones rather than internal ones.APPROACHES TO STRATEGY Analytical Approach – Igor H. Ansoff (1960) – Strategy can be segregated into certain mutually exclusive and inter-related components aimed at managing the growth of an organization. 15 .
– The top managers then decide on the type of organization structure & systems to be in place. The organization initially decides which industry to enter. – Organization structure will precede and cause changes in strategy. Once the control systems are in place. Successful organizations align authority and responsibility of various departments in way to reach overall objectives. everything else follows. who will be the top managers. how it will compete. – Management control systems has a dominating role in influencing firm performance. 16 .APPROACHES TO STRATEGY Design Approach – Alfred Chandler (1970) – Structure follows strategy.
substitutes. – The environmental forces comprises of – supplier. 17 . competitors. – An organization is seldom in a position to influence the larger business environment. customer. new entrant. – 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.APPROACHES TO STRATEGY Positioning Approach – Michael E. – The organization will outperform the industry where environmental forces are weak and vice-versa.
locating in most attractive industries and pursuing the same strategy. 18 . – Organizations can significantly alter the way an industry functions. K. – Core competencies are a set of skills that are unique and can be leveraged. Prahalad (1990) – The key to superior performance is not doing the same as other organizations.APPROACHES TO STRATEGY Core Competence – C. They are complex resources and undermines a firms competitive advantage. but exploiting the resource differences among them. – It enables a firm to deliver unimaginable value ahead of time.
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 .
A substantial gap between its resources and aspirations. It provides a sense of direction and destiny. A strategic intent is a statement of purpose of existence. It implies a significant stretch. It involves an obsession to be the best or outperform the best. It is the cornerstone of an organizations strategic architecture reflecting its desired future state or its aspirations.STRATEGIC INTENT If you cannot see the future. 21 . A gap that consciously manages between stagnation and atrophy. you cannot reach there. It’s a philosophy that distinguishes it from its competitors.
STRATEGIC INTENT .HIERARCHY Integrativ e m Do an in Visio n Mission Dominant Objective s Goal s Plans Lo g ic Single Specifi c Man y 22 t .
e. Dominant logic changes. It is core to the strategic intent of the firm.DOMINANT LOGIC A dominant logic can be defined as the way in which the top management team conceptualizes its various businesses and make critical resource allocation decisions. strategic variety) is apparent. 23 . To put it more simply. it can be perceived as a set of working rules (similar to thumb rules) that enables the top management to decide what can be done and more importantly what cannot be done. when radical changes in the internal and external environment (i.
It enables the top management to remain focused.VISION It is a dream (not a forecast) about what the company wants to become in the foreseeable future. but achievable aspirations. beyond just making money. It ensures that the company does not wander off into unrelated zones or fall into an activity trap. It is a combination of three basic elements – – An organizations fundamental reason for existence. – It stands for the unchanging core values of the company. 24 . It provides an unity of purpose amidst diversity of personal goals. – It represents the company’s audacious.
Brevity – It should be short. 25 . In Reliance when a new project becomes operational top managers hand over charge to the SBU heads and move on to a new project. Sharing – The company across all hierarchies should have faith in it. clear. Empathy – It should reflect the company’s beliefs to which it is sensitive. and memorizable.CHARACTERISTICS Reliance – Where growth is a way of life. not an utopian dream. Reachable – It should be within a reasonable target in the known future. Clarity – Vividly descriptive image of what the company wants to be known for in the future.VISION .
ADVANTAGES To stay focused on the right track. It fosters risk taking and experimentation. To prevent the fall in a activity trap.VISION . It gives enlightment. It gives the impression of a forward-looking organisation. 26 . It makes strategic alignment easier. It facilitates development of skills & capabilities. It lends integrity and genuineness. It provides a holistic picture. It gives a shared platform.
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. Although the purpose may change over time. its reason for existence.MISSION Mission defines the space that a business wants to create for itself in a competitive terrain. It enables the firm to define its business landscape and identify its competitive forces. A broad mission statement helps in fending competitors. 27 . It serves as a road map to reach the vision.
…………………. We offer security. …………………. Some other examples – We do not offer shoes. – We do not offer insurance. – We do not offer software's. …………………. We offer strength. 28 . We offer comfort.MISSION – SOME IDEAS Reliance – We are in the business of integration. All the businesses of the company are strongly integrated with their main business. – We do not offer steel. …………………. though some may seem unrelated in nature. We offer solutions.
– It keeps the mid management pre-occupied.100K crore company by the year 2005. It provides a quantitative feel to an abstract proposition. – It adds legitimacy and motivation. – It is based on Management by Objectives (MBO). – It provides a benchmark for evaluation.GOALS & OBJECTIVES Reliance – We want to become a Rs. – It helps identifying key success factors. – It lends direction – time frame in the medium term. 29 . It is an end result (quantifiable) something a firm aims and tries to reach in a time bound frame. – It prevents deviation.
The details of the plan Reliance Telecom adopted were – Backward integrate process technologies. – Acquire a market share of indomitable position. coordinating appropriate technologies. – Use price-elasticity to break market barriers. – Compress project times. and gaining access to desired markets to achieve the desired goals and objectives.PLANS Reliance – Desire to invest 25K crore in telecom business by circa 2010. – Leverage economies of size and scale. It is the process of garnering necessary inputs. It is specific to a particular business. 30 .
strategies lose touch with the emerging realities. When changes in the environment is incremental. However. radical change may lead to disequilibrium. past strategies tend to have a bearing on future strategies. Historical studies have shown that most organizations tend to continue with their existing strategies. This tendency to restore continuity is known as inertia (resistance to change). 31 . In such a context. equilibrium is maintained.STRATEGIC DRIFT Due to top management commitment. It often leads to an organizational crisis. This state of affairs is known as strategic drift.
STRATEGIC DRIFT FRAMEWORK Environmental Change Degree of change Strategic Change Radical Change Incremental Change State of Flux Continuity Stage of Transformation Strategic Drift Stage of Atrophy Time 32 .
33 . Organizational politics involves intentional acts of influence to enhance or protect the self-interest of individuals or groups over organizational goals. Some instances of organizational politics – Formation of powerful groups or coteries. – Developing a platform of support. – Creating a favourable image. – Hiding vulnerability. – Using covert tactics to pursue self interests.ORGANIZATIONAL POLITICS Strategic drift often leads to organizational politics. – Creating obligations of reciprocity. – Distorting information to gain mileage.
– Influential stake-holders back out. – Persons responsible for strategy conceptualization and implementation are34 divergent. . Other causes – – The plans are unworkable and utopian. – The environment context has changed.INTENDED & REALISED STRATEGIES An intended strategy is an expression of interest of a desired strategic direction. Usually there is wide gap between the two when organizational politics is evident. A realized strategy is what the top management actually translates into practice.
but as a defensible response to the complexities of a large organization that mitigate against publicizing goals. but the master scheme of the rational comprehensive scheme is not apparent. Learning is an integral part of logical incrementalism.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. Strategy formulation and implementation are linked together in a continuous improvement cycle. They simply unfold the particulars of the sub-system in stages. this is not to be treated as “muddling”. 35 . However.
Agent of Change – Formal ratification of a change plan through MBO. The broader objective should serve the overall interest of the organization. Macro Broadcasting – The broad idea is floated without details to invite pros and cons leading to finer refinements. Adaptation – As implementation progresses.IMPLEMENTING INCREMENTALISM General Concern – A vaguely felt awareness of an issue or opportunity. 36 . Leveraging Crisis – A sudden crisis or an opportunity should be used as a trigger to facilitate acceptance and implementation of change.
STRATEGIC TRANSFORMATION Strategic transformation (a complete overhauling of the strategic architecture) becomes inevitable whenever a strategic drift takes place. Strategic transformation becomes smooth through a change in top leadership. As it brings 37 with it a different dominant logic. Tampering with surface level factors often leads to atrophy. 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.
– Constructive Bargaining – Agree to disagree. – Informal Networks – Emerging of new ideas. It helps prevent a strategic drift from occurring at the first place. 38 . Factors that fosters a learning organization – Pluralistic – An environment where different and even conflicting ideas are welcome. – Experimentation – Fosters a culture of risk taking.LEARNING ORGANIZATION A learning organization is capable of continual regeneration from knowledge. A learning organization must continuously focus on unlearning as well. and skills that fosters experimentation and questioning and challenge around a shared purpose. experience. – Organisational Slack – Enough free space.
ENVIRONMENTAL CONDITIONS Dynamic Scenario Planning Learning Organization Static Forecasting Decentralization Simple Complex 39 .
ANALYZING BUSINESS ENVIRONMENT 40 .
e. Strategic planning is a function of discounting the future. gap analysis). Competitive advantage provides the surest way to fulfill the strategic gap. 41 . It requires a quantum leap (i. It is based on the assumption of radical change. Strategic gap basically points towards a vacuum of where the organisation wants to be and where it is. It points to a position of superiority with relation to competition. It is based on the assumption of incremental change. It is reactive in nature.PLANNING & STRATEGIC PLANNING Formal planning is a function of extrapolating the past. It is pro-active in nature.
The segments of the environment a top manager scans selectively depends upon his dominant logics. Environmental factors can be external as well as internal to the organization. It is exploratory in nature. resources and ideas move unhindered. Environmental scanning is very important component of strategic planning. A manager has to continuously scan the environment to ensure alignment of the strategies with the radically changing environment. The world is flat. and influences that affect an organizations way of doing things. events.ENVIRONMENTAL SCANNING The environment is defined as the aggregate of conditions. 42 . not guided by any boundaries.
It is particularly important that PESTEL be used to look at the future impact of environmental factors. but also to analyze the complex linkages across them. for which a holistic picture is required.PESTEL PESTEL attempts to provide a broad framework on how the broader environmental forces affects an organization and influences the way it practices strategy. It is important not only to identify the structural drivers of change. 43 . which may be different from the past impact. It is not intended to be used as an exhaustive list. Understanding the composite effect is critical.
Central – State Co-alignment.PESTEL FRAMEWORK Political – Government Stability. Infra-Structural Investments. Subsidies & Protection. 44 . FDI Inflows. Social – Population Diversity. Fiscal Deficit. Capital Market & Forex Reserves. Economic Model. Currency Stability. Social Values. Inflation & Interest Rates. Government Attitude. Licensing & Quotas. Economic Cycles. Economic – GDP. Religious Sentiments. Savings & Investment. Literacy Levels. Monsoon & Food Grains Reserves. Income & Age Distribution. Language Barriers.
45 . Legal – Monopolies Legislation. Obsolescence Rate. Waste Disposal & Emissions. Employment Laws. Product Safety & Health Hazards. ERP. Environmental – Global Warming & CSR. Product Design. Environmentally Preferable Purchasing. Technological Convergence. Extended Producer Responsibility. Direct & Indirect Taxes. Patent Laws. Consumer Protection Laws. Non-Fossil & Alternative Fuels. Pollution Control Laws. Carbon Credits. Patents. Research & Development.PESTEL FRAMEWORK Technological – Innovation.
46 . MRTP Liberalization.ECONOMIC LIBERALISATION New Industrial Policy (NIP) – Liberalizing industrial licensing. Rupee convertibility. Exit Policy. Curtailment of PSU’s. Dismantling price controls. New Trade Policy (NTP) – Lowering import tariffs. Banking Sector Reforms. Structural Adjustments – Phasing out subsidies. Capital Market Reforms. Abolition of import licenses. Encouraging FDI. Encouraging exports. Economic Reforms – Fiscal & Monetary Reforms. PSU Disinvestments. FERA Liberalization.VRS.
Mergers & Acquisitions 47 .DISCONTINUITY Destabilization due to entrepreneurial freedom – Cocoon of protection disappears – Diversification spree – Existing notions of size shaken – Industry structures change radically – Economic Darwinism .Survival of the fittest MNC Onslaught – Enhancing stakes – Power Equation – Joint Ventures – Technological Alliances – Take-over threat.
DISCONTINUITY Hyper Competition – MNC’s .Globalization – Cheap Imports & Dumping – Push to Pull Marketing Buyers exacting demands – Shortage to surplus – Price competition – Life-style changes – Stress on quality. Consumerism Challenges on the technology front – Competencies become technology based – Investment in R&D become inescapable 48 .
DISCONTINUITY Compulsion to find export markets – Identifying competitive advantage – Technological gap – Global presence – Depreciating currency – Exports Corporate vulnerability – It is no longer business as usual – Capital inadequacy – Lack of product clout and brand power – One product syndrome – Loss of monopoly 49 .
PORTER Threat of New Entrants Bargainin g power of Suppliers Competition from Existing Players Bargainin gBargainin power g of power of Suppliers Customer s Threat of Substitutes 50 .FIVE FORCES MODEL .
the forces are subject to changes. The five forces have strong cross-linkages. incremental or otherwise. It depicts the attractiveness of an industry (i. profit potential) per se. 51 .FIVE FORCES MODEL ASSUMPTIONS The model is to be used at the SBU level and not at the industry level. It should not only be used to understand the forces. The model should not be used as a snapshot in time. but also used to understand how they can be countered and overcome. It is even wiser to apply the same at the product – market level.e.
Low customer switching costs. High switching costs. Resource profile & fear of retaliation. Learning curve advantages. Undifferentiated product. Product differentiation through proprietary technology or brand power. Presence of substitutes or unorganized sector. Scope for backward integration. Access to distribution channels. Government policy. 52 . Threat of Customers – Buyer concentration and volumes. Low margins & stagnancy. Industry stagnation.PORTERS FIVE FORCES ANALYSIS Threat to Entry – Economies of size and scale. Capital requirements. Low relative importance of the segment. Unimportance of product quality.
High customer switching costs. Jockeying for position – Fragmented market. Produced by industries earning high profits. High exit barriers. Scope for forward integration. Unorganised sector. Diversity of players. Low level of differentiation. Threat of Substitutes – Improvement in price -performance trade-off. Industry stagnancy. Low relative importance of the segment. Piracy and counterfeits. Differentiated inputs. 53 . Intermittent overcapacity. Buyer’s propensity to substitute.PORTERS FIVE FORCES ANALYSIS Threat of Suppliers – Supplier monopoly. Lack of substitute inputs. Product perishability.
dominant or related diversified or unrelated diversified businesses (Infosys. Business Scope – The intention whether the firm wants to be in a single. Cohesiveness – Degree of bonding existing across affiliated firms.FIRM ENVIRONMENT Size and Scale of Operations – It is a very important component of competitiveness in today's global context (Bharti – MTN. Tata). Inertia – Excessive commitment to past strategies prevents firms from tapping emerging opportunities. 54 . Resource Profile – It highlights the capabilities (generic) or competencies (business specific) of the firm. Reliance).
experience teaches better and more effective way of doing things. it can price its products more competitively.EXPERIENCE CURVE The cost of performing an activity declines on per-unit basis as a firm becomes more efficient. and with lower prices it can increase its sales volume. The E-Curve thus enables organisations to build entry barriers. which further reduces costs. With lower costs. 55 . Matured firms will always be positioned advantageously on the ECurve than new entrants. However. leverage it as a competitive advantage. an E-Curve can prove to be futile during discontinuity. Experience curve has strong linkages with performance.
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 .
Customers. Competitors. A SWOT audit involves – Company Records – Annual Reports. Websites. Business Intelligence – Bankers. .VULNERABILITY ANALYSIS . Interviews. It helps an organisation to capitalize on the opportunities by maximizing its strengths and neutralizing the threats minimizing the weaknesses. 59 Analysts. Press Clippings & Interviews. Acronym for Strengths – Weaknesses – Opportunities – Threats. It is one of the earliest models in environmental scanning. Observation. Case Studies – Structured Questionnaires. Suppliers.SWOT The framework was originally conceptualized by Kenneth Andrews in 1970.
FRAMEWORK Opportunities Nullify weaknesses which prevents you from exploiting opportunities Leverage strengths to make use of opportunities Weaknesses Minimize weaknesses which prevents you from countering threats Strengths Threats Utilise strengths to counter threats (?) 60 .SWOT ANALYSIS .
SOURCES OF STRENGTH Strong brand identity – Eg. Engineering Skills – Eg. Reddy’s. Motivated employees & cordial industrial relations – Eg. Infosys. Dr. Sony. Infosys. Volkswagen. Aditya Birla. 61 . Ranbaxy. High quality products – Eg. Biocon. Strong R&D base – Eg. Excellent penetration – Eg. Good credit rating – Eg. Economies of scale – Eg. Honda. Large resource pool – Eg. Tata. Reliance. Toyota. HUL. Strong after sales & service network – Eg. SBI. ITC. Siemens. Tata Steel. Reliance. Caterpillar.
Nirma. Ballarpur Inds. SAIL. Hindustan Motors. CESC.Raymond. Single product syndrome – Eg. Bijoligrill.SOURCES OF WEAKNESSES Outdated technology – Eg. J. Lack of product / brand clout – Eg. B. CMC (Tata Group) 62 . Tatas. Lacking experimentation culture – Eg. Narrow business scope – Eg. Procter & Gamble. Group . Modi Group. Excessive diversification – Eg. K. K. Organizational Politics – Eg. Excess manpower – Eg. Inefficient top management – Eg. Inertia – Eg. Strategic myopia – Eg.
Banking. Collaborations & Joint Ventures – Bharti & WalMart. Life style changes – Eg. ECB’s. Maruti. Abolishing MRTP – Eg. 63 . Retailing. Free pricing – Eg. Fertilizer. Abolishing CCI. Fertilizers. Growing population – Eg. Capital market reforms – Eg. Sugar. VRS. Globalization – Eg. Market driven Pricing – Eg. Market driven Interest rates – Eg. Telecom. GDR’s. Middle-class buying power.SOURCES OF OPPORTUNITIES Delicensing of Industries – Eg.Tata Motors. Insurance. Sugar. Exit Policy – Eg.
Dumping from China. Import relaxation – Eg. Group disintegration – Eg. Satyam. Onida. 26/11. Bajoria – Bombay Dyeing. Lack of Corporate Governance – Eg. 64 . Tata Steel.SOURCES OF THREATS Political instability – Eg. Tsunami. Foreign Direct Investment (FDI) – Eg. (2008). Terrorist attacks – Eg. Earth Quake. Reliance. (1985–1990). 11/9. Land acquisition . Hostile take-over – Eg. Singur SEZ.Social activism – Eg. Natural disaster – Eg. Nationalisation – Eg. Economic recession – Eg.
Holistic view – Prepare a complete overall picture. Assess the extent of impact of the factors. Delphi's technique. Stages in ETOP analysis – List the aspects of the environment that has a bearing on the organization. Forecasting – Predict the future (i. scenario analysis). It represents a summary picture of the external environmental factors and their likely impact on the organization. Strategic responses (including adaptation) to opportunities and threats is critical for survival and success.e. 65 .ETOP Acronym for Environment – Threat – Opportunity – Profile. time series.
Some key findings on major performance drivers that explains 75% deviations in performance – Product quality and relative market share. It is also a form of assessing vulnerability through longitudinal analysis. Relative attractiveness of the market. An organization can draw upon the experience of its peers in similar situations. 66 Vertical integration is a powerful strategy. .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. selectively. High investment intensity acts as a drag.
therefore 67 validity may be a question.PIMS . Managers should be particularly cautious while referring to such data during times of discontinuity as it makes past patterns futile. 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. – Contexts may vary over time. .LIMITATIONS The analysis is based on historical data and it does not take care of future challenges. – Contexts may vary across countries. when radical changes in the economy takes place.
It involves a three-stage process – Identify KSF – What does it take to be successful in a business? Drawing KSF – What should be the organizations response to the same? Benchmarking KSF – How do we evaluate organization success on this factor? 68 . It enables the top management to draw focus.KEY SUCCESS FACTORS (KSF) KSF relates to identification and putting concentrated effort on a particular activity or process which forms the very basis of competitive advantage. KSF helps organizations spot early opportunities and convert them into value adding business propositions.
IDENTIFYING ALTERNATIVE STRATEGIES 69 .
It reflects the customer needs it intends to satisfy. A corporate strategy identifies and fixes the strategic gap it proposes to fill.CORPORATE .GRAND STRATEGY It is concerned with the overall business scope (single. It indicates the quality of growth an organization is looking for. dominant. It determines the locus a firm encounters with internal and external environment. related. unrelated) and geographical scope (local. It provides broad direction to the groups vision and mission. global) of a firm and deals with choices of allocating resources across them. national. 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 .
– To stop for a while and assess past records. erosion of capabilities. Even during adverse times firms need to adopt a strategy to sustain current performance levels. Citibank). does not relate to do-nothing (Eg.STABILITY It involves maintaining status-quo or growing in a slow and selective manner. (Eg. Hindustan Motors). – The firm may not be willing to take additional risk associated with new projects. The reasons for stability strategy – – Lack of attractive opportunities. – Why disturb the existing equilibrium set up? – Limited resource position. 72 . Stability however. The scale and scope of present operations remains almost intact.
73 .GROWTH .ANSOFF’S MODEL New Product Existing Product Existing Market Market Penetration (+) Product Development (++) New Market Market Development (++) Diversificatio n (+++) Note: (+) indicates degree of growth and risk involved.
– Suitable for industries where scope for technological breakthrough is limited. 74 . Nirma. Ujjala. – Elongated product life-cycle. within a well defined market segment. – Helps firms which are not comfortable with unfamiliar terrain.MARKET PENETRATION It is a strategy where a firm directs its entire resources to the growth of a single product or a closely knit product set. Market penetration can be achieved by – increasing sales to current customers. Britannia). (Eg. – The company carries a risk of product obsolescence. convert competitors customers. direct non-users to users.
(Eg. carpets.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. 75 . socks & stockings. Du Pont – Nylon: parachutes. – Immense customer reach & flexible advertising. fabrics. – Unconventional and flexible distribution channels. – Creativity and innovation – thinking out of the box. upholstery. – Stretches product life cycles. tyres. – Moves across geographical boundaries.…… or Teflon: aircraft technologies to cutlery to paints or Raytheon Corp – Microwaves: radars to kitchen appliances).
Refills) 76 . features. – Substitutes that serve the same needs (Eg. conformance.PRODUCT DEVELOPMENT It is a strategy where a firm tries to achieve growth through a radical new product (Eg. perception. aesthetics. – Deliverable through – redesigning or reengineering.Strolleys). Microsoft: DOS to Windows) or a substantial improved version (incremental) of an existing product to repeatedly enter the same market (Eg. reliability. – Leverage on customer and brand loyalty. Close Up: Fluoride – Gel toothpaste or VIP . durability. serviceability. – Leveraging through – innovation. – Areas of product improvement – performance.
– Permits: quotas. – High transaction costs and institutional gaps. the new business is distinct from the existing business in terms of – inputs – technologies – markets. industrial embassies). thereby creating a new business. dominance). – Internal capital market. licenses (i. From the modern point of view they are strategically dissimilar.e. 77 . Why do firms diversify in the Indian context? – Shift the growth trajectory or opportunistic. – Risk reduction. From the traditional point of view.e.DIVERSIFICATION It marks the entry of a firm into newer markets with new products. – Conglomerate or market power (i.
If the hot wave dominates the planet. while the coffee business would register a return of 10%. while the coffee business would register a return of 30%. ice-cream business would register a return of 10%. What would be your ideal diversification strategy through optimization? 78 . Let us assume that there are two businesses constituting the entire market – coffee and icecream. If on the other hand.HOW DIVERSIFICATION REDUCES RISK? Consider a hypothetical planet. either of which is equally likely to prevail. cold wave dominates the planet. in which a given year is either under hot or cold wave. the ice-cream business would register a return of 30%.
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.
Quasi-integration . Ranbaxy. Usually the firm concentrates on its core activities. Tapered integration .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. Reliance).A firm gets most of its requirements from one or more outside suppliers that is under its partial control through value chain partnerships (Eg. Dr. Maruti – Sona Steering). and out-sources the noncore activities (Eg.Where one firm has full ownership and control over all the stages of a value-chain in the manufacturing of a product (Eg. 85 . Reddy’s).
A CASE OF TAPERED INTEGRATION Partial Ownershi p Transmission Engine Design Electricals Steering 86 Seats & Carpets Windscreen Ordinary Components Zero Ownership Very Critical Component s Full Ownership Critical Component s .
e. Firms usually engage in conglomerate diversification when emerging opportunities are very attractive and offers potential growth opportunities. lack of strategic intent. – Cost of neglect (i. and are also strategically dissimilar.e.e. synergies pulling in opposite directions). myopia). 87 .CONGLOMERATE DIVERSIFICATION It relates to entry of firms into businesses which are distinct in terms of – inputs – technologies – markets. – Cost of ignorance (i. – Cost of dysynergy (i. Drawbacks of unrelated diversification – – Cost of failure (i.e. lack of knowledge of competitive forces). core business).
CONGLOMERATE DIVERSIFICATION Paper & Packaging Edible Oils Tobacco Hotels Food & Confectionary 88 .
ACC) in full to an independent entity.DIVESTMENT Divestment is a defensive strategy involving the sale of entire stake (Eg. In strategy there is no scope for sentimentality with divestment. It may also involve a SBU (Eg. (Eg. It is may also be a pro-active strategy.e. reactive) and survival is at stake and the firm does not have resources to fend off competitive forces. 89 . where a company simply exits because the business no longer contribute to or fit its dominant logic. It taken into account when performance is disappointing (i. Tatas sale of Goodlass Nerolac. L&TCement Division to Aditya Birla Group) technically known as divestiture or a product (Eg. Tata Press). Tata Pharma. Glaxo’s “Glucon-D” to Heinz).
However. Sale of Diamond Beverages to Coca-Cola for US $ 40 million). Tatas buy-out of Corus for US $ 11. involving 608 pence per share). where the equity is allotted amongst the existing shareholders on a pro-rata basis. (Eg.3 billion. Hive-Off – A hive off is the creation of a new entity followed by transfer of assets. Leveraged Buy-Out (LBO) – Here the company’s shareholders are bought out through a negotiated deal using borrowed funds. where 100% of the assets (including intangibles) are valued and paid for. the Companies Act. (Eg.ROUTES Outright Sale – Popularly known as the asset route. 1956 does not permit this mode. 90 .DIVESTMENT .
developing facilities right from the scratch) or through brown-field projects (i. because every business has its own unique external and internal environment.e. growth.COMBINATION STRATEGY It is a mixture of stability.e. 91 . There can be no ideal strategy for every business. joint ventures). A combination strategy can be implemented through green-field projects (i. It is usually pursued by a business group with diverse interests across multiple industries. mergers and acquisition. and divestment strategies applied simultaneously or sequentially for a portfolio of businesses.
STRATEGY CHOICE & PORTFOLIO ANALYSIS 92 .
In most cases the trade-off is between resources and opportunities. What then is the magical number? 93 . It attempts to answer the following questions – How effective has the existing strategy been? How effective will that strategy be in the future? What will be the effectiveness of alternative strategies? It is impossible for a manager to assess all the alternatives.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.
To identify the right problems.SELECTIVITY IS THE KEY The role of a top manager is not to solve a problem. managers need to ask the right questions. For an optimal choice the following four issues need to be resolved – Is the strategy clearly identifiable? Is it consistent with the resources of the firm? Will it be able to exploit the opportunities in full? Is it in tune with the values and beliefs of the firm? 94 . if addressed. nor is to a define a problem for others to solve. They must choose problems which will lead to the right kind of opportunities. will help the firm achieve its intent. The key task before a top manager is to identify the right problems.
Licenses & Quotas.e. . embassies). Resource sharing. 95 Succession planning is critical to continuity. Their roots can be traced to a single family or clan and share broad similarities. Managing Agency). Their origins can be traced back to market imperfections existing in an economy (MRTP Laws. BRC). Proximity to the corridors of power (i. chaebols in Korea. business houses in India.DEFINITION A business group is known by various names in various countries – guanxique in China. High degree of centralized control (GEO. formal and informal ties.BUSINESS GROUP . keiretsus in Japan.
RESOURCE SHARING ACROSS FIRMS Parent Company Firm 1 Firm 5 Firm 3 Firm 2 Firm 4 96 .
STRATEGIC CHOICE – MACRO TIMING Recession (Stability) Prosperity (Diversificatio n) Depression (Divestmen t) Recovery (Intensification ) 97 .
STRATEGIC CHOICE – MICRO TIMING ReEngineering Growth (%) Maturity Stability Growth Diversification Decline .Divestment Duration (Yrs) Inception Intensification 98 .
next only to choice of business. 99 . Power and resources often goes hand in hand. Investing in emerging businesses may not actually be so simple as it appears to be. Why? Businesses are not about liquid assets. Redeployment of resources upsets the established power bases of a group. Relatedness across resources are difficult to realize. therefore.PORTFOLIO ANALYSIS Resource allocation across a portfolio of businesses is an important strategic choice. there are high costs associated with entry and exit. sometimes impossible. Rules of the game are different.
BCG GROWTH MODEL Relative Market Share (%) Industry Growth (%) Low High High Low Stars Question Mark ? Cash Cow Dogs 100 .
product development). provided the company is able to build up on its market-share (i.e. Trent. Stars – They achievers in the near term. market development. market penetration. which remains a big? These businesses are net users of resources. but to larger extent than a question mark. TCS. Tata Telecom. and their risk profile is high (Eg. provided the industry growth rate continues and the company is able to maintain its growth (i. These businesses are also net users of resources (Eg. Tata Steel).e.BUSINESS ANALYSIS – TATA GROUP Question Marks – They have potentials in the long term. Tata-AIG). 101 . diversification).
stability). Given that the growth potential in the business is low. 102 . they are generators of resources. Tata Press). Dogs – They are a drag on the group. divest) as achieving a dominant position in these businesses is a difficult task.e. harvest. Indian Hotels. However. Groups prefer to dispose off such businesses (i. Tata Chemicals). Tata Tea. Tata Motors. Nelco. and the company dominates the industry ahead of competition (i. Tata Pharma. cash cows may also need to invest provided the industry takes an upswing (Eg.BUSINESS ANALYSIS – TATA GROUP Cash Cow – These are matured businesses.e. and they lack on competencies to take on competition and are basically cash traps (Eg.
niche – Rolex. Armani).LIMITATIONS It does not address the concerns of a business which is in the average category (usually the majority). neither in high or low. 103 . The terminologies used are somewhat prohibitive. The model does not provide specific solutions within a particular category. Cartier. Mercedes Benz.e. Cash cows may actually need substantial investments to retain their market position (Eg. HUL). Certain businesses in the low market share category may be the result of a conscious strategy (i. Data may be prohibitive. factors are limited.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. SBU – A business unit which is strategically different from another and also shares a different SIC code. Disinvestment involves selling in phases. Divest – Selling a part or the entire business at one go. Portfolio – An organization is perceived as a portfolio of businesses. BCG – Boston Consulting Group. 107 .TERMINOLOGIES Harvest – It entails minimizing investments while trying to maximize short-run profits and cash flow with the intention to exit the business in the near future.
BUSINESS STRATEGY & COMPETITION 108 .
COMPETITIVE STRATEGY A competitive strategy deals with how a firm competes in a particular business or product-market segment. Such resources or activities should be distinctive and sustainable over time. building market-share. Competitive advantage refers to a firms resources or activities in which it is way ahead of competition. The principal focus is on meeting competition. Competitive advantage is the back-bone of strategy. The strength of a firm in a particular business usually stems from its competitive advantage. and earning super-normal profits (i. 109 . rent).e.
involving harmonizing and integrating multiple streams of technologies. identifying critical success factors. preventing new entry and/or competition (Hax & Wilde). Blue Ocean – Consciously moving away from overcrowded industries to uncharted territories and making competition irrelevant (Kim & Mauborgne).BUSINESS STRATEGY FRAMEWORKS How to be distinctive and yet sustainable – Differentiation – Understanding of the dynamics of competition. Delta Lock In – Two dominant players co-opt to selfreinforce and create or escalate an entry barrier. developing competitive advantage (Porter). leveraging (Prahalad). Resource Based View – Obsession with competence building. 110 .
preferential access to raw materials. Compress project duration through crashing. Reliance) or may pass it to customers to increase market-share (Eg. Locational or early entry advantage. Nirma. Ayur. 111 . T-Series). The firm may retain the benefits of cost advantage by enjoying higher margins (Eg. backward integration. Steep experience curve effects. proprietary technology. Sources of cost advantage are varied and depends on the structure of the industry – Economies of size.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.
Focus on brand loyalty. It selects one or more attributes that buyers perceive as important. Sony. Successful product differentiation is often followed by premium pricing. Means of product differentiation are peculiar to each industry. and sufficient slack. Intel. Creativity.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 . avoiding brand dilution. Rayban). Culture of experimentation. innovation and out of the box thinking. Feeling the pulse of the customer. undeterred attention to quality. (Eg.
coupled with fear of structural erosion. though it may not possess an overall competitive advantage. Sub optimization alone may not be a source of superior performance.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. Rolex. The target segment must have unusual needs or the delivery system catering to this segment must be unique. Armani). 113 . A focuser seeks to achieve a competitive advantage in its target segment. Maybach. Cartier. Mont-Blanc. They are poorly served by mainstream players.
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 .
Tata Nano).e. similarly differentiation may not always lead to rising costs (i. in a hyper competitive context the two strategies need not be mutually exclusive.HYBRID STRATEGY A hybrid strategy is the simultaneous pursuit of cost leadership and differentiation. 115 . Firms focusing on a hybrid strategy typically aim at shifting the productivity frontier and recreating a new product-market segment altogether (Eg. Though cost leadership and differentiation are inconsistent. and usually outperforms a stand alone generic strategy. Reducing cost does not always involve a sacrifice in differentiation. jugaad or frugal engineering).
Industry maturity will usually widen the gap. unless such a player is capable of discovering a profitable segment. It is usually the result of a firm not willing to make trade offs.stuck in the middle. The positioning therefore gets – blurred. It will have a competitive disadvantage vis-à-vis a clearly positioned generic player. but achieves none. leading to what is called – straddling.STUCK IN THE MIDDLE A firm that engages in a hybrid strategy and fails to achieve a competitive advantage because it was ill conceived will be . It tries to compete through every means. 116 .
117 . changing customer needs. Market segmentation not well defined. Artificial intelligence). First-time buyers. Eg. It is characterized by – High level of technological uncertainty.radical environmental changes. Consumer behaviour pattern unstable and evolving. coupled with low penetration levels. (Eg.EMERGING INDUSTRY Emerging Industry – An evolving industry characterized by . ending in a differential cost economics. technological innovations. leading to a blurred productivity frontier and steep learning curve.) Excessive turbulence in the dynamics of the environment. 3D imaging. There is a lot of scope to define the rules of competition. Speech recognition software's. Nano technology.
Retail and telecom. leading to clear fragmentation. Eg. IT. because of lack of economies of size and scale. Paints. High exit barriers because of huge investment in CAPEX. Eg. Consumer durables. It is characterized by – Low entry barriers. Air Conditioning.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). MRTP may also cause fragmentation. Scope for players to change the rules of the game. Diverse customer needs. 118 . Government regulations in the form Eg. Eg.
Strong entry barriers. well defined consumer behavioral patterns and imperfect competition leading to near monopoly. early entry and location advantages. 119 . Limited scope for innovation . because of economies of size and learning curve effects. established industry dynamics.technological maturity. Cartel among existing players through collusion. Firms are rule takers in the segment as productivity frontier is well defined.MATURED INDUSTRY Matured Industry – An industry characterized by saturation in growth rates. distribution networks. technological maturity. collaboration and co-option.
dot-matrix printers). backed by corporate espionage. (Eg. and costly price wars.DECLINING INDUSTRY Declining Industry – An industry which has outlived its utility due to the entry of close substitutes and or radical product innovations which results in a shift of the productivity frontier. 120 . Nature of competition extremely high. scooters. with little or no signs of recovery. Exit barriers are extremely high because of limited prospective buyers. Typewriters. Learning abilities have been stunted and firms adverse to investment in R&D and make fresh investments. Firms facing a declining phase are characterized by inertia and slow to react to environmental changes.
assess and overcome fragmentation. increasing scope.COMPETITIVE STRATEGIES Emerging Industry – Set benchmarks. Matured Industry – Sophisticated cost analysis. move beyond boundaries. Locate a defendable position. premium pricing. Fragmented Industry – Identify. strike alliances. Declining Industry – Redesign. mergers and acquisition. 121 . branding and promotion. recreate new markets. regenerate. strictly product differentiation and not standardization. process innovation. reengineer. or else exit the segment. focus more on product differentiation or even a hybrid one. strictly cost differentiation. aggressive building of distribution networks.
However. Intangible – These refer to goodwill. positions based on resources which are unique and inimitable are far more sustainable even in the long term. 122 . A firms resources can be classified into – Tangible – These refer to real assets. They are a standard in nature.RESOURCE BASED VIEW Differentiation based on cost or products saturates and ceases to exist beyond the medium term. hence very rarely confer competitive advantage as can be easily acquired or replicated. and complex learning experiences in integrating and harmonizing technologies (distinctive capabilities) that play an important role in delivering competitive advantage through “causal ambiguity”. patents. brands.
differentiation based on capabilities can be sustained even in the long run. but not necessarily. they are woven around technologies. can be leveraged across businesses) or specific to a particular business. Hence.e. Therefore firms should concentrate on developing complex resources that forms the very basis of differentiation. Typically. 123 . There is a high degree of internal and external causal ambiguity involved in it. Capabilities can be generic (i. They play a very critical role in shaping competitive advantage.CAPABILITIES & COPMPETENCIES These include a complex combinations of tangible and intangible resources that organizations use to convert inputs to outputs.
COMPETITIVE ADVANTAGE 124 .
e.COMPETITIVE ADVANTAGE A competitive advantage is a position of superiority relative (i. Success of a strategy critically depends on SAP. 125 . competitive advantage subsequently becomes the back bone for a competitive strategy. It results in a distinct differentiation advantage or a cost advantage or hybrid as well. A portfolio of competitive advantage comprises strategic advantage profile (SAP). not absolute) to competition. and results in well springs of new business development. Strategy drives competitive advantage. It enlarges the scope of an organization.
In today's world of discontinuity. 126 . SAP changes from time to time. Internal strategic fit between its strategy and dominant logics is essential for the top management to stretch and leverage SAP. Most successful organizations around the world have a well balanced SAP. In most cases SAP is hidden and dormant.STRATEGIC ADVANTAGE PROFILE (SAP) Organizations have to systematically and continuously conduct exercises to identify its SAP. Identification of SAP is critical for and stretching and leveraging of resources.
Inventory Mgt to Logistics Mgt to Supply Chain Mgt (SCM). Competitive advantage arises not from an individual activity but a stream of inter-related activities. each of the players need to be efficient backed by sufficient coordination at the contact points (i. and enhanced customer tracking – higher market share. kaizen or internal customer). Today SCM is integrated with greening the environment as CSR practices. A VC is often compared with a relay team. 127 . VC pay-offs: better product availability.e.VALUE CHAIN ANALYSIS A value-chain segregates a firm into strategically relevant activities to understand its composite behaviour. Substantial cost reductions also follow. 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 high fit involving a complex chain of activities drives both competitive advantage and its sustainability. 129 . Operational effectiveness is not strategy. A learning organization helps create strategic fit. – Second order fit occurs when activities are reinforcing amongst them. Fit is important because discrete activities result in negative synergy and can also be easily copied by competitors. – Third order fit refers to optimization of effort.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.
but not necessarily. . – Can be sustained even in the long run. – Can be leveraged across businesses. It forms the very basis of competitive advantage.CORE COMPETENCE A core competence represents the collective learning's of an organization around diverse streams of technologies. These skills results in distinctive activities and processes. A core competence usually has its roots in technology. It should satisfy the following conditions – Contributes significantly to customer benefits. – Cannot be easily imitated or substituted. Core competence has a high degree of external and 130 internal causal ambiguity embedded in it.
Majority of the firms have competitive advantage. a core competence has its roots in a set of skills. a core competence always implies a competitive advantage. A competitive advantage is sustainable in the shortmedium term.CORE COMPETENCE A competitive advantage does not necessarily imply a core competence. a core competence usually does. 131 . A competitive advantage manifests from a function. a core competence is sustainable even in the long-term. only global leaders possess a core competence. A competitive advantage may or may not lead to superior performance.
each of whom wants to win. Subsequent work on game theory by John Nash led him to win the Nobel prize in 1994. illustrations depicting a win-win situation.GAME THEORY The game theory was developed in 1944 by Oscar Morgenstern. A game is a contest involving two or more players. 132 . Here the magnitude of gain offsets the magnitude of loss equally. However. This is known as a zero-sum game. In fact there are no. In a game (similar to a business) one players win is always another's loss. the stringent assumptions of game theory and difficulty in ascertaining of pay-offs makes game theory application difficult in business.
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 .
However. This is usually through learning by “experience or observation” (i. 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.g. collaboration or cooption. It represents the classical “prisoner’s dilemma”. Yahoo Vs Microsoft). 135 . iteration) rather than through collusion (E. Repeated Games – In this situation the players interact repeatedly with each other sub-optimizing the outcome possibilities.e.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).
– Making pricing more transparent. In a market dominated by price-based differentiation one may attempt to change the rules of the game by/when – – Bases of differentiation dependent on clear identification of what customer wants or value.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. but 136 players do not always behave rationally. It results in a shift in the productivity frontier. – Building incentives for customer loyalty. . Game theory relies on the principle of rationality.
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.
While external strategic fit (strategy – environment) is relevant for strategy formulation. – Changing the rules of the game.IMPORTANCE OF STRATEGIC FIT Strategic fit has a central role to play in strategic management. – Better strategic and operational control. internal strategic fit (strategy – dominant logic) is critical to strategy implementation. – Unlearning & learning of new skill sets. A high strategic fit (co alignment) is useful because it enables – – Appropriate and timely response. – Resource commitment from top management. 143 . – Development of capabilities & competencies.
formulation & implementation can occur simultaneously. Some of the key strategic learning's exists at the contact point between the organization and its customer.e. In such a situation. strategy formulation and implementation has been perceived to be distinct & independent. while control is very effective. at the cost of sacrificing a lesser degree of control. In fact. 144 . learning levels are very low. learning levels are very high. According to Mintzberg. emergent strategy vis-à-vis intended & realized). effective strategies are better crafted when there is a subtle overlapping between the two (i.FORMULATION Vs IMPLEMENTATION Traditionally. In such a situation.
In contrast. He should be an agent of change.ROLE OF TOP MANAGEMENT To bring about change and to implement strategies successfully. Install a system of shared beliefs and values. companies depend more on transformational leaders than transactional leaders. Pragmatism is the ability to make things happen. A transactional leader is usually confined to allocating tasks & responsibilities and extracting performance. bring about transparency. shift from compliance to commitment. transformational leaders go one step beyond – Design a well crafted and designed strategic intent of the organization. 145 .
The various methods of resource allocation includes Historical Budget – The budgets framed by HQ for a particular SBU keeping in mind past trends. 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. brands. 146 . minimum requirement). land.e. Zero Based Budget – In this case the budget of a SBU has to be worked out right from the scratch. skills) also includes complex resources like capabilities and competencies. patents.RESOURCE ALLOCATION Resources allocation includes tangible resources (Eg. machines) referred to as threshold resources (i. labour.
147 . Flat Screen Displays. Due to causal ambiguity (complexity).CAPABILITIES & COMPETENCIES Technology and business are slowly becoming in – separable. Distinctive capabilities are complex set of skills woven around technologies. Mobiles). Distinctive capabilities helps in stretching and leveraging resources thereby overcoming two major constraints involved in strategy implementation – times & costs. though not necessarily in the case of emerging markets. these capabilities are sustainable even in the medium to long term. convergence of multiple streams of technologies at the product – market level is becoming increasingly evident (Eg. Moreover.
STRATEGY & STRUCTURE It is a framework within which individual efforts are coordinated to bring synergy. 148 . A single product or a dominant business firm usually employs a functional structure. A firm in several related businesses usually employs a divisional structure. An appropriate organization structure & adequate control systems are essential to implement strategies and achieve stated goals. The level of centralization and decentralization is decisive. processes become people independent. A firm in several unrelated businesses usually employs a SBU structure. Once the structure is in place.
Marketing. Divisional Structure – Units grouped together in terms of products. Output).TYPES OF STRUCTURES Functional Structure – Activities grouped together by a common function (Eg. Project / Matrix Structure – A formal but temporary framework initiated for the completion of a particular project/crisis. 149 . with team members having dual line of control. Finance). Inputs . Team Structure – An informal group formed for a crisis.Technology. disbanded subsequently. Virtual Structure – A boundary less or hollow organization. based on skills and competencies. or geographical locations. SBU Structure – Businesses segregated in terms of strategic dissimilarities (Eg. processes.
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. as span is broader. structures are becoming flatter and more simpler. It includes the desire for independence. Environment & People – Economic and political conditions have a major bearing on structure coupled with the attitude and aspirations of the people in the organization. facing challenges & crises. Technology – With more and more convergence of technologies in business. assuming responsibility. leading to a tall structure. 150 .
Inertia acts as an impediment in strategy implementation. irrespective whether it is from worse to good or good to worse. Inertia is a characteristic of a firm that endures status quo (i.INERTIA When a firm has been operating in a certain fashion for a long time. Common sources of 151 inertia – complacency with past successes. Most firms undergo periods of strategic continuity rather than strategic discontinuity.e. Top managers resist change. there is a tendency to continue along the same lines. co0ntinuity). . Changes in top management and unlearning helps overcome inertia.
STRATEGY EVALUATION Strategy evaluation centers around assessment of strategic fit. firms should move beyond financial performance to strategic performance as organization systems are becoming complex. Since the internal and external environment is in a state of continuous flux. To prevent deviation of fit. . strategies need to be evaluated on an ongoing basis to prevent deviations of fit. Deviation of fit is detrimental to performance and may lead to strategic failure. certain authors propose misfit as a source of superior 152 performance. However.
. It attempts to answer the following questions – Is the strategic intent appropriate to the changing context? Are the organizations capabilities still holding good.STRATEGY CONTROL It is concerned with trafficking a strategy as it is being implemented. detecting changes in the external and internal environment and taking corrective action wherever necessary. competitive advantages becoming disadvantages? Has the company acquired any new competency? Has the company been able to overcome the 153 environmental threats.
Premise Control – Checking the validity of the assumptions on which a strategy was based.STRATEGY CONTROL IMPLEMENTATION It involves steering the company towards its original growth trajectory & stated goals. It involves assessing – strategic thrusts and milestones. Special Alert Control – It intends to uncover unanticipated information having critical impact 154 on strategies. However. checking every premise is costly as well as difficult. It is open-ended as well as . Implementation Control – It aims at assessing whether key activities are proceeding as per schedule.
Performance measures are defective – What to evaluate against? How to measure the 155 construct? As a saying goes. “If you cannot .BARRIERS TO STRATEGY EXECUTION Vision and strategy not actionable – Utopian ideas. Strategy intent not linked with goals and objectives – Lack of coordination at lower levels leading to negative synergy. low strategic fit due to consultants intervention. Strategy not linked to resource allocation & capabilities – Lacking commitment of top management. difficult to translate into practice.
to be sure of successful implementation of a strategy. Today it is considered one of the most powerful tools for strategy implementation determining success or failure. Large or small. Managers should take into account all seven of these factors. Together these factors determine the way in which a corporation operates. 156 . the relative importance of each factor may vary over time and context. 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. On top of that. this may effect all others as well. so if one fails to pay proper attention to one of them.
It appeared also in "In Search of Excellence" by Peters and Waterman.BACKGROUND & ORIGIN The 7-S Framework was first mentioned in "The Art Of Japanese Management" by Richard Pascale and Anthony Athos in 1981. At around the same time in the US Tom Peters and Robert Waterman were exploring what made a company excellent. The 7-S model was born at a meeting of these four authors in 1982. 157 . Since then it is known as their 7-S model and is extensively used by corporations worldwide to implement their strategies. and was taken up as a basic tool by the global management consultancy company McKinsey. They had been investigating how Japanese industry had been so successful.
Systems – The procedures. 158 . processes and routines that characterize how work should be done.THE 7’S Shared Values – It represents what the organization stands for and what the top management believes in. to reach identified & stated goals. Staff – Human inter-relationships. Style – The way in which the top management influences the functioning of an organization. Skills – An organizations capabilities and competencies. Strategy – Trade-offs for the allocation of a firms scarce resources. formal & informal . over time. Structure – The way in which the organization's units relate to each other in terms of their commonalities.
STRATEGIC FIT Strategy Structure Shared Values Systems Skills Staff Style 1st Order Fit 2nd Order Fit 3rd Order Fit 159 .
structure. A choice of an alphabet often limits the scope and skews the interpretation of a model. shared values) are very malleable and comparatively more difficult to identify & influence. the soft S’s (skill.A CRITIC OF THE 7S MODEL While the hard S’s (strategy. style. their Japanese counterparts focus more on the soft S’s for their early success and sustainability. Ineffective in case of a virtual company. systems) are comparatively easy to identify and influence. Consider the 4P’s of marketing or 3R’s of SCM. While the American co’s focuses on the hard S’s. In contrast. staff. 160 . because most often they are culturally embedded and often neglected.
STRATEGY IMPLEMENTATION ROUTES Strategic Fit .High Organic Growth Strategic Alliance Joint Venture Mergers & Acquisition Strategic Fit .Low Take Overs 161 .
(Eg. technologies. and markets. i. 162 Risk of cost and time overruns. . green-field projects. tax holidays. Reliance Industries). (Eg. concessions are available for green-field projects. subsidized power). The entire infra-structural facilities are set up afresh having its own gestation and break-even. soft loans. Govt.e. Long gestation leads to delayed market entry. SEZ’s. the entire value chain.ORGANIC GROWTH Here a firm builds up its facilities right from the scratch and continues to do so without any external participation. It has complete control over inputs. i.e.
Alliances are usually in the areas of technologies or markets (Eg. Alliances are usually short-lived and disbanded once the purpose is achieved. There is no funding or equity participation from the alliance partner & both the firms continue to operate independently. 163 It is a form of competitive collaboration.STRATEGIC ALLIANCE It involves a pro-active collaboration between two or more firms on a particular domain or function for mutual gain. Tata Motors & Fiat). It has limited intervention power and usually lacks holistic commitment from the alliance partner. . It touches upon a limited aspects of a firms value chain.
Dominant logic of both the companies should be complimentary. . Degree and extent of management control must be clearly 164 laid down. Hero . Tata – AIG. Selecting the right partner is critical for success. leaving minimum scope of overlapping. (Eg.JOINT VENTURES A joint venture involves an equivalent equity participation between two firms usually of similar strategic intent and comparable size to enter a particular market through a newly formed entity. A comprehensive MOU is essential.Honda). It is a win-win situation for both the companies.
Coca Cola – Thums Up). . Brooke Bond & Lipton). Revival of a sick-unit through better management practices is a major motive behind an acquisition 165 strategy.MERGERS & ACQUISITION It refers to the fusion of two or more firms into a single entity. Economies in scale leading to lowering of costs. Integrated distribution channel leads to better market penetration and overall synergy. Acquisition is an outright purchase of a firm assets by another independent entity (Eg. Integration of assets and other financial resources. ITC Tribeni Tissues. with the individual firms ceasing to exist any more (Eg.
TAKE OVERS It refers to the acquisition of significant management control by buying out majority stake in a firm through due diligence or hostility (Eg. Larger geo-graphical diversity. Most countries have stringent laws that prevents hostile take over. Inform SEBI / Stock Exchange after 5% stake is 166 acquired. Instant access to capacities and markets.Corus). often the new firm is “left alone”. Tata Steel . Integration of organization structure & cultures is difficult. Make a public offer of not less than . Consolidation in a fragmented industry.
MANAGEMENT TOOLS IN STRATEGY 167 .
Change provides enormous opportunities. Balanced Scorecard – Tracking strategy 3600. Companies therefore need to ensure competitive advantages doesn’t become competitive disadvantages. 168 . TQM – Doing the right thing the first time. or better still create next practices Reengineering – Redesigning work processes right from the scratch. Some tools to ensure that – Benchmarking – Adopt certain best practices. every time. The past is ceasing to be an indication of the future.WHY MANAGEMENT TOOLS? Change is becoming pertinent in the business environment. it is also a source of potential threat. Radical change is superseding incremental change.
A best practice is defined as an activity performed by a company in a particular domain or function which distinguishes it from others and making them world-class. These exemplary practices involves the stakeholders of the company and helps achieve its strategic intent. Best practices centers around looking at a different way to satisfy various stakeholders. Benchmarking involves the identification, understanding and adapting of certain best practices and implementing them to enhance performance. Firms are moving towards next practices as best practices make firms look more and more homogeneous.
SOME BEST PRACTICES
Dell: Customized configuration of computers. Caterpillar: 48 hours delivery anywhere in the world. Citi Bank : Priority banking services. Maruti: Certified “true value” pre-owned cars. Microsoft: ESOP to employees. Infosys: Customized work-stations. TCS: Referencing potential new recruits. ITC: Shareholders factory visit. AmEx: Outsourcing data warehousing mining. MARG: Set-top box to study viewing patterns. Honda: CEO’s visit to dealers.
TYPES OF BENCHMARKING
Functional – Used by companies to improve a particular management activity. Eg. Motorola learnt delivery scheduling from Domino’s. Process – Improving specific key processes and operations from experiences in similar businesses. Eg. Ford adopting assembly lay-out plan of Toyota. Competitive – It involves assessing the sources of competitive advantage and imitating them. Eg. Samsung leveraging miniaturization skills of Sony. Strategic – It involves assessing business models and replicating them in a different market. Eg. Reliance replicating AT&T business model.
HOW TO BENCHMARK?
Phase 1: Planning – What to benchmark? Whom to benchmark? – Identify key performance indicators & Data source. Phase 2: Analysis – Assessment of performance gaps. – Predict future performance levels. Phase 3: Integration – Communicate findings and gain acceptance. – Establish functional goals and its implementation. Phase 4: Action – Implement and monitor progress. – Measure results against stakeholder wants and needs. – Recalibrate or outperform benchmarks.
WHOM TO BENCHMARK?
Selecting the benchmarking partner is critical to solving the problem. Firms should generally avoid selecting the industry leader, because it may not always adopt the best practices for every process or activity. Benchmarking partners may also be from different industries. Types – – Internal – It involves benchmarking against its own branches, divisions, SBU’s. Proximity to data and cooperation is taken care of automatically. – External – It involves benchmarking against firms that succeeded on account of their best practices. It may also involve benchmarking against world-class firms. Friction may arise due to presence in competing industries.
BENCHMARKING - ADVANTAGES
Finding better ways of meeting stakeholder needs. Organizational learning comes from internal as well as external sources. Establishing goals based on formal assessment of external conditions. Defining effective measure of indicators, facilitate comparison, adopt from other organizations. Ensuring a continuous learning organization. Reducing competitive disadvantage. Organizational turnaround, especially effective in case of a wide strategic drift when differentiation strategies fail to work. 174
Benchmarking merely reorients profits in the hands of few to profits in the hands in the hands of many (i. the more similar they end up looking. clustering).BENCHMARKING . but it cannot be used as a strategic decision making tool.e. It can at best complement it. It does not shifts the growth 175 trajectory of the industry as a whole. Strategy is more of creating best practices rather than copying them. Benchmarking is useful for bringing about operational efficiency. While strategy is all about differentiation and not looking alike. .LIMITATIONS More and more companies benchmark.
. Re-engineering involves complete reconstruction and overhauling of job descriptions from the scratch (i.e. Re-engineering attempts to radically change an organizational products or process by challenging the basic assumptions surrounding it. for achieving performance improvement (E. clean sheet). process mapping) and eliminating or improving them (E.g. The task demands a total change in organisational 176 culture and mindset.g. DOS to Windows).e.RE-ENGINEERING Redesigning leads to identification of superfluous activities or product features (i. Windows 95 to 97).
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 .
Business – It looks into markets. structures. It can be of the following types – Functional – It looks into the flow of operations (i. BPR). etc) and supports the organization for the present. .e. 178 . processes. customers and suppliers and protects the organization from the future (i.e. resource allocation and prepares the organization for the future through a reorientation of the entire strategic architecture.LEVELS Reengineering can be successfully leveraged at all levels of an organization with varying degree of results. products.REENGINEERING . Strategic – It looks into the process of strategic planning.
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. 179 . reverse engineering is a top-bottom approach. protection can be had in the following ways – – Patenting. – High cost and time acts as a deterrent. with an intention to copy it (Eg. While traditional manufacturing is a bottom-up approach. Indonesia). Cheaper versions of Intel chips and mother-boards manufactured in Taiwan. – Causal Ambiguity. However. – Early entry advantages. It generally acts as a threat to innovation. learning curve advantage.
Usually in such cases segmentation and pricing is different from the original innovator.e. cost and effort necessary for the purpose of reverse engineering. Actualization – Obtaining and dismantling of the product to assess how it functions. machine tools to convert ideas into a marketable product (i. nano-technology). 180 . Introduction – Launching the product in the market. designing facilities. Inaccurate assessment at this stage may lead to a failure of the entire project. Implementation – Developing of a prototype.STAGES IN REVERSE ENGINEERING Awareness – Recognizing whether the product is found to be worth the time.
– Features – Anti-lock braking systems. Air bags. It has eight dimensions (Eg. – Reliability – Consistency in mileage. 181 . – Durability – 1980 manufactured cars still on road. – Conformance – Emission standards .Euro IV. – Perception – Customer notions. – Serviceability – Large no. of service stations. – Aesthetics – Appeal in design.WHAT IS QUALITY? It involves the totality of a product or service in meeting certain stated or implied needs. Car) – – Performance – Mileage of 14 kms to a litre of fuel. More and more companies are moving towards meeting implied rather than stated needs.
It had little impact on improving overall productivity.TOTAL QUALITY MANAGEMENT Objective – Management of quality ensures conformance to certain pre-set standards. which ensures good market standing. Management of quality was traditionally inspect it .fix it in nature. TQM is a way of creating an organization culture committed to the continuous improvement of work processes – Deming. zero defects. touching upon a limited aspect of a value chain. . It is deeply embedded as an aspect of 182 organisational life & culture.
183 . not a final destination. Kaizen – Make continuous improvement a way of life. Be customer centric – Generate the concept of internal customer (Ishikawa). the first time – From reactively fixing error in products to proactively preventing errors from occurring at the first place (Juran). Empowerment – It takes place when employees are properly trained. fully involved in decision-making and fairly rewarded for results.TQM – KEY TENETS Do it right. provided with all relevant information and best possible tools. Looking at quality as an endless journey.
equal participation). 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. It is based on the principles of MBO (i. 184 . saving precious top management time. enabling the firm to concentrate on core activities essential to customer satisfaction.TQM .e.STRATEGIES Outsourcing – It is the process of self-contracting services and operations which are routine and mundane. of units meet preset standards (Eg. Quality Circles – It a small group of shop-floor employees who meet periodically to take decisions regarding operational problems and crises. 6-Sigma).
..... – Efficiency and effectiveness is passé.. strategy implementation has never been more important. – In the majority of failures – we estimate 70% – the real problem isn’t (bad strategy) ....BALANCED SCORE CARD Some interesting comments . – Less than 10% of strategies effectively formulated are effectively executed.. Source: Fortune Magazine Why CEO’s fail? 185 . it’s bad execution...
Focus more on causes. 186 .CONCEPTUALISATION A company’s performance depends on how it measures performance. Organizations need to move from financial to strategic performance. rather than effects.BSC . In today’s context when organizational systems have become complex and multi-directional we need to have a holistic view of performance to cut the lag effects. Most managers tend to rely on traditional measures of performance having its origin in finance as they are well tried and tested. These measures worked well when organizational systems were simple and unidirectional and more importantly the environment was static.
BSC – KAPLAN & NORTON (1992) A BSC helps a manager to track and communicate the different elements of company’s strategy. The most critical element of a BSC is to measure these four dimensions. 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. 187 . because they have too many. and distinguish strategic problems from operational ones.
e.CUSTOMER PERSPECTIVE GOALS Products Supply Preference Relationship MEASURES Relative market share (%) % of sales from new Vs proprietary products Timely deliveries and service Customer credit analysis (i. of visits or calls made % of NPA’s 188 . ageing schedule) % of key customer transactions Ranking of key customer accounts No.
of times covered in media No.BUSINESS PERSPECTIVE GOALS Skills Excellence Exposure Introduction MEASURES New capabilities and competencies Implementation & gestation period Bank and supplier credit limits & PLR Unit Costs / Conversion Ratio / Defect Ratio No. of new product launches Vs competition Product pricing Vs competition 189 .
of product innovations 190 .LEARNING PERSPECTIVE GOALS Technology Manufacturing Focus Timing MEASURES No. of new patents registered Time to develop next generation products Average and spread in operating cycle % of products that equal 2/3 sales No.
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 .
BSC .IMPLEMENTATION 2 Translate strategy into operational terms 1 Mobilize change through effective leadership 5 STRATEGY Make strategy a continual process 3 Align the organization to the strategy 4 Make strategy everyone’s job 193 .
ADVANTAGES Most often top managers face information overload. Shift from control to strategy (i.what they don’t know.e. The BSC brings together the different elements of a company’s strategy at a glance. Modern managers should be poised to ask the right questions. Focus on cause not effects.e. doing right things instead of doing things right). Seek excellence.BSC . they don’t know . 194 performance will automatically follow. . It helps translating strategy into practice (i. sharing of vision). As a result.
EFFICIENCY Vs EFFECTIVENESS Ineffective Effective Inefficient Goes out of Business quickly Survives Efficient Dies Slowly Thrives 195 .
EFFECTIVENESS + STRATEGY A company which is effective as well as strategic.Michael E. but also sustains it. not only thrives. Porter 196 . .
CORPORATE RESTRUCTURING 197 .
To adapt to the changing environment.CORPORATE RESTRUCTURING The only thing constant in today's business environment is change. to survival of the most adaptable.” 198 .. Restructuring involves consciously driving significant changes in the way an organizations thinks and looks (Eg. Radical change brings about strategic variety.. from survival of the fittest . Strategic variety may be caused by changes in the as external well as internal environment.. Tata Group). Strategic variety brings paradigm shift... firms use restructuring strategies. As Peter Drucker pointed out.. “every organization must be prepared to abandon everything it does.
Instead. Structural Changes – Conventional hierarchical structures should be disbanded in favour of more 199 flexible ones (i.e. Internal customers should also not be neglected. Walkman. etc). Company’s should go beyond just asking what he expects.e. . downsizing or rightsizing). Core Business – Company’s should introspect – What business are we in? Business evolved out of opportunism or myopia should be divested. ATM. they should strive to provide unimaginable value ahead of its time (Eg. downscoping).RESTRUCTURING – BASIC TENETS Customer Focus – Restructuring ideally begins and ends with the customer. and dividing the core businesses into SBU’s (i. Fax.
It is created and institutionalized by the top management....) The Aditya Birla group typically relied on the “marwari” community for key management positions .. Restructuring also requires cultural reorientation... 200 .. During the times of JRD.RESTRUCTURING – BASIC TENETS Cultural Changes – A culture represents the values and beliefs of the people about the organization. started focusing on their capabilities.. ..) Reliance dismantled their industrial embassies .. the Tatas were considered a benevolent and charitable organization.. Ratan Tata now drives the point the group means business.. Kumar Birla today is more dependent on professionals.
Communicating to the media about organization efforts to deliver quality products. Carry out PR campaigns. “ … one reason our customers are satisfied is that we aren’t.” 201 . Restructuring provides a platform to close this gap. Organizing customer and supplier meets. they tend to move away from the customer. Getting feedback & addressing customer complaints. Use the reach of networking technologies. Honda’s ad says. Publicizing welfare projects to demonstrate CSR.MOVING CLOSER TO THE CUSTOMER As companies evolve.
Asset Swaps – It entails divesting and acquisition simultaneously by two companies. including its intangibles – Mergers – It may be vertical.ASSET RESTRUCTURING Asset Restructuring – The asset composition of a firm undergoes a major change. where the difference in valuation is settled off through cash or equity (Eg. horizontal. 202 . Mittal – Arcelor) and can take various forms. Further spin-off can be classified as split-off and split-up. Further. Tata – Corus) or hostile (Eg. it may be smooth (Eg. It can have two forms. Glaxo – Heinz). Hive Off – It involves siphoning of assets under control. It may include brands as well. spin-off and equity carve. or conglo-merate.
HIVE OFF Spin-Off – A spin off is the creation of a new entity. Most of these practices are not in consonance with Indian laws. Equity Carve – It involves selling a minority stake to a third party while retaining control (Eg. – Split-Up – In a split-up. in which the equity is allotted amongst the existing shareholders on a pro-rata basis (Eg. – Split-Off – In a split-off. the existing shareholders receive equity in the subsidiary in exchange for the stocks of the parent company. 203 . the entire parent company loses its identity after being split into a number of subsidiaries. Tata Industries selling 20% stake to Jardine Matheson). Reliance Ent).
Selling out in phases is called disinvestment (IPCL).DIVESTITURE It involves the sale of a brand or a division of a company to a third party. In 1995. Generic motives include – – Raise working capital. L&T sold its cements division to Aditya Birla group. – Poor performance. for a specified market or in general with full management control. Parle sold its Thums Up brand to Coke for $40 million apprehending fierce competition. repay long-term debts. 204 . A complete sell-out is known as divestment (TOMCO). In 2005. but retained its engineering division. strategic misfit.
CAPITAL RESTRUCTURING Capital Restructuring . Conversion – Replacing debt with equity or vice-versa or costlier with cheaper debt or cross currency debt.3 billion. Tatas take-over of Corus for US $11. involving 608 pence per share).The internal & external liability composition undergoes a major change – LBO – Acquiring control over a substantially larger company through borrowed funds (Eg. It provides greater leverage as well as management control. Wipro). 205 . Share Buyback – It is a process of cancellation of shares out of free reserves to the extent of 25% of paid-up capital (Eg.
230 cr Diversifications Tata Motors – Rs. 99 cr Tata Power – Rs.BUSINESS RESTRUCTURING – TATAS Divestments Lakme – Rs. 250 cr Tata Tetley – Rs. 150 cr VSNL – Rs. 256 cr ACC – Rs. 120 cr Tata AIG – Rs.Rs. 950 cr Merind .Rs. 1860 cr . 1439 cr 206 Tata Timken – Rs 120 cr Tata Telecom – Rs. 1890 cr CMC – Rs. 42 cr Voltas . 1700 cr Trent – Rs. 1170 cr Goodlass Nerolac – Rs.
keeping the composition of business intact (Jet Airways). Turnaround is the primary motive. Survival is the primary motive. Rightsizing – It is phasing of excess and redundant employees resulted out of faulty internal planning (SAIL). 207 . Downscoping – It involves reducing the business and/or geographical scope of a firm (Aditya Birla group).ORGANIZATIONAL RESTRUCTURING Organizational structure and systems calls for a change when strategic variety is apparent. of operating units. It can be carried out in the following ways – Downsizing – It is a systematic one-time reduction in the no. usually as a result external turbulence. of a firm’s employees and sometimes in the no.
the more difficult it becomes to uproot the paradigm (i.e. Strategy change is unviable without a preceding change in its dominant logics. Dominant logic becomes deep-rooted in organizational contexts depending on the period it is in place (tenure of the CEO). The dominant logic represents the perceptions and biases (i. 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. thumb rules) of the top management. The longer the period. inertia). as strategies are based on such beliefs and biases.e.
FORCES AGAINST STRATEGIC CHANGE The problem with strategic change is that the whole burden typically rests on few people (i. In most organizations. 209 . Companies achieve real agility only when people at every level rise above the ordinary to face the challenges – revitalization or transformation.e. Successful transformation requires – incorporating employees fully into the process – leading from a different place so as to maintain employee involvement – instill mental disciplines that will enable employees to behave differently. 20% of the people carry out 80% of the changes). the factor that stifled change & performance was – culture.
SUCCESSFUL TRANSFORMATION Build an intricate understanding of the business model at all levels of the organization. Manage from the future. Questioning every basic action of the organization. Encourage uncompromising straight talk. process ownership. Harness setbacks. it is not about winning but about learning. 210 . Understand and deliver the quid pro quo. Promote inventive accountability. The best way is to alter the institutional point of view. Create relentless discomfort with the status quo. never take no for an answer.
It involves diagnosing a change situation – systems & structures. It involves identifying – Aspects of current culture which needs to be reinforced. that can be both enablers and blockages to change and restructuring. Culture and style of management are two main impediments in force-field analysis.FORCE-FIELD ANALYSIS A force-field analysis provides an initial overview of change problems that needs to tackled. 211 . by identifying forces for and against change. also known as cultural-web. Identify and implement facilitators of cultural change. Aspects of current culture which needs to be overcome.
Term Loss of human capital Lower performance Higher performance Capital .RESTRUCTURING .OUTCOMES Alternatives Organizational Short .Term Reduced labour costs Reduced debt costs Emphasis on strategic control Business High debt costs Higher risk 212 Long .
213 . Numerator – It assumes that turnover is not a barrier or constraint. the second one is a more viable strategy and sustainable option in the long run. down-scoping or asset stripping. hence go in for downsizing. focuses on reengineering. While the first strategy produces results instantaneously. reverse engineering and regenerating. In order to put back the company on the right track they are resort to – Denominator – It assumes that turnover cannot be increased.NUMERATOR & DENOMINATOR MGT Most firms across emerging markets undergo strategic discontinuity and as a result are forced to restructure their businesses.
TURNAROUND MANAGEMENT 214 .
WHY TURN AROUND MANAGEMENT? Some interesting insights . 215 (Govindarajan and Trimble.. January 1997). Source: Why do firms atrophy? (Business Today.. . – Less than 10% of the Fortune 500 companies as first published in 1955.. 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. and that the thirty-two of the country’s largest business groups in 1969 are no longer among the top fifty today.
ends the threat with a combination of strategies. 216 . and capabilities. Both content (what) and process (how) are equally important for a successful turnaround. skills. process focuses on – A logic to explain a causal relationship between intervening variables. Stage Theory). and achieves sustainable performance recovery. As a sequence of events describing how things change and why they change (i. A category of underlying principles and concepts. While content focuses on endogenous and exogenous variables.e.TURN AROUND MANAGEMENT A turnaround is said to occur when a firm perseveres through an existence threatening performance decline. systems.
TURNAROUND INDICATORS Most firms atrophy simply because they fail to diagnose the indicators that acts as threat to organizational existence. Low stakeholder confidence. Low employee morale leading to high employee attrition at all levels. suppliers and bankers. 217 . Substantial shifts in consumer preferences. unavailability or radical lowering of substitute costs or technological obsolescence. leading to lack of acceptability from distributors and customers. especially in key positions. Rising input costs. Uncompetitive products or services. Some indicators Continuous cash flow crises as a result of dwindling market-share and profits.
consider extension. Hence. focus on power brands. Product redesigning or reengineering. Recalibrate prices. liquidating dead assets. Revamp product portfolio. Common approaches adopted Change in key positions.TURNAROUND ILLUSION The first step to a successful turnaround is the basic acceptance of the fact that …. “all is not well”.. prune work-force. which most top managers fail to appreciate. Emphasis on advertising and market penetration. 218 . be more customer centric. based on elasticity. Extending work hours. they adopt surface level measures (disprin popping) which most often fail.
TURNAROUND STAGE THEORY Stage 1 Decline Stage 2 Stage 3 Stage 4 Outcome Response Transition Performance Equilibrium Line Success Failure Indeterminate Nadir Time 219 .
R-Extinction – It suggests that organization factors. It has its origin in “resource led stretch” and subscribes to the view that a firm has substantial power to override the context. 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. 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. 220 . Identification of the stimulus leads to the arrest of the downfall.
The response must match the cause of the decline. diversification. the response should be strategic. Operating responses typically focuses on the way the firm conducts business and involves tactics geared towards – cost cutting and process redesigning (BPR). Strategic responses focus on changing or adjusting the business the firm is engaged in through long term moves such as – integration.RESPONSE INITIATION Turnaround responses are typically categorized as operating or strategic. asset reduction. If the decline stems from structural shifts. If the underlying cause is internal efficiency. the response should be operational. 221 . new market initiatives.
Untangling this question brings into focus three events – Domain – Many of the strategic cures have limited applicability for an affiliated firm. Scope – A diversified conglomerate may acquire a distressed business to turn it around and gain valuable synergies. which may be unavailable to a focused firm. Contour – It is easier to reverse decline in the earlier stages through operational measures.RESPONSE DICHOTOMY The response initiation is somewhat dichotomous and cannot be universally applicable. Similarly new market initiatives is feasible only for multi-product firms. when decline deepens shifts in strategic position becomes essential. 222 .
many a times early signs of recovery fades out. The top management has a key role to play through empowerment. participative management (i.TRANSITION Transition usually reflects the first signs of recovery.7 years with a range of (4-16) years. 223 . substantial amount of time usually passes before results begin to show (i. Empirical studies show that average time is 7. lead – lag). However. transparency. However. Support from all the stake holders through resource commitment. Effective levers of transition. consensus).e. confidence building measures.e. Sustenance is the key factor in this stage. role model.
Failure is an indication that initial momentum was not sustainable characterized by irreversibility. Cut off points must be unequivocal.OUTCOME Outcome is said to be successful when a firm breaches the equilibrium performance level. it should adopt a holistic approach. 224 . Commanding a premium in the market. Instead of focusing on financial parameters alone. Revival of key customers and new product launches. Supplier and banker confidence. Share price indications and media coverage. Regaining lost market share and distributor confidence.
COOPERATIVE STRATEGIES & ALLIANCES 225 .
licensing. the commitment and the involvement between the firms increases manifold. and globalization . More and more companies worldwide are moving away from competition to co-option to leverage their resources and enhance bargaining power. technology. strategic alliance. Any cooperative strategy maybe between firms within the same country or cross border as well. It can assume any of the following forms – franchising. 226 . In the cooperative strategy continuum as firms move up the value order. or joint venture.COOPERATIVE STRATEGIES Cooperative strategies are a logical and timely response to changes in business dynamics. supply-chain partnership. consortia.
owners of the brand Tanishq allows its franchisees to sell its jewellery products. Switz Foods. owners of the brand Monginis allows its franchisees to sell its confectionary products. Branding is critical to franchising. 227 .FRANCHISING Franchising – It is a contractual agreement between two legally independent firms whereby the franchiser grants the right to the franchisee to sell the franchisor’s product or service or do business under its brand-name in a given location for a specified period of time for a consideration. It is an effective strategy to penetrate markets in a shortest possible time at a minimum cost. Titan Inds.
HM manufacturing GM range of cars in India with a buy-back arrangement is a perfect example of CBU. 228 . Develop a product through its crude stage. Become a systems integrator (CKD). refine processes and adopt necessary technologies (SKD).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). as in Tata Indica.
229 . Collusion – Few firms in a matured industry collude to reduce industry output below the equilibrium level.CONSORTIA Consortia – They are defined as large inter-locking relationships & cross holdings between businesses in a similar industry. Airbus – Boeing). Tata. leverage upon size to preempt competition by escalating entry barriers (Eg. enabling them to increase prices (Eg. Cross Holdings – A maze of equity holdings through centralised control to ensure earnings stability & threshold resources for critical mass (Eg. It can be of the following types – Multipartner – Intends to share an underlying technology or asset. Hyundai). Coke – Pepsi).
It usually provides a platform to sort out differences between conceptualization and implementation to suit local market needs. Companies in different industries with different but complimentary skills. 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. otherwise it 230 becomes routine outsourcing. . link their capabilities to create value for end users. Continuous sharing of knowledge is critical to the success of a supply chain partnership.
instead of hurrying into a relationship. Firm’s should undertake a long courtship with potential partners. effective R&D management. Tata Motors – Fiat. Reliance – Du Pont). Despite their popularity (50-60)% of the alliances fail to accomplish their stated objectives. enter newer markets.STRATEGIC ALLIANCE It is an short to medium term understanding between two or more firms to share knowledge and risk.learning organization. preempt competition. 231 . enhance credibility. design next generation products. to gain knowledge and to obtain access to new markets (Eg. Partner selection is one of the critical success factors. Generic motives involved are .
Coke – Pepsi). Maruti).STRATEGIC ALLIANCE . Alliances of the Weak – An alliance is entered into to preempt competition (Eg. Whirlpool – Tide. Backward – An alliance (quasi or tapered) with a supplier of critical components seeking commitment (Eg. Complementary Equals – Two firms mutually promoting each others complimentary products (Eg. Airbus – Boeing).TYPES Collusion – Tacit top management understanding to neutralize price wars (Eg. 232 . Bootstrap – An alliance between a weak and a strong company with an intention to acquire it. Bajaj – Castrol).
PARTNER SELECTION CRITERIA It is likely that partners will not have complete consent on alliance objectives because the institutional context in which the alliance embedded varies from country to country. 233 . Too much stress on financials & structure be avoided. Firms from developed markets seek access to markets and firms from emerging markets seeking access to technology. Cultural orientation has been found to have a profound effect on top management’s strategic orientation (Eg. Differences in level of economic development can produce differences in alliances motives. – Japan Vs US).
PARTNER CHARACTERISTICS Complimentarity of Capabilities – The degree to which partners resources can be used in conjunction. Willingness to share knowledge and skills. Dominant Logic’s – Similarity in beliefs & biases. Managerial capabilities. Intangible Assets – Move beyond the financials of the firm. Partner’s ability to acquire fresh skills. including ability to provide quality products and services. Experience related to previous alliances. Unique Resources – Abilities or skills which cannot be easily duplicated. 234 .
MANAGING ALLIANCES Alliances are more than just a deal. vows to include commitment to expand the relationship. operational & cultural integration. Getting Engaged – It should incorporate a specific joint activity. partners should nurture it. Selection & Courtship – It involves self analyzing. Changing within. differences not anticipated earlier. understanding the chemistry. incorporating clear signs of continuing independence for all partners. 235 . degree of compatibility. instead of focusing controlling the relationship. the value chain. Setting up the housekeeping. Learning to collaborate – strategic.
There are substantial linkages in the value-chain. combining parts). a joint venture is a selection among modes by which two or more firms can transact. synergy) rather than mere exchange (i. Conceptually.JOINT VENTURE A joint venture is a long term association between two equal partners to create an independent firm (SPV) by complementing their resources and capabilities to explore newer businesses or markets for achieving a shared vision. whilst the partners continue to operate independently.e. It aims at creating new value (i.e. . separation is very 236 bitter. It lasts till the vision is reached.
Organizational Learning – It is a means through which a firm learns or seeks to retain their capabilities.JOINT VENTURE – GENERIC MOTIVES Transaction Cost – The situational characteristics best suited for a JV are high performance uncertainty. though more profitable alternative to other choices. It may also be linked to deterring entry or eroding competitors position. 237 . Strategic Behaviour – Firms may override transaction costs. 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.
Learning new technologies. – Eg. Maruti – Suzuki. – Eg. – Eg. – Eg. TVS – Suzuki (4-Stroke Engines) Fill gaps in existing product lines. Daimler – Chrysler (Premium Cars) 238 . Renault – Nissan (Minivans – Cars). – Eg.OTHER MOTIVES Entry into newer markets. Eli Lily – Ranbaxy. Yamaha – Escorts. Sharing of resources. Define future industry standards. – Eg. Endorsement from government authorities. Essar – Hutch (Vodafone).
LML – Piaggio Differences in size and resource base.RISKS INVOLVED Incompatibility – Differences in cultural background. – Eg. Tata – Aditya Birla in Idea Cellular 239 .Enka. PAL – Fiat If the cost of continuing exceeds the exit costs? – Eg.e. technology) drain. Risk of brain (i. Risk of over dependence. – Eg. Century . – Maruti – Suzuki. – Godrej – Procter & Gamble. Modi – Telstra What after exit (parenting disadvantage)? – Eg.
respect. Partner – Avoid duplication of skills and capabilities. time sharing.PRE-REQUISITES FOR SUCCESS Commitment – Mutual trust. Inertia – Differences in age and evolution patterns. Focus – Avoid strategic myopia. 240 . Culture – Reconcile gaps. Incompatibility – Performance expectations. Equality – Lack of dominance. Objectives – Shared vision. Flexibility – Sufficient space to breathe and adjust. Agreement – Clarity on operational control. Costs – Other modes of transaction becomes cheaper.
MERGERS & ACQUISITION 241 .
reverses are also taking place through LBO) with a view to acquire conglomerate power and induce synergy (Eg. Mittal Arcelor). An acquisition is said be smooth if it is with the consent of the management (Eg. 242 . Brooke Bond – Lipton). Ranbaxy . SEBI Takeover Code. HLL – Tomco). 2002). Most countries have stringent laws that prevents hostile takeovers (Eg.Daichi) and hostile if it is without the consent of the management (Eg. An acquisition is the purchase of a firm by a firm (of larger size. The larger objective is to leverage on size. 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.
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. Hike – An acquirer who has already picked up a 5% has to make a mandatory disclosure for every additional 1% stake that it acquires. Control – A special resolution of 75% of the share 243 holders approving the change of guard.e. Acquirer – Someone (individual or firm) who picks up an atleast 5% stake without mandatory disclosure having an intention to wrest management control (i. creeping acquisition).SEBI TAKEOVER CODE. .
e. asset stripping). 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. 244 .SEBI TAKEOVER CODE. SEBI – In case of a hostile take over. Grasim – L&T Cement. 2002 Pricing – Acquirers will have to offer minority shareholders (at least 20%) the past 26 weeks or past 2 weeks average price. and/or does not enjoy the confidence of the different stake holders. the SEBI can intervene and block share transfers if: the acquirer has ulterior motives (i. credentials or track record is at stake. whichever is higher as an exit route (Eg. Gujarat Ambuja – ACC).
Kelvinator). The type of merger is depends on the degree of relatedness (strategic) between the two businesses. Vertical – It involves complimentarily (partially related) in terms of supply of inputs or marketing activities (Eg. Electrolux . Conglomerate – It involves integration of two distinctly unrelated businesses. Reliance). Horizontal – It involves integration of two highly related businesses (Eg. 245 . ITC). Godrej. usually opportunistic (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.
quick access). Reduction in risk. Avoiding risk of new product development. 246 . Tata Steel – Corus). Overcoming entry barriers (Eg. Ranbaxy – Crosslands). Coinsurance effect – Higher debt raising capability. Economies of size. Mittal – Arcelor). ITC Bhadrachalam). Global image (Eg. ICICI –ITC Classic). Acquiring assets or capabilities (Eg. Reduced gestation (i. Tax benefits (Eg. Asset Stripping – Shaw Wallace).MERGERS & ACQUISITION .MOTIVES Increased market / conglomerate power.e. Access to newer segments (Eg. Ulterior motives – (Eg. scale and scope.
Managing size. When Tata Steel started negotiations with Corus. Overvaluation of buying firms (Eg. their initial offer was around 420 pence/share. Tata – Corus). Managing over-diversification. Merging of organisational structures. while the ultimate acquisition was made at 607 pence/share). neglecting core business. Top management overtly focused on due diligence exercise and negotiations.MERGERS & ACQUISITIONS PITFALLS Cultural differences (Eg. Overvaluation is often as a result of an ego drive and substantially affects future returns. 247 . Inability to achieve synergy.
Kingfisher – Air Deccan).MERGER TYPE & PLC Introduction – A larger firm may acquire a newly formed entity with an objective to preempt new competition or acquire its license (Eg. vertical to save transactions costs. Decline – Horizontal mergers are undertaken to ensure survival. with an objective to reinforce its growth trajectory or to take on the might of a comparatively larger player (Eg. Tata Steel – Corus). Brooke Bond – Lipton). Growth – This stage may witness parallel merger of two firms of similar size. 248 . Maturity – A larger firm acquires a smaller firm with an objective to achieve economies of scale and experience curve effects (Eg.
Immediate attempts to super impose structure and culture may cause bottle necks. Strong differences may stifle plans and its execution. An acquisition just for the sake of it or reputation yields very little value in the long term. 249 . Left alone syndrome. A common shared vision. active top management intervention in phases. Blanket promotions across entities and confidence building exercises needs to be practiced.INTERNATIONAL M&A .FRAMEWORK Positive contribution to the acquired company. A concern of respect and trust for the business of the acquired company.
INTEGRATION . 250 Do not ignore the “people factor”.BLUEPRINT Take the media into confidence. Decide on the new hierarchy. Determine business strategy. It will enable focus on customers and key people. promptly. Integrating work processes. They can carry the message to the various stake holders. Shift attention from business portfolio to people and processes. Decide upon management control systems. Redefine responsibilities and authority. .
Valuation decisions are arrived through a due diligence process when the prospective acquirer gets access to the books of accounts of acquiring company. Financial motives – Undervaluation relative to true value. operational & financial). over valuation can become a curse.e. 251 . The process takes (6-12) months. – Synergy – Potential value gain from combining operations (i. While under valuation may be a significant opportunity. – Market for corporate control. – Unstated reasons – Personal self interest and hubris.M&A .VALUATION The process of valuation is central to M&A.
252 . when the “fit” between the two entities is very poor. – Conglomerate Synergy – Gains come when one firm complements the resources or capabilities of another (Eg.VALUING OPERATIONAL SYNERGY Synergy – It refers to the potential value gain where the whole is greater than the sum of the parts. – Vertical Synergy – Gains come from controlling the supplychain and savings in transaction costs. Sources of operational synergy – Horizontal Synergy – Gains come from economies of scale which reduces costs. or from increased market power which increases sales and margins. Synergy can be negative as well. Innovative product – Good distribution network).
253 . Hotmail). Synergy comes from projects which would not have been undertaken if the two firms stayed apart (Eg. Cash Slack – It reduces asymmetry between cash starved firms with deserving projects and cash cows with no investment opportunities. and without paying take-over premiums. Tax Benefits – Tax benefits may accrue from tax entitlements and depreciation benefits unutilized by a loss making firm.VALUING FINANCIAL SYNERGY Diversification – Reduce variability in earnings by diversifying into unrelated industries. shareholders can accomplish the same at a much lesser cost. ITC – Bhadrachalam Paper). However. but availed after being merged with a profitable firm (Eg.
– Coupon rates may also be negotiated at lower rates. It relates to the concept of diversification. 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. as risky debt is spread across the new firm's operations. the cash flow the merged firm will be less variable than the individual firms. This will induce higher debt capacity. hence better performance.VALUING FINANCIAL SYNERGY Co-Insurance Effect – If the cash flows of the two firms are less than perfectly correlated. – Default risk comes down and credit rating improves. 254 . higher leverage.
Assessment of perceived quality is critical. The value of wrestling control is inversely proportional to the perceived quality of that management.VALUING CORPORATE CONTROL Premium of M&A are often justified to control the management of the firm. – – Value of Control = Value of firm after restructuring Value of firm before restructuring. 255 . since a restructuring can lead to significant increase in value. While value of corporate control is negligible for firms that are operating close to their optimal value. The value of control can be substantial for firms that are operating well below optimal value.
The assets of the acquired company are used as collateral for the borrowed capital. sometimes in combination with the assets of the acquiring company.e. 256 . debt component) at the time of buyout and rapid changes in capital structure over time. LBO facilitates a relatively smaller firm to bid for a comparatively larger firm in the bid for management control. It is a very costly and risky proposition. Confidence of investment bankers and the international financial community is essential.LEVERAGE BUYOUT (LBO) The basic difference between a take-over and a LBO is the high inherent leverage (i.
A research study showed that 30% of the publicly listed firms reported above average returns after going private. liquidity. off-late many publicly traded firms have gone private keeping in mind the following – – The fear of LBO. However. The increased benefit showed in the following way – reduced costs and increased revenue. the advantages of going public includes . – The need to satisfy analysts and shareholders.access to financial markets. – Separation of ownership from management. on-going valuation. – Increased information needs. 257 .TO GO PUBLIC OR NOT? However.
co-insurance effect).e. 258 . which disappears once assets are liquidated and significant portion of debt is paid off. – Cash trapped company unable to utilize opportunities. – Managers cannot be trusted to invest free cash flows wisely. – Debts repaid off from increased value after successful restructuring and wresting management control. – It is a temporary phenomenon. – Cost of debt coming down (i.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).
leverage is expected to decrease over time.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. – Increase equity valuation. A LBO has to pass two tests to be viable – – Restructuring to pay-off increased debt. initial rise in leverage is anticipated. Lack of sufficient cash flows to repay costly debts resulting in a possible debt trap. Any discounting has to reflect these changing cost of capital. 259 .
REVERSE MERGER Reverse Merger – The acquisition of a public company. which has discontinued its operations (i. – Facilitates better valuation and forthcoming offerings. small in size but having a promising business. – Tax shelter. shell company) by a private company. Objectives – – Traditional route of filing prospectus and undergoing an IPO is costly. 260 . – Prevents dilution of equity. allowing the private company to bypass the usually lengthy and complex process of going public. – Automatic listing in major exchanges. time-barred.e. or costly.
During bearish periods excess returns were 19%. Excess returns also vary across time periods.EFFECT OF TAKE-OVER ANNOUNCEMENT The shareholders of target firms are the clear winners. and 35% during bullish periods. – Takeover announcements reported 30% excess returns. Initial anomaly in stock prices usually normalizes over a period of time (6-12) months. However. takeover failures have only initial negative effects on stock prices. 261 . – Merger announcements reported 20% excess returns. Most target firms are taken over within (6090) days.
and Netter. as stock markets become more and more perfect such anomalies would reduce Source: Jensen and Ruback. in the event of take-over failure negative returns to the extent of 5% on bidder firm stock prices is reflected.EFFECT OF TAKE-OVER ANNOUNCEMENT The effect of take-over announcement on bidder firm’s stock prices are not clear cut. 262 Jarrel. 1983. Desai. and Kim. – However. – However. 1983. over time. Bradley. 1988 . – Most studies reported insignificant excess returns around take-over offers or merger announcements. Brickley.
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. Poison Put – Premature retirement of bonds at attractive rates to pour surplus cash and make target investment unattractive. so that nothing is left for the raider to strip off. 263 .DEFENSIVE STRATEGIES Golden Parachute – An employment contract that compensates top managers for loss of jobs as a result of change in management control. Rights).
thus thwarting the raider company’s attention. Pac Man – The target company makes a counter bid to take over the raider company. Shapoorji Pallonji). Gray Knight – The target company takes the help of friendly company to buy the shares of the raiding company.DEFENSIVE STRATEGIES White Knight – It is the placing of stocks to a cash rich investor and bargaining for protection in return. Green Mail – The targeted company buys large blocks from holders either through premium or through pressure tactics (Eg. 264 . But often the White Knight turns a betrayer himself (Eg. East India Hotels – Reliance Industries – ITC).
COMPETING FOR THE FUTURE 265 .
The reverse was true for the companies overpowering. What went wrong???? What were they doing with the present? What were they pre-occupied with? 266 . were spending 99% of their precious time dealing with present. Most companies were too preoccupied with the present than the future? 99% of the companies overpowered. Nokia overpowering Motorola. Honda overpowering GM. Wal-Mart overpowering Sears. British Air overpowering Pan Am. Honda overpowering Volkswagen. Hitachi overpowering Westinghouse.GETTING OFF THE TREADMILL Canon overpowering Xerox. Compaq overpowering IBM.
THE PAST OF COMPETITION Beyond Restructuring – When a competitiveness become inescapable problem (stagnant growth. decluttering. declining margins. Not knowing when to stop. downsizing). CEO’s brutally pick up the knife and ruthlessly carve away layers of corporate flab (delayering. Thus efficiency was grievously hurt. falling market share). most often they ended up cutting corporate muscle as well and became anorexic. These denominator based managers stuck to their restructuring strategies (like building pyramids) and didn't know what to do next? Thus they became history? (like the pharaohs) 267 .
S. incrementalism or nominal innovation has almost reached a plateau. 268 . top managers believed that quality will be a source of competitive advantage of the future. but not of the future. but forging ahead in competition.THE PRESENT OF COMPETITION Beyond Reengineering – Numerator based managers (innovation) at least offers some hope. The future is not about catching up with competition. On the contrary only 20% of Japanese managers believed that quality will be a source of competitive advantage of the future. A poll in circa 2000 revealed that 80% of the U. ensuring only survival of the present. However.
THE FUTURE OF COMPETITION Regenerating – Leaner. not the other way. not just the organization. Create a potential gap. don’t predict. 269 . It is based on deep insights into trends in technology. as important as these may be. better. reinvent its industry. they are not enough to get a company to the future. Companies need to fundamentally reconcieve itself. It involves Dream about the company’s future. aspirations and resources. and regenerate its strategies (breaking its – managerial frames). Creating the future requires industry foresight. demographics and lifestyles. Empower from bottom to top. Transform the industry. faster.
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 .
271 . hence do not fall sick in the first place. Redraw the boundaries between industries.e. Change in at least one fundamental way the rules of engagement in an industry. by converging technologies complex. Successful companies have a complete grip over the industry. It is about deliberately creating a strategic misfit. Create entirely new industries (i. they do not need to restructure. It drives a hunger and a passion to transform.ABOUT THE TRANSFORMATION The future does not belong to those who take the industry for granted. blue oceans). Therefore.
ABOUT THE EMPOWERMENT Bring about a revolution (a paradigm shift) in the organization. More importantly. Such a process is called institutionalization (from people centric to organisational centric). Transformational leaders merely lead the way. A revolution that is thrust upon from the top seldom sustains. 272 . Most successful revolutions (Gandhi to Mandela) rose from the dispossessed. The middle management plays a strong moderating role. the revolution must start at the bottom and spread in all directions of the organization.
THE FUTURE OF STRATEGY A company must get to the future not only first but also for less. Apple – iphone). Apply the 40 – 30 – 20 principle. Companies need to strategize (think ahead of times). Get to the future first. What does it take to get to the future first? Understanding how competition for the future is different. A process for finding and gaining insight into tomorrows opportunities (Eg. Toshiba – LCD. It requires a lot of common sense and a little bit of out of the box thinking. An ability to energize the company. 273 . South West Airlines – LCC. without taking undue risk.
but hundreds. The farther one can see in this endless space. As there is no one future. the farther it will be away from competition. Companies of the future will be not based so much on the strength of their resources. We are in the midst of a 3600 vacuum. What distinguishes a leader from a laggard. 274 . is the ability to imagine in a different way what the future could be. as on their aspirations.HOW DOES THE FUTURE LOOK LIKE? There is no rule which says that for every leader there will be a follower. greatness from mediocrity. each point in space represents a unique business opportunity.
THE EMERGING STRATEGY PARADIGM Not Only Reengineering Processes But Also Regenerating Strategy The Competitive Challenge Organizational Transformation Industry Transformation Competing for Market Share Competing for Opportunity Share Finding the Future Strategy as Learning Strategy as Positioning Strategy as Engineering Strategy as Unlearning Strategy as Dream Strategy as Architecture 275 .
THE EMERGING STRATEGY PARADIGM Not Only But Also Mobilising for the Future Strategic Fit Resource Allocation Strategic Misfit Resource Stretch & Leverage Getting to the Future First Existing Industry Structure Product Leadership Single Entity Product Hits & Timing Future Industry Structure Competency Leadership Dominant Coalitions / Co-option Market Learning & Preemption 276 .
Learning Curve t1 t2 t3 Time t4 t5 277 .LEARNING TO FORGET P1: The degree of learning in current period is directly proportional to the degree of unlearning in the previous period. Degree of Learning Unlearning Curve P2: Unlearning in previous period does not necessarily ensure learning in the current period.
278 . Leverage – They are the gateways to future markets.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 is characterized by the following – Unique – It provides unimaginable customer value ahead of its times. It cannot be matched even by its closest competitors. It represents the collective learning's of an organization centering around diverse streams of technologies.
it gets more refined and valuable through use. Wal-Mart – logistics. Canon – imaging.MORE ABOUT CORE COMPETENCE Sony – miniaturization. Honda – engines. A core competency cannot be outsourced. Intel – nano-electronics. at the most three to four. Nike – designing. Coca Cola – brand. Although a core competence may lose value over time. SKF – antifriction and precision. Toyota – lean manufacturing. Most companies around the world do not possess one. it is deeply embedded in the heart of the organization. leaders have one. Toshiba – flat screen displays. Core competencies are the roots of the organization. 279 .
ROOTS OF COMPETITIVENESS End Products 1 2 3 4 5 6 7 8 9 10 Core Businesses Core Business 1 Core Business 2 Core Business 3 Core Business 4 Core Product 2 Core Products Core Competencies Core Product 1 Competence 1 Competence 2 Competence 3 Competence 4 280 .
RESOURCE STRETCH & LEVERAGE
Initial resource position is a very poor indicator of future performance. It leads to atrophy and stagnation. Successful companies consciously create a potential gap between aspirations and resources. Resource crunch is a common factor among firms that faces a wealthy rival, and outperforms them. Leveraging what a company already has, rather than allocating it is a more creative response to scarcity. – By concentrating existing resources. – By accumulating existing resources. – By complementing existing resources. – By conserving existing resources. – By recovering existing resources.
Concentrating – It involves effectively directing portfolio of resources on key strategic goals in which individual efforts converge over time. It is a balance between individual mediocrity and collective brilliance. It is achieved through – Converging – Redirecting multiple diverging (i.e. fragmented) short term goals into one long term goal. It is then resources can be stretched over time. Focusing – Making trade-offs and preventing dilution of resources at a particular point of time. Targeting – Focusing on the right innovations that are likely to have the biggest impact on customer value.
Accumulating – Using existing reservoir of resources to build new resources. Each and every individual is a rich & potential source of learning, discover better ways of doing things. It is achieved through Mining – Extracting learning experiences from existing body of each additional experience (i.e. success or failure). It is an attitude that can be acquired, but never learnt. It leads to a substantial jump in the experience curve. Borrowing – Utilizing resources outside the firm through licensing, alliances, joint ventures. A firms absorptive capacity is as important as its inventive capacity.
Complementing – Using resources of one type with another that aligns smoothly to create higher order value. In a way it produces an accelerating effect on each individual resource. It is achieved through – Blending – Interweaving discrete capabilities to create world class technologies (GM – Honda) through integration and imagination. Different functional skills can also be blended to create a world class end products (Yamaha – Keyboard). Balancing – An ability to exploit excellence in one area is never imperiled by mediocrity in another (GE acquiring the CT scanning rights from EMI because of its inadequate market reach).
Conserving – Sustaining competencies over time through frequent usage. Resources are never abandoned; they are always preserved for future use. Recycling – Increasing the velocity of use of a competencies over time. As a result core competencies can be leveraged across an array of products (Sony - Betamax). It includes brand extensions as well. Co-Opting – Enticing resources of potential competitors to exercise influence in an industry (Fujitsu – IBM). Shielding – It involves identifying competitors blind spots and then attacking without having the fear of retaliation.
Recovering - It is the process of reducing the elapsed time between investing in resources and the recovery of those resources in the form of revenues via the market. Speeding – Prior to the 1980’s Detroit’s majors took an average of 8 years to develop an entirely new model; the Japanese reduced it to less than 4.5 years, with major new variants in 2 years. This envisaged Japanese players in giving customers more opportunities to switch allegiance and loyalty (Toyota). Protecting – It uses competitors strength to one’s own advantage, by deflecting it, rather than absorbing it as practiced in Judo.
INTERNATIONAL BUSINESS ENVIRONMENT 287 .
1997). and high transaction costs. China. Chile) provide a different context (i. Diversified groups in operating in emerging markets therefore benefit from unrelated diversification. Therefore. high levels of market imperfection). Therefore focused strategies based on core competence may not be suitable for emerging markets (Khanna & Palepu. 288 .EMERGING MARKETS Emerging markets (India. institutional gaps.e. Korea. Emerging markets are characterised by infrastructural bottlenecks. strategies suited for the developed markets may not be appropriate for emerging markets.
(2000) 289 . subsequently negatively related across developed markets. Entropy). Optimum level of diversification Performance Diversity is initially positively related with performance. et al. Synergy.DIVERSITY . Experience Strategic Fit Diversity Palich.PERFORMANCE (I) Diversity attempts to measure the degree and extent of diversification (Herfindahl. Concentric. Size & Scale.
Huge initial investment. brand building Risk diversification.DIVERSITY . subsequently positively related across emerging markets. 2001) 290 .PERFORMANCE (II) Diversity is initially negatively related with performance. conglomerate power Threshold level of diversification Performance Diversity (Khanna & Palepu.
HSBC). act locally (Eg. It should have a spread of manufacturing facilities. It should have a spread of interest groups / stake holders. 291 . Characteristics – It should have a spread of affiliates or subsidiaries. It should have a spread of assets. revenues and profits. It should think globally.INTERNATIONAL IDENTITY MNC’s consciously engage in FDI in different parts of the globe to forge resource diversity as a distinct competitive advantage.
Feminity Index . 292 . high feminity index in developed markets and vice versa for emerging markets).It reflects the disparities in women in workforce (Eg.GLOBAL BUSINESS ENVIRONMENT Power Distance – It reflects the disparities in income and intellectual development (Eg. low risk profile in developed markets and vice versa for emerging markets). Risk Profile – It reflects the risk attitude of the top management (Eg. low power distance in developed markets and vice versa for emerging markets). low group scale in developed markets and vice versa for emerging markets).It reflects the relative role of team building (Eg. Group Scale .
low country risk in developed markets and vice versa for emerging markets). Country Risk – It reflects the political and economic risk (Eg. inflation. currency. credit rating.GLOBAL BUSINESS ENVIRONMENT Cultural Adaptability – It reflects the adaptive ability to a changing environment . attitude. time value. customs. judiciary) of doing business in a particular country (Eg. corruption. code of conduct. interest rates.culture. high cultural adaptability in developed markets and vice versa for emerging markets). FOREX reserves. flexibility (Eg. terrorism (9/11). dress sense. political stability. 293 . way of life.
however. Language Barriers – Developed country managers expect foreign partners to communicate in their languages. in most emerging markets meetings are delayed and lasts unusually long. in most emerging markets use of an interpreter may be a standard protocol. Ethnocentrism – Developed country managers tend to regard their own culture as superior. and vice-versa. High levels of ethnocentrism usually has a negative effect on business. Other factors – local celebrations. time-zones. 294 .GLOBAL BUSINESS ENVIRONMENT Time Sensitiveness – Developed country managers regard time as precious.
In 1995 (Uruguay Round) GATT was renamed to WTO. copyrights. ASEAN. trademarks). It focused largely on TRIPS (patents. It a multi-lateral treaty with 143 (as on 2002) member countries to reduce tariff and non-tariff (quota) barriers. BRIC).GATT GATT was a bi-lateral treaty initiated between US and some member countries in 1947 to promote free trade. The 1999 (Seattle Round) saw a lot of protest amidst bringing agriculture under the purview of TRIPS. It also initiated provisions on anti-dumping. 295 . It also highlighted the nexus between US & WTO. The 2001 (Doha Round) focused on power blocks (NAFTA.
However with current recession in the US 2002 onwards. Sterling . three countries joined in 2002 increasing it to fifteen members as of 2008.EURO – SINGLE CURRENCY In 1999 twelve member countries in Europe joined hands to move over to a single currency (i. the Dollar still remains the most preferred currency globally. primarily the OPEC countries.Pound). the Euro slowly started outperforming the Dollar.e. The Euro was significantly devalued against the Dollar till 2002. However. The notable exception was Great Britain which still continues with its local currency (i.e. 296 . Euro).
it helps avoiding transaction costs associated with a multiple currency. Transparency – A single currency is transparent and competitive.SINGLE Vs MULTIPLE CURRENCY Transaction Costs – Though the initial cost of introduction of a single currency is very complicated and costly. 297 . Rate Uncertainty – A single currency eliminates the risk of competitive devaluations. but it may have spill-over effects. Trade Block – It will strengthen the EU identity which would not have been possible otherwise. However. a multiple currency is preferable where the business cycles of member nations are different.
– FII (transfer of intangible resources) is fast but may have strong repercussions (i. 298 . It is long term with high levels of commitment. Neo classical economists believe that foreign investment may in fact be a win-win game. hot money). – FDI (transfer of tangible resources) is slow but steady for the purpose of economic growth. the gain of one country is loss of another).e.FII Vs FDI INVESTMENT Classical economists believed that foreign investment (in any form) is basically a zero sum game (i.e. It is short-medium term with comparatively low levels of commitment.
lifestyle (petroleum 299 outlets – departmental stores). customer awareness (microwaves). . promotion (surrogate advertising). buying patterns (spread). usage (talk time). Distribution – It depends on the market characteristics (fragmented – concentrated). technology (microchip). economic (middle class buying power). Pricing – It depends on the competitive structure (PLC – Kellogg's).INTERNATION MARKETING Product – The various attributes of a product may receive different degrees of emphasis depending on differences in .culture (food habits).
equity is cheap in India). debt is cheap in US. Leverage – The leverage may vary across countries depending upon money and capital market conditions (Eg.India) may be different from that another trading country (US – GAAP or IRS). Cost Structure – Companies in India need to investment in fixed costs due to poor infra-structure 300 compared to developed markets. . Accounting Norms – The accounting norms of one country (AS .INTERNATION FINANCE Currency Risk – Many Indian IT companies (Rs) having business in US (Dollar) are asking for quotes in (Euro) or are shifting bases out of US to avoid risk of devaluation of Dollar.
shortened life cycles). in most cases it is not desirable nor practiced. labour laws. Recruitment – In local recruitment. social security. 301 . technology (convergence. however. double taxation.INTERNATIONAL HR An uniform HR policy is idealistic to enable parity in performance appraisal. skills are more important that cultural fit and vice-versa. Compensation – Differential pay packages exists because of differences in purchasing power. Training – It is a pre-requisite for international business to reduce language. and cultural barriers (language) vis-à-vis emerging markets.
INTERNATIONAL OPERATIONS Location Incentives – FDI in emerging markets should explore options for SEZ’s to explore benefits (tax holidays. reduce power costs) vis-à-vis infrastructural bottlenecks. Outsourcing – A company having a core competence may be the source of global outsourcing (Eg. SCM – Use of ERP to network the extended enterprise 302 across the globe. . Bosch spark plugs are used by car manufacturers worldwide). Technology – The cost to be evaluated in terms of latest technology (Euro VI) vis-à-vis effective cost of appropriate technology (Euro II).
CONTEMPORARY TOPICS 303 .
Innovation is the most preferred strategy today to maintain competitive advantage in the present turbulent business environment. 304 . Innovation is all about staying ahead of competition. but has inherent risks involved as well. it has destructive effects as well.INNOVATION An invention is the first occurrence of an idea for a new product or process. Innovations typically paves the way for more secured and improved lifestyle for consumers in general. While innovation typically adds value for organizations. innovation is the first attempt to carry it out in practice.
process innovation is necessary to sustain the competitive advantage of product innovation. Tangible impact of product innovation on performance is significantly higher than process innovation. However. Strategic innovation has the potential to change the rules of the game. process innovations are organizational driven. 305 .TYPES OF INNOVATION A key challenge is maintaining a balance between process and product innovations. While product innovations are typically customer driven. Process innovation usually follows product innovation.
Processors (Pentium).e. putting an idea into practice). Telecom (CDMA Technology). Innovations are the back-bone of successful business models . Drug Development (Bio Chemicals). about how an organization makes money (i. It leads to a shift in the price – performance envelope.BUSINESS MODEL It is a simplified description and representation of a complex real world. a paradigm shift). Medical Surgery (Lasik). Data Storage (Pen Drives). 306 . Disruptive business models brings in a new frame of reference (i.e.
The cost structure resulting from the business model.NINE BUILDING BLOCKS Value proposition offered to the market. The key resources and capabilities required. The key activities / processes necessary for execution. 307 . The channels to reach out to the clients. The revenue streams generated by the activities. The proposed relationships established with clients. The segment(s) of clients to be addressed. The key partners involved in the activities.
BUSINESS MODEL FRAMEWORK 308 .
REVENUE MODEL Positioning is just not sufficient. The revenue model described here are the means to generate revenues. Investment Banking. With the rapid erosion of certain industries (IT. Real Estate) companies need to untangle and understand the intricacies of their business model. It involves – Product Visualization – Product Prototype – Product Test – Capacity – Pricing – Distribution. 309 . It is just one piece of the puzzle. innovative companies to carve out unique business models to fend off competition.
Have a lean and a flat organization structure. Allow the workforce idiosyncrasies for their errors. A favourable intellectual property (IP) climate.HOW TO MAKE INNOVATIVE CO’S Innovative company’s are a matter of culture and aspirations rather than tangible resources. Allow the management sufficient slack to be future oriented. Provide reasonable incentives (not necessarily monetary). Promote the culture of experimentation. 310 . Promote the grape-vine.
The most preferred strategy of internal protection includes imbibing “causal ambiguity” in the production process to make reverse engineering difficult. 311 311 .HOW TO PROTECT INNOVATION? Without adequate protection (external or otherwise) the effects of innovation does not translate to performance. Collusion with the judiciary is also another distinct possibility in emerging markets. however that possibility is slowly atrophying. companies are increasingly relying on internal protection to sustain innovation effects. In most emerging markets where the IP climate is not so favorable.
In fact the principles of corporate governance implies that managers go beyond in satisfying the stated and unstated needs of the multiple stakeholders. 312 312 . Corporate governance aims to reduce the principal-agent problem present in most professional managed organizations through appropriate forms of accountability and control mechanisms.CORPORATE GOVERNANCE The basic theme of corporate governance is to ensure that professional managers are identified and made accountable in terms of clear business processes or activities and held responsible through adequate mechanisms & control systems for channelizing their decisions for the benefit of stakeholders at large.
313 . shareholders can diversify their portfolio at a much lesser risk and cost.AGENCY THEORY The root of Corporate Governance goes back to the Agency Theory. However. This exposes the shareholders to additional risks and higher costs. also known as the principal-agent problem or agency dilemma. From the strategic point of view managers tend to diversify into unrelated businesses as it provides higher returns hence a more favourable appraisal. not present in portfolio diversifications. According to the agency theory top managers and shareholders interests are usually conflicting in nature and tend to pull in opposite directions.
various laws were enacted to ensure proper usage of these funds. After the Enron downfall. the US government passed the Sarbanes – Oxley Act. SEBI Report – 2005. 2002 to restore public confidence in corporate governance. . 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.ORIGIN & CONTEXT Since the early 20th century since a large part of public funds were held by publicly traded firms in the US.
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. 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. 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.
They should also implement systems to independently verify and safeguard the integrity of the company's financial reporting. Independence of the entity's auditors: Identification. 316 316 .. assessment and mitigation of risks and retirement by rotation over a fixed period of time. Disclosure and transparency: Disclosure of information should be timely and balanced to ensure that investors have clear access to data and facts.GOVERNANCE PRINCIPLES Integrity and ethical behaviour: Organizations should develop a code of conduct for their top management that promotes ethical and responsible decision making.
Balance of power: The simplest balance of power is very common. 317 . discussed and resolved.GOVERNANCE STRATEGIES Monitoring by the board of directors: The board of directors. safeguards invested capital. Regular board meetings allow potential problems to be identified. they should provide no mechanism or scope for opportunistic behaviour. Remuneration: Performance-based remuneration is designed to relate some proportion of salary to individual performance. a person benefitting from a decision should abstain from it. However. with its legal authority to hire. fire and compensate top management.
and was responsive to investors' requests for information on governance issues. 318 . who had no management ties. McKinsey found that 80% of the respondents would pay a premium for wellgoverned companies. from 10% for companies where the regulatory backdrop was least certain (those in Morocco. They defined a well-governed company as one that had mostly out-side directors. The size of the premium varied by market. Egypt and Russia) to around 40% for Canadian & European companies. undertook formal evaluation of its directors.GOVERNANCE & PERFORMANCE In its “Global Investor Opinion Survey” of over 200 institutional investors in 2002.
Over a period of time. today economic institutions are considered as a major drivers of improvement in quality of life in general and therefore needs to include multiple stakeholders. corporate philanthropy should be a part of every corporate mission. Therefore. the short-term view of profit maximisation gave way to a more broader and mediumterm view wealth maximisation of the shareholders. 319 . However. The basic premise is that firms cannot exist in vacuum.SHAREHODER – STAKE HOLDER THEORY Till the early part of the 20th the basic objective of modern organizations was to provide goods and services for public consumption for profit maximisation.
CORPORATE SOCIAL RESPONSIBILITY As Peter Drucker rightly pointed out that. However. “a healthy business cannot exist in a sick and impoverished society”. economic and social responsibilities cannot be mutually exclusive. giving a very important message that one cannot exist without the other. CSR can be defined as. the debate on CRS still continues whether firms should detract its focus from its business? 320 . Therefore. Therefore. “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.
people are becoming increasingly aware of their right to a decent and healthy life. 321 . Public image: Entrepreneurs are increasingly relying on public image as a source of competitive advantage and a higher financial discounting. MRTP). The role of media: The media and various consumer organizations have come up in protecting consumer rights and exposing mal-practices.GROWING CONCERN FOR CSR Awareness due to education: With growing literacy. Fear of government interference: Excessive quench for profits may lead to build up of adverse public opinion compelling the government to intervene (Eg.
Exide – Product take back). and extended producer responsibility (Eg. Cement . Aditya Birla Research Centre – LBS).CSR STRATEGIES Green Supply Chain Management: It includes environmentally preferable purchasing. designing eco-friendly products. 322 . Refrigerators – CFC. Health & Hygiene – Attending the health hazards due to wastes and by-products to employees and society in proximity (Eg. Education. Literacy & Training Programs – (Eg.Paper packaging. Tata Steel – Life Line Express). eco efficiency.
Prahalad notes that future markets exist collectively. 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. C. In turn companies by serving these markets.BOTTOM OF THE PYRAMID With the market across most developed markets including the US getting saturated. they're helping millions of the world's poorest people to escape poverty. Strategic innovations leading to disruptive business models can show the way out. K. 323 .
BLUE OCEAN STRATEGY 324 .
TWO WORLDS 325 .MARKETSPACE .
WHAT IS RED OCEAN? Companies have long engaged in head-to-head competition in search of sustained. 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). one companies gain is always at the 326 cost of another companies loss. battled over market-share. profitable growth. . In today’s red oceans. Yet in today’s overcrowded industries. where most industries are saturated. They have fought for profits.
rendering rivals obsolete and unleashing new demand. Such strategic moves are possible through the pursuit of product differentiation and low cost simultaneously. Blue Ocean’s have existed in the past. It is only the frames of the . it will exist 327 in the future as well. It helps in creating powerful leaps in value for both the firm and its buyers. but by creating blue oceans of uncontested market space ripe for growth .WHAT IS BLUE OCEAN? Tomorrow’s leading companies will succeed not by battling in red oceans.
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 .
Demand across developed markets reaching a plateau. . Niche markets & monopoly havens are continuing to disappear. information imperfections atrophy instantly. As trade barriers between nations & regions fall.BLUE OCEAN STRATEGY IMPERATIVES Prospects in most established market spaces – red oceans – are shrinking steadily. Technological advances have substantially 329 improved industrial productivity. of European nations. Population shrinkage across a no.
CONCEPTUAL UNDERPINNINGS Blue oceans have existed in the past and will exist in the future as well. the underlying technology was often already in existence. . Incumbents often create blue oceans within the ambit of their core business. History indicates that blue oceans exist in three basic industries – automobiles (how people get to work) – computers (what people use at work) – entertainment (what people do after work). managerial moves are. They are not necessarily about technology. Company & industry are the wrong units of 330 strategic analysis.
BLUE OCEAN .IMPLEMENTATION Reduce Which factors to be reduced below the industry standard Eliminate Which of the industry factors that the industry takes for granted should be eliminated Create VI Which factors should be created that the industry has not offered Raise Which of the factors should be raised above the industry’s standard 331 .
IMPLEMENTATION SEQUENCE Buyer Utility (1) Is there exceptional buyer utility in your business idea? Price (2) Is your price easily accessible to the mass of buyers? Blue Ocean Strategy Adoption (4) What are the adoption hurdles in actualizing your business idea? Are you addressing them up front? Cost (3) Can you attain your cost target to profit at your strategic price? 332 .
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. Sony Play Station: Redefining machine-human interface in entertainment and targeting an altogether new user base. Southwest Airlines: Pioneering the concept of LCC. Citibank – Automated teller machines & credit 333 cards. .
companies & managers are largely at the mercy of economic forces. According to this view managers need not be constrained to act within the confines of their industry. 334 . All they need to do is change their managerial frames. greater than themselves. 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. According to this view.