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.FEATURES
It forms the core activity of the top management. It is all about creativity and innovation. It is about adaptation and response to the same.
. It provides broad guidelines.STRATEGIC MANAGEMENT . It involves substantial resource outlay. It requires full commitment of the top management. It is a holistic and integrated approach. It is irreversible.
. It brings instant success. It attempts to minimize risk.STRATEGIC MANAGEMENT – MYTHS
It involves short-cuts. It is about forecasting. It is rocket science. It a bundle of techniques or even tricks. It involves only the top management. It about mere data and facts. It is fool-proof in nature. It involves nitty-gritty's. It is about a definite formula.
scale and scope. To be insulated against environmental threats. To tap markets across boundaries. To be future oriented. To assimilate change faster. To gain expertise in technologies.
. To innovate. 9 To develop core–competencies. again and again ……. To leverage size. rather than reactive. To be proactive. To generate large resource pool.STRATEGIC MANAGEMENT IMPERATIVES
To be continuously alert.
obsession.strategies.STRATEGY . It is an old wine in a new bottle. and more importantly . Even in today’s markets. In the ancient days battles were won not by virtue of size of the army or armory. In contrast. battles fought on the market front are won by companies by virtue of their obsession & strategies. In the ancient days battles were fought over land.
. whose origin can be traced to some of the greatest battles fought in the ancient days. but by virtue of their courage. but with a lot a rigour and robustness.ORIGIN
The word strategy has its origin from the Greek word strategia meaning Military Commander. today's battles are fought over markets.
US attack of Morocco to capture Germany – Strategy: Pin-hole strategy – Wal-Mart challenging Sears by entering small towns. – Reliance’s entry into telecom.SOME PARALLELS
Japan’s attack on Pearl Harbour – Strategy: Attack where it hurts the most. challenging GM and Ford. – Toyota’s entry in the US. – Yahoo and Microsoft challenging Google. Allied Forces Vs Germany (WW-II) – Strategy: Forging alliances. Napoleon’s attack on Russia – Strategy: Waiting for the right time.
The first major discontinuity in the history of global business environment was the .
.EVOLUTION OF MANAGEMENT
As Peter Drucker refers to it. – 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. A paradigm is a dominant belief about how the business and its environment operates. The things happening around the firm when totally disconnected from the past leads to a paradigm shift.Industrial Revolution.
1960). performance across firms became differentiated.EVOLUTION OF STRATEGIC MANAGEMENT
The second major discontinuity in the history of global economic environment – World War II. From uniform performance. The question of outperforming the benchmark became the new buzzword. – Global market place. – Changes in the technology fore-front. push to pull). Survival of the most adaptable becomes a new management paradigm (Ansoff. – Homogeneous to heterogeneous products. Efficiency and effectiveness are no longer sufficient. – Affluence of the new customer (i.
Phase IV: Horizon of Scenarios 2
Phase I: Extrapolation of the past
1 2 1 3 1A 1B 2A
Prior to 1950 Phase II: Discrete Scenarios
Phase III: Range of Scenarios
1970 to 1990
1950 to 1970
– It is primarily the top management’s prerogative.
. – The choice of product-market mix is based on conscious evaluation of risk – return factors. Learning always begin on a clean sheet of paper. – The choice of strategy is primarily concerned with external ones rather than internal ones. Ansoff (1960) – Strategy can be segregated into certain mutually exclusive and inter-related components aimed at managing the growth of an organization. – Biases and prejudices has a very little role to play in strategic choices pursued by managers.APPROACHES TO STRATEGY
Analytical Approach – Igor H.
The organization initially decides which industry to enter. – The top managers then decide on the type of organization structure & systems to be in place. how it will compete. everything else follows. – Organization structure will precede and cause changes in strategy.APPROACHES TO STRATEGY
Design Approach – Alfred Chandler (1970) – Structure follows strategy. Once the control systems are in place. who will be the top managers. Successful organizations align authority and responsibility of various departments in way to reach overall objectives. – Management control systems has a dominating role in influencing firm performance.
APPROACHES TO STRATEGY
Positioning Approach – Michael E. – The environmental forces comprises of – supplier. competitors. new entrant. – The organization will outperform the industry where environmental forces are weak and vice-versa. – A firms performance is inversely related with the bargaining power of environmental forces to which it is exposed. – An organization is seldom in a position to influence the larger business environment. customer.
. Porter (1980) – Choose a consumer segment and position your product accordingly. substitutes.
but exploiting the resource differences among them. – It enables a firm to deliver unimaginable value ahead of time. – Core competencies are a set of skills that are unique and can be leveraged.APPROACHES TO STRATEGY
Core Competence – C. locating in most attractive industries and pursuing the same strategy. Prahalad (1990) – The key to superior performance is not doing the same as other organizations. – Organizations can significantly alter the way an industry functions. They are complex resources and undermines a firms competitive advantage. K.
STRATEGIC MANAGEMENT PROCESS
Strategic Intent Strategic Planning Strategic Gap – Environmental Scanning – Internal Appraisal of the Firm Strategy Formulation – Corporate Strategy – Business Strategy Strategic Choices – Functional Strategy Strategy Implementation Strategy Performance Strategy Evaluation & Control 19
TOP MANAGEMENT PERSPECTIVE
It is the cornerstone of an organizations strategic architecture reflecting its desired future state or its aspirations. A substantial gap between its resources and aspirations. It’s a philosophy that distinguishes it from its competitors. It involves an obsession to be the best or outperform the best.
If you cannot see the future. you cannot reach there. It provides a sense of direction and destiny. A gap that consciously manages between stagnation and atrophy. It implies a significant stretch. A strategic intent is a statement of purpose of existence.
m Do an in
Visio n Mission Dominant Objective s Goal s Plans
Lo g ic
.STRATEGIC INTENT .
when radical changes in the internal and external environment (i. To put it more simply.e. It is core to the strategic intent of the firm.
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. Dominant logic changes. it can be perceived as a set of working rules (similar to thumb rules) that enables the top management to decide what can be done and more importantly what cannot be done. strategic variety) is apparent.
It provides an unity of purpose amidst diversity of personal goals. It is a combination of three basic elements – – An organizations fundamental reason for existence.VISION
It is a dream (not a forecast) about what the company wants to become in the foreseeable future. – It represents the company’s audacious. It enables the top management to remain focused.
. but achievable aspirations. beyond just making money. – It stands for the unchanging core values of the company. It ensures that the company does not wander off into unrelated zones or fall into an activity trap.
not an utopian dream. and memorizable. Clarity – Vividly descriptive image of what the company wants to be known for in the future. Brevity – It should be short.VISION . Sharing – The company across all hierarchies should have faith in it. In Reliance when a new project becomes operational top managers hand over charge to the SBU heads and move on to a new project. clear.CHARACTERISTICS
Reliance – Where growth is a way of life. Reachable – It should be within a reasonable target in the known future.
. Empathy – It should reflect the company’s beliefs to which it is sensitive.
It provides a holistic picture. It gives enlightment.ADVANTAGES
To stay focused on the right track. It gives a shared platform. To prevent the fall in a activity trap. It lends integrity and genuineness.
. It makes strategic alignment easier.VISION . It fosters risk taking and experimentation. It gives the impression of a forward-looking organisation. It facilitates development of skills & capabilities.
A broad mission statement helps in fending competitors.
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. Although the purpose may change over time. its reason for existence. 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. It serves as a road map to reach the vision.
We offer strength. though some may seem unrelated in nature. – We do not offer insurance. …………………. Some other examples – We do not offer shoes. ………………….
.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 offer security. We offer solutions. We offer comfort. – We do not offer software's. – We do not offer steel.
– It prevents deviation. – It is based on Management by Objectives (MBO). It is an end result (quantifiable) something a firm aims and tries to reach in a time bound frame.GOALS & OBJECTIVES
Reliance – We want to become a Rs. – It adds legitimacy and motivation. – It provides a benchmark for evaluation. – It helps identifying key success factors. – It keeps the mid management pre-occupied.
. – It lends direction – time frame in the medium term. It provides a quantitative feel to an abstract proposition.100K crore company by the year 2005.
– Use price-elasticity to break market barriers. – Leverage economies of size and scale. It is specific to a particular business. coordinating appropriate technologies. It is the process of garnering necessary inputs. – Compress project times. and gaining access to desired markets to achieve the desired goals and objectives. The details of the plan Reliance Telecom adopted were – Backward integrate process technologies. – Acquire a market share of indomitable position.
Reliance – Desire to invest 25K crore in telecom business by circa 2010.
Due to top management commitment.
. radical change may lead to disequilibrium. This state of affairs is known as strategic drift. In such a context. However. It often leads to an organizational crisis. This tendency to restore continuity is known as inertia (resistance to change). equilibrium is maintained. When changes in the environment is incremental. Historical studies have shown that most organizations tend to continue with their existing strategies. past strategies tend to have a bearing on future strategies. strategies lose touch with the emerging realities.
STRATEGIC DRIFT FRAMEWORK
Degree of change
Incremental Change State of Flux Continuity
Stage of Transformation Strategic Drift Stage of Atrophy
– Using covert tactics to pursue self interests. – Distorting information to gain mileage. – Developing a platform of support. – Creating obligations of reciprocity. Organizational politics involves intentional acts of influence to enhance or protect the self-interest of individuals or groups over organizational goals. – Hiding vulnerability.
Strategic drift often leads to organizational politics. Some instances of organizational politics – Formation of powerful groups or coteries. – Creating a favourable image.
– Persons responsible for strategy conceptualization and implementation are34 divergent. Usually there is wide gap between the two when organizational politics is evident. Other causes – – The plans are unworkable and utopian.
. A realized strategy is what the top management actually translates into practice.INTENDED & REALISED STRATEGIES
An intended strategy is an expression of interest of a desired strategic direction. – Influential stake-holders back out. – The environment context has changed.
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.
. However. but the master scheme of the rational comprehensive scheme is not apparent. They simply unfold the particulars of the sub-system in stages. Learning is an integral part of logical incrementalism. this is not to be treated as “muddling”. but as a defensible response to the complexities of a large organization that mitigate against publicizing goals. Strategy formulation and implementation are linked together in a continuous improvement cycle.
The broader objective should serve the overall interest of the organization. Agent of Change – Formal ratification of a change plan through MBO.IMPLEMENTING INCREMENTALISM
General Concern – A vaguely felt awareness of an issue or opportunity. Adaptation – As implementation progresses. Macro Broadcasting – The broad idea is floated without details to invite pros and cons leading to finer refinements.
. Leveraging Crisis – A sudden crisis or an opportunity should be used as a trigger to facilitate acceptance and implementation of change.
Dominant logic’s are very rigid and sticky and prone to inertia.STRATEGIC TRANSFORMATION
Strategic transformation (a complete overhauling of the strategic architecture) becomes inevitable whenever a strategic drift takes place. Strategic transformation becomes smooth through a change in top leadership. As it brings 37 with it a different dominant logic. Dominant logic’s are the cornerstones of change when strategic transformation is apparent. Tampering with surface level factors often leads to atrophy.
. It creates blinders.
. and skills that fosters experimentation and questioning and challenge around a shared purpose. It helps prevent a strategic drift from occurring at the first place.LEARNING ORGANIZATION
A learning organization is capable of continual regeneration from knowledge. – Organisational Slack – Enough free space. A learning organization must continuously focus on unlearning as well. – Constructive Bargaining – Agree to disagree. experience. – Experimentation – Fosters a culture of risk taking. Factors that fosters a learning organization – Pluralistic – An environment where different and even conflicting ideas are welcome. – Informal Networks – Emerging of new ideas.
ANALYZING BUSINESS ENVIRONMENT
It is pro-active in nature. Strategic gap basically points towards a vacuum of where the organisation wants to be and where it is. Strategic planning is a function of discounting the future. It is based on the assumption of incremental change. It points to a position of superiority with relation to competition. It is reactive in nature.e. gap analysis).
.PLANNING & STRATEGIC PLANNING
Formal planning is a function of extrapolating the past. It is based on the assumption of radical change. It requires a quantum leap (i. Competitive advantage provides the surest way to fulfill the strategic gap.
The world is flat. It is exploratory in nature. events. The segments of the environment a top manager scans selectively depends upon his dominant logics.
. Environmental scanning is very important component of strategic planning. resources and ideas move unhindered. not guided by any boundaries. Environmental factors can be external as well as internal to the organization.ENVIRONMENTAL SCANNING
The environment is defined as the aggregate of conditions. A manager has to continuously scan the environment to ensure alignment of the strategies with the radically changing environment. and influences that affect an organizations way of doing things.
Understanding the composite effect is critical.
. It is particularly important that PESTEL be used to look at the future impact of environmental factors.PESTEL
PESTEL attempts to provide a broad framework on how the broader environmental forces affects an organization and influences the way it practices strategy. but also to analyze the complex linkages across them. It is important not only to identify the structural drivers of change. It is not intended to be used as an exhaustive list. for which a holistic picture is required. which may be different from the past impact.
Inflation & Interest Rates. Government Attitude. Currency Stability. Language Barriers. Religious Sentiments. Licensing & Quotas. Economic – GDP. Infra-Structural Investments. Fiscal Deficit.
Political – Government Stability. FDI Inflows. Savings & Investment. Subsidies & Protection. Income & Age Distribution. Literacy Levels. Social Values. Economic Cycles. Monsoon & Food Grains Reserves. Central – State Co-alignment. Capital Market & Forex Reserves. Economic Model. Social – Population Diversity.
Waste Disposal & Emissions. Patents. Technological Convergence.
. Research & Development. Product Safety & Health Hazards. Pollution Control Laws.PESTEL FRAMEWORK
Technological – Innovation. Extended Producer Responsibility. Direct & Indirect Taxes. Patent Laws. Legal – Monopolies Legislation. Carbon Credits. Environmental – Global Warming & CSR. Employment Laws. Consumer Protection Laws. Product Design. Obsolescence Rate. Environmentally Preferable Purchasing. ERP. Non-Fossil & Alternative Fuels.
New Industrial Policy (NIP) – Liberalizing industrial licensing. MRTP Liberalization. PSU Disinvestments. Capital Market Reforms. Structural Adjustments – Phasing out subsidies. FERA Liberalization. Rupee convertibility. Exit Policy. Encouraging FDI. Dismantling price controls. Encouraging exports.
. Economic Reforms – Fiscal & Monetary Reforms.VRS. Abolition of import licenses. Banking Sector Reforms. Curtailment of PSU’s. New Trade Policy (NTP) – Lowering import tariffs.
Mergers & Acquisitions
.Survival of the fittest MNC Onslaught – Enhancing stakes – Power Equation – Joint Ventures – Technological Alliances – Take-over threat.DISCONTINUITY
Destabilization due to entrepreneurial freedom – Cocoon of protection disappears – Diversification spree – Existing notions of size shaken – Industry structures change radically – Economic Darwinism .
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
Hyper Competition – MNC’s .
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
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
.FIVE FORCES MODEL .
the forces are subject to changes.FIVE FORCES MODEL ASSUMPTIONS
The model is to be used at the SBU level and not at the industry level. It is even wiser to apply the same at the product – market level.
. It should not only be used to understand the forces. but also used to understand how they can be countered and overcome. profit potential) per se. incremental or otherwise.e. It depicts the attractiveness of an industry (i. The five forces have strong cross-linkages. The model should not be used as a snapshot in time.
Low customer switching costs. Undifferentiated product. Capital requirements. Government policy. Resource profile & fear of retaliation. Product differentiation through proprietary technology or brand power. Low relative importance of the segment. High switching costs. Unimportance of product quality. Industry stagnation. Learning curve advantages.PORTERS FIVE FORCES ANALYSIS
Threat to Entry – Economies of size and scale. Access to distribution channels.
. Threat of Customers – Buyer concentration and volumes. Presence of substitutes or unorganized sector. Low margins & stagnancy. Scope for backward integration.
Unorganised sector. Scope for forward integration. Produced by industries earning high profits.
. Industry stagnancy. Threat of Substitutes – Improvement in price -performance trade-off. Low level of differentiation. Buyer’s propensity to substitute. High exit barriers. Piracy and counterfeits. Low relative importance of the segment. Product perishability.PORTERS FIVE FORCES ANALYSIS
Threat of Suppliers – Supplier monopoly. Jockeying for position – Fragmented market. Differentiated inputs. Diversity of players. Intermittent overcapacity. Lack of substitute inputs. High customer switching costs.
Size and Scale of Operations – It is a very important component of competitiveness in today's global context (Bharti – MTN. Tata). Resource Profile – It highlights the capabilities (generic) or competencies (business specific) of the firm. dominant or related diversified or unrelated diversified businesses (Infosys. Business Scope – The intention whether the firm wants to be in a single.
. Inertia – Excessive commitment to past strategies prevents firms from tapping emerging opportunities. Cohesiveness – Degree of bonding existing across affiliated firms.
. The E-Curve thus enables organisations to build entry barriers. Experience curve has strong linkages with performance. which further reduces costs. Matured firms will always be positioned advantageously on the ECurve than new entrants. experience teaches better and more effective way of doing things.EXPERIENCE CURVE
The cost of performing an activity declines on per-unit basis as a firm becomes more efficient. an E-Curve can prove to be futile during discontinuity. leverage it as a competitive advantage. and with lower prices it can increase its sales volume. However. With lower costs. it can price its products more competitively.
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
EXPERIENCE CURVE .TRADITIONAL VIEW
Efficiency = Lower Costs
Experience = Efficiency
Lower Costs = Higher Sales
Entry Barrier = Better Performance
Higher Sales = Lower Costs Lower Costs = Entry Barrier
Inertia = Limited Growth Experience = Inertia
Limited Growth = Diversification
Strategic Failure = Poor Performance
Diversification = New Experience
≠ Old Experience
.EXPERIENCE CURVE .
Business Intelligence – Bankers. Competitors. Interviews. Observation. Acronym for Strengths – Weaknesses – Opportunities – Threats. Case Studies – Structured Questionnaires. 59 Analysts.VULNERABILITY ANALYSIS . Press Clippings & Interviews.
. Suppliers. Customers. Websites. It helps an organisation to capitalize on the opportunities by maximizing its strengths and neutralizing the threats minimizing the weaknesses. A SWOT audit involves – Company Records – Annual Reports.SWOT
The framework was originally conceptualized by Kenneth Andrews in 1970. It is one of the earliest models in environmental scanning.
Nullify weaknesses which prevents you from exploiting opportunities
Leverage strengths to make use of opportunities
Weaknesses Minimize weaknesses which prevents you from countering threats
Utilise strengths to counter threats (?)
.SWOT ANALYSIS .
SBI. Economies of scale – Eg. Volkswagen. Dr. Sony. Aditya Birla. Caterpillar. Excellent penetration – Eg. Siemens. High quality products – Eg. Engineering Skills – Eg.SOURCES OF STRENGTH
Strong brand identity – Eg. Reliance. Toyota. Motivated employees & cordial industrial relations – Eg. Tata. Infosys. Large resource pool – Eg. Strong after sales & service network – Eg. Infosys. Biocon. Strong R&D base – Eg.
. Tata Steel. Reliance. ITC. Honda. Reddy’s. HUL. Good credit rating – Eg. Ranbaxy.
Hindustan Motors. Group . Tatas. J. K. Excess manpower – Eg. CESC. Ballarpur Inds. Nirma.SOURCES OF WEAKNESSES
Outdated technology – Eg. K. Single product syndrome – Eg. Inertia – Eg. CMC (Tata Group)
. Narrow business scope – Eg. Organizational Politics – Eg. Lack of product / brand clout – Eg. Lacking experimentation culture – Eg. Modi Group. B. Procter & Gamble. Inefficient top management – Eg.Raymond. Bijoligrill. SAIL. Excessive diversification – Eg. Strategic myopia – Eg.
Fertilizer. Life style changes – Eg. Growing population – Eg. Globalization – Eg. Sugar. Retailing. VRS. Market driven Interest rates – Eg.SOURCES OF OPPORTUNITIES
Delicensing of Industries – Eg. Market driven Pricing – Eg. Abolishing MRTP – Eg. Capital market reforms – Eg. Maruti. Insurance. ECB’s. Sugar. Telecom.
. Banking. Free pricing – Eg. Abolishing CCI. Middle-class buying power. Collaborations & Joint Ventures – Bharti & WalMart. Fertilizers. Exit Policy – Eg. GDR’s.Tata Motors.
Tata Steel. 26/11. Onida. Foreign Direct Investment (FDI) – Eg. Economic recession – Eg. (1985–1990). Earth Quake.SOURCES OF THREATS
Political instability – Eg. (2008). Reliance. Bajoria – Bombay Dyeing. Nationalisation – Eg.
. Natural disaster – Eg.Social activism – Eg. Land acquisition . Hostile take-over – Eg. Import relaxation – Eg. Singur SEZ. Tsunami. 11/9. Lack of Corporate Governance – Eg. Terrorist attacks – Eg. Dumping from China. Satyam. Group disintegration – Eg.
. Holistic view – Prepare a complete overall picture.ETOP
Acronym for Environment – Threat – Opportunity – Profile. Forecasting – Predict the future (i. Strategic responses (including adaptation) to opportunities and threats is critical for survival and success. time series. It represents a summary picture of the external environmental factors and their likely impact on the organization. scenario analysis). Stages in ETOP analysis – List the aspects of the environment that has a bearing on the organization.e. Assess the extent of impact of the factors. Delphi's technique.
Relative attractiveness of the market. selectively. An organization can draw upon the experience of its peers in similar situations.PROFIT IMPACT OF MARKET STRATEGY
PIMS is a database model developed by GE and later extended by HBS to examine the impact of a wide range of strategy variables on business performance. Some key findings on major performance drivers that explains 75% deviations in performance – Product quality and relative market share. High investment intensity acts as a drag.
. It is also a form of assessing vulnerability through longitudinal analysis. 66 Vertical integration is a powerful strategy.
The analysis is based on historical data and it does not take care of future challenges. Managers should be particularly cautious while referring to such data during times of discontinuity as it makes past patterns futile. when radical changes in the economy takes place. As every organization is unique in its own way.PIMS . – Contexts may vary across countries. – Contexts may vary over time. therefore 67 validity may be a question.
. Authenticity of data is of prime importance – Contexts drawn across one organization may not be applicable to another.
It involves a three-stage process – Identify KSF – What does it take to be successful in a business? Drawing KSF – What should be the organizations response to the same? Benchmarking KSF – How do we evaluate organization success on this factor? 68
. It enables the top management to draw focus. KSF helps organizations spot early opportunities and convert them into value adding business propositions.KEY SUCCESS FACTORS (KSF)
KSF relates to identification and putting concentrated effort on a particular activity or process which forms the very basis of competitive advantage.
IDENTIFYING ALTERNATIVE STRATEGIES
It determines the locus a firm encounters with internal and external environment.GRAND STRATEGY
It is concerned with the overall business scope (single. global) of a firm and deals with choices of allocating resources across them. dominant. It indicates the quality of growth an organization is looking for. unrelated) and geographical scope (local. national. It provides broad direction to the groups vision and mission. A corporate strategy identifies and fixes the strategic gap it proposes to fill. It reflects the customer needs it intends to satisfy.CORPORATE . related.
CORPORATE STRATEGY MATRIX
Corporate Strategy Stability Stability Growth Growth Combination Diversification Divestment
Intensification Market Penetration Related Vertical
Market Development Product Development Unrelated Horizontal
– Why disturb the existing equilibrium set up? – Limited resource position. Even during adverse times firms need to adopt a strategy to sustain current performance levels. The reasons for stability strategy – – Lack of attractive opportunities. – To stop for a while and assess past records. does not relate to do-nothing (Eg.
It involves maintaining status-quo or growing in a slow and selective manner. – The firm may not be willing to take additional risk associated with new projects. (Eg. erosion of capabilities. The scale and scope of present operations remains almost intact. Hindustan Motors). Stability however. Citibank).
New Product Existing Product
Existing Market Market Penetration (+) Product Development (++) New Market Market Development (++)
Diversificatio n (+++)
Note: (+) indicates degree of growth and risk involved.
(Eg. Nirma. – The company carries a risk of product obsolescence. – Elongated product life-cycle. – Helps firms which are not comfortable with unfamiliar terrain. Britannia). convert competitors customers. Ujjala. Market penetration can be achieved by – increasing sales to current customers. – Suitable for industries where scope for technological breakthrough is limited. within a well defined market segment. direct non-users to users.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.
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. Du Pont – Nylon: parachutes. – Creativity and innovation – thinking out of the box. carpets. – Unconventional and flexible distribution channels. tyres. fabrics. – Immense customer reach & flexible advertising.…… or Teflon: aircraft technologies to cutlery to paints or Raytheon Corp – Microwaves: radars to kitchen appliances). socks & stockings. – Stretches product life cycles.
. – Moves across geographical boundaries. upholstery. (Eg.
features.Strolleys). – Areas of product improvement – performance. durability. – Deliverable through – redesigning or reengineering. reliability. – Substitutes that serve the same needs (Eg. serviceability. perception. Refills)
. Close Up: Fluoride – Gel toothpaste or VIP .PRODUCT DEVELOPMENT
It is a strategy where a firm tries to achieve growth through a radical new product (Eg. – Leverage on customer and brand loyalty. – Leveraging through – innovation. Microsoft: DOS to Windows) or a substantial improved version (incremental) of an existing product to repeatedly enter the same market (Eg. conformance. aesthetics.
e. licenses (i. – High transaction costs and institutional gaps. thereby creating a new business. From the modern point of view they are strategically dissimilar. the new business is distinct from the existing business in terms of – inputs – technologies – markets. industrial embassies). From the traditional point of view.e. – Permits: quotas. – Conglomerate or market power (i. – Internal capital market. Why do firms diversify in the Indian context? – Shift the growth trajectory or opportunistic.
. – Risk reduction. dominance).DIVERSIFICATION
It marks the entry of a firm into newer markets with new products.
If the hot wave dominates the planet. either of which is equally likely to prevail.HOW DIVERSIFICATION REDUCES RISK?
Consider a hypothetical planet. in which a given year is either under hot or cold wave. the ice-cream business would register a return of 30%. ice-cream business would register a return of 10%. while the coffee business would register a return of 10%. Let us assume that there are two businesses constituting the entire market – coffee and icecream. cold wave dominates the planet. If on the other hand. What would be your ideal diversification strategy through optimization?
. while the coffee 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.
A firm gets most of its requirements from one or more outside suppliers that is under its partial control through value chain partnerships (Eg. Reddy’s). Dr. Ranbaxy. Usually the firm concentrates on its core activities.Where one firm has full ownership and control over all the stages of a value-chain in the manufacturing of a product (Eg.
. Quasi-integration . Maruti – Sona Steering). and out-sources the noncore activities (Eg. 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 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
– Cost of dysynergy (i.e. Firms usually engage in conglomerate diversification when emerging opportunities are very attractive and offers potential growth opportunities. – Cost of ignorance (i.CONGLOMERATE DIVERSIFICATION
It relates to entry of firms into businesses which are distinct in terms of – inputs – technologies – markets.e. synergies pulling in opposite directions). lack of knowledge of competitive forces). lack of strategic intent.e. and are also strategically dissimilar. myopia).
. – Cost of neglect (i. Drawbacks of unrelated diversification – – Cost of failure (i. core business).e.
Paper & Packaging
Food & Confectionary
Tata Pharma. where a company simply exits because the business no longer contribute to or fit its dominant logic. Tata Press).DIVESTMENT
Divestment is a defensive strategy involving the sale of entire stake (Eg. Glaxo’s “Glucon-D” to Heinz). In strategy there is no scope for sentimentality with divestment. It taken into account when performance is disappointing (i.e. (Eg. L&TCement Division to Aditya Birla Group) technically known as divestiture or a product (Eg. Tatas sale of Goodlass Nerolac.
. ACC) in full to an independent entity. reactive) and survival is at stake and the firm does not have resources to fend off competitive forces. It may also involve a SBU (Eg. It is may also be a pro-active strategy.
where 100% of the assets (including intangibles) are valued and paid for.3 billion. where the equity is allotted amongst the existing shareholders on a pro-rata basis. (Eg. involving 608 pence per share). Leveraged Buy-Out (LBO) – Here the company’s shareholders are bought out through a negotiated deal using borrowed funds. Tatas buy-out of Corus for US $ 11. the Companies Act. Hive-Off – A hive off is the creation of a new entity followed by transfer of assets.DIVESTMENT . 1956 does not permit this mode.
Outright Sale – Popularly known as the asset route. (Eg. Sale of Diamond Beverages to Coca-Cola for US $ 40 million). However.
developing facilities right from the scratch) or through brown-field projects (i. There can be no ideal strategy for every business. growth. and divestment strategies applied simultaneously or sequentially for a portfolio of businesses. because every business has its own unique external and internal environment. A combination strategy can be implemented through green-field projects (i. mergers and acquisition.COMBINATION STRATEGY
It is a mixture of stability. 91
.e. It is usually pursued by a business group with diverse interests across multiple industries. joint ventures).e.
STRATEGY CHOICE & PORTFOLIO ANALYSIS
What then is the magical number?
. Dominant logic enables top managers to selectively scan the environment and make trade-offs. 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. In most cases the trade-off is between resources and opportunities.
nor is to a define a problem for others to solve. if addressed. managers need to ask the right questions.SELECTIVITY IS THE KEY
The role of a top manager is not to solve a problem. They must choose problems which will lead to the right kind of opportunities. 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?
. The key task before a top manager is to identify the right problems. will help the firm achieve its intent. To identify the right problems.
chaebols in Korea. embassies). keiretsus in Japan. formal and informal ties. Their roots can be traced to a single family or clan and share broad similarities.
.e. 95 Succession planning is critical to continuity. Resource sharing. business houses in India.DEFINITION
A business group is known by various names in various countries – guanxique in China. Licenses & Quotas. Managing Agency). High degree of centralized control (GEO. Their origins can be traced back to market imperfections existing in an economy (MRTP Laws. BRC).BUSINESS GROUP . Proximity to the corridors of power (i.
RESOURCE SHARING ACROSS FIRMS
Firm 5 Firm 3
STRATEGIC CHOICE – MACRO TIMING
Recession (Stability) Prosperity (Diversificatio n) Depression (Divestmen t)
Recovery (Intensification )
Duration (Yrs) Inception Intensification
.STRATEGIC CHOICE – MICRO TIMING
Maturity Stability Growth Diversification
Rules of the game are different. sometimes impossible.PORTFOLIO ANALYSIS
Resource allocation across a portfolio of businesses is an important strategic choice.
. there are high costs associated with entry and exit. Redeployment of resources upsets the established power bases of a group. Relatedness across resources are difficult to realize. Power and resources often goes hand in hand. Why? Businesses are not about liquid assets. therefore. Investing in emerging businesses may not actually be so simple as it appears to be. next only to choice of business.
BCG GROWTH MODEL
Relative Market Share (%)
Industry Growth (%) Low High
provided the company is able to build up on its market-share (i.e. Tata Telecom. but to larger extent than a question mark. Tata Steel). Trent. These businesses are also net users of resources (Eg.BUSINESS ANALYSIS – TATA GROUP
Question Marks – They have potentials in the long term. market development. provided the industry growth rate continues and the company is able to maintain its growth (i. diversification). Stars – They achievers in the near term. market penetration. TCS. which remains a big? These businesses are net users of resources.e. Tata-AIG).
. product development). and their risk profile is high (Eg.
. Groups prefer to dispose off such businesses (i. Tata Chemicals). Tata Press). Dogs – They are a drag on the group. Tata Motors. However.BUSINESS ANALYSIS – TATA GROUP
Cash Cow – These are matured businesses. Given that the growth potential in the business is low. Tata Pharma. Tata Tea. cash cows may also need to invest provided the industry takes an upswing (Eg. Nelco. divest) as achieving a dominant position in these businesses is a difficult task. and the company dominates the industry ahead of competition (i.e. and they lack on competencies to take on competition and are basically cash traps (Eg. they are generators of resources. Indian Hotels. stability).
Armani). Mercedes Benz.e.BCG .
. neither in high or low. factors are limited. niche – Rolex. Cartier. The model does not provide specific solutions within a particular category. HUL). The terminologies used are somewhat prohibitive. Certain businesses in the low market share category may be the result of a conscious strategy (i. Cash cows may actually need substantial investments to retain their market position (Eg. Data may be prohibitive.LIMITATIONS
It does not address the concerns of a business which is in the average category (usually the majority).
Diversify (++) Intensify (+)
Divest (.GE .-)
Inception Dominant Strong Favourable Tenable Weak Growth Maturity Decline
Improve Selective Niche Abandon Industry Life-Cycle Divest Harvest
SHELL – DIRECTIONAL POLICY MATRIX
Business Sector Prospects
Attractive Average Unattractive Generate Cash Phased Withdrawal
Market Leadership Try Harder Double Or Quit
Phased Expand Withdrawal
. SBU – A business unit which is strategically different from another and also shares a different SIC code. Portfolio – An organization is perceived as a portfolio of businesses. Disinvestment involves selling in phases. Gap Analysis – It emphasizes what a firm wants to achieve. BCG – Boston Consulting Group.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. Divest – Selling a part or the entire business at one go.
BUSINESS STRATEGY & COMPETITION
Competitive advantage refers to a firms resources or activities in which it is way ahead of competition.
. rent). building market-share. and earning super-normal profits (i. The strength of a firm in a particular business usually stems from its competitive advantage.e. Such resources or activities should be distinctive and sustainable over time.COMPETITIVE STRATEGY
A competitive strategy deals with how a firm competes in a particular business or product-market segment. Competitive advantage is the back-bone of strategy. The principal focus is on meeting competition.
leveraging (Prahalad). identifying critical success factors.
. Resource Based View – Obsession with competence building.BUSINESS STRATEGY FRAMEWORKS
How to be distinctive and yet sustainable – Differentiation – Understanding of the dynamics of competition. preventing new entry and/or competition (Hax & Wilde). developing competitive advantage (Porter). Blue Ocean – Consciously moving away from overcrowded industries to uncharted territories and making competition irrelevant (Kim & Mauborgne). involving harmonizing and integrating multiple streams of technologies. Delta Lock In – Two dominant players co-opt to selfreinforce and create or escalate an entry barrier.
T-Series). Sources of cost advantage are varied and depends on the structure of the industry – Economies of size.
. preferential access to raw materials. Steep experience curve effects. Locational or early entry advantage. Compress project duration through crashing.PORTERS – COST LEADERSHIP
Cost Leadership – It is a strategy that focuses on making a firm more competitive by producing its products more cheaply than its competitors. Reliance) or may pass it to customers to increase market-share (Eg. backward integration. The firm may retain the benefits of cost advantage by enjoying higher margins (Eg. proprietary technology. Ayur. Nirma.
Focus on brand loyalty. Creativity. (Eg. Means of product differentiation are peculiar to each industry.
. It selects one or more attributes that buyers perceive as important.PORTERS – PRODUCT DIFFERENTIATION
Product Differentiation – It is a strategy that attempts to provide products or services that are differentiated from competitive products in terms of its value proposition and uniqueness. avoiding brand dilution. Successful product differentiation is often followed by premium pricing. Culture of experimentation. innovation and out of the box thinking. undeterred attention to quality. Intel. Rayban). Feeling the pulse of the customer. and sufficient slack. Sony.
Sub optimization alone may not be a source of superior performance. Mont-Blanc. They are poorly served by mainstream players. A focuser seeks to achieve a competitive advantage in its target segment. though it may not possess an overall competitive advantage. Rolex.
. coupled with fear of structural erosion. Maybach. Cartier. The target segment must have unusual needs or the delivery system catering to this segment must be unique.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. Armani).
Cost Differentiation Product Differentiation
Cost Leadership (Toyota)
Product Differentiation (General Motors)
Cost Focus (Hyundai)
Differentiation Focus (Mercedes)
Though cost leadership and differentiation are inconsistent.
. Firms focusing on a hybrid strategy typically aim at shifting the productivity frontier and recreating a new product-market segment altogether (Eg. and usually outperforms a stand alone generic strategy.HYBRID STRATEGY
A hybrid strategy is the simultaneous pursuit of cost leadership and differentiation. in a hyper competitive context the two strategies need not be mutually exclusive. jugaad or frugal engineering). similarly differentiation may not always lead to rising costs (i.e. Tata Nano). Reducing cost does not always involve a sacrifice in differentiation.
It is usually the result of a firm not willing to make trade offs. It tries to compete through every means. but achieves none. The positioning therefore gets – blurred. It will have a competitive disadvantage vis-à-vis a clearly positioned generic player.stuck in the middle.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 . unless such a player is capable of discovering a profitable segment. leading to what is called – straddling. Industry maturity will usually widen the gap.
Eg.radical environmental changes. It is characterized by – High level of technological uncertainty. Nano technology. leading to a blurred productivity frontier and steep learning curve. ending in a differential cost economics. First-time buyers. coupled with low penetration levels. changing customer needs. (Eg. Speech recognition software's. 3D imaging. technological innovations.
. There is a lot of scope to define the rules of competition. Market segmentation not well defined. Consumer behaviour pattern unstable and evolving. Artificial intelligence).) Excessive turbulence in the dynamics of the environment.EMERGING INDUSTRY
Emerging Industry – An evolving industry characterized by .
MRTP may also cause fragmentation. Eg.
. because of lack of economies of size and scale. Diverse customer needs. Retail and telecom. Scope for players to change the rules of the game. IT. It is characterized by – Low entry barriers. Eg. Paints. leading to clear fragmentation. Consumer durables. Air Conditioning. Government regulations in the form Eg. Eg. High exit barriers because of huge investment in CAPEX.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).
Firms are rule takers in the segment as productivity frontier is well defined. well defined consumer behavioral patterns and imperfect competition leading to near monopoly. established industry dynamics. 119
. Cartel among existing players through collusion.MATURED INDUSTRY
Matured Industry – An industry characterized by saturation in growth rates.technological maturity. collaboration and co-option. early entry and location advantages. distribution networks. Strong entry barriers. technological maturity. because of economies of size and learning curve effects. Limited scope for innovation .
Typewriters. Learning abilities have been stunted and firms adverse to investment in R&D and make fresh investments.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. Nature of competition extremely high. Firms facing a declining phase are characterized by inertia and slow to react to environmental changes. backed by corporate espionage. (Eg. and costly price wars. with little or no signs of recovery.
. scooters. dot-matrix printers). Exit barriers are extremely high because of limited prospective buyers.
premium pricing. recreate new markets. strictly cost differentiation. move beyond boundaries. mergers and acquisition. process innovation. increasing scope.COMPETITIVE STRATEGIES
Emerging Industry – Set benchmarks.
. focus more on product differentiation or even a hybrid one. or else exit the segment. strike alliances. Declining Industry – Redesign. regenerate. Matured Industry – Sophisticated cost analysis. Locate a defendable position. strictly product differentiation and not standardization. reengineer. Fragmented Industry – Identify. branding and promotion. aggressive building of distribution networks. assess and overcome fragmentation.
positions based on resources which are unique and inimitable are far more sustainable even in the long term.
. brands. A firms resources can be classified into – Tangible – These refer to real assets. However. They are a standard in nature.RESOURCE BASED VIEW
Differentiation based on cost or products saturates and ceases to exist beyond the medium term. Intangible – These refer to goodwill. and complex learning experiences in integrating and harmonizing technologies (distinctive capabilities) that play an important role in delivering competitive advantage through “causal ambiguity”. patents. hence very rarely confer competitive advantage as can be easily acquired or replicated.
but not necessarily.CAPABILITIES & COPMPETENCIES
These include a complex combinations of tangible and intangible resources that organizations use to convert inputs to outputs. Typically. differentiation based on capabilities can be sustained even in the long run. Hence. They play a very critical role in shaping competitive advantage.e. There is a high degree of internal and external causal ambiguity involved in it. Capabilities can be generic (i. they are woven around technologies. Therefore firms should concentrate on developing complex resources that forms the very basis of differentiation.
. can be leveraged across businesses) or specific to a particular business.
It enlarges the scope of an organization. Success of a strategy critically depends on SAP.COMPETITIVE ADVANTAGE
A competitive advantage is a position of superiority relative (i. It results in a distinct differentiation advantage or a cost advantage or hybrid as well. not absolute) to competition.e.
. Strategy drives competitive advantage. and results in well springs of new business development. competitive advantage subsequently becomes the back bone for a competitive strategy. A portfolio of competitive advantage comprises strategic advantage profile (SAP).
In most cases SAP is hidden and dormant. Identification of SAP is critical for and stretching and leveraging of resources. Most successful organizations around the world have a well balanced SAP. SAP changes from time to time. In today's world of discontinuity.STRATEGIC ADVANTAGE PROFILE (SAP)
Organizations have to systematically and continuously conduct exercises to identify its SAP. Internal strategic fit between its strategy and dominant logics is essential for the top management to stretch and leverage SAP.
A VC is often compared with a relay team.VALUE CHAIN ANALYSIS
A value-chain segregates a firm into strategically relevant activities to understand its composite behaviour. Competitive advantage arises not from an individual activity but a stream of inter-related activities. faster product launches. each of the players need to be efficient backed by sufficient coordination at the contact points (i. Today SCM is integrated with greening the environment as CSR practices. Substantial cost reductions also follow. and enhanced customer tracking – higher market share. Inventory Mgt to Logistics Mgt to Supply Chain Mgt (SCM). VC pay-offs: better product availability.e. kaizen or internal customer).
THE VALUE CHAIN
n gi ar M
Human Resource Management Technology Development Procurement
Mktg & Sales
ar gi n
– Third order fit refers to optimization of effort.
. A learning organization helps create strategic fit. Operational effectiveness is not strategy. – 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. A high fit involving a complex chain of activities drives both competitive advantage and its sustainability.STRATEGIC FIT – THE PORTER WAY
The sustainability of the value chain depends on the degree of fit between the activities. – First order fit refers to simple consistency between each activity and the overall strategy.
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. – Can be leveraged across businesses. A core competence usually has its roots in technology. – Cannot be easily imitated or substituted. These skills results in distinctive activities and processes. – Can be sustained even in the long run.
. It should satisfy the following conditions – Contributes significantly to customer benefits. but not necessarily. Core competence has a high degree of external and 130 internal causal ambiguity embedded in it.
A competitive advantage may or may not lead to superior performance. a core competence usually does. Majority of the firms have competitive advantage.CORE COMPETENCE
A competitive advantage does not necessarily imply a core competence. a core competence always implies a competitive advantage. A competitive advantage is sustainable in the shortmedium term. only global leaders possess a core competence. a core competence is sustainable even in the long-term.
. A competitive advantage manifests from a function. a core competence has its roots in a set of skills.
This is known as a zero-sum game. Here the magnitude of gain offsets the magnitude of loss equally.GAME THEORY
The game theory was developed in 1944 by Oscar Morgenstern. However. illustrations depicting a win-win situation. In fact there are no. each of whom wants to win.
. 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. A game is a contest involving two or more players. Subsequent work on game theory by John Nash led him to win the Nobel prize in 1994.
An unbiased game is one where both the players have equal chances of winning. Firm Y’s Strategy Use Radio Use Radio +2 +6 Use Newspaper +7 -4
Firm X’s Strategy
Firm X’s Pay-Off Matrix
.BIASED AND UNBIASED GAME
A game is said to be biased when one of the players have a disproportionate chance of winning.
PURE STRATEGY GAME
The strategy each player follows will always be the same regardless of the other players strategy. Firm Y’s Strategy Use Radio +3 +1 Use Newspaper +7 -2
Firm X’s Strategy
Use Radio Use Newspaper
Firm X’s Pay-Off Matrix
. A saddle point is a situation where both the players are facing pure strategies.
collaboration or cooption. 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. It represents the classical “prisoner’s dilemma”.
. iteration) rather than through collusion (E.g.TYPES OF GAMES
Simultaneous Games – This is a situation where the players have an option to choose to cooperate or not through collusion. Yahoo Vs Microsoft). Coke Vs Pepsi).e. Repeated Games – In this situation the players interact repeatedly with each other sub-optimizing the outcome possibilities. However.
but 136 players do not always behave rationally. Game theory relies on the principle of rationality. It results in a shift in the productivity frontier. – Making pricing more transparent.CHANGING THE RULES OF THE GAME
In a situation where a player is unable to compete with the existing rules of the game may attempt to change the rules of the game altogether. In a market dominated by price-based differentiation one may attempt to change the rules of the game by/when – – Bases of differentiation dependent on clear identification of what customer wants or value.
. – Building incentives for customer loyalty.
DELTA MODEL & LOCK-IN
Its a systematic approach where-in two or more industry majors, who by default has achieved a proprietary position (Microsoft – Software / IBM – Computers) which are not necessarily best-products in the industry, co-opt to create a lock-in. A lock-in implies that other players has to conform or relate to that standard in order to prosper. Becoming the industry standard requires – strong brand, causal ambiguity, and close relationship with other companies offering complimentary services. Lock-in is self reinforcing and escalating (i.e. accelerating effect).
THE THREE STRATEGIC POSITIONS
System Economics Market Dominance Complementary Share
Enabled through effective use of technology
Total Customer Solutions
Customer Economics Cooperation Customer Share
Product Economics Rivalry Product Share 138
Bill Gates is the richest man in the world not necessarily because he has developed the world’s best software's or excels at customer satisfaction; but he has got an army of people working for him who are not on his payroll – all the application software providers who are writing programs based on “Windows” compatible operating platform. Once you create the lock-in it is sustainable because of the “network effects”; which creates the proverbial “virtuous cycle” – customers want to buy the computer with largest set of applications and software developers want to write programs for the computers with the largest installed base.
The proponents (Hax & Wilde) believe that every organization has the ability to create and sustain a “lock-in” positioning (though in varying degree). This “system lock-in” is referred to as “delta” – delta being the Greek letter that stands for transformation and change amongst the players. The lock-in once created becomes very difficult for a firm to penetrate, and becomes a distinct entry barrier. The model is based on the belief that it compliments Porter’s differentiation model and RBV framework instead of contradicting them. In a lock-in strategy the performance outcomes are dependent on the success of another.
It relates to translating strategy formulations into practice. Performance realization of a strategy depends on the implementation effort. Successful implementation also depends on the appropriateness of the strategy. Since strategy implementation is a time bound process, alignment (i.e. strategic fit) is a key variable during times of radical change. Some of the other levers of successful strategy implementation are – Transformational leadership and motivating power. Resource allocation; its stretching and leveraging. Compatible organization structure & control systems. Inertia & resistance to change.
IMPORTANCE OF STRATEGIC FIT
Strategic fit has a central role to play in strategic management.
. – Better strategic and operational control. While external strategic fit (strategy – environment) is relevant for strategy formulation. – Changing the rules of the game. – Unlearning & learning of new skill sets. internal strategic fit (strategy – dominant logic) is critical to strategy implementation. – Resource commitment from top management. – Development of capabilities & competencies. A high strategic fit (co alignment) is useful because it enables – – Appropriate and timely response.
emergent strategy vis-à-vis intended & realized). effective strategies are better crafted when there is a subtle overlapping between the two (i.
. at the cost of sacrificing a lesser degree of control. According to Mintzberg. while control is very effective. In such a situation. Some of the key strategic learning's exists at the contact point between the organization and its customer. strategy formulation and implementation has been perceived to be distinct & independent. In such a situation.FORMULATION Vs IMPLEMENTATION
Traditionally.e. formulation & implementation can occur simultaneously. In fact. learning levels are very high. learning levels are very low.
bring about transparency. Install a system of shared beliefs and values.ROLE OF TOP MANAGEMENT
To bring about change and to implement strategies successfully. In contrast. He should be an agent of change. A transactional leader is usually confined to allocating tasks & responsibilities and extracting performance. transformational leaders go one step beyond – Design a well crafted and designed strategic intent of the organization. companies depend more on transformational leaders than transactional leaders. Pragmatism is the ability to make things happen.
. shift from compliance to commitment.
. labour. Zero Based Budget – In this case the budget of a SBU has to be worked out right from the scratch.RESOURCE ALLOCATION
Resources allocation includes tangible resources (Eg. brands. machines) referred to as threshold resources (i. minimum requirement). Intangible resources (Eg. The various methods of resource allocation includes Historical Budget – The budgets framed by HQ for a particular SBU keeping in mind past trends. skills) also includes complex resources like capabilities and competencies. Performance Budget – SBU managers need to justify the distinctive resources in terms of the opportunity it is pursuing yields the highest possible pay-offs.e. land. patents.
Flat Screen Displays. these capabilities are sustainable even in the medium to long term. though not necessarily in the case of emerging markets.CAPABILITIES & COMPETENCIES
Technology and business are slowly becoming in – separable. Moreover. Mobiles). Due to causal ambiguity (complexity). Distinctive capabilities helps in stretching and leveraging resources thereby overcoming two major constraints involved in strategy implementation – times & costs. Distinctive capabilities are complex set of skills woven around technologies.
. convergence of multiple streams of technologies at the product – market level is becoming increasingly evident (Eg.
Once the structure is in place. A single product or a dominant business firm usually employs a functional structure.
. A firm in several related businesses usually employs a divisional structure. A firm in several unrelated businesses usually employs a SBU structure.STRATEGY & STRUCTURE
It is a framework within which individual efforts are coordinated to bring synergy. The level of centralization and decentralization is decisive. processes become people independent. An appropriate organization structure & adequate control systems are essential to implement strategies and achieve stated goals.
Inputs . Divisional Structure – Units grouped together in terms of products. or geographical locations.Technology. Marketing. SBU Structure – Businesses segregated in terms of strategic dissimilarities (Eg.TYPES OF STRUCTURES
Functional Structure – Activities grouped together by a common function (Eg. Virtual Structure – A boundary less or hollow organization. Project / Matrix Structure – A formal but temporary framework initiated for the completion of a particular project/crisis. disbanded subsequently. based on skills and competencies. Team Structure – An informal group formed for a crisis. processes. with team members having dual line of control. Output).
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. leading to a tall structure. assuming responsibility. Technology – With more and more convergence of technologies in business. It includes the desire for independence. as span is broader. structures are becoming flatter and more simpler.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.
Inertia acts as an impediment in strategy implementation. Most firms undergo periods of strategic continuity rather than strategic discontinuity. co0ntinuity). irrespective whether it is from worse to good or good to worse. Common sources of 151 inertia – complacency with past successes. there is a tendency to continue along the same lines. Changes in top management and unlearning helps overcome inertia.
.e. Inertia is a characteristic of a firm that endures status quo (i. Top managers resist change.INERTIA
When a firm has been operating in a certain fashion for a long time.
. certain authors propose misfit as a source of superior 152 performance. Deviation of fit is detrimental to performance and may lead to strategic failure. Since the internal and external environment is in a state of continuous flux. strategies need to be evaluated on an ongoing basis to prevent deviations of fit. To prevent deviation of fit. firms should move beyond financial performance to strategic performance as organization systems are becoming complex.STRATEGY EVALUATION
Strategy evaluation centers around assessment of strategic fit.
It is concerned with trafficking a strategy as it is being implemented. competitive advantages becoming disadvantages? Has the company acquired any new competency? Has the company been able to overcome the 153 environmental threats. detecting changes in the external and internal environment and taking corrective action wherever necessary.
. It attempts to answer the following questions – Is the strategic intent appropriate to the changing context? Are the organizations capabilities still holding good.
checking every premise is costly as well as difficult. It is open-ended as well as
. However. It involves assessing – strategic thrusts and milestones. Premise Control – Checking the validity of the assumptions on which a strategy was based. Implementation Control – It aims at assessing whether key activities are proceeding as per schedule. Special Alert Control – It intends to uncover unanticipated information having critical impact 154 on strategies.STRATEGY CONTROL IMPLEMENTATION
It involves steering the company towards its original growth trajectory & stated goals.
Strategy not linked to resource allocation & capabilities – Lacking commitment of top management. difficult to translate into practice. Strategy intent not linked with goals and objectives – Lack of coordination at lower levels leading to negative synergy. low strategic fit due to consultants intervention.BARRIERS TO STRATEGY EXECUTION
Vision and strategy not actionable – Utopian ideas. Performance measures are defective – What to evaluate against? How to measure the 155 construct? As a saying goes. “If you cannot
Today it is considered one of the most powerful tools for strategy implementation determining success or failure.
. to be sure of successful implementation of a strategy.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. Large or small. Together these factors determine the way in which a corporation operates. important or not they're all interdependent. Managers should take into account all seven of these factors. On top of that. this may effect all others as well. so if one fails to pay proper attention to one of them. the relative importance of each factor may vary over time and context.
. 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. At around the same time in the US Tom Peters and Robert Waterman were exploring what made a company excellent. It appeared also in "In Search of Excellence" by Peters and Waterman.BACKGROUND & ORIGIN
The 7-S Framework was first mentioned in "The Art Of Japanese Management" by Richard Pascale and Anthony Athos in 1981. The 7-S model was born at a meeting of these four authors in 1982. They had been investigating how Japanese industry had been so successful.
Staff – Human inter-relationships. over time. Strategy – Trade-offs for the allocation of a firms scarce resources. Style – The way in which the top management influences the functioning of an organization. Structure – The way in which the organization's units relate to each other in terms of their commonalities.
. processes and routines that characterize how work should be done. Skills – An organizations capabilities and competencies. formal & informal . to reach identified & stated goals. Systems – The procedures.THE 7’S
Shared Values – It represents what the organization stands for and what the top management believes in.
Strategy Structure Shared Values Systems
1st Order Fit 2nd Order Fit 3rd Order Fit
Ineffective in case of a virtual company.A CRITIC OF THE 7S MODEL
While the hard S’s (strategy. Consider the 4P’s of marketing or 3R’s of SCM.
. their Japanese counterparts focus more on the soft S’s for their early success and sustainability. In contrast. systems) are comparatively easy to identify and influence. shared values) are very malleable and comparatively more difficult to identify & influence. While the American co’s focuses on the hard S’s. the soft S’s (skill. style. structure. staff. A choice of an alphabet often limits the scope and skews the interpretation of a model. 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
i. Reliance Industries). (Eg. technologies. Govt. The entire infra-structural facilities are set up afresh having its own gestation and break-even.
. and markets.e. concessions are available for green-field projects.e. (Eg. 162 Risk of cost and time overruns. Long gestation leads to delayed market entry. SEZ’s. green-field projects. tax holidays. subsidized power).ORGANIC GROWTH
Here a firm builds up its facilities right from the scratch and continues to do so without any external participation. i. the entire value chain. It has complete control over inputs. soft loans.
Tata Motors & Fiat). Alliances are usually short-lived and disbanded once the purpose is achieved.STRATEGIC ALLIANCE
It involves a pro-active collaboration between two or more firms on a particular domain or function for mutual gain. It has limited intervention power and usually lacks holistic commitment from the alliance partner. 163 It is a form of competitive collaboration.
. There is no funding or equity participation from the alliance partner & both the firms continue to operate independently. It touches upon a limited aspects of a firms value chain. Alliances are usually in the areas of technologies or markets (Eg.
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. (Eg. It is a win-win situation for both the companies. leaving minimum scope of overlapping. Dominant logic of both the companies should be complimentary. Degree and extent of management control must be clearly 164 laid down.Honda). Tata – AIG. Selecting the right partner is critical for success. Hero .
. A comprehensive MOU is essential.
with the individual firms ceasing to exist any more (Eg.
. Revival of a sick-unit through better management practices is a major motive behind an acquisition 165 strategy. Integrated distribution channel leads to better market penetration and overall synergy.MERGERS & ACQUISITION
It refers to the fusion of two or more firms into a single entity. Integration of assets and other financial resources. Brooke Bond & Lipton). Acquisition is an outright purchase of a firm assets by another independent entity (Eg. ITC Tribeni Tissues. Economies in scale leading to lowering of costs. Coca Cola – Thums Up).
Corus). Consolidation in a fragmented industry. Inform SEBI / Stock Exchange after 5% stake is 166 acquired. often the new firm is “left alone”. Integration of organization structure & cultures is difficult. Larger geo-graphical diversity. Most countries have stringent laws that prevents hostile take over. Make a public offer of not less than
. Instant access to capacities and markets.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. Tata Steel .
MANAGEMENT TOOLS IN STRATEGY
or better still create next practices Reengineering – Redesigning work processes right from the scratch. Companies therefore need to ensure competitive advantages doesn’t become competitive disadvantages. it is also a source of potential threat. Balanced Scorecard – Tracking strategy 3600. The past is ceasing to be an indication of the future. Radical change is superseding incremental change. every time. Some tools to ensure that – Benchmarking – Adopt certain best practices.
. TQM – Doing the right thing the first time. Change provides enormous opportunities.WHY MANAGEMENT TOOLS?
Change is becoming pertinent in the business environment.
A best practice is defined as an activity performed by a company in a particular domain or function which distinguishes it from others and making them world-class. These exemplary practices involves the stakeholders of the company and helps achieve its strategic intent. Best practices centers around looking at a different way to satisfy various stakeholders. Benchmarking involves the identification, understanding and adapting of certain best practices and implementing them to enhance performance. Firms are moving towards next practices as best practices make firms look more and more homogeneous.
SOME BEST PRACTICES
Dell: Customized configuration of computers. Caterpillar: 48 hours delivery anywhere in the world. Citi Bank : Priority banking services. Maruti: Certified “true value” pre-owned cars. Microsoft: ESOP to employees. Infosys: Customized work-stations. TCS: Referencing potential new recruits. ITC: Shareholders factory visit. AmEx: Outsourcing data warehousing mining. MARG: Set-top box to study viewing patterns. Honda: CEO’s visit to dealers.
TYPES OF BENCHMARKING
Functional – Used by companies to improve a particular management activity. Eg. Motorola learnt delivery scheduling from Domino’s. Process – Improving specific key processes and operations from experiences in similar businesses. Eg. Ford adopting assembly lay-out plan of Toyota. Competitive – It involves assessing the sources of competitive advantage and imitating them. Eg. Samsung leveraging miniaturization skills of Sony. Strategic – It involves assessing business models and replicating them in a different market. Eg. Reliance replicating AT&T business model.
HOW TO BENCHMARK?
Phase 1: Planning – What to benchmark? Whom to benchmark? – Identify key performance indicators & Data source. Phase 2: Analysis – Assessment of performance gaps. – Predict future performance levels. Phase 3: Integration – Communicate findings and gain acceptance. – Establish functional goals and its implementation. Phase 4: Action – Implement and monitor progress. – Measure results against stakeholder wants and needs. – Recalibrate or outperform benchmarks.
WHOM TO BENCHMARK?
Selecting the benchmarking partner is critical to solving the problem. Firms should generally avoid selecting the industry leader, because it may not always adopt the best practices for every process or activity. Benchmarking partners may also be from different industries. Types – – Internal – It involves benchmarking against its own branches, divisions, SBU’s. Proximity to data and cooperation is taken care of automatically. – External – It involves benchmarking against firms that succeeded on account of their best practices. It may also involve benchmarking against world-class firms. Friction may arise due to presence in competing industries.
BENCHMARKING - ADVANTAGES
Finding better ways of meeting stakeholder needs. Organizational learning comes from internal as well as external sources. Establishing goals based on formal assessment of external conditions. Defining effective measure of indicators, facilitate comparison, adopt from other organizations. Ensuring a continuous learning organization. Reducing competitive disadvantage. Organizational turnaround, especially effective in case of a wide strategic drift when differentiation strategies fail to work. 174
.e. clustering). the more similar they end up looking. It does not shifts the growth 175 trajectory of the industry as a whole. but it cannot be used as a strategic decision making tool. It can at best complement it. While strategy is all about differentiation and not looking alike. Benchmarking is useful for bringing about operational efficiency.BENCHMARKING . Benchmarking merely reorients profits in the hands of few to profits in the hands in the hands of many (i. Strategy is more of creating best practices rather than copying them.LIMITATIONS
More and more companies benchmark.
Redesigning leads to identification of superfluous activities or product features (i. DOS to Windows).e. clean sheet). process mapping) and eliminating or improving them (E.g. Windows 95 to 97). Re-engineering attempts to radically change an organizational products or process by challenging the basic assumptions surrounding it.g. Re-engineering involves complete reconstruction and overhauling of job descriptions from the scratch (i. for achieving performance improvement (E.
.e. The task demands a total change in organisational 176 culture and mindset.
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
. Strategic – It looks into the process of strategic planning. . resource allocation and prepares the organization for the future through a reorientation of the entire strategic architecture.e.REENGINEERING . products.LEVELS
Reengineering can be successfully leveraged at all levels of an organization with varying degree of results. structures. It can be of the following types – Functional – It looks into the flow of operations (i. customers and suppliers and protects the organization from the future (i. etc) and supports the organization for the present. Business – It looks into markets. processes.
It is a process by which a product is dismantled and analyzed in order to understand how the product was designed and manufactured. Cheaper versions of Intel chips and mother-boards manufactured in Taiwan. While traditional manufacturing is a bottom-up approach. protection can be had in the following ways – – Patenting. learning curve advantage. with an intention to copy it (Eg. Indonesia). However.
. – Causal Ambiguity. It generally acts as a threat to innovation. reverse engineering is a top-bottom approach. – High cost and time acts as a deterrent. – Early entry advantages.
cost and effort necessary for the purpose of reverse engineering.e. machine tools to convert ideas into a marketable product (i.STAGES IN REVERSE ENGINEERING
Awareness – Recognizing whether the product is found to be worth the time.
. Usually in such cases segmentation and pricing is different from the original innovator. nano-technology). Introduction – Launching the product in the market. Implementation – Developing of a prototype. Actualization – Obtaining and dismantling of the product to assess how it functions. Inaccurate assessment at this stage may lead to a failure of the entire project. designing facilities.
More and more companies are moving towards meeting implied rather than stated needs. – Serviceability – Large no. – Aesthetics – Appeal in design.Euro IV. of service stations. – Features – Anti-lock braking systems. Car) – – Performance – Mileage of 14 kms to a litre of fuel. Air bags. – Durability – 1980 manufactured cars still on road.WHAT IS QUALITY?
It involves the totality of a product or service in meeting certain stated or implied needs. – Reliability – Consistency in mileage.
. It has eight dimensions (Eg. – Conformance – Emission standards . – Perception – Customer notions.
It had little impact on improving overall productivity. TQM is a way of creating an organization culture committed to the continuous improvement of work processes – Deming. It is deeply embedded as an aspect of 182 organisational life & culture.
.fix it in nature.TOTAL QUALITY MANAGEMENT
Objective – Management of quality ensures conformance to certain pre-set standards. Management of quality was traditionally inspect it . which ensures good market standing. zero defects. touching upon a limited aspect of a value chain.
fully involved in decision-making and fairly rewarded for results. 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). 183
. Looking at quality as an endless journey. not a final destination.TQM – KEY TENETS
Do it right. Kaizen – Make continuous improvement a way of life. provided with all relevant information and best possible tools. Empowerment – It takes place when employees are properly trained.
. 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. equal participation). enabling the firm to concentrate on core activities essential to customer satisfaction.STRATEGIES
Outsourcing – It is the process of self-contracting services and operations which are routine and mundane. It is based on the principles of MBO (i.TQM . saving precious top management time. 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).e.
Source: Fortune Magazine Why CEO’s fail?
... – Less than 10% of strategies effectively formulated are effectively executed. it’s bad execution. – 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 .
These measures worked well when organizational systems were simple and unidirectional and more importantly the environment was static.
. rather than effects.CONCEPTUALISATION
A company’s performance depends on how it measures performance. Focus more on causes.BSC . Organizations need to move from financial to strategic performance. 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.
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. because they have too many. and distinguish strategic problems from operational ones. It has four dimensions – – How do customers see us? – What must we excel at? – Can we continue to improve and create value? – How do we look to shareholders? Firms more often have problems.
GOALS Products Supply Preference Relationship
MEASURES Relative market share (%) % of sales from new Vs proprietary products Timely deliveries and service Customer credit analysis (i. ageing schedule) % of key customer transactions Ranking of key customer accounts No. of visits or calls made % of NPA’s
GOALS Skills Excellence Exposure Introduction
MEASURES New capabilities and competencies Implementation & gestation period Bank and supplier credit limits & PLR Unit Costs / Conversion Ratio / Defect Ratio No. of times covered in media No. of new product launches Vs competition Product pricing Vs competition
of new patents registered Time to develop next generation products Average and spread in operating cycle % of products that equal 2/3 sales No. of product innovations
GOALS Technology Manufacturing Focus Timing
Return on Investment Market Capitalization / PE ratio
GOALS Survival Success Prosper Divestment
MEASURES Cash flows Growth in Sales and Profits EPS.
2 Translate strategy into operational terms 1 Mobilize change through effective leadership
Make strategy a continual process
3 Align the organization to the strategy
4 Make strategy everyone’s job
It helps translating strategy into practice (i.BSC . Shift from control to strategy (i.e. they don’t know . Focus on cause not effects. As a result. The BSC brings together the different elements of a company’s strategy at a glance.
. doing right things instead of doing things right).ADVANTAGES
Most often top managers face information overload.what they don’t know.e. Seek excellence. Modern managers should be poised to ask the right questions. sharing of vision). 194 performance will automatically follow.
EFFICIENCY Vs EFFECTIVENESS
Goes out of Business quickly
Michael E. Porter
. not only thrives. but also sustains it.EFFECTIVENESS + STRATEGY
A company which is effective as well as strategic. .
Strategic variety may be caused by changes in the as external well as internal environment. Strategic variety brings paradigm shift. “every organization must be prepared to abandon everything it does.CORPORATE RESTRUCTURING
The only thing constant in today's business environment is change.. firms use restructuring strategies. To adapt to the changing environment.. from survival of the fittest .... to survival of the most adaptable.”
. As Peter Drucker pointed out. Radical change brings about strategic variety. Restructuring involves consciously driving significant changes in the way an organizations thinks and looks (Eg.. Tata Group).
Fax. Instead.e. downsizing or rightsizing). downscoping). etc).e. and dividing the core businesses into SBU’s (i. ATM. Core Business – Company’s should introspect – What business are we in? Business evolved out of opportunism or myopia should be divested. they should strive to provide unimaginable value ahead of its time (Eg. Walkman. Internal customers should also not be neglected. Company’s should go beyond just asking what he expects.RESTRUCTURING – BASIC TENETS
Customer Focus – Restructuring ideally begins and ends with the customer.
. Structural Changes – Conventional hierarchical structures should be disbanded in favour of more 199 flexible ones (i.
. the Tatas were considered a benevolent and charitable organization.. It is created and institutionalized by the top management.... Kumar Birla today is more dependent on professionals..RESTRUCTURING – BASIC TENETS
Cultural Changes – A culture represents the values and beliefs of the people about the organization.) Reliance dismantled their industrial embassies ..) The Aditya Birla group typically relied on the “marwari” community for key management positions . Restructuring also requires cultural reorientation.. During the times of JRD.. started focusing on their capabilities... . Ratan Tata now drives the point the group means business.
“ … one reason our customers are satisfied is that we aren’t. Publicizing welfare projects to demonstrate CSR.”
.MOVING CLOSER TO THE CUSTOMER
As companies evolve. they tend to move away from the customer. Organizing customer and supplier meets. Honda’s ad says. Getting feedback & addressing customer complaints. Carry out PR campaigns. Restructuring provides a platform to close this gap. Use the reach of networking technologies. Communicating to the media about organization efforts to deliver quality products.
It may include brands as well. Mittal – Arcelor) and can take various forms. Hive Off – It involves siphoning of assets under control. or conglo-merate. including its intangibles – Mergers – It may be vertical. Further spin-off can be classified as split-off and split-up. it may be smooth (Eg.ASSET RESTRUCTURING
Asset Restructuring – The asset composition of a firm undergoes a major change.
. Tata – Corus) or hostile (Eg. Glaxo – Heinz). spin-off and equity carve. It can have two forms. horizontal. where the difference in valuation is settled off through cash or equity (Eg. Further. Asset Swaps – It entails divesting and acquisition simultaneously by two companies.
– Split-Off – In a split-off. – Split-Up – In a split-up. Tata Industries selling 20% stake to Jardine Matheson).HIVE OFF
Spin-Off – A spin off is the creation of a new entity. Reliance Ent). the entire parent company loses its identity after being split into a number of subsidiaries. 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. the existing shareholders receive equity in the subsidiary in exchange for the stocks of the parent company. in which the equity is allotted amongst the existing shareholders on a pro-rata basis (Eg.
It involves the sale of a brand or a division of a company to a third party. In 2005. for a specified market or in general with full management control.
. – Poor performance. strategic misfit. Generic motives include – – Raise working capital. L&T sold its cements division to Aditya Birla group. but retained its engineering division. A complete sell-out is known as divestment (TOMCO). In 1995. Selling out in phases is called disinvestment (IPCL). repay long-term debts. Parle sold its Thums Up brand to Coke for $40 million apprehending fierce competition.
.3 billion.CAPITAL RESTRUCTURING
Capital Restructuring . involving 608 pence per share). It provides greater leverage as well as management control.The internal & external liability composition undergoes a major change – LBO – Acquiring control over a substantially larger company through borrowed funds (Eg. Share Buyback – It is a process of cancellation of shares out of free reserves to the extent of 25% of paid-up capital (Eg. Conversion – Replacing debt with equity or vice-versa or costlier with cheaper debt or cross currency debt. Tatas take-over of Corus for US $11. Wipro).
Rs. 150 cr VSNL – Rs. 1700 cr Trent – Rs. 256 cr ACC – Rs. 1170 cr Goodlass Nerolac – Rs. 99 cr Tata Power – Rs. 42 cr Voltas . 120 cr Tata AIG – Rs. 1890 cr CMC – Rs. 1439 cr
Tata Timken – Rs 120 cr Tata Telecom – Rs. 950 cr Merind . 250 cr Tata Tetley – Rs. 230 cr Diversifications Tata Motors – Rs. 1860 cr
.BUSINESS RESTRUCTURING – TATAS
Divestments Lakme – Rs.Rs.
usually as a result external turbulence. Rightsizing – It is phasing of excess and redundant employees resulted out of faulty internal planning (SAIL). It can be carried out in the following ways – Downsizing – It is a systematic one-time reduction in the no. keeping the composition of business intact (Jet Airways).
. of a firm’s employees and sometimes in the no.ORGANIZATIONAL RESTRUCTURING
Organizational structure and systems calls for a change when strategic variety is apparent. Turnaround is the primary motive. Survival is the primary motive. Downscoping – It involves reducing the business and/or geographical scope of a firm (Aditya Birla group). of operating units.
The longer the period. Dominant logic becomes deep-rooted in organizational contexts depending on the period it is in place (tenure of the CEO).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. the more difficult it becomes to uproot the paradigm (i. thumb rules) of the top management.
. The dominant logic represents the perceptions and biases (i.e. Strategy change is unviable without a preceding change in its dominant logics. as strategies are based on such beliefs and biases.e. inertia).
20% of the people carry out 80% of the changes).FORCES AGAINST STRATEGIC CHANGE
The problem with strategic change is that the whole burden typically rests on few people (i. Companies achieve real agility only when people at every level rise above the ordinary to face the challenges – revitalization or transformation.
.e. the factor that stifled change & performance was – culture. 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. In most organizations.
Promote inventive accountability. Understand and deliver the quid pro quo.
. it is not about winning but about learning. The best way is to alter the institutional point of view. Manage from the future. Harness setbacks. Encourage uncompromising straight talk. process ownership. Questioning every basic action of the organization.SUCCESSFUL TRANSFORMATION
Build an intricate understanding of the business model at all levels of the organization. never take no for an answer. Create relentless discomfort with the status quo.
It involves diagnosing a change situation – systems & structures. Identify and implement facilitators of cultural change. by identifying forces for and against change. also known as cultural-web.
. Culture and style of management are two main impediments in force-field analysis. that can be both enablers and blockages to change and restructuring. Aspects of current culture which needs to be overcome. It involves identifying – Aspects of current culture which needs to be reinforced.FORCE-FIELD ANALYSIS
A force-field analysis provides an initial overview of change problems that needs to tackled.
Alternatives Organizational Short .Term Reduced labour costs Reduced debt costs Emphasis on strategic control Business High debt costs Higher risk
Long .Term Loss of human capital Lower performance Higher performance
. 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. In order to put back the company on the right track they are resort to – Denominator – It assumes that turnover cannot be increased. focuses on reengineering. down-scoping or asset stripping. reverse engineering and regenerating.NUMERATOR & DENOMINATOR MGT
Most firms across emerging markets undergo strategic discontinuity and as a result are forced to restructure their businesses. hence go in for downsizing. While the first strategy produces results instantaneously.
...WHY TURN AROUND MANAGEMENT?
Some interesting insights . – Less than 10% of the Fortune 500 companies as first published in 1955. 215 (Govindarajan and Trimble. and that the thirty-two of the country’s largest business groups in 1969 are no longer among the top fifty today... – Only seven of the first fifty Indian business groups in 1947 were even in business by the turn of this century.. Source: Why do firms atrophy? (Business Today. still exist as on 2005..
. systems. While content focuses on endogenous and exogenous variables. and capabilities.e. process focuses on – A logic to explain a causal relationship between intervening variables. As a sequence of events describing how things change and why they change (i. ends the threat with a combination of strategies. skills. Stage Theory).TURN AROUND MANAGEMENT
A turnaround is said to occur when a firm perseveres through an existence threatening performance decline. A category of underlying principles and concepts. and achieves sustainable performance recovery. Both content (what) and process (how) are equally important for a successful turnaround.
. especially in key positions. unavailability or radical lowering of substitute costs or technological obsolescence.TURNAROUND INDICATORS
Most firms atrophy simply because they fail to diagnose the indicators that acts as threat to organizational existence. suppliers and bankers. Low employee morale leading to high employee attrition at all levels. leading to lack of acceptability from distributors and customers. Rising input costs. Substantial shifts in consumer preferences. Low stakeholder confidence. Some indicators Continuous cash flow crises as a result of dwindling market-share and profits. Uncompetitive products or services.
The first step to a successful turnaround is the basic acceptance of the fact that …. prune work-force.. Extending work hours. focus on power brands. “all is not well”. Hence. Emphasis on advertising and market penetration. be more customer centric. liquidating dead assets. Product redesigning or reengineering. based on elasticity. Recalibrate prices.
. Revamp product portfolio. consider extension. Common approaches adopted Change in key positions. they adopt surface level measures (disprin popping) which most often fail. which most top managers fail to appreciate.
TURNAROUND STAGE THEORY
Stage 1 Decline Stage 2 Stage 3 Stage 4 Outcome
Success Failure Indeterminate
Identification of the stimulus leads to the arrest of the downfall. R-Extinction – It suggests that organization factors. primarily dwindling resources and capabilities are responsible for decline. It has its origin in “resource led stretch” and subscribes to the view that a firm has substantial power to override the context.DECLINE
Decline is the first stage in the turnaround process. It has its origin in “environment led fit” that subscribes to the view that a firm has little control over external factors.
. It involves the identification of the theoretical perspectives that explains performance decline – K-Extinction – It suggests that macro economic and industry wide factors are responsible for decline.
the response should be operational. If the underlying cause is internal efficiency.
. the response should be strategic. The response must match the cause of the decline.RESPONSE INITIATION
Turnaround responses are typically categorized as operating or 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. If the decline stems from structural shifts. asset reduction. diversification. new market initiatives.
which may be unavailable to a focused firm. Contour – It is easier to reverse decline in the earlier stages through operational measures. Similarly new market initiatives is feasible only for multi-product firms. Untangling this question brings into focus three events – Domain – Many of the strategic cures have limited applicability for an affiliated firm.
. when decline deepens shifts in strategic position becomes essential. Scope – A diversified conglomerate may acquire a distressed business to turn it around and gain valuable synergies.RESPONSE DICHOTOMY
The response initiation is somewhat dichotomous and cannot be universally applicable.
The top management has a key role to play through empowerment. Effective levers of transition. However. lead – lag). Sustenance is the key factor in this stage. Support from all the stake holders through resource commitment.
. consensus). transparency. substantial amount of time usually passes before results begin to show (i.e. many a times early signs of recovery fades out. However.e.7 years with a range of (4-16) years. Empirical studies show that average time is 7.TRANSITION
Transition usually reflects the first signs of recovery. role model. confidence building measures. participative management (i.
Supplier and banker confidence. Commanding a premium in the market.
. it should adopt a holistic approach.OUTCOME
Outcome is said to be successful when a firm breaches the equilibrium performance level. Regaining lost market share and distributor confidence. Instead of focusing on financial parameters alone. Cut off points must be unequivocal. Share price indications and media coverage. Failure is an indication that initial momentum was not sustainable characterized by irreversibility. Revival of key customers and new product launches.
COOPERATIVE STRATEGIES & ALLIANCES
licensing. In the cooperative strategy continuum as firms move up the value order.
. technology. consortia. More and more companies worldwide are moving away from competition to co-option to leverage their resources and enhance bargaining power. supply-chain partnership. It can assume any of the following forms – franchising. strategic alliance. Any cooperative strategy maybe between firms within the same country or cross border as well.COOPERATIVE STRATEGIES
Cooperative strategies are a logical and timely response to changes in business dynamics. the commitment and the involvement between the firms increases manifold. and globalization . or joint venture.
Branding is critical to franchising. Titan Inds. owners of the brand Tanishq allows its franchisees to sell its jewellery products. It is an effective strategy to penetrate markets in a shortest possible time at a minimum cost. Switz Foods.
Franchising – It is a contractual agreement between two legally independent firms whereby the franchiser grants the right to the franchisee to sell the franchisor’s product or service or do business under its brand-name in a given location for a specified period of time for a consideration. owners of the brand Monginis allows its franchisees to sell its confectionary products.
Develop a product through its crude stage. Become a systems integrator (CKD).
. Different levels of licensing Manufacturing without embracing any technology (CBU).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. as in Tata Indica. HM manufacturing GM range of cars in India with a buy-back arrangement is a perfect example of CBU. refine processes and adopt necessary technologies (SKD).
Coke – Pepsi). Airbus – Boeing). It can be of the following types – Multipartner – Intends to share an underlying technology or asset. Tata.CONSORTIA
Consortia – They are defined as large inter-locking relationships & cross holdings between businesses in a similar industry. 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. Collusion – Few firms in a matured industry collude to reduce industry output below the equilibrium level. leverage upon size to preempt competition by escalating entry barriers (Eg. Hyundai).
SUPPLY CHAIN PARTNERSHIP
It is a pro-active & collaborative arrangement between supplier and customer aimed at achieving better control over the value chain (Eg. Companies in different industries with different but complimentary skills. Continuous sharing of knowledge is critical to the success of a supply chain partnership.
. It usually provides a platform to sort out differences between conceptualization and implementation to suit local market needs. link their capabilities to create value for end users. otherwise it 230 becomes routine outsourcing. Tata Motors – IDEA).
Despite their popularity (50-60)% of the alliances fail to accomplish their stated objectives. Firm’s should undertake a long courtship with potential partners. to gain knowledge and to obtain access to new markets (Eg. Generic motives involved are . design next generation products.STRATEGIC ALLIANCE
It is an short to medium term understanding between two or more firms to share knowledge and risk.learning organization. enhance credibility.
. enter newer markets. Partner selection is one of the critical success factors. instead of hurrying into a relationship. preempt competition. effective R&D management. Reliance – Du Pont). Tata Motors – Fiat.
Maruti). Whirlpool – Tide. Coke – Pepsi). Bootstrap – An alliance between a weak and a strong company with an intention to acquire it. Bajaj – Castrol). Alliances of the Weak – An alliance is entered into to preempt competition (Eg. Complementary Equals – Two firms mutually promoting each others complimentary products (Eg.STRATEGIC ALLIANCE .TYPES
Collusion – Tacit top management understanding to neutralize price wars (Eg. Airbus – Boeing).
. Backward – An alliance (quasi or tapered) with a supplier of critical components seeking commitment (Eg.
Too much stress on financials & structure be avoided.
. – Japan Vs US). Cultural orientation has been found to have a profound effect on top management’s strategic orientation (Eg. Differences in level of economic development can produce differences in alliances motives. Firms from developed markets seek access to markets and firms from emerging markets seeking access to technology.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.
Dominant Logic’s – Similarity in beliefs & biases. including ability to provide quality products and services. Willingness to share knowledge and skills. Unique Resources – Abilities or skills which cannot be easily duplicated.PARTNER CHARACTERISTICS
Complimentarity of Capabilities – The degree to which partners resources can be used in conjunction.
. Managerial capabilities. Partner’s ability to acquire fresh skills. Intangible Assets – Move beyond the financials of the firm. Experience related to previous alliances.
understanding the chemistry. incorporating clear signs of continuing independence for all partners. differences not anticipated earlier. instead of focusing controlling the relationship.
. partners should nurture it. Setting up the housekeeping. operational & cultural integration. Getting Engaged – It should incorporate a specific joint activity. Learning to collaborate – strategic. the value chain. degree of compatibility. Changing within. Selection & Courtship – It involves self analyzing. vows to include commitment to expand the relationship.MANAGING ALLIANCES
Alliances are more than just a deal.
a joint venture is a selection among modes by which two or more firms can transact. separation is very 236 bitter.
. combining parts). It lasts till the vision is reached. There are substantial linkages in the value-chain.e. synergy) rather than mere exchange (i. Conceptually.e. whilst the partners continue to operate independently. It aims at creating new value (i.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.
. Organizational Learning – It is a means through which a firm learns or seeks to retain their capabilities. Strategic Behaviour – Firms may override transaction costs. It may also be linked to deterring entry or eroding competitors position. in addition to a high degree of asset specificity. though more profitable alternative to other choices. The market fails as sellers are unwilling to reveal their technology and buyers are unwilling to purchase in the absence of inspection.JOINT VENTURE – GENERIC MOTIVES
Transaction Cost – The situational characteristics best suited for a JV are high performance uncertainty.
Maruti – Suzuki. Renault – Nissan (Minivans – Cars). – Eg.OTHER MOTIVES
Entry into newer markets. Daimler – Chrysler (Premium Cars)
. – Eg. Sharing of resources. – Eg. Eli Lily – Ranbaxy. Endorsement from government authorities. – Eg. TVS – Suzuki (4-Stroke Engines) Fill gaps in existing product lines. – Eg. Learning new technologies. – Eg. Essar – Hutch (Vodafone). Yamaha – Escorts. Define future industry standards.
Modi – Telstra What after exit (parenting disadvantage)? – Eg. LML – Piaggio Differences in size and resource base. Century . Tata – Aditya Birla in Idea Cellular
. – Godrej – Procter & Gamble.Enka. Risk of over dependence. – Eg.e. – Eg. Risk of brain (i. PAL – Fiat If the cost of continuing exceeds the exit costs? – Eg. technology) drain.RISKS INVOLVED
Incompatibility – Differences in cultural background. – Maruti – Suzuki.
Incompatibility – Performance expectations. Culture – Reconcile gaps. Focus – Avoid strategic myopia. Agreement – Clarity on operational control.
. Costs – Other modes of transaction becomes cheaper.PRE-REQUISITES FOR SUCCESS
Commitment – Mutual trust. Flexibility – Sufficient space to breathe and adjust. time sharing. Equality – Lack of dominance. Inertia – Differences in age and evolution patterns. Objectives – Shared vision. respect. Partner – Avoid duplication of skills and capabilities.
MERGERS & ACQUISITION
Brooke Bond – Lipton). Ranbaxy . The larger objective is to leverage on size. SEBI Takeover Code. An acquisition is said be smooth if it is with the consent of the management (Eg. 2002).MERGERS & ACQUISITION
A merger is a mutually beneficial consent between two or more firms (usually of similar size) to form a newly evolved entity by absolving their individual entities to preempt competition (Eg. HLL – Tomco). Most countries have stringent laws that prevents hostile takeovers (Eg. reverses are also taking place through LBO) with a view to acquire conglomerate power and induce synergy (Eg. An acquisition is the purchase of a firm by a firm (of larger size.
.Daichi) and hostile if it is without the consent of the management (Eg. however. Mittal Arcelor).
Hike – An acquirer who has already picked up a 5% has to make a mandatory disclosure for every additional 1% stake that it acquires. 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.
. creeping acquisition).SEBI TAKEOVER CODE. Preferential – A preferential allottee ending up acquiring 5% stake also comes under its purview. Control – A special resolution of 75% of the share 243 holders approving the change of guard. Acquirer – Someone (individual or firm) who picks up an atleast 5% stake without mandatory disclosure having an intention to wrest management control (i.e.
credentials or track record is at stake. and/or does not enjoy the confidence of the different stake holders.SEBI TAKEOVER CODE. 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. 2002
Pricing – Acquirers will have to offer minority shareholders (at least 20%) the past 26 weeks or past 2 weeks average price. Gujarat Ambuja – ACC). the SEBI can intervene and block share transfers if: the acquirer has ulterior motives (i. whichever is higher as an exit route (Eg. SEBI – In case of a hostile take over.
.e. Grasim – L&T Cement.
The type of merger is depends on the degree of relatedness (strategic) between the two businesses. Reliance). Conglomerate – It involves integration of two distinctly unrelated businesses. Electrolux . Vertical – It involves complimentarily (partially related) in terms of supply of inputs or marketing activities (Eg. Horizontal – It involves integration of two highly related businesses (Eg. usually opportunistic (Eg. Godrej.
.Kelvinator). ITC).TYPES OF MERGERS
A business is an activity that involves procuring of desired inputs to transform it to an output by using appropriate technologies and thereby creating value for its stake holders in the process.
ITC Bhadrachalam). Reduction in risk. Ulterior motives – (Eg.MOTIVES
Increased market / conglomerate power. Ranbaxy – Crosslands). Economies of size. quick access).e. Coinsurance effect – Higher debt raising capability. Acquiring assets or capabilities (Eg. Overcoming entry barriers (Eg.
. Tata Steel – Corus).MERGERS & ACQUISITION . Mittal – Arcelor). Avoiding risk of new product development. Reduced gestation (i. Global image (Eg. Tax benefits (Eg. ICICI –ITC Classic). Asset Stripping – Shaw Wallace). scale and scope. Access to newer segments (Eg.
Tata – Corus). Overvaluation of buying firms (Eg. Managing size. Inability to achieve synergy. Overvaluation is often as a result of an ego drive and substantially affects future returns. Merging of organisational structures. When Tata Steel started negotiations with Corus. Managing over-diversification.
.MERGERS & ACQUISITIONS PITFALLS
Cultural differences (Eg. their initial offer was around 420 pence/share. Top management overtly focused on due diligence exercise and negotiations. neglecting core business. while the ultimate acquisition was made at 607 pence/share).
Kingfisher – Air Deccan). Growth – This stage may witness parallel merger of two firms of similar size. 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.MERGER TYPE & PLC
Introduction – A larger firm may acquire a newly formed entity with an objective to preempt new competition or acquire its license (Eg.
. Tata Steel – Corus). vertical to save transactions costs. Brooke Bond – Lipton). Maturity – A larger firm acquires a smaller firm with an objective to achieve economies of scale and experience curve effects (Eg.
Positive contribution to the acquired company. A common shared vision. A concern of respect and trust for the business of the acquired company. Immediate attempts to super impose structure and culture may cause bottle necks. Blanket promotions across entities and confidence building exercises needs to be practiced. Left alone syndrome. An acquisition just for the sake of it or reputation yields very little value in the long term.
. active top management intervention in phases.INTERNATIONAL M&A . Strong differences may stifle plans and its execution.
Redefine responsibilities and authority.BLUEPRINT
Take the media into confidence. They can carry the message to the various stake holders. 250 Do not ignore the “people factor”.INTEGRATION . Shift attention from business portfolio to people and processes. Integrating work processes. Decide upon management control systems. Decide on the new hierarchy.
. promptly. Determine business strategy. It will enable focus on customers and key people.
Financial motives – Undervaluation relative to true value. – Synergy – Potential value gain from combining operations (i. While under valuation may be a significant opportunity. over valuation can become a curse.
. operational & financial). – Market for corporate control.M&A . – Unstated reasons – Personal self interest and hubris.e.VALUATION
The process of valuation is central to M&A. Valuation decisions are arrived through a due diligence process when the prospective acquirer gets access to the books of accounts of acquiring company. The process takes (6-12) months.
when the “fit” between the two entities is very poor. – Vertical Synergy – Gains come from controlling the supplychain and savings in transaction costs. Synergy can be negative as well.
. Innovative product – Good distribution network). Sources of operational synergy – Horizontal Synergy – Gains come from economies of scale which reduces costs.VALUING OPERATIONAL SYNERGY
Synergy – It refers to the potential value gain where the whole is greater than the sum of the parts. or from increased market power which increases sales and margins. – Conglomerate Synergy – Gains come when one firm complements the resources or capabilities of another (Eg.
shareholders can accomplish the same at a much lesser cost. Hotmail). Cash Slack – It reduces asymmetry between cash starved firms with deserving projects and cash cows with no investment opportunities. However. Synergy comes from projects which would not have been undertaken if the two firms stayed apart (Eg.VALUING FINANCIAL SYNERGY
Diversification – Reduce variability in earnings by diversifying into unrelated industries. ITC – Bhadrachalam Paper). but availed after being merged with a profitable firm (Eg. Tax Benefits – Tax benefits may accrue from tax entitlements and depreciation benefits unutilized by a loss making firm. and without paying take-over premiums.
VALUING FINANCIAL SYNERGY
Co-Insurance Effect – If the cash flows of the two firms are less than perfectly correlated. It relates to the concept of diversification. as risky debt is spread across the new firm's operations.
. – Default risk comes down and credit rating improves. This will induce higher debt capacity. hence better performance. – Coupon rates may also be negotiated at lower rates. the cash flow the merged firm will be less variable than the individual firms. higher leverage. 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.
. – – Value of Control = Value of firm after restructuring Value of firm before restructuring. The value of wrestling control is inversely proportional to the perceived quality of that management.VALUING CORPORATE CONTROL
Premium of M&A are often justified to control the management of the firm. since a restructuring can lead to significant increase in value. While value of corporate control is negligible for firms that are operating close to their optimal value. Assessment of perceived quality is critical. The value of control can be substantial for firms that are operating well below optimal value.
It is a very costly and risky proposition. sometimes in combination with the assets of the acquiring company.LEVERAGE BUYOUT (LBO)
The basic difference between a take-over and a LBO is the high inherent leverage (i. LBO facilitates a relatively smaller firm to bid for a comparatively larger firm in the bid for management control. The assets of the acquired company are used as collateral for the borrowed capital. Confidence of investment bankers and the international financial community is essential. debt component) at the time of buyout and rapid changes in capital structure over time.e.
– Increased information needs.TO GO PUBLIC OR NOT?
However. – Separation of ownership from management. – The need to satisfy analysts and shareholders. A research study showed that 30% of the publicly listed firms reported above average returns after going private. The increased benefit showed in the following way – reduced costs and increased revenue. on-going valuation. the advantages of going public includes .access to financial markets.
. off-late many publicly traded firms have gone private keeping in mind the following – – The fear of LBO. However. liquidity.
– Debts repaid off from increased value after successful restructuring and wresting management control. co-insurance effect). – 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). – Managers cannot be trusted to invest free cash flows wisely. – Cash trapped company unable to utilize opportunities. – It is a temporary phenomenon.e. which disappears once assets are liquidated and significant portion of debt is paid off.
Lack of sufficient cash flows to repay costly debts resulting in a possible debt trap.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. leverage is expected to decrease over time. – Increase equity valuation.
. initial rise in leverage is anticipated. Any discounting has to reflect these changing cost of capital. A LBO has to pass two tests to be viable – – Restructuring to pay-off increased debt.
Reverse Merger – The acquisition of a public company. – Automatic listing in major exchanges. – Facilitates better valuation and forthcoming offerings. which has discontinued its operations (i. – Tax shelter. small in size but having a promising business.e. Objectives – – Traditional route of filing prospectus and undergoing an IPO is costly.
. or costly. – Prevents dilution of equity. shell company) by a private company. allowing the private company to bypass the usually lengthy and complex process of going public.
– Takeover announcements reported 30% excess returns. However. and 35% during bullish periods.
. Initial anomaly in stock prices usually normalizes over a period of time (6-12) months. takeover failures have only initial negative effects on stock prices. Most target firms are taken over within (6090) days. – Merger announcements reported 20% excess returns.EFFECT OF TAKE-OVER ANNOUNCEMENT
The shareholders of target firms are the clear winners. Excess returns also vary across time periods. During bearish periods excess returns were 19%.
in the event of take-over failure negative returns to the extent of 5% on bidder firm stock prices is reflected. 1983. over time.
Jarrel. – However. – However. and Netter. 1983. Bradley. and Kim. Desai. 1988
. – Most studies reported insignificant excess returns around take-over offers or merger announcements. Brickley.EFFECT OF TAKE-OVER ANNOUNCEMENT
The effect of take-over announcement on bidder firm’s stock prices are not clear cut. as stock markets become more and more perfect such anomalies would reduce Source: Jensen and Ruback.
Rights). Asset Stripping – The targeted company hives off its key assets to another subsidiary. Poison Pill – An offer to existing shareholders to buy shares at a substantial discount to increase their voting rights (Eg.DEFENSIVE STRATEGIES
Golden Parachute – An employment contract that compensates top managers for loss of jobs as a result of change in management control. Poison Put – Premature retirement of bonds at attractive rates to pour surplus cash and make target investment unattractive. 263
. so that nothing is left for the raider to strip off.
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. Gray Knight – The target company takes the help of friendly company to buy the shares of the raiding company. East India Hotels – Reliance Industries – ITC). Shapoorji Pallonji). thus thwarting the raider company’s attention. But often the White Knight turns a betrayer himself (Eg. Pac Man – The target company makes a counter bid to take over the raider company.
COMPETING FOR THE FUTURE
British Air overpowering Pan Am. Honda overpowering GM. The reverse was true for the companies overpowering. Most companies were too preoccupied with the present than the future? 99% of the companies overpowered. Hitachi overpowering Westinghouse. Honda overpowering Volkswagen. Wal-Mart overpowering Sears. Nokia overpowering Motorola. were spending 99% of their precious time dealing with present. Compaq overpowering IBM.GETTING OFF THE TREADMILL
Canon overpowering Xerox. What went wrong???? What were they doing with the present? What were they pre-occupied with?
THE PAST OF COMPETITION
Beyond Restructuring – When a competitiveness become inescapable problem (stagnant growth. most often they ended up cutting corporate muscle as well and became anorexic. Thus efficiency was grievously hurt. downsizing). falling market share). CEO’s brutally pick up the knife and ruthlessly carve away layers of corporate flab (delayering. declining margins. 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)
. Not knowing when to stop. decluttering.
THE PRESENT OF COMPETITION
Beyond Reengineering – Numerator based managers (innovation) at least offers some hope.S. ensuring only survival of the present.
. The future is not about catching up with competition. However. incrementalism or nominal innovation has almost reached a plateau. but not of the future. On the contrary only 20% of Japanese managers believed that quality will be a source of competitive advantage of the future. but forging ahead in competition. top 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.
Empower from bottom to top. demographics and lifestyles. faster. Transform the industry.
. Creating the future requires industry foresight. and regenerate its strategies (breaking its – managerial frames).THE FUTURE OF COMPETITION
Regenerating – Leaner. as important as these may be. don’t predict. they are not enough to get a company to the future. not the other way. not just the organization. It is based on deep insights into trends in technology. better. reinvent its industry. It involves Dream about the company’s future. aspirations and resources. Create a potential gap. Companies need to fundamentally reconcieve itself.
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?
Redraw the boundaries between industries. hence do not fall sick in the first place. Change in at least one fundamental way the rules of engagement in an industry. Create entirely new industries (i.
.e. blue oceans).ABOUT THE TRANSFORMATION
The future does not belong to those who take the industry for granted. they do not need to restructure. Therefore. It drives a hunger and a passion to transform. Successful companies have a complete grip over the industry. by converging technologies complex. It is about deliberately creating a strategic misfit.
A revolution that is thrust upon from the top seldom sustains. Most successful revolutions (Gandhi to Mandela) rose from the dispossessed. Transformational leaders merely lead the way. The middle management plays a strong moderating role. Such a process is called institutionalization (from people centric to organisational centric). 272
. More importantly.ABOUT THE EMPOWERMENT
Bring about a revolution (a paradigm shift) in the organization. the revolution must start at the bottom and spread in all directions of the organization.
An ability to energize the company.
. What does it take to get to the future first? Understanding how competition for the future is different. Apple – iphone). Companies need to strategize (think ahead of times). Toshiba – LCD. Apply the 40 – 30 – 20 principle. Get to the future first. without taking undue risk. It requires a lot of common sense and a little bit of out of the box thinking. South West Airlines – LCC.THE FUTURE OF STRATEGY
A company must get to the future not only first but also for less. A process for finding and gaining insight into tomorrows opportunities (Eg.
as on their aspirations. We are in the midst of a 3600 vacuum. What distinguishes a leader from a laggard. the farther it will be away from competition. greatness from mediocrity. As there is no one future.HOW DOES THE FUTURE LOOK LIKE?
There is no rule which says that for every leader there will be a follower. each point in space represents a unique business opportunity. but hundreds. Companies of the future will be not based so much on the strength of their resources. is the ability to imagine in a different way what the future could be.
. The farther one can see in this endless space.
THE EMERGING STRATEGY PARADIGM
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
Degree of Learning
Unlearning Curve P2: Unlearning in previous period does not necessarily ensure learning in the current period.LEARNING TO FORGET
P1: The degree of learning in current period is directly proportional to the degree of unlearning in the previous period.
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. 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. Inimitable & Insubstitutable – A high degree causal ambiguity between these skills yield sustainable competitive advantage. It represents the collective learning's of an organization centering around diverse streams of technologies.
it is deeply embedded in the heart of the organization. Although a core competence may lose value over time. SKF – antifriction and precision.MORE ABOUT CORE COMPETENCE
Sony – miniaturization. Toyota – lean manufacturing. A core competency cannot be outsourced. Nike – designing. Wal-Mart – logistics. it gets more refined and valuable through use. at the most three to four. Toshiba – flat screen displays.
. Coca Cola – brand. Intel – nano-electronics. Canon – imaging. Core competencies are the roots of the organization. Honda – engines. leaders have one. Most companies around the world do not possess one.
ROOTS OF COMPETITIVENESS
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
. institutional gaps. high levels of market imperfection). and high transaction costs.e.EMERGING MARKETS
Emerging markets (India. Therefore. China. Emerging markets are characterised by infrastructural bottlenecks. Korea. Therefore focused strategies based on core competence may not be suitable for emerging markets (Khanna & Palepu. Diversified groups in operating in emerging markets therefore benefit from unrelated diversification. Chile) provide a different context (i. strategies suited for the developed markets may not be appropriate for emerging markets.
subsequently negatively related across developed markets. Optimum level of diversification
Diversity is initially positively related with performance. Entropy).PERFORMANCE (I)
Diversity attempts to measure the degree and extent of diversification (Herfindahl. (2000)
. Synergy. et al. Size & Scale. Experience Strategic Fit
Palich. Concentric.DIVERSITY .
conglomerate power Threshold level of diversification
(Khanna & Palepu. subsequently positively related across emerging markets. Huge initial investment.PERFORMANCE (II)
Diversity is initially negatively related with performance.DIVERSITY . brand building Risk diversification. 2001)
It should have a spread of manufacturing facilities. It should think globally. Characteristics – It should have a spread of affiliates or subsidiaries. HSBC).INTERNATIONAL IDENTITY
MNC’s consciously engage in FDI in different parts of the globe to forge resource diversity as a distinct competitive advantage. It should have a spread of assets. It should have a spread of interest groups / stake holders.
. revenues and profits. act locally (Eg.
Risk Profile – It reflects the risk attitude of the top management (Eg. low group scale in developed markets and vice versa for emerging markets).It reflects the relative role of team building (Eg. low risk profile in developed markets and vice versa for emerging markets).GLOBAL BUSINESS ENVIRONMENT
Power Distance – It reflects the disparities in income and intellectual development (Eg. Group Scale .It reflects the disparities in women in workforce (Eg. Feminity Index . low power distance in developed markets and vice versa for emerging markets).
. high feminity index in developed markets and vice versa for emerging markets).
inflation. currency. FOREX reserves. time value.
. flexibility (Eg.culture. terrorism (9/11). corruption. attitude. political stability. customs. code of conduct. low country risk in developed markets and vice versa for emerging markets). credit rating.GLOBAL BUSINESS ENVIRONMENT
Cultural Adaptability – It reflects the adaptive ability to a changing environment . Country Risk – It reflects the political and economic risk (Eg. interest rates. way of life. high cultural adaptability in developed markets and vice versa for emerging markets). judiciary) of doing business in a particular country (Eg. dress sense.
in most emerging markets meetings are delayed and lasts unusually long.
. Other factors – local celebrations. Language Barriers – Developed country managers expect foreign partners to communicate in their languages.GLOBAL BUSINESS ENVIRONMENT
Time Sensitiveness – Developed country managers regard time as precious. in most emerging markets use of an interpreter may be a standard protocol. High levels of ethnocentrism usually has a negative effect on business. and vice-versa. time-zones. however. Ethnocentrism – Developed country managers tend to regard their own culture as superior.
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 a multi-lateral treaty with 143 (as on 2002) member countries to reduce tariff and non-tariff (quota) barriers. The 2001 (Doha Round) focused on power blocks (NAFTA. BRIC). ASEAN.
. It also highlighted the nexus between US & WTO. In 1995 (Uruguay Round) GATT was renamed to WTO. copyrights. It focused largely on TRIPS (patents. It also initiated provisions on anti-dumping.
. the Euro slowly started outperforming the Dollar. Euro). primarily the OPEC countries. The Euro was significantly devalued against the Dollar till 2002.e. The notable exception was Great Britain which still continues with its local currency (i. Sterling .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.e. However.Pound). three countries joined in 2002 increasing it to fifteen members as of 2008. However with current recession in the US 2002 onwards.
Rate Uncertainty – A single currency eliminates the risk of competitive devaluations. it helps avoiding transaction costs associated with a multiple currency.SINGLE Vs MULTIPLE CURRENCY
Transaction Costs – Though the initial cost of introduction of a single currency is very complicated and costly. Trade Block – It will strengthen the EU identity which would not have been possible otherwise. However.
. but it may have spill-over effects. Transparency – A single currency is transparent and competitive. a multiple currency is preferable where the business cycles of member nations are different.
e. – FDI (transfer of tangible resources) is slow but steady for the purpose of economic growth. It is long term with high levels of commitment. – FII (transfer of intangible resources) is fast but may have strong repercussions (i.e.FII Vs FDI INVESTMENT
Classical economists believed that foreign investment (in any form) is basically a zero sum game (i. the gain of one country is loss of another). It is short-medium term with comparatively low levels of commitment. Neo classical economists believe that foreign investment may in fact be a win-win game.
. hot money).
usage (talk time). technology (microchip).
. Pricing – It depends on the competitive structure (PLC – Kellogg's). promotion (surrogate advertising). lifestyle (petroleum 299 outlets – departmental stores). customer awareness (microwaves). Distribution – It depends on the market characteristics (fragmented – concentrated). economic (middle class buying power).INTERNATION MARKETING
Product – The various attributes of a product may receive different degrees of emphasis depending on differences in . buying patterns (spread).culture (food habits).
equity is cheap in India).India) may be different from that another trading country (US – GAAP or IRS). Leverage – The leverage may vary across countries depending upon money and capital market conditions (Eg. Cost Structure – Companies in India need to investment in fixed costs due to poor infra-structure 300 compared to developed markets.INTERNATION FINANCE
Currency Risk – Many Indian IT companies (Rs) having business in US (Dollar) are asking for quotes in (Euro) or are shifting bases out of US to avoid risk of devaluation of Dollar.
. Accounting Norms – The accounting norms of one country (AS . debt is cheap in US.
technology (convergence. Recruitment – In local recruitment. social security. skills are more important that cultural fit and vice-versa.
. in most cases it is not desirable nor practiced. shortened life cycles). labour laws. and cultural barriers (language) vis-à-vis emerging markets. Compensation – Differential pay packages exists because of differences in purchasing power. however. Training – It is a pre-requisite for international business to reduce language.INTERNATIONAL HR
An uniform HR policy is idealistic to enable parity in performance appraisal. double taxation.
Bosch spark plugs are used by car manufacturers worldwide). SCM – Use of ERP to network the extended enterprise 302 across the globe. Outsourcing – A company having a core competence may be the source of global outsourcing (Eg.INTERNATIONAL OPERATIONS
Location Incentives – FDI in emerging markets should explore options for SEZ’s to explore benefits (tax holidays. Technology – The cost to be evaluated in terms of latest technology (Euro VI) vis-à-vis effective cost of appropriate technology (Euro II).
. reduce power costs) vis-à-vis infrastructural bottlenecks.
innovation is the first attempt to carry it out in practice. While innovation typically adds value for organizations. Innovations typically paves the way for more secured and improved lifestyle for consumers in general. Innovation is the most preferred strategy today to maintain competitive advantage in the present turbulent business environment.
. but has inherent risks involved as well.INNOVATION
An invention is the first occurrence of an idea for a new product or process. it has destructive effects as well. Innovation is all about staying ahead of competition.
While product innovations are typically customer driven. Process innovation usually follows product innovation. Strategic innovation has the potential to change the rules of the game. 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.
.TYPES OF INNOVATION
A key challenge is maintaining a balance between process and product innovations. However. process innovations are organizational driven.
It leads to a shift in the price – performance envelope. about how an organization makes money (i.e.e. Medical Surgery (Lasik). putting an idea into practice).BUSINESS MODEL
It is a simplified description and representation of a complex real world. Processors (Pentium). Data Storage (Pen Drives). Innovations are the back-bone of successful business models . Telecom (CDMA Technology). Disruptive business models brings in a new frame of reference (i. Drug Development (Bio Chemicals). a paradigm shift).
The segment(s) of clients to be addressed. The key resources and capabilities required.
. The channels to reach out to the clients.NINE BUILDING BLOCKS
Value proposition offered to the market. The key partners involved in the activities. The proposed relationships established with clients. The revenue streams generated by the activities. The cost structure resulting from the business model. The key activities / processes necessary for execution.
BUSINESS MODEL FRAMEWORK
With the rapid erosion of certain industries (IT. Real Estate) companies need to untangle and understand the intricacies of their business model. It is just one piece of the puzzle. innovative companies to carve out unique business models to fend off competition. Investment Banking.REVENUE MODEL
Positioning is just not sufficient. The revenue model described here are the means to generate revenues.
. It involves – Product Visualization – Product Prototype – Product Test – Capacity – Pricing – Distribution.
Promote the grape-vine. Promote the culture of experimentation.
. Have a lean and a flat organization structure.HOW TO MAKE INNOVATIVE CO’S
Innovative company’s are a matter of culture and aspirations rather than tangible resources. Allow the workforce idiosyncrasies for their errors. Provide reasonable incentives (not necessarily monetary). A favourable intellectual property (IP) climate. Allow the management sufficient slack to be future oriented.
. companies are increasingly relying on internal protection to sustain innovation effects. In most emerging markets where the IP climate is not so favorable. Collusion with the judiciary is also another distinct possibility in emerging markets.HOW TO PROTECT INNOVATION?
Without adequate protection (external or otherwise) the effects of innovation does not translate to performance. The most preferred strategy of internal protection includes imbibing “causal ambiguity” in the production process to make reverse engineering difficult. however that possibility is slowly atrophying.
The basic theme of corporate governance is to ensure that professional managers are identified and made accountable in terms of clear business processes or activities and held responsible through adequate mechanisms & control systems for channelizing their decisions for the benefit of stakeholders at large. In fact the principles of corporate governance implies that managers go beyond in satisfying the stated and unstated needs of the multiple stakeholders. Corporate governance aims to reduce the principal-agent problem present in most professional managed organizations through appropriate forms of accountability and control mechanisms.
shareholders can diversify their portfolio at a much lesser risk and cost. not present in portfolio diversifications.AGENCY THEORY
The root of Corporate Governance goes back to the Agency Theory. From the strategic point of view managers tend to diversify into unrelated businesses as it provides higher returns hence a more favourable appraisal. This exposes the shareholders to additional risks and higher costs. However. According to the agency theory top managers and shareholders interests are usually conflicting in nature and tend to pull in opposite directions. also known as the principal-agent problem or agency dilemma.
. After the Enron downfall. the US government passed the Sarbanes – Oxley Act. 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. various laws were enacted to ensure proper usage of these funds.ORIGIN & CONTEXT
Since the early 20th century since a large part of public funds were held by publicly traded firms in the US. SEBI Report – 2005.
The key roles of chairperson and CEO should not be held by the same person and their offices be clearly separated. including the society at large. Role and responsibilities of the board: It deals with issues about an appropriate mix of executive and nonexecutive directors. Interests of other stakeholders: Recognize the legal and other obligations of all legitimate stakeholders.
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.
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.
. 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.
Remuneration: Performance-based remuneration is designed to relate some proportion of salary to individual performance. safeguards invested capital. with its legal authority to hire. However.
. Balance of power: The simplest balance of power is very common. Regular board meetings allow potential problems to be identified. they should provide no mechanism or scope for opportunistic behaviour. a person benefitting from a decision should abstain from it.GOVERNANCE STRATEGIES
Monitoring by the board of directors: The board of directors. fire and compensate top management. discussed and resolved.
who had no management ties. Egypt and Russia) to around 40% for Canadian & European companies. from 10% for companies where the regulatory backdrop was least certain (those in Morocco. undertook formal evaluation of its directors. They defined a well-governed company as one that had mostly out-side directors. The size of the premium varied by market.GOVERNANCE & PERFORMANCE
In its “Global Investor Opinion Survey” of over 200 institutional investors in 2002. and was responsive to investors' requests for information on governance issues. McKinsey found that 80% of the respondents would pay a premium for wellgoverned companies.
The basic premise is that firms cannot exist in vacuum. However.
.SHAREHODER – STAKE HOLDER THEORY
Till the early part of the 20th the basic objective of modern organizations was to provide goods and services for public consumption for profit maximisation. the short-term view of profit maximisation gave way to a more broader and mediumterm view wealth maximisation of the shareholders. Over a period of time. corporate philanthropy should be a part of every corporate mission. today economic institutions are considered as a major drivers of improvement in quality of life in general and therefore needs to include multiple stakeholders. Therefore.
giving a very important message that one cannot exist without the other. “a healthy business cannot exist in a sick and impoverished society”. Therefore. However.CORPORATE SOCIAL RESPONSIBILITY
As Peter Drucker rightly pointed out that. economic and social responsibilities cannot be mutually exclusive. CSR can be defined as. the debate on CRS still continues whether firms should detract its focus from its business?
. “an enterprises decisions and actions being taken for reasons at least partially beyond its immediate economic interests”. Therefore. in fact a large part of it is significantly overlapping.
The role of media: The media and various consumer organizations have come up in protecting consumer rights and exposing mal-practices. people are becoming increasingly aware of their right to a decent and healthy life.
.GROWING CONCERN FOR CSR
Awareness due to education: With growing literacy. MRTP). Fear of government interference: Excessive quench for profits may lead to build up of adverse public opinion compelling the government to intervene (Eg. Public image: Entrepreneurs are increasingly relying on public image as a source of competitive advantage and a higher financial discounting.
Green Supply Chain Management: It includes environmentally preferable purchasing. Education. Health & Hygiene – Attending the health hazards due to wastes and by-products to employees and society in proximity (Eg. Refrigerators – CFC.
. and extended producer responsibility (Eg. eco efficiency. designing eco-friendly products. Cement . Tata Steel – Life Line Express). Exide – Product take back).Paper packaging. Literacy & Training Programs – (Eg. Aditya Birla Research Centre – LBS).
. They represent an enormous opportunity for companies who learn how to serve them.BOTTOM OF THE PYRAMID
With the market across most developed markets including the US getting saturated. C. Prahalad notes that future markets exist collectively. In turn companies by serving these markets. Strategic innovations leading to disruptive business models can show the way out. K. they're helping millions of the world's poorest people to escape poverty. across the world's billions of poor people having immense untapped buying power.
BLUE OCEAN STRATEGY
They have fought for profits. battled over market-share.WHAT IS RED OCEAN?
Companies have long engaged in head-to-head competition in search of sustained. where most industries are saturated. profitable growth. Yet in today’s overcrowded industries.
. one companies gain is always at the 326 cost of another companies loss. In today’s red oceans. 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).
Such strategic moves are possible through the pursuit of product differentiation and low cost simultaneously. but by creating blue oceans of uncontested market space ripe for growth . It helps in creating powerful leaps in value for both the firm and its buyers. It is only the frames of the
. it will exist 327 in the future as well. Blue Ocean’s have existed in the past. rendering rivals obsolete and unleashing new demand.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
Technological advances have substantially 329 improved industrial productivity.
. Niche markets & monopoly havens are continuing to disappear. of European nations. Demand across developed markets reaching a plateau.BLUE OCEAN STRATEGY IMPERATIVES
Prospects in most established market spaces – red oceans – are shrinking steadily. As trade barriers between nations & regions fall. information imperfections atrophy instantly. Population shrinkage across a no.
Blue oceans have existed in the past and will exist in the future as well. They are not necessarily about technology. the underlying technology was often already in existence. 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. Incumbents often create blue oceans within the ambit of their core business.
. Company & industry are the wrong units of 330 strategic analysis.
BLUE OCEAN .IMPLEMENTATION
Which factors to be reduced below the industry standard
Which of the industry factors that the industry takes for granted should be eliminated
Which factors should be created that the industry has not offered
Which of the factors should be raised above the industry’s standard
Buyer Utility (1)
Is there exceptional buyer utility in your business idea?
Is your price easily accessible to the mass of buyers?
Blue Ocean Strategy
What are the adoption hurdles in actualizing your business idea? Are you addressing them up front?
Can you attain your cost target to profit at your strategic price?
Southwest Airlines: Pioneering the concept of LCC.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. Citibank – Automated teller machines & credit 333 cards.
According to this view managers need not be constrained to act within the confines of their industry. greater than themselves. companies & managers are largely at the mercy of economic forces.
. According to this view. All they need to do is change their managerial frames. 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.