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Strategic Management

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Strategic Intent

Formulation of Strategies

Implementation of Strategies

Strategic Control

Strategic Evaluation

1.Strategic Intent
Vision, Mission, Goal and Objective

2. Formulation of Strategies
1. 2. 3. 4. 5. 6. 7. 8. Environmental Appraisal Organisation Appraisal Corporate level strategies Business level strategies Strategic analysis Strategic choice Formulating strategies Preparing a strategic plan

1.Environmental Appraisal
External and Internal Environment Environment Sectors Macro and Micro General vs relevant environment Environment Scanning Identifying high priority factors-impactProbabality matrix

External = Macro and Micro Internal Factors inside the company leadership,climate, employees, systems and processes .. Environment factors are also called Sectors Give examples

Figure 4-1:

Actors in the Microenvironment

Figure 4-2:

Major Macroenvironmental Forces

NEED FOR ENVIRONMENTAL ANALYSIS

Increases managerial awareness of environmental changes. Increases understanding of the context in which industries and markets functions. Increases understanding of multilateral settings; Improves resource allocation decisions; Facilitates risk management; Focuses attention on the primary influences on strategic changes; Acts as an early warning system to anticipate opportunities and threats and devise appropriate strategies. This analysis is a valuable mechanism for increasing strategic awareness of managers.

Five stages of environmental analysis suggested by Johnson and Scholes


Audit of environmental influences

Assessment of the nature of the environment

Identification of the key environmental forces

Identification of the principal Os and Ts

Strategic Position

MODEL FOR HANDLING ENVIRONMENTAL CONDITIONS


Conditions
Simple/Static
Aims
To achieve through (historical) understanding the environment

Dynamic
To understand the future rather than simply relying on past experience

Complex
The reduction of complexity. Greater structural understanding

Methods

Analysis of past influences and their effect on organizational performance. Identification of key forces. Analysis of existing relationship

Manager's sensitivity to change. Scenario planning. Contingency planning .Sensitivity planning

Specialist attention to elements of complexity. Model building

Dangers

The sudden emergency of unpredicted change. Mechanistic organizational structures. Lack of skills. Focus on existing relationship Lack of willingness to accept that conditions are changing. Stereotyped responses.

Management myopia. Organizational structures. Lack of skills. Inappropriate forecasting. Failure to recognize significant new players.

Unsuitable organizational structure of control systems. Inappropriate reactions. Inappropriate focuses. Overreaction

MACRO FACTORS

Technological environment
Ayurvedic solutions to common ailments Fuel efficient technology= honda city IPR in Pharma R & D spend

The Italian swim wear company Diana developed fabric which does not absorb water Database technology -personalised customer marketing offers.

Economic environment
High inflation CRR rate hike GDP growth Fiscal and monetary policy Middle class.. Brazildisparity between rich and poor

Economic impact examples


Rates of VAT vary across Europe - this had led to unofficial markets e.g. illegal imports of tobacco and alcohol. Interest rate rises can influence the amount of cash a consumer has available to purchase luxury items, Exchange rates - for example strong exchange rates mean that imports become cheaper, exports however become more expensive. International trading blocs for example EU trade agreements, General Agreement on Tariffs and Trade (GATT), etc.

India economic scenario


GDP growth remained slowed to 8.2% y/y import growth has slowed markedly inflation remaining above target a tightening stance by raising interest rates Industrial activity stood at a near standstill

Government- regulatory/legal
Deregulation of telecom, insurance, petroleum, multi brand retailing Companies act FEMA Import and Export Control Act

examples
Change in minimum wages and labour laws Import duties Emission control and Effluent treatment plants tax on tobacco products Advertising regulations- alcohol,cigarette ads

Exchange Control Regulations of India


Exchange control is regulated under the Foreign Exchange Management Act, 1999 (FEMA) Foreign exchange transactions have been divided into two broad categories current account transactions and capital account transactions. The Indian rupee is fully convertible for current account transactions, subject to a negative list of transactions that are prohibited/ require prior approval. The exchange control laws and regulations for residents apply to foreign invested companies as well.

Repatriation of Capital

Foreign capital invested in India is generally repatriable, along with capital appreciation, if any, after the payment of taxes due on them, provided the investment was on repatriation basis.

Laws Governing Business in India The Companies Act, 1956 Arbitration and Reconciliation Act, 1996 The Competition Act, 2002 The Foreign Exchange Management Act, 1999 Income Tax Act, 1961 Central Sales Tax, 1956 Central Excise Act, 1944 Information Technology Act, 2000 Copyright Act, 1957 Trademarks Act, 1999

Laws Contd Geographical Indications of Goods Act, 1999 Indian Patents Act, 1970 Designs Act, 2000 Industrial Disputes Act, 1947 Workmen Compensation Act, 1956 Employees Provident Fund Miscellaneous Provisions Act, 1952 Consumer Protection Act, 1956

Important Regulatory Authorities for Foreign Investment


Secretariat for Industrial Assistance (SIA) Foreign Investment Promotion Board (FIPB) The Foreign Investment Implementation Authority (FIIA) Reserve Bank of India (RBI) Registrar of Companies (RoC) Securities and Exchange Board of India (SEBI) Central Board of Excise and Customs (CBEC) Central Board of Direct Taxes (CBDT) Authority for Advance Rulings (AAR) Investment Commission (IC)

Government Sector-Political
Coalition vs majority Ideologies- thrust areas in the plans and budgets Elections- rock the boat

Key political risks in India


the corruption issue may continue to paralyse parliament emboldened opposition blocking proceedings The opposition halt the progress of bills Shouting forcing the chamber to shut for weeks demanded a joint probe into the telecoms scandal. vowed to intensify its campaign against the Congress party-led coalition meaning large-scale financial reforms that investors want could well be delayed.

Key changes that markets, and especially foreign businesses with an eye on expanding into India, are looking for include

Recasting the complex tax code to a more investor-friendly goods and services tax, Laws to liberalise the retail sector, keenly anticipated by firms such as Wal-Mart .

Prime Minister Manmohan Singh's credibility has taken a big blow from the allegations. In December he attacked corporate India for its "ethical deficit" and the worry is this could mark another step on a path towards confrontation between government and business.

India's environment ministry has already shown itself unafraid of clashing with corporate interests as it takes an increasingly aggressive stance in trying to enforce green laws.

Investments worth tens of billions of dollars, including a proposed $12 billion steel project by South Korea's POSCO , are up for review, and other firms who have either agreed deals to build factories and industrial plants, or are planning investments, will be wary of the ministry's scrutin

Government attempts at increasing FDI inflows have been hampered by several impediments including pervasive corruption, uncertain regulations, and a critical infrastructure deficit.

Several terrorist attacks in recent years in several major cities Tensions with Pakistan The ongoing Maoist (Naxalite) insurgency

Demographic factors

Demographic
India has more than 50% of its population below the age of 25 and more than 65% hovers below the age of 35. It is expected that, in 2020, the average age of an Indian will be 29 years, compared to 37 for China and 48 for Japan;

more than 11 million workers per year expected to come over the next two decades , the focus now is how India can reap a "demographic dividend" increased savings and capital creation from a rise in the number of workers relative to dependents.

Demographic trends could help tilt the Asian power balance more in Indias favour if New Delhi starts planning now for the challenges of educating and employing this rising tide of youth.

Socio cultural
Ethnic wear, westernisation Debt averse Food habits Music Values, rituals , practices..

Open society Disappearing lines of divide between religions&castes in typical networking among youngsters in society Fast food culture, speed of transportation and communication speed of action, thinking and unthinking action some confusion regarding 'values Lot of technological progress, spiritual progress health focus stress and tension somewhat neglected children, somewhat neglected old men&women! highly intelligent and efficient society with not-so-matching 'values'!

International Environment
Difficulties in international business: 1. political and legal differences 2. cultural differences 3. Economic differences- currency exchange rate fluctuation, convertibility, 4.language differences 5.Marketing infrastructure-media, bill boards, etc

6.Trade restrictions anti dumping, import duties, 7. Physical distance 8. Trade practices China unethical, market intermediaries in India - wrigleys

Ecological environment
Climate change :The potential solution to tackle climate change in form of legally binding international climate deal still looks highly unlikely because of the difference in opinion between the developed and the developing countries. Tipping point in greenhouse gases

Pollution
pollution, especially air and water pollution. Pollution has become particularly serious problem for fast developing economies such as China and India

Mass extinction
scientists claim that world is heading for yet another mass extinction event, last of which happened more than 600 million years ago.

PESTEL
Political Economic Socio cultural Technological Ecological Legal and regulatory International

SWOT analysis was developed by the middle of the 1960s for large organisations to determine the strategic fit between an organisation's internal, distinctive capabilities and external possibilities and to prioritise actions.

In 1960, a number of large American enterprises commissioned a long range study at Stanford Research Institute to investigate why their long range planning efforts where unsuccessful.

SRI's research team -- Marion Dosher, Otis Benepe, Albert Humphrey, Robert Stewart and Birger Lie -- interviewed 5,000 managers at 1,000 companies over nine years.

They found that the difference between what an organisation planned to do and what they actually accomplished was about 35%.

The SWOT framework was first described in detail in the late 1960's by Edmund P. Learned, C. Roland Christinsen, Kenneth Andrews, and William D. Guth in Business Policy, Text and Cases (Irwin, 1969).

1. Strengths those potential factors inside the firm that make a firm more competitive than its direct competitors; 2. Weaknesses both potential limitations and defects inside in an organisation and/or weak factors relative to direct competitors;

3. Opportunities future factors outside that allow the organisation to improve its relative competitive position;
4. Treats those future factors outside that reduce the firm's relative competitive position.

The steps in the common three phase SWOT analysis process


Phase 1: Detect strategic issues 1. Identify external issues - factors that management cannot directly influence. 2. Identify internal issues relevant to the firm's strategic position. 3. Analyse and rank the external issues according to probability and impact. 4. List the key strategic issues factors inside or outside the organisation that significantly impact the long-term competitive position in the SWOT matrix.

High impact low probability


meteor hitting the earth and destroying mankind World war III Attack by aliens

High impact high probability


Global warming Depletion of fossil fuel Attack by virulent viruses( ebola, HIV)

5. Identify firm's strategic fit given its internal capabilities and external environment. 6. Formulate alternative strategies to address key issues.

Phase 2: Determine the strategy

Strategies that combine: a. internal strengths with external opportunities are the most ideal mix, but require understanding how the internal strengths can support weaknesses in other areas;

b. internal weaknesses with opportunities must be judged on investment effectiveness to determine if the gain is worth the effort to buy or develop the internal capability,

c. internal strengths with external threats demand knowing the worth of adapting the organisation to change the threat into opportunity;

d. internal weaknesses with threats create an organisation's worst-case scenario. Radical changes such as divestment are required.

9. Select an appropriate strategy.

Phase 3: Implement and monitor strategy


10. Develop action plan to implement strategy; 11. Assign responsibilities and budgets; 12. Monitor progress; 13. Start review process from beginning.

Pros of SWOT

SWOT analysis makes the solution space explicit it provides a tool to coordinate direction and action and external events that are related to internal capabilities.

The analysis can be executed as a quick scan and used as an early warning system. The model can be used for any complex situation that requires explicit decision making: on an individual, team, departmental or organisational level.

Cons of SWOT :
The model is process based. It provides no insight into what each of the SWOT categories should contain, or which alternative strategies are appropriate. An accurate analysis of the firm's weaknesses requires self-knowledge and discipline. External opinions may be required to provide input or to validate findings.

The model mixes qualitative and quantitative data. It can be dangerous to derive conclusions based on these two types of data. Using SWOT as a strategic planning tool often results in creating excessive lists of factors without prioritising issues.

The assignment of impact and likelihood is a difficult and time-consuming task. The analysis helps only when the key decision makers agree that activities need to be better coordinated and an explicit decision making process is required.

The analysis needs to be conducted for each business or product market.

A strong brand name. Market share. Good reputation. Strength examples could include: Expertise and skill.

Weaknesses could include:


Low or no market share. No brand loyalty. Lack of experience.

Opportunities could include


: A growing market. Increased consumer spending. Selling internationally. Changes in society beneficial to your company

Threats could include


: Competitors Government policy eg taxation, laws. Changes in society not beneficial to your company

Which one of the following is a true definition of SWOT?:


Strengths, Wishes, Opportunities and Tests
Strengths, Weaknesses, Opportunities and Threats Skills, Work-tasks, Openings and Tests Strengths, Weaknesses, Organisation and Threats

Which one of the following is the true distinction between aspects of SWOT?:
S and O are internal factors whereas W and T are external factors. S and T are internal factors whereas W and O are external factors. S and W are internal factors whereas O and T are external factors. S, W and O are internal factors, whereas O is an external factor.

In an Organisational context, which two of the following are strengths?


1. New machinery or equipment 2. Lack of computing expertise 3. A new or developing market 4. Competitors developing new products or services 5. A new product or service 6. Location of the business in respect to the market place 7. Extra competitors in the main market area

1&5

In an Organisational context, which two of the following are weaknesses?


1. The location of a business in respect to the market place 2. A big increase in labour costs 3. An unstable workforce 4. The possibility of cheaper raw materials 5. Government grants offered for new market development 6. ISO 9000 Quality' or 'Investors in People' accreditation 7. A poor after-sales service record

3&7

In an Organisational context, which two of the following are Opportunities?

1. 'ISO 9000 Quality' or 'Investors in People' accreditationAA 2. A big increase in labour costs 3. A poor reputation 4. A poor after sales service record 5. An unstable work force 6. The possiblity of purchasing an effective competitor 7. The relaxation or abolition of international tariffs

6&7

In an Organisational context, which two of the following are Threats?

1. Competitors developing new products or services 2. A big increase in labour costs 3. New machinery or equipment. 4. Lack of computing expertise 5. An unstable work-force 6. The possibility of purchasing an effective competitor 7. A poor after sales service record

1&2

Which two of the following are an acceptable strategy to use after a SWOT analysis?
1. A focus on Opportunities to overcome Weaknesses 2. A Focus on Strengths to take advantage of Opportunities 3. A focus on Strengths be used to offset Threats that hinder achievement of objectives and pursuit of Opportunities 5. A focus on overcoming Weaknesses to take advantage of Opportunities 6. A Focus on overcoming Threats to offset the effects of Weaknesses 7. A focus on Weaknesses to offset threats that hinder achievement of objectives and

2&3

When can SWOT analysis be used in a complex Planning process? At the beginning and at the end At the beginning At the end At any time during the process

Technique for Environment AppraisalETOP(Environment Threat and Opportunity Profile)

Suggested by Glueck
Environmental Sector Regulatory/Gov ernment

Bicycle company

Nature of Impact

Impact of each sector Bicycle thrust area for exports

2.Organisation Appraisal
Organisation resources + Organisation Behaviour S&W Synergistic Effects Core Competencies

Organisational Capability

Strategic Advantage

Organisational Resources
Tangible and Intangible Physical, Human and Organisational Physical- Technology, Plant, access to raw material Human Training, experience. Organisational- Systems and structures Mere resources dont make an organisation capable

Organisational Behaviour
Usage of the resources Leadership, culture and climate, power, values. Hardware- resources Software- Behaviour Yin and Yang S&W

S&W
Strength is an inherent capability which can be used to give Strategic Advantage Weakness is an inherent limitation which creates strategic disadvantage

Financial Strength low cost of capital and efficient use of funds Operational weakness poor logistics management and low productivity

Synergistic Effects- 2 + 2 = 5 (or 3 ?)


2 or more strengths synergy 2 or more weaknesses Dysergy Eg Samsung mobiles - good product range, reasonable price , good promotion and good distribution Ambassador poor product range and substandard promotion

Core Competencies
All S & W combine to give synergy and manifests as Competency Competing with rivals Also known as embedded knowledge Can do something which others cant Popularised by Prahlad and Hamel

3 tests of core competence


1. Provide potential access to a wide variety of markets 2. Should make a significant contribution to the percieved customer benefits 3. Should be difficult for competitors to imitate

Eg of Core Competencies
Canon- optics, imaging Sony miniaturisation 3M- Stick tape Honda engines Reliance project management

Organisation Capability
Capacity or potential of an organisation to use its strengths and overcome weaknesses in order to exploit opportunities and face threats

Strategic Advantage
Outcome of organisation capabilities. Measured by parameters like Profits , Market Share, Brand Image as compared to other companies

Financial Capability
Give examples

Financial Capability
Access Relationship with FI Credit worthiness Low cost of capital Bajaj High profits, good WC, good cash flows Murugappa group-conservative, ability to raise finances, reliable

Marketing Capability
LG Good market planning, good distribution, good USP Nestle strong brand like Maggie Philips- high prices and poor image Amway- unique distribution

Operations Capability
Bridgestone tyres- access to best technology Amara raja batteries- Valve regulated lead acid technology for industrial batteries McDonalds- quick delivery

HR Capability
HUL good training and development O & M nurtures creativity Metal Box huge wage bill lead to shut down

Wikepedia

What do you know about wikipedia ??

Jimmy Wales, one of Wikipedia's founders

Introduction
Wikipedia, a free online encyclopedia, was launched in January 2001 by Jimmy Wales and Larry Sanger On September 09, 2007, Wikipedia, the US-based online encyclopedia, posted its two millionth article in its English edition. By then, Wikipedia had published more than 8 million articles in around 253 different languages. Wikipedia hosted a total of 1.41 billion words with more than 609 million words in the English edition alone.

What is a wiki ???

Wiki is a software using which one can create, and edit web page content. Wiki is generally used to create collaborative websites. The website was a wiki, to which anyone could contribute content and which anyone could edit. Hence, the name Wikipedia - a combination of Wiki and Encyclopedia.

Imagine a world in which every single person on the planet is given free access to the sum of all human knowledge. That's what we're doing." - Jimmy Wales, Founder, Wikipedia, in July 2004

Wikipedia was a result of an experiment to collect information for another project called Nupedia . Nupedia was also an open content, peer review encyclopedia to which highly qualified people contributed.

Wikipedia in itself became so popular that the parent project was soon abandoned and it was taken up as a full-time project. Founders gave many interviews which helped in marketing the new project... The concept became a huge success because anybody could contribute and edit the content without being bound by strict policies

It also created a robust community of content contributors. instilled in them a sense of belonging as far as the project was concerned. around 75% of the articles in Wikipedia were on the non-English sites of Wikipedia. This had steadily increased from 10% in January 2002, and about 50% in January 2004. Since the beginning, Wikipedia strove to be an international project...

The Criticism

"I only use Wikipedia for things I know cold, looking for a terse description to share with my daughter doing homework so I don't have to write it myself. But if I don't know the subject, I would never consider Wikipedia as a source of information. The biggest issue is that Wikipedia provides no information on who posted the story, the writer's credentials or the motives behind changes. - Eric Clemons, Professor of Operations and Information Management, Wharton University, in January 2006.

Many analysts questioned the credibility of something written by an anonymous writer. there were cases of vandalism, which were becoming more rampant by the day. you have no idea whether you are reading an established person in the field or somebody with an ax to grind

Wikipedia may contain articles of great scholarly value. The question is, how do you choose between those and the other kind? the credentials of the author of the article or its editor were not displayed on the website. Some articles which were written by people knowledgeable in the field were excellent, containing useful and relevant information, while others were very amateurish, unauthoritative, and even downright wrong.

it was very difficult to determine the credibility of the articles, especially for those who were new to the topic that they were researching on Wikipedia...

Vandalism means destruction of a monument, a structure, or a symbol which goes against the will of the owner. Vandalism on Wikipedia meant causing such edits to articles on the site which changed their meaning or neutrality.

Future ?
What can Wikipedia do to overcome these weaknesses ???

http://en.wikipedia.org/wiki/Category:Wikipedia_polic ies_and_guidelines
limiting page creation to logged-in users Full protection disables editing for everyone except administrators. Fully protected media files cannot be overwritten by new uploads. Semi-protection disables editing for anonymous users and registered accounts less than four days old. Move protection protects the page solely from moves. By default, fully protected pages are also move protected.

Wikipedia
ETOP and SAP ????

ETOP
Customers Reason for Success and Criticism- O and T Technology Wiki relatively new O Socio economic- Increasing literacy across the globe O Public Vandalism - T

Capabilities ( S & W) of Wikipedia


Marketing founder interviews/publicity, no of languages, identifying a crucial need and fulfilling it HR- robust community of writers /virtual employees, sense of belonging Operations superior , well structured Policies- very unstructured, consensus

Techniques used for Organisation Appraisal


Types-

1. Internal Value Chain,


Quantitative,qualitative

2. Comparative- Historical, Industry norms,


Benchmarking
3. Comprehensive- Balanced Score Card, Key Factor Rating

1.Internal Analysis techniques


1. Value Chain analysisThose businesses that focused their innovation around creating or improving customer value consistently outperformed competitors in their industries

Revenue and earnings analysis from 100 business launches demonstrated that the value innovators generated 38% of the cumulative revenues and 61% of the total profit. it seems that value innovation offers the potential for significant competitive advantage.

consider Bert Claeys, a Belgian company that owns and operates movie theaters. In the 1980s, the Belgian cinema market was rapidly shrinking due to competitive pressures from alternate sources of entertainment such as cable television and video.

Increasing real-estate costs and a generalized lack of affordable parking in the city centers, where most of the cinemas were located, compounded this general market decline.

What will you do in such a situation ?

Bert Claeys responded to these challenges by creating the worlds first megaplex, Kinepolis.
While the competition was building 100-seat multiplex theaters with small screens, Kinepolis offered customers large (700-seat) viewing rooms with comfortable seating, excess legroom, and large screens featuring 70-mm projection equipment and the latest high-quality audio..

Further, by placing these complexes outside the city center, Bert Claeys real-estate costs were reduced and the organization could offer patrons free parking in large, well-lit parking lots. Kinepolis radically altered the customers cinema experience while simultaneously reducing its cost of doing business

learn from the entrepreneurial innovations that have made companies like McDonalds successful. McDonalds first studied what value meant to the customer, defined it as quality and predictability of product, speed of service, absolute cleanliness, and friendliness, then set the standards for all of these

They essentially designed an end product that defined customer value Then created an efficient process to deliver this value, inexpensively to the customer and economically for the organization.

Successful execution of this strategy allows shareholders to extract an excess portion of this created value as earnings. Therefore, the organization gains advantage over competitors when it can create and deliver sufficient value to induce some customer to purchase its product or service, leaving residual margin for the organization.

Rather than blind acceptance of the status quo, the value innovator assumes a fresh-start mentality and attempts to shape the industrys environment. Value innovation also seeks the simultaneous reduction of costs to both the customer and the organization.

Creating Value
Blackberry I pod BMW Dell Facebook ebay

Porter 1985 introduced the value chain framework. Set of interlinked value creating activities performed Procurement of basic Raw material to ultimate consumer

Most organisations engage in hundreds, even thousands, of activities in the process of converting inputs to outputs. These activities can be classified generally as either primary or support activities that all businesses must undertake in some form.

Divided into primary and support activities. Primary- related to flow of the product :
Inbound Logistics

Operation s
Manufactu ring , Packaging Maintenan ce

Outbound Marketing Service Logistcs and Sales


Transport, Place, WH,Order Pricing, Processing, Promotion, Scheduling

Warehousin g, Inventory, Vendor selection

After sales

Support Sustain the primary activities: 1. Firm infrastructure 2. HR Management, 3. TechnologyDevelopment 4. Procurement

The chain of activities gives the products more added value than the sum of added values of all activities.
It is important not to mix the concept of the value chain with the costs occurring throughout the activities. A diamond cutter can be used as an example of the difference. The cutting activity may have a low cost, but the activity adds much of the value to the end product

since a rough diamond is significantly less valuable than a cut diamond.

Value chain is a powerful analysis tool for strategic planning.

The value-chain concept has been extended beyond individual firms. It can apply to whole supply chains of an industry and distribution networks.

A value system includes the value chains of a firm's supplier (and their suppliers all the way back), the firm itself, the firm distribution channels, and the firm's buyers (and presumably extended to the buyers of their products, and so on).

By exploiting the upstream and downstream information flowing along the value chain, the firms may try to bypass the intermediaries creating new business models, or in other ways create improvements in its value system. Give examples

Example of value chain changes


Airlines :Backward- Maintenance,Catering, Forward- Own booking offices Dell- direct marketing Railway ticketing Just dial

Techniques used for Organisation Appraisal


Types-

1. Internal Value Chain,


Quantitative,qualitative

2. Comparative- Historical, Industry norms,


Benchmarking
3. Comprehensive- Balanced Score Card, Key Factor Rating

Quantitative Analysis
1. 2. 3. 4. 5. 6. Ratio anlaysis EVA (profit-cost of capital) ABC( costs of activities in value chain) employee turnover Ad Recall No of patents registered..

Financial

Non- financial

Qualitative analysis
Temper quantitative with qualitative : 1. Corporate culture 2. Creativity 3. Morale

2. Comparative Analysis
Comparative- Historical, Industry norms,
Benchmarking
1.Historical Analysis Own Past Performance Dividends,Profits.

2. Industry NormsCost structure, Ad budget Annual Reports.. Areas to improve, or strengthen

3. Bench Marking Find the best practices and best performers so that one could match ones own performance with them or surpass them

Competitive Benchmarking or Performance Benchmarking


: Used by companies to compare their positions with respect to the performance characteristics of their key products and services. Competitive benchmarking involves companies from the same sector.

Process Benchmarking: Used by companies to improve specific key processes and operations with the help of best practice organizations involved in performing similar work or offering similar services.

Functional Benchmarking or Generic Benchmarking: Used by companies to improve their processes or activities by benchmarking with other companies from different business sectors or areas of activity but involved in similar functions or work processes.

Internal Benchmarking: This involves benchmarking against its own units or branches for instance, business units of the company situated at different locations. This allows easy access to information, even sensitive data, and also takes less time and resources than other types of benchmarking.

External Benchmarking: Used by companies to seek the help of organizations that succeeded on account of their practices. This kind of benchmarking provides an opportunity to learn from high-end performers.

International Benchmarking: Involves benchmarking against companies outside the country, as there are very few suitable benchmarking partners within the country.

Benchmarking at Xerox
Benchmarking against Japanese competitors Xerox found out that it took twice as long as its Japanese competitors to bring a product to market, five times the number of engineers four times the number of design changes, and three times the design costs.

also found that the Japanese could produce, ship, and sell units for about the same amount that it cost Xerox just to manufacture them. Xerox's products had over 30,000 defective parts per million - about 30 times more than its competitors. Benchmarking also revealed that Xerox would need an 18% annual productivity growth rate for five consecutive years to catch up with the Japanese.

Xerox began by implementing competitive benchmarking. However, the company found this type of benchmarking to be inadequate as the very best practices

some processes or operations were not being practiced by copier companies. The company then adopted functional

benchmarking, which involved a study of the best practices followed by a variety of companies regardless of the industry they belonged to. Xerox initiated functional benchmarking with the study of the warehousing and inventory management system of L.L. Bean (Bean), a mail-order supplier of sporting goods and outdoor clothing.

Similarly, Xerox zeroed in on various other best practice companies to benchmark its other processes. These included American Express (for billing and collection), Cummins Engines and Ford (for factory floor layout), Florida Power and Light (for quality improvement), Honda (for supplier development), Toyota (for quality management), Hewlett-Packard (for research and product development), Saturn (a division of General Motors) and Fuji Xerox (for manufacturing operations) and DuPont (for manufacturing safety).

Xerox found that all the Japanese copier companies put together had only 1,000 suppliers, while Xerox alone had 5,000. To keep the number of suppliers low, Japanese companies standardized many parts.

Xerox's efforts to improve inventory management practices drew inspiration from the innovative spare parts management practices of its own European operations. Actual usage, rather than mere withdrawal from the stocking point, was used to determine inventory levels. In the late 1980s, Xerox replicated the system in the US and saved tens of millions of dollars in the process.

benchmarked against those competitors that had scored high marks on specific measures of customer satisfaction. benchmarking was extended to over 240 key areas of product, service and business performance at Xerox adopted, at varying levels, at Xerox units across the world. The benchmarking process encouraged Xerox's employees to learn from every situation. This new philosophy was dubbed 'steal shamelessly,' though the company used only those ideas that the best practice companies willingly gave away.

Highly satisfied customers for its copier/duplicator and printing systems increased by 38% and 39% respectively. Customer complaints declined by more than 60%. Customer satisfaction with Xerox's sales processes improved by 40%, service processes by 18% and administrative processes by 21%. The financial performance of the company also improved considerably

SUMMARISE THE TYPES OF BENCHMARKING AT XEROX

Types of Benchmarking
1. Performance 2. Process 3. Strategic 1.Internal 2.Competitive 3.Functional 4.Generic What
1.Depts within Co 2. Other competing Cos

Whom

3.Other non comp cos 4. Any world class cos

Techniques used for Organisation Appraisal


Types-

1. Internal Porters Value Chain,


Quantitative,qualitative

2. Comparative- Historical, Industry norms,


Benchmarking
3. Comprehensive- Balanced Score Card, Key Factor Rating

Comprehensive AnalysisCombination of techniques


1. Balanced Score cardProposed by Robert S Kaplan and David NortonSet of measures that give top Management a comprehensive view of business

Where it started . . .
Introduced in 1992, by Robert Kaplan and David Norton, the Balanced Scorecard is the most commonly used framework for ensuring that agencies execute their strategies. Today, about 70% of the Fortune 1,000 companies utilize the Balanced Scorecard to help manage performance.

Balanced Scorecards are used as the roadmap for creating the Strategic Management System And this will drive overall organizational performance

4 key performance measures in Balanced Scorecard

1. Customer Perspective- How do customers see us 2. Internal Business Perspective- What must we excel in ? 3. Innovation and learning perspective-Can we continue to create value ? 4. Financial perspective How do we look at shareholders ?

Why Do Organizations Struggle So Hard With Strategy?


1 in 10 organizations execute their strategies successfully

Fortune Magazine, 1998

72% of CEOs believe that executing their chosen strategy is more difficult than developing a good strategy
Malcolm Baldrige CEO Survey, 2002

#5

MAKE STRATEGY A CONTINUAL PROCESS


The Problem:

The Strategic Management Process Is Missing in Most Organizations

STRATEGY

60% of organizations dont link strategy & budgets

update the strategy Strategic Learning Loop

test the hypotheses

85% of management teams spend less than one hour per month on strategy issues

BALANCED SCORECARD

BUDGET

78% of organizations lock budgets to an annual cycle 20% of organizations take more than 16 weeks to prepare a budget

funding

Management Control Loop

reporting

PERFORMANCE Input (Resources)


Initiatives & Programs

92% of organizations do not report on lead indicators

Output (Results)

Strategy Development or Strategy Execution? Strategic success requires going beyond successful strategy Organizations Need Both formulation to successful strategy execution
1

Strategy Formulation

Sound

Missed Opportunity

Strategic Success

Flawed

Doomed From The Start

At Risk

Flawed Strategy Execution

Sound

Source:

1Execution:

The Discipline of Getting Things Done, by Larry Bossidy, 2002.

Strategy Execution Challenge


There are generally accepted tools to manage finances, customers, processes, and people. But what about strategy?
Financial Management Tools
EVA Balance Sheets Income Statements Shareholder Value Analysis

Process Management Tools


Six Sigma Supply Chain Integration

Strategy Management Tools

Cycle Time Reduction


TQM

Customer Management Tools


Customer Satisfaction Measurement Customer Relationship Management Segmentation Analysis

People Management Tools


Core Competencies Knowledge Management

One-to-One Marketing

Pay for Performance


HRIS

The Balanced Scorecard is the vehicle that fills the Strategy Management Gap

Balanced Scorecard Organizations Are Achieving BREAKTHROUGH Breakthrough Results


RESULTS Private Sector
Mobil
From last to first in industry ROI 6% --> 16%

Public Sector
Shareholder Value

SMDC Health System


Profitability up $23m Customer Satisfaction

Wendys International
Mkt. Cap $2.5 --> $4b Stock Price up 75%

Profitable Growth

City of Charlotte
Customer Satisfaction = 70% Public Official Award

Customer Satisfaction

UPS
Revenues Net Income 9% 33%

Duke Childrens Hospital


Organizational Alignment
Customer Satisfaction #1 Cost/Case 33%

Hilton Hotels
Customer Loyalty 5% EDITDA margins 3% above average

Defense Logistics Agency


Cost Reduction
$130MM in Savings in FY2002 Processed $2.2B more requisitions for its customers

How Did They Do It? They Created Strategy-Focused Organizations


STRATEGY: They made strategy the central organization agenda FOCUSED: They created incredible focus on the strategy ORGANIZATION: They mobilized their employees to act in fundamentally different ways, guided by the strategy

STRATEGY

The Balanced Scorecard Is a Performance Management Program That Puts Strategy at the Center of the Process

Reflecting a Natural Cause and Effect Logic


of Business Performance
And Realize the Vision

Financial Results

To Drive Financial Success...

Customer Benefits

Needed to Deliver Unique Sets of Benefits to Customers...

Internal Capabilities

To Build the Strategic Capabilities..

Knowledge, Skills, Systems, and Tools

Equip our People...

The Balanced Scorecard Should Tell the Story of the Strategy


Illustrative Example: Southwest Airlines
Strategic Theme: Operating Efficiency
Financial Profitability Fewer planes Customer

What will drive operating efficiency?


More customers

More customers on fewer planes How will we do that?

Flight Is on time

Lowest prices

Attract targeted customer segments who value price and on time arrivals What must the internal focus be? Fast turnaround Will our people do that?

Internal Fast ground turnaround

Learning Ground crew alignment

Educate and compensate ground crew regarding how they contribute to the firms success Employee stockholder program

Lets Take a Minute to Agree Upon Some Common Vocabulary


Diagram of the cause and effect relationships between strategic objectives (Strategy Map)
Strategic Theme: Operating Efficiency
Financial Profitability Fewer planes Customer Flight Is on time Lowest prices More customers

Statement of what strategy must achieve and whats critical to its success

How success The level of in achieving performance the strategy or rate of will be measured and improvement needed tracked

Key action programs required to achieve objectives

Objectives
Internal Fast ground turnaround

Measurement

Target

Initiative

Fast ground
turnaround

On Ground Time On-Time


Departure

30 Minutes 90%

Cycle time
optimization

Learning Ground crew alignment

PHILIPS
WHICH IS THE COUNTRY OF ORIGIN OF THIS COMPANY ?

Philips was founded in 1891 by Gerard Philips who established a facility at Eindhoven, a small town in the Netherlands, to produce carbon filament lamps and electrical products. Gerard's younger brother, Anton, joined the business in 1895 as a salesperson.

By the early 1900s, Gerard's company had emerged as one of the largest producers and marketers of carbon-filament lamps.
In the 1920s, Philips began the mass production of consumer goods, and started to diversify its product range. X-ray radiation and radio reception were key focus areas for Philips and the company's innovations in these areas were protected through patents.

During the late 1990s the external environment was changing rapidly and Philips needed to respond quickly to these changes. However, the existing organization structure at Philips did not support this kind of change. The company's operations were spread across several countries, and the products were most often sold in the country in which they were manufactured.

Due to high manufacturing costs, the products could not be priced competitively. This led to the company initiating job cuts, selling unprofitable businesses and closing down several manufacturing facilities Rapid changes in the external business environment and growing competition due to Asian manufacturers

With growing wage levels, selling and manufacturing in the same country was not a lucrative value proposition. This was especially the case in some of Philips' major markets in Western Europe where the cost of manufacturing had increased significantly.

At the same time, the growing influence of Asian companies like LG and Samsung increased competition in the businesses in which Philips was operating. These changes made Philips realize that its operations needed to be more flexible, more innovative, and value adding. A silo mentality had developed in the organization due to years of bureaucracy...

Implementing Balanced Scorecard


At Philips, the initiative to implement the Balanced Scorecard system came from the top management at its headquarters in the Netherlands. All the subsidiaries of Philips across the world were instructed by their quality departments on how to go about the implementation...

Reflecting a Natural Cause and Effect Logic of Business Performance


And Realize the Vision

Financial Results

To Drive Financial Success...

Customer Benefits

Needed to Deliver Unique Sets of Benefits to Customers...

Internal Capabilities

To Build the Strategic Capabilities..

Knowledge, Skills, Systems, and Tools

Equip our People...

The balanced scorecard serves not only as the starting point for identifying those areas where breakthroughs in performance are most needed, but also as an instrument for tracking progress." - Annual Report, Philips Electronics NV, 2001

Philips realized the need to transform into a flexible organization and shift focus from highvolume business to high-value business. In order to bring in the desired change, Philips embarked on an improvement program, in all its divisions and departments across the world, encompassing all the employees The program, called Business Excellence through Speed and Teamwork (BEST), described a set of methods and tools through which Philips aimed to improve business and financial performance.

BEST was a company-wide initiative aimed at achieving excellence in every aspect of business at Philips. Philips used several tools and approaches as a part of BEST. One of them was Balanced Score Card

The top management, and all the divisions identified the factors that were important to create value and they were grouped under four perspectives -

competence, process, customers and financial. After establishing the 'Critical Success
Factors' (CSFs), key indicators to measure the CSFs were decided. Some of the indicators like achieving revenue growth, employee satisfaction, customer satisfaction were common for all the business units while other indicators differed.

During the periodical management reviews, the Balanced Scorecard was used as an instrument to evaluate actual performance against the targets and to monitor future plans.

Philips used the traffic light system with the green light indicating a target that had been met, amber indicating performance in line with the target, and red denoting a problem area, to measure the level of achievement of the key indicators.

The 117-year-old Dutch company was a lumbering conglomerate that made everything from semiconductors to light bulbs, without clear leadership in anything.

Today Philips is on its way to becoming a case study in European restructuring. While still a conglomerate, it has streamlined its business and revitalized its brand under the leadership of chief executive Gerard Kleisterlee. Its financial performance has also improved.

Exit from Semiconductor business


in 2006, Philips unloaded 80% of its volatile semiconductor business for 6.4 billion euros ($9.6 billion). It has also been steadily selling off its holdings in Taiwan Semiconductor. Philips also plans to sell most of its nearly 20% stake in its South Korean venture, LG Philips LCD, by next year.

Building capability in Health Care and Lighting


Meanwhile, Philips has been busy putting all of this cash to work. In December, it announced a share buyback, worth 5 billion euros ($7.2 billion). It has also been on a shopping spree, buying a handful of companies that will bolster its growth prospects. These include Respironics (in home health care), Visicu (in health care information technology), and Genlyte (in lighting fixtures). These deals should put Philips in a position to deliver more stable growth and better profitability in the future.

Philips is a leading maker of light-emitting diodes (LEDs), LEDs are brighter, cooler, and more-energy efficient than regular bulbs, and Philips is building a dominant position in this market.

Philips [also] is capitalizing on another important trend-the growth of home care and patient monitoring. Another growth opportunity: emerging markets. About a third of Philips' revenue comes from emerging markets, including Asia, Latin America, and Russia.

Balanced Scorecard Implementation at Philips


Our aim for adopting the balanced scorecard solution is to consistently communicate strategy deep down into Philips' 80 businesses and support more than 10,000 managers with tools to turn strategy into action by sharing knowledge, aligning actions, monitoring progress and learning."1 - Peter Geelen of Philips Corporate Control, Responsible for the Balanced Scorecard Project, in 2001.

Balanced Score Card is a comprehensive Management System for --- STRATEGY PLANNING AND EVALUATION

Techniques used for Organisation Appraisal


Types-

1. Internal Value Chain,


Quantitative,qualitative

2. Comparative- Historical, Industry norms,


Benchmarking
3. Comprehensive- Balanced Score Card, Key Factor Rating

Key factor Rating


Used by consultants : Look at the strengths and synergies, that result in capabilities described earlier. Credit worthiness Low cost of capital Product Price

Asking relevant questions in each area


How does the companys products compare wrt .Brand Image ..

OCP- Organisation Capability Profile


Factor Weakness Normal -5 0 Strength +5

Source of fund

The chart helps strategists to assess the S &W of the organisation in each functional area

SAP Strategic Advantage Profile


Outcome of the Organisation Appraisal Similar to ETOP for opportunities and threats Gets input from OCP Picture of more critical factors affecting Strategic Posture

For a -------- company


Capability Factor S or W Competitive S or W

Finance

High cost of capital

HR

Comparable to competitors

The Organisation Appraisal can be done by a detailed OCP or a summarised SAP

3.Corporate Level Strategies


2. Formulation of strategies
Environmental Appraisal- ETOP Organisation Appraisal - SAP

Corporate level strategies


Business level strategies Strategic analysis Strategic choice Formulating strategies Preparing a strategic plan

Grand Strategies- Corporate Level


Outcome of ETOP and SAP Various Strategic Alternatives Choice adopted to achieve objectives

A (Diversified )Company Has Two Levels of Strategy


1. Corporate-Level Strategy
(Companywide Strategy)

How to create value for the corporation as a whole

2. Business-Level Strategy

(Competitive Strategy)

How to create competitive advantage in each business in which the company competes

Key Questions of Corporate Strategy


1. What businesses should the corporation be in? 2. How should the corporate office manage the array of business units?

Corporate Strategy is what makes the corporate whole add up to more than the sum of its business unit parts

Glueck- 4 Grand Strategic Alternatives

1. Stability- Internal
2. Expansion - External 3. Retrenchment - Internal 4. Combination

1. Stability Strategy
1. Incremental Improvement 2. Marginal changecustomer group, customer functions, alternate technologies 1. Companies do not go beyond what they are doing now- same markets, same products.

Pharma company- special package for Hospitals Printer company- Better After sales service Steel Company- Modernises plant

Types of Stability Strategies


1. No change 2. Pause/proceed with caution 3. Profit

STABILITY- No Change
Do nothing new, taking no decision is a decision too, S.T Continuing with present strategy Predictable external and stable internal No new O and T, no new S and W Inertia vs conscious decision Small and med sized, niche markets, familiar market, EG Bata, Canara Bank

STABILITY- Profit
Situation of lowering profits Reduce investment, cut costs, raise prices, increase productivity, sell assets,hive off brands , outsourcing In response to recession, industry downturn, competition. Used if problems are temporary To keep afloat Eg Ashok Leyland( lay off), IT Companies( wage cuts during recession ) , Maruti increased prices . Nokia huge losses due to competition cutting costs

STABILITY-Pause/Proceed with caution


Testing ground before moving with more aggressive strategy Intervening consolidation before further expansion To allow changes to seep down, structural changes, allow systems to adapt.. Temporary- till company is ready to move on HUL entered shoes in a small way. Nokias new model phones Videocon tvs

1. Stability

2. Expansion
3. Retrenchment 4. Combination

Expansion Strategies
Most popular Growing economy,growing markets, new tastes, new technologies.

Types of Expansion Strategies


International

Concentration

Expansion

Diversification
Related

Integration
Cooperation
Related

Businesses Businesses

Businesses Businesses

Unrelated

Unrelated

Expansion - Types
1. Concentration
2. 3. 4. 5. Integration Diversification Cooperation Internationalisation

Concentration/Intensification/ focus/specialisation
Simple, first level, first preference Doing more of what it is already doing Investing more in known industry rather than unknown Converging resources Stick to the knitting(Peters and Waterman- In Search of Excellence) Rely on doing what you are best at Industry should possess high growth potential/attractive Firm should have adequate funds

Concentration
Organization concentrates on its primary lines of business and looks for ways to meet its growth objectives through increasing its level of capability in this primary business

Examples ???Advantages ???

Concentration/Intensification/ focus/specialisation
Eg, Mc Donald, Maruthi Udyog, Colgate High growth industry. Advantages- Minimal changes, less threatening, more comfortable staying in same business., indepth knowledge of business,Intense focus, competitive advantage, known situations, fewer problems,higher predictability,replicable past experience,

Limitations ???

All eggs in one basket Dependent on industry Recession in industry- reduce growth prospects Crowded with competitors reduces attractiveness Mature- less chance for expansion

Product obsolesence(pagers),fickle markets( fashion clothes),newer technologies ( PCs) Organisation inertia, less interest Cash surplus in maturity stage..

Expansion - Types
1. Concentration

2. Integration
3. Diversification 4. Cooperation 5. Internationalisation

Integration
Combining activities related to the present activity Committing to adjacent businesses Extending value chain from the basic raw materials to ultimate consumer Two types- Vertical and Horizontal

Conditions favoring Vertical Integration ???

Make or Buy Cost of manufacturing vs cost of procuring from suppliers Cost of selling vs price paid to sellers

Vertical Integration
New products/services to serve own needs Supplying inputs or serving as a customer for outputs Backward Upstream-Going back to source of raw material Forward Downstream- Moving closer to consumer

best examples of vertically integrated companies is the oil industry. Oil companies, ExxonMobil, Royal Dutch Shell, or BP often adopt a vertically integrated structure. This means that they are active all the way along the supply chain from locating crude oil deposits, drilling and extracting crude, transporting it around the world, refining it into petroleum products such as Petrol/Gasoline, to distributing the fuel to company-owned retail stations, where it is sold to consumers.

Reliance eg of Vertical Integration


The Indian petrochemical giant Reliance Industries is a great example of vertical integration in modern business. Reliance's backward integration into polyester fibres from textiles and further intopetrochemicals was started by Dhirubhai Ambani. Reliance has entered the oil and natural gas sector, along with retail sector. Reliance now has a complete vertical product portfolio from oil and gas production, refining, petrochemicals, synthetic garments and retail outlets.

Apple - VI
Apple Inc. have been listed as an example of vertical integration, specifically with many elements of the ecosystem for the iPhone and iPad, where they control the processor, the hardware and the software.

Horizontal Integration
The acquisition of additional business activities ( same type of products)at the same level of the value chain is referred to as horizontal integration. Eg suitcase company takes over its rival suitcase company Buying competitors business to expand geographically,

examples
The Standard Oil Company's acquisition of 40 refineries. An automobile manufacturer's acquisition of a sport utility vehicle manufacturer. A media company's ownership of radio, television, newspapers, books, and magazines. Rupert Murdoch purchase of medianewspaper, tv channels, FM radio channels

Limitations

Commitment to businesses serving the same customers Main product failing /becoming obsolete More resources put in same market

Expansion types
1. Concentration 2. Integration

3. Diversification
4. Cooperation 5. Internationalisation

Diversification
Much used, Most important type Involves all strategic alternatives: Internal/external, related/unrelated, horizontal/vertical, active/passive New markets, technologies, products. Two types concentric and conglomerate

Concentric Diversification
Related to existing business in some way- market, technology . 3 types Marketing related to same customer group printers and stationary Technology related-Workstations to large Cos and PCs to small customers; gaming software and business software Marketing and technology related- Books, maps, calendars sold in same shops

1.
2. 3.

Conglomerate Diversification

Diversification two types concentric and

conglomerate
Unrelated to existing business definition

ITC Businesses FMCGCigarettes & Cigars Foods Lifestyle Retailing Personal Care Education and Stationery Safety Matches Agarbattis Hotels Paperboards and Packaging Paperboards and Specialty Papers Packaging Agri Business Agri Commodities & Rural Services e-Choupal Leaf Tobacco, Spices & Agri Inputs Information Technology

The Tata Group has operations in more than 80 countries across six continents and its companies export products and services to 80 nations. The Tata Group comprises 114 companies and subsidiaries in eight business sectors,[4] 27 of which are publicly listed. 65.8% of the ownership of Tata Group is held in charitable trusts.[5] Companies which form a major part of the group include Tata Steel (including Tata Steel Europe), Tata Motors (including Jaguar and Land Rover), Tata Consultancy Services, Tata Technologies, Tata Tea (including Tetley), Tata Chemicals, Titan Industries, Tata Power, Tata Communications, Tata Sons, Tata Teleservices and the Taj Hotels.

Wipro Group Companies


Wipro Consumer Care & Lighting Wipro EcoEnergy Wipro Infrastructure & Engineering Wipro GE Medical Systems Limited

Why do companies adopt diversification ???

Minimise risks Exploit strengths or minimise weakness Slow growth in existing business due to Govt, customer,

Limitations ???

Expansion types
1. Concentration 2. Integration 3. Diversification

4. Cooperation
5. Internationalisation

Cooperation
Principle- Competition could exist with cooperation( Moore, Noorda, )

Types : 1. Mergers 2. Takeovers 3. Joint Ventures 4. Strategic Alliances

Mergers /takeover, JVS indicate inorganic growth

Mergers mutual need of buyer and seller Takeover- Strong motivation of the buyer Joint Venture- Independent firm is created by at least two other firms. Strategic Alliance- Partnership firms resources, capabilities are combined

1. Mergers
Voluntary Combination of two or more organisations Exchange of cash or shares of one for the assets and liabilities of another( merger) Or each dissolves to create a new entitiy..( consolidation)

In a merger of two corporations, the shareholders usually have their shares in the old company exchanged for shares in the merged entity.

They have become popular because of the enhanced competition, breaking of trade barriers, free flow of capital across countries and globalisation of businesses. increasing exposure to competition both domestically and internationally.

Two types of mergers


Merger through Absorption:- An absorption is a combination of two or more companies into an 'existing company'. All companies except one lose their identity in such a merger. For example, absorption of Tata Fertilisers Ltd (TFL) by Tata Chemicals Ltd. (TCL). TCL, an acquiring company (a buyer), survived after merger while TFL, an acquired company (a seller), ceased to exist. TFL transferred its assets, liabilities and shares to TCL.

Merger through Consolidation:- A consolidation is a combination of two or more companies into a 'new company'. In this form of merger, all companies are legally dissolved and a new entity is created. For example, merger of Hindustan Computers Ltd, Hindustan Instruments Ltd, Indian Software Company Ltd and Indian Reprographics Ltd into an entirely new company called HCL Ltd.

Types of Mergers
Horizontal Mergers- Pharma company with another pharma company Vertical- footwear company + shoe retail stores Concentric- Related in terms of customer or technology or .eg footwear + socks, . Conglomerate footwear + Pharma

Horizontal merger Two companies that are in direct competition and share the same product lines and markets i.e. it results in the consolidation of firms that are direct rivals. E.g. Exxon and Mobil, Ford and Volvo, Volkswagen and Rolls Royce and Lamborghini , Daimler-Benz and Chrysler ,Lipton and Brooke bond, ICICI bank and bank of madura,centurion bank and HDFC,ACC and Damodar cement

Vertical mergerA customer and company or a supplier and company i.e. merger of firms that have actual or potential buyer-seller relationship Daimler chrysler bidding for Tognum (manufactures diesel engines)

Concentric mergers
E.g. Phillip Morris-Kraft Tobacco and food Pepsico- Pizza Hut Pizza and softdrinks Proctor and Gamble and Clorox Personal care and cleaning products

Conglomerate merger two companies which merge have no obvious relationship of any kind. BankCorp of America- Hughes Electronics.

De mergers
Opposite of mergers Eg Clariant from sandoz, Ciba speciality from Ciba Geigy Aptech from Apple Dabur Pharma from Dabur ADAG from the Ambani group

Reasons for mergers ???

1. Accessing new markets # maintaining growth momentum # acquiring visibility and international brands # buying cutting edge technology rather than importing it # taking on global competition # improving operating margins and efficiencies # developing new product mixes

1. 2. 3. 4. 5. 6. 7. 8.

Increase stock value Increase growth Diversify To reduce competition Tax concessions Acquire resources quickly Synergy Succession problems

Issues in Mergers
1. Strategic Issues Match in objectives of firms Should increase strength 2. Financial Issues Valuation of firm DCF, CAPM(Capital Asset Pricing Method). EPS of merged entity should be higher or neutral

Ranbaxy and Crosslands = positive Punjab National Bank and New bank of India= negative Source of funds- Increasing Debt, Equity;NRIs, surplus, .

3. Managerial Issues- Change in structure, leadership, Authority, style 4. Legal Issues Companies Act, Income Tax Act ,

Cooperation- 2. Takeovers
Post liberalisation- popular strategy SEBI introduced Takeover code in 1994 Bhagwati code in 1996 SEBI 1997 modified takeover code To ensure transparency, fair

A merger - the mutual decision of two Takeover characterized the purchase of a

companies to combine and become one entity; it can be seen as a decision made by two "equals",

smaller company by a much larger one. This combination of "unequals" can produce the same benefits as a merger, but it does not necessarily have to be a mutual decision

In a Takeover, the acquiring firm usually offers a cash price per share to the target firms shareholders or the acquiring firm's share's to the shareholders of the target firm according to a specified conversion ratio.

Issues in takeovers
1. Check Compatability of business styles 2. Treat people with dignity and concern 3. Trusted intermediary Accountant, Merchant bankers 4. Negotiations

What factors influence the price of takeovers

Asset valuation using due diligence Goodwill Market opportunities Growth potential

Leveraged buyouts(LBOs) or bootstrap acquisitions


A leveraged buyout (or LBO, or highly-leveraged transaction (HLT), or "bootstrap" transaction) occurs when a financial sponsor gains control of a majority of a target company's equity through the use of borrowed money or debt. The purpose of a LBO is to allow an acquirer to make large acquisitions without having to commit a significant amount of capital

In an LBO, there is most often a ratio of 70% debt to 30% equity, although debt can reach as high as 90% to 95% of the target company's total capitalization. The equity component of the purchase price is typically provided by a pool of Private Equity capital.

Often, the debt will appear on the acquired company's balance sheet and the acquired company's free cash flow will be used to repay the debt. the assets of the target company are used as collateral for the debt

Target Company Tetley

Country UK

Indian acquirer

Value 271 million pound 550 million pound 11.3 billion $ 2 billion dollars 465 million euro

Type LBO

Whyte and UK Mackay Corus UK

LBO

LBO LBO LBO

American USA axle Hansen Netherla transmissio nds n

Target Company Tetley

Country UK

271 million pound Whyte and UK UB group 550 Mackay million pound Corus UK Tata 11.3 Steel billion $ American USA Tata 2 billion axle motors dollars Hansen Netherla Suzlon 465 transmissi nds million on euro

Indian acquirer tata tea

Value

Type LBO

LBO

LBO LBO LBO

Friendly takeover and Hostile takeovers


Friendly both parties consent same as a merger eg tata tea Asina coffee Hostile resisted by the existing management pick up share in open market, through support of other major share holders NEPC Modiluft Swaraj Pauls failed bid for Escorts and DCM (1984); 2. ICIs attempt to takeover Asian Paints (1997); 3. India Cements/ Raasi Cements (1998); and 4. The Dalmia groups purchase of stake in GESCOs real estate company (2000).

Pros and cons of takeovers

Pros:
INORGANIC GROWTH Easy growth Avoid gestation period No hurdles as in new projects Chance to sick units Selective divestment

Cons
Do not create any real value for society Bad for the economy Stress to minority management Use of Money power

Motives behind M & A -Economies of Scale:


This generally refers to a method in which the average cost per unit is decreased through increased production, since fixed costs are shared over an increased number of goods. In a laymans language, more the products, more is the bargaining power. This is possible only when the companies merge/ combine/ acquired, as the same can often obliterate duplicate departments or operation, thereby lowering the cost of the company relative to theoretically the same revenue stream, thus increasing profit. It also provides varied pool of resources of both the combining companies along with a larger share in the market, wherein the resources can be exercised.

Increased revenue /Increased Market Share:


This motive assumes that the company will be absorbing the major competitor and thus increase its power (by capturing increased market share) to set prices.

Cross selling:
For example, a bank buying a stock broker could then sell its banking products to the stock brokers customers, while the broker can sign up the bank customers for brokerage account. Or, a manufacturer can acquire and sell complimentary products.

# Corporate Synergy:
Better use of complimentary resources. It may take the form of revenue enhancement (to generate more revenue than its two predecessor standalone companies would be able to generate) and cost savings (to reduce or eliminate expenses associated with running a business).

Taxes :
A profitable company can buy a loss maker to use the targets tax right off i.e. wherein a sick company is bought by giants.

# Geographical or other diversification: this is designed to smooth the earning results of a company, which over the long term smoothens the stock price of the company giving conservative investors more confidence in investing in the company. However, this does not always deliver value to shareholders.

# Resource transfer:
Resources are unevenly distributed across firms and interaction of target and acquiring firm resources can create value through either overcoming information asymmetry or by combining scarce resources. Eg: transfer of employees, reducing taxes etc.

# Improved market reach and industry visibility - Companies buy companies to reach new markets and grow revenues and earnings. A merge may expand two companies' marketing and distribution, giving them new sales opportunities. A merger can also improve a company's standing in the investment community: bigger firms often have an easier time raising capital than smaller ones.

Caselet
William Durant founded GM. Lost control of GM because of unconsolidated expansion Started Chevrolet with a swiss Racer Louis Chevrolet Durant brought out Louis Chevrolet became a popular brand Used the money to buyout GM with a 5:1 swap of shares Merger of GM with Chevrolet

Legal Procedures for Merger, Amalgamations and Take-overs


The general law relating to mergers, amalgamations and reconstruction is embodied in sections 391 to 396 of the Companies Act, 1956

Companies Act 1956


Permission for merger:- Two or more companies can amalgamate only when the amalgamation is permitted under their memorandum of association. Also, the acquiring company should have the permission in its object clause to carry on the business of the acquired company. In the absence of these provisions in the memorandum of association, it is necessary to seek the permission of the shareholders, board of directors and the Company Law Board before affecting the merger. Information to the stock exchange:- The acquiring and the acquired companies should inform the stock exchanges (where they are listed) about the merger. Approval of board of directors:- The board of directors of the individual companies should approve the draft proposal for amalgamation and authorise the managements of the companies to further pursue the proposal. Application in the High Court:- An application for approving the draft amalgamation proposal duly approved by the board of directors of the individual companies should be made to the High Court. Shareholders' and creditors' meetings:- The individual companies should hold separate meetings of their shareholders and creditors for approving the amalgamation scheme. At least, 75 percent of shareholders and creditors in separate meeting, voting in person or by proxy, must accord their approval to the scheme. Sanction by the High Court:- After the approval of the shareholders and creditors, on the petitions of the companies, the High Court will pass an order, sanctioning the amalgamation scheme after it is satisfied that the scheme is fair and reasonable. The date of the court's hearing will be published in two newspapers, and also, the regional director of the Company Law Board will be intimated. Filing of the Court order:- After the Court order, its certified true copies will be filed with the Registrar of Companies. Transfer of assets and liabilities:- The assets and liabilities of the acquired company will be transferred to the acquiring company in accordance with the approved scheme, with effect from the specified date. Payment by cash or securities:- As per the proposal, the acquiring company will exchange shares and debentures and/or cash for the shares and debentures of the acquired company. These securities will be listed on the stock exchange.

The Competition Act, 2002



Act regulates the various forms of business combinations throughCompetition Commission of India. Under the Act, no person or enterprise shall enter into a combination, in the form of an acquisition, merger or amalgamation, which causes or is likely to cause an appreciable adverse effect on competition in the relevant market and such a combination shall be void. The Commission while regulating a 'combination' shall consider the following factors :Actual and potential competition through imports; Extent of entry barriers into the market; Level of combination in the market; Degree of countervailing power in the market; Possibility of the combination to significantly and substantially increase prices or profits; Extent of effective competition likely to sustain in a market; Availability of substitutes before and after the combination; Market share of the parties to the combination individually and as a combination; Possibility of the combination to remove the vigorous and effective competitor or competition in the market; Nature and extent of vertical integration in the market; Nature and extent of innovation; Whether the benefits of the combinations outweigh the adverse impact of the combination.

Thus, the Competition Act does not seek to eliminate combinations and only aims to eliminate their harmful effects.

The other regulations are provided in the:- The Foreign Exchange Management Act, 1999 the Income Tax Act,1961. the Securities and Exchange Board of India (SEBI) has issued guidelines to regulate mergers and acquisitions. The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations,1997 and its subsequent amendments aim at making the take-over process transparent, and also protect the interests of minority shareholders.

New Takeover Code


Under the existing rules: an acquirer launches a mandatory 20% open offer for the minority shareholders once he crosses the 15% threshold limit. A Sebi panel proposed that a mandatory open offer to raise stakes to 100% should be triggered once an acquirer buys at least 25% in another listed firm.

Cooperation
1. Mergers 2. Takeovers 3. Joint Ventures 4. Strategic Alliances

Joint Venture
Two or more businesses joining together under a contractual agreement to conduct a specific business enterprise with both parties sharing profits and losses. The venture is for one specific project only,

Parryware with Roca to form Parry Roca Bharti-Walmart

Joint Venture Strategies


Absorption- Acquire another company Consolidation- Combine and form new company

Joint ventures- partnership or consortium for a specific purpose

WHY ARE JVs USEFUL

When are JVs useful


Activity uneconomical to do alone Sharing of risk Complementary competencies To overcome local environment roadblocks Complement each other : Roca technology, Parryware- Distribution Government regulations= India does not allow 100% FDI in wholesale cash and carryWalmart and Bharti

Easier to achieve objectives because of partnership Reduce competition Diversification- different industries Need for technology Circumvent legal and regulatory hurdlesinternational Threats and opportunities

Types of JVS
Same industry, different industry, international, national In one of their countries or third country

JV must for entry into India as 100%FDI not permitted in some sectors
100% FDI permitted in Power,BPO, Pharma, Pollution control,roads,highways( infrastructure), hotel and tourism Telecom(49%), insurance(26%), NBFC(49%)

JV low risk option to enter into a new market


Motorola entered India in JV with Blue Star, which had a reputed brand name and a vast distribution network.

Opportunity to leverage their core strengths


Xerox entered India in venture with Modiearly lead in the photocopier market leveraging on the brand name of Modi

Examples of JVs
1. Cummins and TELCO Manufacture Telco engines 2. Ashok leyland and Singapore telecom- - AL plans to enter telecom and handset manufacture

Benefits and Draw back of JVs

Benefits : Minimise risk, less investment, access to foreign technology, access to new markets, synergies, larger equity base Disadvantage : Problems in partnership, cultural,behavioural Time in negotiating the JV Aligning thinking Longer DM Less freedom and flexibility IPR concerns

Case study-JV- lack of strategic fit


70;30 JV between Hotline (india) and Haier(China) Haier wanted to focus on imports and Increase stake to 49% Hotline disagreed JV broke up even before operations started Haeir reentered as 100% FDI subsidiary

JV Case study-redundant partner


TVS and Suzuki (Japan) formed in 1983 and broke in 2001 Uneasy relationship between the partners TVS increased stake Suzuki was not contributing enough Suzuki wanted own manufacturing Suzuki no longer useful to TVS

JV- breach of terms of JV


Danone and Wadia(Brittania) JV in 1995 Wadias accused Danone of using Brittania tiger brand for products outside India. This not permitted as per the terms agreed Danone invested in a bio-nutrition firm Avaesthagen Foreign company needs the consent of its Indian partner before pursuing business ventures in similar area. Wadia objected to the above..

JV- lack of synergy


40:60 JV between Godrej Boyce and GE (USA) formed in 1993. broke off in 2001 JV failed to meet projected revenues (of Rs 35 billion vs actual Rs 8 billion) GE wanted to increase stake GE accuse the indian partner of lack of professionalism

Broken JV Indian partner has to issue NOC for the foreign partner to pursue other entry avenues Indian partners try to ruin the chances Wadia-Danone, Modi-dysney, TVS-suzuki

Strategic Alliance:
A partnership with another business in which you combine efforts in a business effort involving anything from getting a better price for goods by buying in bulk together to seeking business together with each of you providing part of the product. The basic idea behind alliances is to minimize risk while maximizing your leverage.

Strategic alliances
Unite to pursue common goals Companies otherwise are independent Partner firms contribute in a key strategic area : technology, product, marketing Pooling of resources for mutual gain all JVs are strategic alliances also. But all SAs need not be JVs because SAs can happen without equity participation

Liberalisation has spurred the growth of SA Access to technology, markets, funds, quality standards Funding, New Products, Risk sharing, higher ROI,Validation, market access

Pyramid of alliances

Merger
JV
R&D/technology transfer Licensing /private label

Joint distribution Joint marketing

Vendor
Supplier

Partner A

Partner B

Contribution

Benefit

Issues in SA
Get experienced expert to negotiate the deal Upfront and milestone payments/invesments/royalty/loan R&D funds Control of IPR Dispute resolution

What if it does not work out


Prenuptial agreement how to divide the assets Money, fixed assets, product, IPR..

Types of SA
Procompetitive alliances value chain related supplier-buyer-intermediary Noncompetitve same industry, different product range, territory Competitive Rival firms Precompetitive firms from unrelated industries =biotech + pharma

Nortel and Microsoft form SA shared vision of unified communication Nortel world class network quality and reliability Microsoft ease of use Takes silos email, instant messaging, telephony, e-conferencing and uses advanced technology to make it more efficient and easy

Symantec and microsoft SA Symantec has apps that run on windows platform Use each others technology Symantec reduces the cost of windows management Channel partners who sell both symantec and microsoft..have more benefits

Facebook and microsoft Microsoft will sell advertising for facebook globally Fb uses microsoft digital advertising solution

Examples of SA
Network 18 and Sun Wipro and IBM TCS and Cisco ETS and NIIT Air India and Lufthansa

Network 18 and Sun Network

entered into a strategic alliance to form a distribution venture called Sun18. The alliance marks the entry of Network18 Group into the Indian television distribution space. As part of the agreement Sun18 will distribute a total of 33 channels across all platforms in India via all networks including cable, DTH, . The bouquet of channels include Network18s CNN-IBN, CNBC-TV18, CNBC-Awaaz, IBN-7
and IBN-Lokmat, Viacom18s Colors, MTV, Nick and Vh1. From Sun Networks will be SUN TV, KTV, Sun News, Sun Music, Chutti TV, Adithya, Gemini TV, Teja TV, Gemini News, Gemini Music, Navvulu TV, Kushi TV, Surya TV, Kiran TV, Udaya TV, Udaya Movies, U2, Udaya Varthegalu, Ushe TV and Chintu TV. Disney India Networks Disney Channel, Disney XD and Hungama TV will also be part of the bouquet.

While Sun18 South will manage the South India market (non Hindispeaking-markets) and will be operated by the Sun Network,

Sun18 North will manage the rest of India markets and will be operated
by the Network18 Group.

Wipro and IBM - 2002


wipro will market and integrate ibm's wide range of server and storage products in india including pseries (unix servers), xseries (intelbased servers), iseries and zseries. the partnership will offer a greater market reach to ibm's products in india. the alliance will give wipro a lead to address growing segments like banking & finance, manufacturing and telecom

TCS and Cisco


To develop and deliver IT service solutions to help customers build or evolve next generation Data Centers by taking advantage of the network as a platform.

Nokia and Microsoft enter strategic alliance


Microsoft's Bing and adCenter will provide search and ad services across Nokia devices, Nokia will innovate imaging. Ovi Maps will be a core part of Microsoft's mapping services and will be integrated with Bing, Nokia's content store will be integrated into Microsoft's Marketplace. Xbox Live and Office will, feature on these new Microkia handsets

Summary of Corporate Strategies

Grand Corporate Strategies

Stability

Expansion

RetrenchmentCombination

No change Pause and Proceed Profit

Concentration Diversification

Integration

Cooperation Internationalisation Turnaround Divestment Liquidation

Concentric

Vertical

Mergers

Conglomerate

Horizontal

Takeovers

Joint Ventures

Strategic alliances

Internationalisation
Type of expansion strategy where firms market their products or services beyond their domestic market

Entry modes for International strategies


Export Contractual- Licensing, Franchising, Technical agreement, BOT Investment entry- J.V, S.A,Subsidiaries( WOS)

Types International, Multidomestic, global and transnational

International International company offers standardised product to different countries without any differentiation Eg Coca cola, P & G

Multidomestic strategycustomise product to local needs eg Mc Donalds

Global Low cost approach standard undifferentiated product across all countries Economies of scale , production in favourable locations

Transnational Low cost and customised

Eg Indian software companies

Forced Standardization
Coca-Cola in Chinese: bite the wax tadpole Coca-Cola 30 liter bottle?? U.S. carmakers lefthand drive cars

Effective Standardization
Coca-Colas transnational polar bears McDonalds Big Mac

Barbie: The All-American Girl Goes Overseas


Barbie is 41 years old Sold in 130 countries National adaptations: Physical features Costumes Activity sets Standardized physique: Scaled to 62, 110 lbs. 38-18-28

Effective Adaptation
McMutton Pie in Australia Wendys shrimp sandwich in Japan Campbells noncondensed soups in the UK Coca-Colas 175 ml containers in Japan

Cadillac Seville 1997 Asian edition


Right-hand drive, shorter

seats, closer pedals, 10 shorter, retractable mirrors

International Strategy:
Pressures for Global Efficiency

Managing Dual Pressures


High

Low
Low High

Pressures for Local Responsiveness

International Strategy:
Pressures for Global Efficiency

Managing Dual Pressures


High

Low

Export Strategy ??
Low High

Pressures for Local Responsiveness

Export Strategy
(same as Export entry mode)
Germany
U.S. Mexico

Malaysia

International Strategy:
Managing Dual Pressures
Pressures for Global Efficiency
High

Low

Export Strategy ?? Low

Multidomestic Strategy
High

Pressures for Local Responsiveness

Multidomestic Strategy
Germany
U.S. Mexico

Malaysia

International Strategy:
Managing Dual Pressures
Pressures for Global Efficiency
High

Global Strategy

Low

Export Strategy ?? Low

Multidomestic Strategy High

Pressures for Local Responsiveness

Global Strategy
(Textbook Variety)
Germany
U.S. Mexico

Malaysia

Entry?

International Strategy:
Pressures for Global Efficiency

Managing Dual Pressures


High

Global Strategy

Transnational Strategy

Low

Export Strategy ?? Low

Multidomestic Strategy High

Pressures for Local Responsiveness

Transnational Strategy (v.3)


Germany
U.S.
Steel Engines

Mexico
Final Assembly

Malaysia

Entry?

Trim, seats, glass

Foreign Market Entry Modes


Export Licensing Joint Venture WOS Acquisition Greenfield

Intl. Strategy and Entry Mode


Germany JV U.S. H.Q.

Mexico WOS-G

Malaysia Export

Examples
AV Birla manufactures carbon black in Thailand and exports it to 30 other countries Blue Dart with Fedex S.A Archies Franchising

68 % of Coca Colas revenues are generated outside north America. Failure of Parker Pen in the 1980s standardised, high quality product, std Advertising, pricing and distribution For low priced products like cigarettes, soft drinks, etc population more important than income China and India attractive markets

Coke waited for 15 years to make its entry in russia, Pepsi had a 100% russian market share Coke entered Russia in 1987 and has a 50% market share by 1996 Upscale prestigious segment- loreal, oriflame( narrow global market) Swiss watch Co. watches from 50$ to 1 lakh $

Examples of Global marketing


Brand name Coca Cola Product Design Mcdonald(US), toyota(Japan) Positioning Unilever(GB) Distribution Benetton ( Italy) Customer Service -Caterpillar (US) Sourcing Toyota, Honda( Japan)

Electral from FDC sold in many countries Coca cola strong brand name McDonald restaurant system that can be set up anywhere in the world. Orchid hotels, Hubli now in Singapore, UK, USA,Belgium, Dubai

Global Marketing:
What It Is Not ?
Global marketing does not mean to develop standardized, high-quality world products and market them using standardized advertising, pricing and distribution.
Parker Pens failure in the world market is one such example.

Global marketing does not mean entering every country in the world. The decision to enter outside markets depends on the companys resources, managerial mind-set and the nature of opportunity and threat.

eg.

Japan and Vietnam are both in East Asia but Japan is a high-income, postindustrial society and the other is an emerging, less developed preindustrial society.

Annual per capita income varies widely from a low 81$ in Congo 38587 $ in Luxembourg.
For low price products like cigarettes, soft drinks etc, population is more important than income. China & India with a population of 1.3 & 1.0 billion are attractive target markets.

Strategy Company/Country Examples of Global Marketing


1.Brand Name 2.Product Design 3.Positioning 4.Packaging 5.Distribution 6.Customer service 7.Sourcing Coca-Cola (U.S)
McDonalds(U.S), Toyota(Japan)

Unilever (Great Britain) Gillette (U.S) Benetton (Italy) Caterpillar (U.S) Toyota, Honda (Japan)

Summary of Corporate Strategies

Grand Corporate Strategies

Stability

Expansion

RetrenchmentCombination

No change Pause and Proceed Profit

Concentration Diversification

Integration

Cooperation Internationalisation Turnaround Divestment Liquidation

Concentric

Vertical

Mergers

Conglomerate

Horizontal

Takeovers

Joint Ventures

Strategic alliances

When does a company pursue Retrenchment ???

Retrenchment Strategy
Management may pursue retrenchment strategies when the company has a weak competitive position in some or all of its product line resulting in poor performance. i. Turnaround

downsizing existing company/divisions ii. Divestiture selling off existing divisions/subdivisions iii. Liquidation company closes down

Turnaround
Firms pursue a turnaround strategy by undertaking a temporary reduction in operations in an effort to make the business stronger and more viable in the future. These moves are popularly called downsizing or rightsizing. The hope is that going through a temporary belttightening will allow the firm to pursue a growth strategy at some future point. Eg Xerox, Sony, Dell, Chrysler, Starbucks

Why Divestment ???

Divestment
A divestment decision occurs when a firm elects to sell one or more of the businesses in its corporate portfolio. Typically, a poorly performing unit is sold to another company and the money is reinvested in another business within the portfolio that has greater potential.

After trying for a number of years( after M&A) to integrate the new activities into the existing organization, many firms have elected to divest themselves of portions of the business in order to concentrate on those activities in which they had a competitive advantage. REASONS TO DIVEST In most cases it is not immediately obvious that a unit should be divested. Many times management will attempt to increase investment as a means of giving the unit an opportunity to turn its performance around.

Reasons for Divestment


MARKET SHARE TOO SMALL.
Firms may divest when their market share is too small for them to be competitive or when the market is too small to provide the expected rates of return. Reliance foot wear

AVAILABILITY OF BETTER ALTERNATIVES.


Firms may also decide to divest because they see better investment opportunities. Organizations have limited resources. They are often able to divert resources from a marginally profitable line of business to one where the same resources can be used to achieve a greater rate of return.

NEED FOR INCREASED INVESTMENT.


Firms sometimes reach a point where continuing to maintain an operation is going to require large investments in equipment, advertising, research and development, and so forth to remain viable. Rather than invest the monetary and management resources, firms may elect to divest that portion of the business. Airlines

LACK OF STRATEGIC FIT.


A common reason for divesting is that the acquired business is not consistent with the image and strategies of the firm. This can be the result of acquiring a diversified business. It may also result from decisions to restructure and refocus on the existing business.

Legal reasons

Examples of Divesment
the tobacco side of RJR Nabisco was dragging the food business down, the decision was made to sell the overseas tobacco business to Japan Tobacco.
Tata divested Tomco which was aquired by HUL Hutch divested to Vodafone

Bankruptcy
Bankruptcy involves legal protection against creditors or others allowing the firm to restructure its debt obligations or other payments, typically in a way that temporarily increases cash flow. Such restructuring allows the firm time to attempt a turnaround strategy. For example, since the airline hijackings and the subsequent tragic events of September 11, 2001, many of the airlines based in the U.S. have filed for bankruptcy to avoid liquidation as a result of stymied demand for air travel and rising fuel prices. At least one airline has asked the courts to allow it to permanently suspend payments to its employee pension plan to free up positive cash flow. USA: Chapter 7- liquidation Chapter 11- Company functions and repays the loan after restructuring

Washington Mutual September 26, 2008 Lehman Brothers Holdings Inc. September 15, 2008 Delta Airlines Inc. September 14, 2005 WorldCom Inc. July 21, 2002 Enron Corp. February 12, 2001 Satyam almost went bankrupt

Liquidation
Liquidation is the most extreme form of retrenchment. Liquidation involves the selling or closing of the entire operation. There is no future for the firm; employees are released, buildings and equipment are sold, and customers no longer have access to the product or service. This is a strategy of last resort and one that most managers work hard to avoid.

Company liquidations usually signal the end of a company. A true company liquidation involves closing the business or company, ending the business itself, and the sale of all its assets. You can do it as part of a bankruptcy proceeding or simply as a way to close the business and wrap up all business dealings.

India
Sick Industrial Companies Act SICA 1985- declares company sick Board of Industrial and Financial Reconstruction(BIFR) 1987- revive, rehabilitate Industrial Reconstruction Bank of India ( IRBI)

Liquidation
Most extreme Closing down Swadeshi mills of Tata , Binny, Empress Mills Companies Act, 1956- deals with all legal aspects of liquidation

Retrenchment Strategy - Case Studies

Mc Donalds
Why did the company fall sick in the 1990s ?

Mc Donald
McDonald's had promoted itself as the provider of the 'Great American Meal'. However, by the 1990s, it was clear that the company had lost its claim to that title Changing customer eating habits, increased competition and complacence on the part of the company and its franchisees, were the main reasons for the difficulties experienced by McDonald's

After McDonald's announced its first quarterly loss in 38 years in 2003, the board realized that big changes were required in the company's strategy and direction.

The board ousted Greenberg and installed Cantalupo as the CEO. Cantalupo had led McDonald's international expansion through the 1980s and 1990s In 2003, he was brought back from retirement to lead the company's turnaround.

Soon after taking over, Cantalupo prepared the 'Plan to Win', which outlined McDonald's strategy for the next three years. aimed to create a McDonald's that was more geared to the new conditions in the fast food industry...

the fast food industry was undergoing a transformation in the early 2000s. Hamburgers, fries and soda, which epitomized fast food, were being replaced by sandwiches and salads.

. They changed the mission ever so slightly. It had been: "being the world's best quick-service restaurant." Now it's being "our customer's favorite place and way to eat.

was less emphasis on growth in number of stores and more on improving the customer experience. There was also a return to basics, especially QSCV. That stands for Quality, Service, Cleanliness and Value.

McDonald's has modified operations with longer hours and better drivethrough service. quality coffee that bring people in and add to profit. By mid-2004, it was generally acknowledged that McDonald's had turned around

What were the factors that contributed to the turnaround at McDonald ?

Successful turnarounds seem to start by simplifying and putting an emphasis on the basics. Successful turnarounds seem to be created from a mix of existing strengths and new opportunities. They keep the bits of tradition and history that made the company successful and find ways to apply them in today's world. Successful turnarounds don't spend a lot of time starting to prepare to begin to get ready to draw up a plan. Instead, they're action oriented.

Dells turnaround
Michael Dell, the founder of Dell returned as the CEO in January 2007, and the company has a turnaround plan which it promises will yield $3 billion in annual savings over the next three or four years.

Cutting costs: Cutting costs is very important because competitors like HP use the money from profitable printers operations and take more market risk with designing innovative products. Moreover the prices of computers keep going down. One can buy a Dell laptop now for less than $500.

Dell has manufacturing facilities in Texas, North


Its manufacturing operation in Austin, Texas will shut down.

Moving away from computers internally and outsourcing more of its manufacturing operations:
Carolina, Tennessee, and in Malaysia, Penang, China and Poland.

Also HP, IBM and Sun Microsystems already have long-standing partnerships with outside manufacturing partners. These partners offer customers bundles of computer hardware, software and services. Dell on the other hand is relatively a new player in this field and has traditionally depended on its own businesses to design and make computers.

Moving into indirect sales channels like computer resellers and retailers. Introducing more products: New product introduction is vital since major PC manufacturers realistically only make money in the first three months (or six in some cases) of a new product.

Carrefour divestment
On October 15, 2009, just four months after opening its first store in Russia, France-based Carrefour SA (Carrefour), the second largest retailer in the world, announced that it planned to exit the Russian market.

The company announced, "Carrefour has decided to sell its activities in Russia and pull out of the market, given the absence of sufficient organicgrowth prospects and acquisition opportunities in the short- and medium-term that would have allowed Carrefour to attain a position of leadership. This decision is consistent with the Group's strategy which aims at building leadership positions that will ensure strong and lasting profitable growth."4

Combination
Mixture of stability, expansion, retrenchment Simultaneous or sequential Ford= turnaround- Divestment-Stable Growth ITC divested financial ; turnaround of agri, stable growth-hotels Restructuring is a combination strategy

Restructuring
L & T, HUL, SAIL, SBI. TATA

Strategic Management
http://www.presentationmagazine.com/

Strategic Intent

Formulation of Strategies

Implementation of Strategies

Strategic Control

Strategic Evaluation

1.Strategic Intent
Vision, Mission, Goal and Objective

2. Formulation of Strategies
1. 2. 3. Environmental Appraisal Organisation Appraisal Corporate level strategies

4. Business level strategies


5. 6. 7. 8. Strategic analysis Strategic choice Formulating strategies Preparing a strategic plan

Business Level Strategies


Strategy of the individual SBUs within an organisation Why ????

Business-Level Strategy:

How do we compete?

Business Strategy
Cost Leadership Differentiation Focus

Cost leadership
When used ??

Cost based competition Standard product Low loyalty Moser Baer- Noida, UP lower raw material , labour costs - data storage market

Differentiation
When used ??

Differentiation
Frooti-tetra pack; Daiken- noiseless; Maggie, Tanishq Large market requiring differentiated product resulting in increased sales Diversified need Customer will pay premium for a valued differentiation Brand loyalty

Focus
Niche strategies Either lower cost or differentiation CDs- low and high cost ( times) V.Balu- low cost guides for MBA Dezire sweets

Generic Business Level Strategies


Source of Competitive Advantage
Cost Uniqueness

Breadth of Competitive Scope

Broad Target Market

Cost Leadership

Narrow Target Market

Generic Business Level Strategies


Source of Competitive Advantage
Cost Uniqueness

Breadth of Competitive Scope

Broad Target Market

Cost Leadership Differentiation

Narrow Target Market

Generic Business Level Strategies


Source of Competitive Advantage
Cost Uniqueness

Breadth of Competitive Scope

Broad Target Market

Cost Leadership

Differentiation

Narrow Target Market

Focused Low Cost

Focused Differentiation

Strategic
Strategic Intent Formulation of Strategies

Implementation of Strategies

Strategic Control

Strategic Evaluation

2. Formulation of Strategies
1. 2. 3. 4. Environmental Appraisal Organisation Appraisal Corporate level strategies Business level strategies

5. Strategic analysis 6. Strategic choice


7. 8. Formulating strategies Preparing a strategic plan

Strategic Analysis and Choice


1. 2. 3. 4. Focusing on Alternatives Considering the selection factors Evaluation of strategic alternatives Making the strategic choice

Strategic analysis is at corporate

level

and business level

Techniques of CorporateStrategic Analysis


1. Gap analysis 2. BCG (Portfolio)analysis 3. GE Nine Cell(Portfolio ) - McKinsey

Gap analysis:
Desired performance Present Performance Performance Gap in Performance

Time

INTRODUCTION
BOSTON CONSULTING GROUP (BCG) MATRIX is developed by BRUCE HENDERSON of the BOSTON CONSULTING GROUP IN THE EARLY 1970s.

According to this technique, businesses or products are classified as low or high performers depending upon their market growth rate and relative market share.

Relative Market Share and Market Growth


To understand the Boston Matrix you need to understand how market share and market growth interrelate.

MARKET SHARE
Market share is the percentage of the total market that is being serviced by your company, measured either in revenue terms or unit volume terms.

RELATIVE MARKET SHARE


RMS = Business unit/revenue sales this year Close rival sales this year The higher your market share, the higher proportion of the market you control.

MARKET GROWTH RATE


Market growth is used as a measure of a markets attractiveness. MGR = market sales - market sales this year last year market sales last year Markets experiencing high growth are ones where the total market share available is expanding, and theres plenty of opportunity for everyone to make money.

THE BCG GROWTH-SHARE MATRIX


It is a portfolio planning model which is based on the observation that a companys business units can be classified in to four categories: Stars Question marks Cash cows Dogs It is based on the combination of market growth and market share relative to the next best competitor.

STARS
High growth, High market share Stars are leaders in business. They also require heavy investment, to maintain its large market share. It leads to large amount of cash consumption and cash generation. Attempts should be made to hold the market growth otherwise the star will become a CASH COW.

CASH COWS Low growth , High market share


They are foundation of the company and often the stars of yesterday. They generate more cash than required. They extract the profits by investing as little cash as possible They are located in an industry that is mature, not growing or declining.

DOGS
Low growth, Low market share
Dogs are the cash traps. Dogs do not have potential to bring in much cash. Number of dogs in the company should be minimized. Business is situated at a declining stage.

QUESTION MARKS
High growth , Low market share
Most businesses start of as question marks. They will absorb great amounts of cash if the market share remains unchanged, (low). Why question marks? Question marks have potential to become star and eventually cash cow but can also become a dog. Investments should be high for question marks.

Why BCG ???

WHY BCG MATRIX ?


To assess : Profiles of products/businesses The cash demands of products The development cycles of products Resource allocation and divestment decisions

MAIN STEPS OF BCG MATRIX


Identifying and dividing a company into SBU. Assessing and comparing the prospects of each SBU according to two criteria : 1. SBUS relative market share. 2. Growth rate OF SBUS industry. Classifying the SBUS on the basis of BCG matrix. Developing strategic objectives for each

BCG MATRIX WITH CASH FLOW

BENEFITS
BCG MATRIX is simple and easy to understand. It helps you to quickly and simply screen the opportunities open to you, and helps you think about how you can make the most of them. It is used to identify how corporate cash resources can best be used to maximize a companys future growth and profitability.

Limitations of BCG ??

LIMITATIONS
BCG MATRIX uses only two dimensions, Relative market share and market growth rate. Problems of getting data on market share and market growth. High market share does not mean profits all the time. Business with low market share can be profitable too.

PRACTICAL USE
MAHINDRA & MAHINDRA HUL ITC

Business Mix of ITC Ltd.


FMCG Cigarettes

Foods Lifestyle Retailing Greeting, Gifting & Safety Matches Agarbattis

Stationery

Paperboards & Packaging Paperboards & Specialty Papers Packaging

Business Mix (Contd)


Agri - Business Agri-Exports

e-Choupal Leaf Tobacco

Hotels Group Companies ITC Infotech; etc.

Business wise Sales data


Business/ Year Growth Value (Rs in Crore) % 2005 2004 10002.54 9230.27 563.39 304.16

FMCG-cigarettes 8.4 FMCG-Others 85.2

Hotels
Agribusiness Paper & pkg. Net revenue

124.1
4.2 24.9 12.99

577.25
1780.07 1565.31

257.53
1708.77 1253.29

13349.58 11815.04

CAGR during FY 2005-2008


Category CAGR Growth parameters

Cigarettes 10.9 % Pricing power Hotels Paper Agri business FMCGOthers 22.7% Inward traffic, occupancy

17.2 % Capacity utilization, value added products 34.3 % E-choupal, choupal sagar,

60.2 % Fast track, decent share.

Market share of ITC Ltd.


Outstanding market leader Cigarettes, Hotels, Paperboards, Packaging and Agri-Exports. Gaining market share Nascent businesses of Packaged Foods & Confectionery, Branded Apparel and Greeting Cards.

The BCG Matrix for ITC Ltd.


Stars Hotels Paperboards/ Packaging. Agri business. Cows FMCG-Cigarettes ? FMCG- Others

Dogs Maybe ITC Infotech.

Market attractiveness & Competitive strength is also important.

Stars- Expansion Question marks- Expansion, Retrenchment Cash cows stable growth Dogs- Retrenchment

CONCLUSION
Though BCG MATRIX has its limitations it is one of the most FAMOUS AND SIMPLE portfolio planning matrix ,used by large companies having multi-products.

GE Nine-Cell Matrix-McKinsey
IndustryAttractiveness Market Size Growth Rate Profit Margin Intensity of Competition Seasonality Cyclicality Resource Requirements Social Impact Regulation Environment Opportunities & Threats Business Strength

10.0

Strong

6.7

Average

3.3

Weak

1.0

High
6.7

Relative Market Share Reputation/ Image 3.3 Bargaining Leverage Ability to Match Low Quality/Service 1.0 Relative Costs Profit Margins Rating Scale: 1 = Weak ; 10 = Strong Fit with KSFs

Medium

Strategy Implications of Attractiveness/Strength Matrix

Businesses in upper left corner

Accorded top investment priority


Strategic prescription is grow and build Given medium investment priority Invest to maintain position Candidates for harvesting or divestiture May be candidates for an overhaul and reposition strategy

Businesses in three diagonal cells


Businesses in lower right corner


GE Nine Cell matrix-McKinsey


EXPAND
HIGH

EXPAND STABILITY

STABILITY RETRENCH MENT RETRENCH MENT

EXPAND
MEDIUM

LOW

STABILITY

Industry attractiveness

RETRENCH MENT

STRONG

AVERAGE

WEAK

Business strength/competitive position

How is GE different from BCG ????

The Attractiveness/Strength Matrix


Allows for intermediate rankings between high and low and between strong and weak Incorporates a wide variety of strategically relevant variables Stresses allocating corporate resources to businesses with greatest potential for

Competitive advantage and


Superior performance

Decide Resource Allocation Priorities and Strategic Direction


Get the biggest bang for the buck in allocating corporate resources

23

6 5

Other Corporate Portfolio analysis techniques


Hofers product market evolution matrix Directional Policy matrix Space Position And Action Evaluation Corporate Parenting Analysis SWOT

THE HOFER LIFE-CYCLE MARKET EVOLUTION MATRIX


TWO DIMENSIONS EARLY DEVELOPMENT RAPID GROWTH / TAKE-OFF SHAKE-OUT MATURITY / SATURATION DECLINE / STAGNATION (Charles Hofer & A. D. Little, Co)

Stage of Industry / Market Evolution

Business Strength / (Competitive Position)


SAME DIMENSIONS AS USED IN THE GE BUSINESS SCREEN ADVANTAGES
Can be used to identify and track developing winners Illustrates how the firms businesses are distributed across the stages of industry evolution

THE HOFER LIFE-CYCLE MARKET EVOLUTION MATRIX


BUSINESS STRENGTH / COMPETITIVE POSITION
STRONG EARLY DEVELOPMENT -----------------------------AVERAGE WEAK

------------------------------

STAGE OF INDUSTRY / MARKET

RAPID GROWTH / TAKE-OFF -----------------------------SHAKE-OUT

EVOLUTION
-----------------------------MATURITY / SATURATION -----------------------------DECLINE / STAGNATION -----------------------------ONLY ONE DIMENSION IS DIFFERENT FROM THE GE BUSINESS SCREEN Except for the Stage of Market Evolution, this model is identical to the GE Business Screen

IN SUMMARY: USING PORTFOLIO ANALYSIS


PROS AND CONS STRENGTHS ENCOURAGES TOP MANAGEMENT TO EVALUATE EACH LINE OF BUSINESS SEPARATELY, AND TO SET OBJECTIVES AND ALLOCATE RESOURCES TO EACH. IT STIMULATES THE USE OF EXTERNALLY-ORIENTED DATA TO SUPPLEMENT MANAGEMENTS JUDGMENT RAISES THE ISSUE OF CASH FLOW AVAILABILITY FOR USE IN EXPANSION AND GROWTH GRAPHICALLY COMMUNICATES THE MIX OF BUSINESSES THE FIRM HAS INVESTED IN WEAKNESSES DEFINING PRODUCT / MARKET SEGMENTS IS DIFFICULT

IT SUGGESTS STANDARD STRATEGIES THAT CAN MISS OPPORTUNITIES OR BE IMPRACTICAL


PROVIDES AN ILLUSION OF SCIENTIFIC RIGOR, WHEN POSITIONS ARE REALLY BASED ON SUBJECTIVE JUDGMENTS VALUE-LADEN TERMS (cow, dog) LEAD TO SIMPLISTIC STRATEGIES AND SELF-FULFILLING PROPHESIES ITS NOT ALWAYS CLEAR WHAT MAKES AN INDUSTRY ATTRACTIVE OR WHERE A PRODUCT IS IN ITS LIFE CYCLE NAIVELY FOLLOWING PORTFOLIO PRESCRIPTIONS MAY REDUCE PROFITS DOGS CAN MAKE MONEY!

Hofer

CRAFTING A CORPORATE STRATEGY


BY EVALUATING YOUR PORTFOLIO MATRIX

1. 2. 3. 4. 5. 6. 7. 8.

DOES THE PORTFOLIO HAVE ENOUGH BUSINESSES IN ATTRACTIVE INDUSTRIES? DOES THE PORTFOLIO CONTAIN TOO MANY MARGINAL BUSINESSES OR QUESTION MARKS? DOES THE CORPORATION HAVE ENOUGH CASH COWS TO FINANCE THE STARS AND EMERGING WINNERS? DO THE CORE BUSINESSES GENERATE DEPENDABLE PROFITS OR CASH FLOWS? IS THE PORTFOLIO VULNERABLE TO SEASONAL OR RECESSIONARY INFLUENCES? DOES THE PORTFOLIO CONTAIN BUSINESSES THAT THE CORPORATION DOESNT NEED TO BE IN? IS THE CORPORATION BURDENED WITH TOO MANY BUSINESSES IN AVERAGETO-WEAK COMPETITIVE POSITIONS? DOES THE MAKEUP OF THE PORTFOLIO PUT THE CORPORATION IN A GOOD POSITION FOR THE FUTURE?

STEPS IN THE STRATEGIC ANALYSIS OF DIVERSIFIED FIRMS


A SUMMARY

1. 2. 3. 4.

IDENTIFY THE PRESENT CORPORATE STRATEGY CONSTRUCT BUSINESS PORTFOLIO MATRICES PROFILE THE INDUSTRY AND COMPETITIVE ENVIRONMENT OF EACH BUSINESS UNIT EVALUATE THE COMPETITIVE STRENGTH OF EACH INDIVIDUAL BUSINESS

5.
6. 7. 8.

COMPARE PERFORMANCE RECORDS OF EACH BUSINESS UNIT


HOW WELL DOES EACH BUSINESS UNIT FIT WITH CURRENT CORPORATE STRATEGY? RANK THE UNITS FROM HIGHEST TO LOWEST IN INVESTMENT PRIORITY CRAFT A SERIES OF MOVES TO IMPROVE OVERALL CORPORATE PERFORMANCE

Business Level Strategic analysis


1. 2. 3. 4. Experience curve analysis Lifecycle analysis Industry analysis Strategic group analysis

Experience curve analysis


Unit cost declines as a firm accumulated experience in terms of a cumulative volume of production. Larger firms tend to have lower unit cost as compared to those of smaller firms Results in competitive cost advantage Why does this happen ???

Occurs due to : learning effects, economies of scale, product redesign, production process redesign, Technology improvements

Experience Curve Illustration


Experience Curve Effect
A doubling of cumulative volume reduces avg unit cost by 20% $1.25 $1.00

$0.80

Year 1

Year 3

Year 5

Year 6

The Experience Curve

The Law of Experience 1994 1995 The unit cost value added to a standard product declines by a constant % (typically 20-30%) each time cumulative output doubles. 1996 1997 1998 1999 2000

Cost per unit of output

Cumulative Output

Implications of Experience curve


Entry barrier for new firms First mover advantage Mass marketing Large market share examples ???

Tata, Reliance, Mahindra, TVS, HUL ( distribution economies )

Business level strategic analysis


1. Experience curve analysis

2. Lifecycle analysis
3. Industry analysis 4. Strategic group analysis

Life cycle analysis

Life cycle is a conceptual model Products, markets, business, industry


Expansion Expansion Source of cash Retrenchment

Introduction Growth Maturity Decline