Business

11

BUSINESS STRATEGY - IBUSINESS STRATEGY - I

Course Code: 602Course Code: 602

Prof. Subir Sen – Faculty Member Prof. Subir Sen – Faculty Member ICFAIICFAIE-Mail:E-Mail: [email protected] / [email protected] / 9830697368

Ref:Ref: 1)1) Strategic Management – Strategic Management – Thompson & Thompson & StricklandStrickland

2) Strategic Management – 2) Strategic Management – Pearce & RobinsonPearce & Robinson

3) Strategic Management – 3) Strategic Management – LomashLomash

4) Strategic Management – 4) Strategic Management – Fred. R. DavidFred. R. David

5) Strategic Management – 5) Strategic Management – Johnson & ScholesJohnson & Scholes

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INTRODUCTIONINTRODUCTION

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STRATEGY - DEFINITIONSTRATEGY - DEFINITION

StrategyStrategy is all about making trade-offs between is all about making trade-offs between what to dowhat to do and more importantly and more importantly what not to dowhat not to do; ; consciously choosing to consciously choosing to differentiatedifferentiate. It reflects a . It reflects a congruence between external opportunities and congruence between external opportunities and internal capabilities. internal capabilities. Types of strategies -Types of strategies -– Corporate Strategies –Corporate Strategies – It is all about making It is all about making

choices across various businesses and choices across various businesses and allocating resources among them.allocating resources among them.

– Business Strategies –Business Strategies – It is all about developing It is all about developing and leveraging competitive advantage.and leveraging competitive advantage.

– Functional Strategies –Functional Strategies – It is all about doing It is all about doing things differently, rather than doing different things differently, rather than doing different things.things.

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STRATEGIC MANAGEMENT - STRATEGIC MANAGEMENT - DEFINITIONDEFINITION

Strategic managementStrategic management attempts to attempts to alignalign the the traditional management functions with the traditional management functions with the environment to make resource allocations in a environment to make resource allocations in a way to achieve organisational goals and way to achieve organisational goals and objectives. objectives. – This alignment is called This alignment is called strategic fitstrategic fit..– It serves as a It serves as a road-maproad-map for the organisation in for the organisation in

its growth path. It provides the its growth path. It provides the direction – direction – extent – pace – timingextent – pace – timing..

– It depends on the It depends on the turbulenceturbulence of the of the environment and the environment and the aggressivenessaggressiveness of the of the organisation.organisation.

– It distinguishes winners from the losers.It distinguishes winners from the losers.

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Fit

Fit

STRATEGIC MANAGEMENT - STRATEGIC MANAGEMENT - FRAMEWORKFRAMEWORK

FitPoliticalPolitical

Strategic Intent

Strategic

Management

Finance

Marketing

Economical

Social & Cultural

Fit

Fit

Fit

Fit

Polit

ical

Tech

nolo

gic

al

HR

Pro

du

ctio

nStr

ate

gic

Man

ag

em

en

t

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STRATEGY - ORIGINSTRATEGY - ORIGIN

The word The word strategystrategy has its origin from the has its origin from the Greek word Greek word strategiastrategia meaning Military meaning Military Commander. In the ancient days battles were Commander. In the ancient days battles were fought over land. In contrast, today's battles fought over land. In contrast, today's battles are fought over markets.are fought over markets.– In the ancient days battles were won not by In the ancient days battles were won not by

virtue of size, efficiency, adaptive ability; virtue of size, efficiency, adaptive ability; but by virtue of their strategies.but by virtue of their strategies.

– Even in today’s markets, battles fought on Even in today’s markets, battles fought on the market front are won by companies by the market front are won by companies by virtue of their strategies, which has its virtue of their strategies, which has its origin in the battles fought in the ancient origin in the battles fought in the ancient days.days.

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SOME PARALLELSSOME PARALLELS

Japan’s attack on Pearl HarbourJapan’s attack on Pearl Harbour– Strategy: Attack where it hurts the most.Strategy: Attack where it hurts the most.– Toyota’s entry in the US challenging GM and Toyota’s entry in the US challenging GM and

Ford.Ford. US attack of Morocco to capture GermanyUS attack of Morocco to capture Germany

– Strategy: Pin-hole strategyStrategy: Pin-hole strategy– Wal-Mart challenging Sears by first entering Wal-Mart challenging Sears by first entering

small towns.small towns. Battle of Moses and Ramases IIBattle of Moses and Ramases II

– Strategy: Survival of the fittestStrategy: Survival of the fittest– Jack Welch’s ruthless downsizing of GE.Jack Welch’s ruthless downsizing of GE.

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SOME MORE PARALLELS …………SOME MORE PARALLELS …………

Caesar, Genghis Khan, AlexanderCaesar, Genghis Khan, Alexander– Strategy: Concentration of resources.Strategy: Concentration of resources.– Nokia challenging Motorola.Nokia challenging Motorola.

Allied Forces Vs Germany (World War II)Allied Forces Vs Germany (World War II)– Strategy: Forging alliances.Strategy: Forging alliances.– Yahoo and Microsoft challenging Google.Yahoo and Microsoft challenging Google.

Napoleon’s attack on RussiaNapoleon’s attack on Russia– Strategy: Waiting for the right time.Strategy: Waiting for the right time.– Reliance’s entry into telecom.Reliance’s entry into telecom.

Cold War: US Vs USSRCold War: US Vs USSR– Strategy: Containment.Strategy: Containment.– Tata’s during the 80’s vis-à-vis Reliance.Tata’s during the 80’s vis-à-vis Reliance.

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EVOLUTION OF MANAGEMENTEVOLUTION OF MANAGEMENT

As Peter Drucker refers to it, a As Peter Drucker refers to it, a radical changeradical change in the business environment brings about in the business environment brings about discontinuitydiscontinuity. The things happening around . The things happening around the firm are totally disconnected from the the firm are totally disconnected from the past. It leads to a past. It leads to a paradigm shiftparadigm shift..

The first major discontinuity in the history of The first major discontinuity in the history of global business environment – global business environment – Industrial Industrial RevolutionRevolution..– Mass ProductionMass Production– Complicated ProcessesComplicated Processes Organisation Size– Complex StructuresComplex Structures

Evolving of an emerging paradigm – Evolving of an emerging paradigm – Survival Survival of the fittestof the fittest (Fayol & Taylor, 1907).(Fayol & Taylor, 1907).

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EVOLUTION OF STRATEGIC EVOLUTION OF STRATEGIC MANAGEMENTMANAGEMENT

The second major discontinuity in the history of The second major discontinuity in the history of global economic environment – global economic environment – World War IIWorld War II..– Global market place.Global market place.– Affluence of the new customer.Affluence of the new customer.– Homogeneous to heterogeneous products.Homogeneous to heterogeneous products.– Changes in the technology fore-front.Changes in the technology fore-front.

From uniform performance, performance across From uniform performance, performance across firms became differentiated. The question of firms became differentiated. The question of outperforming the benchmarkoutperforming the benchmark became the new became the new buzzword.buzzword.

Survival of the most adaptableSurvival of the most adaptable becomes a new becomes a new management paradigm (Ansoff, 1960).management paradigm (Ansoff, 1960).

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ENVIRONMENTAL CHANGEENVIRONMENTAL CHANGE

Phase I: Extrapolation of the past

Phase II: Discrete ScenariosPhase III: Range of Scenarios

Phase IV: Horizon of Scenarios

1

2

1B

1A

2A

2B

1

3

21

Prior to 1950

1950 to 19701970 to

1990

1990 onwards

3

21

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STRATEGIC MANAGEMENT - STRATEGIC MANAGEMENT - IMPORTANCEIMPORTANCE

Performance Decomposition

Industry Effects – 45%Strategy Effects – 35%Time Effects – 20% Source: Schmalensee, (1985)

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STRATEGIC MANAGEMENT - FEATURESSTRATEGIC MANAGEMENT - FEATURES

It forms the core activity of the top management.It forms the core activity of the top management. It requires commitment of the top management.It requires commitment of the top management. It is long-term.It is long-term. It is about adaptation and response to the same.It is about adaptation and response to the same. It is all about creativity and innovation.It is all about creativity and innovation. It involves substantial resource outlay.It involves substantial resource outlay. It is irreversible.It is irreversible. It is a holistic approach.It is a holistic approach. It provides broad guidelines.It provides broad guidelines. It can make or destroy a company.It can make or destroy a company.

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STRATEGIC MANAGEMENT – MYTHSSTRATEGIC MANAGEMENT – MYTHS

It does not involve short-cuts.It does not involve short-cuts. It is not about forecasting.It is not about forecasting. It is not about a definite formula.It is not about a definite formula. It does not attempt to minimise risk.It does not attempt to minimise risk. It does not brings instant success.It does not brings instant success. It is not about mere data and facts.It is not about mere data and facts. It does not involve nitty-gritty's.It does not involve nitty-gritty's. It is not a bundle of tricks or even techniques.It is not a bundle of tricks or even techniques.

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ENVIRONMENTAL DEMANDSENVIRONMENTAL DEMANDS

To be continuously alert.To be continuously alert. To assimilate change faster.To assimilate change faster. To be future oriented.To be future oriented. To tap markets across boundaries.To tap markets across boundaries. To be insulated against environmental threats.To be insulated against environmental threats. To leverage size, scale and scope.To leverage size, scale and scope. To generate large resource pool.To generate large resource pool. To gain expertise in technologies.To gain expertise in technologies. To develop core–competencies.To develop core–competencies.

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APPROACHES TO STRATEGYAPPROACHES TO STRATEGY

Analytical Approach – Igor H. Ansoff (1960)Analytical Approach – Igor H. Ansoff (1960)– Strategy can be segregated into certain Strategy can be segregated into certain

mutually exclusive and inter-related mutually exclusive and inter-related components aimed at managing the growth of components aimed at managing the growth of an organisation.an organisation.

– The choice of strategy is primarily concerned The choice of strategy is primarily concerned with external ones rather than internal ones. with external ones rather than internal ones.

– The choice of product-market mix is based on The choice of product-market mix is based on conscious evaluation of risk – return factors.conscious evaluation of risk – return factors.

– Personal biases has a very little role to play in Personal biases has a very little role to play in strategic choices.strategic choices.

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Design Approach – Alfred Chandler (1970)Design Approach – Alfred Chandler (1970)– Structure follows strategy. The organisation Structure follows strategy. The organisation

initially decides which industry to enter, initially decides which industry to enter, how it will compete, who will be the top how it will compete, who will be the top managers, and who will directly decide on managers, and who will directly decide on the type of organisation structure (MCS).the type of organisation structure (MCS).

– Organisation structure will precede and Organisation structure will precede and cause changes in strategy. Successful cause changes in strategy. Successful organisations align authority and organisations align authority and responsibility of various departments in responsibility of various departments in way to reach overall objectives. way to reach overall objectives.

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Positioning Approach – Michael E. Porter (1980)Positioning Approach – Michael E. Porter (1980)– An organisations performance is a direct An organisations performance is a direct

function of the environmental forces in which it function of the environmental forces in which it is exposed; over which the firm has little or no is exposed; over which the firm has little or no control.control.

– The environmental forces comprises of – The environmental forces comprises of – supplier power, customer power, new entrant, supplier power, customer power, new entrant, substitutes, competitors.substitutes, competitors.

– The organisation will outperform the industry The organisation will outperform the industry where environmental forces are weak and vice-where environmental forces are weak and vice-versa.versa.

– An organisation is seldom in a position to An organisation is seldom in a position to influence the business environment.influence the business environment.

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Resource Based Approach – C. K. Prahalad (1990)Resource Based Approach – C. K. Prahalad (1990)– The key to superior performance is not doing The key to superior performance is not doing

the same as other organisations the same as other organisations –– locating in locating in most attractive industries most attractive industries –– and pursuing the and pursuing the same strategy same strategy – – but exploiting the differences but exploiting the differences among firms.among firms.

– Core competencies comprises of basic Core competencies comprises of basic resources linked together through a wide resources linked together through a wide range of bonding mechanisms to form range of bonding mechanisms to form complex resources.complex resources.

– It comprises of delivering unimaginable value It comprises of delivering unimaginable value to customers much ahead of time.to customers much ahead of time.

– Organisations can significantly alter the way Organisations can significantly alter the way an industry functions.an industry functions.

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STRATEGIC MANAGEMENT - STRATEGIC MANAGEMENT - PROCESSPROCESS

Strategic IntentStrategic Intent Strategic PlanningStrategic Planning

– Environmental ScanningEnvironmental Scanning– Internal Appraisal of the FirmInternal Appraisal of the Firm

Strategy FormulationStrategy Formulation– Corporate StrategyCorporate Strategy– Business StrategyBusiness Strategy– Functional StrategyFunctional Strategy

Strategy ImplementationStrategy Implementation Strategy PerformanceStrategy Performance Strategy Evaluation & Control Strategy Evaluation & Control

Strategic Gap

Strategic Choices

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TOP MANAGEMENT PERSPECTIVETOP MANAGEMENT PERSPECTIVE

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STRATEGIC INTENTSTRATEGIC INTENT

A A strategic intentstrategic intent is a dream that energizes a is a dream that energizes a company; it is a sophisticated and positive company; it is a sophisticated and positive version of a simple war-cry. It is the version of a simple war-cry. It is the cornerstone of an organisations strategic cornerstone of an organisations strategic architecture.architecture.– It provides a sense of direction and destiny.It provides a sense of direction and destiny.– It’s a philosophy that distinguishes it from It’s a philosophy that distinguishes it from

its competitors.its competitors.– It implies a significant stretch. A substantial It implies a significant stretch. A substantial

gap between its resources and aspirations.gap between its resources and aspirations.– It consciously creates a strategic gap. A gap It consciously creates a strategic gap. A gap

that consciously manages between that consciously manages between stagnation and atrophy.stagnation and atrophy.

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Dominant

STRATEGIC INTENT - HIERARCHYSTRATEGIC INTENT - HIERARCHY

VisionMission

Objectives

Goals

Plans

Integrative

Specific

Single

Many

Dom

inant Logi

c

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DOMINANT LOGICDOMINANT LOGIC

A dominant logic can be defined as the way in A dominant logic can be defined as the way in which the top management team which the top management team conceptualises conceptualises its various businessesits various businesses and make and make critical resource critical resource allocationallocation decisions. decisions.

To put it more simply, it can be perceived as a To put it more simply, it can be perceived as a set of working rules set of working rules (similar to thumb rules)(similar to thumb rules) that that enables the top management to decide enables the top management to decide what what can be donecan be done and more importantly and more importantly what cannot what cannot be donebe done. .

It is central to the strategic intent of the firm.It is central to the strategic intent of the firm. Dominant logic changes, when changes in the Dominant logic changes, when changes in the

internal and external environment internal and external environment (i.e. strategic (i.e. strategic variety)variety) is apparent. is apparent.

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Strategic success or failure

Doing the right things

Identify critical success factors

HOW DOES DOMINANT LOGIC HOW DOES DOMINANT LOGIC EVOLVE?EVOLVE?

(Schemas)

(What worked before?)

(Paradigms)

(Heuristic Principles)

Characteristics of the core business

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DOMINANT LOGICDOMINANT LOGIC

Reliance: Perceptions of Lt. Dhirubhai AmbaniReliance: Perceptions of Lt. Dhirubhai Ambani– Investments marked by low per-capita Investments marked by low per-capita

consumption. consumption. – Create cost barriers through economies of Create cost barriers through economies of

size.size.– Use price-elasticity to blow up the market to Use price-elasticity to blow up the market to

international standards.international standards.– Integrate vertically and horizontally across Integrate vertically and horizontally across

businesses.businesses.– Acquire a dominating market share.Acquire a dominating market share.– Exploit early entry advantages.Exploit early entry advantages.– By-pass the regulatory regime.By-pass the regulatory regime.

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VISIONVISION

It is a dream It is a dream (not a forecast)(not a forecast) about, what the about, what the company wants to become in the foreseeable company wants to become in the foreseeable future. It is a combination of three basic future. It is a combination of three basic elements –elements –– An organisations fundamental reason for An organisations fundamental reason for

existence; beyond just making money.existence; beyond just making money.– It stands for the unchanging core values of It stands for the unchanging core values of

the company.the company.– It represents the company’s aspirations. It It represents the company’s aspirations. It

should be audacious, but achievable.should be audacious, but achievable.

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VISION - CHARACTERISTICSVISION - CHARACTERISTICS

Reliance – Where growth is a way of life.Reliance – Where growth is a way of life.– Clarity –Clarity – Vividly descriptive image of what Vividly descriptive image of what

the company wants to be known for in the the company wants to be known for in the future.future.

– Reachable –Reachable – It should be within a reasonable It should be within a reasonable target in the known future.target in the known future.

– Brevity –Brevity – It should be short, clear, and It should be short, clear, and preferably memorisable.preferably memorisable.

– Empathy –Empathy – It should reflect the company’s It should reflect the company’s beliefs to which it is sensitive.beliefs to which it is sensitive.

– Sharing –Sharing – The company across all The company across all hierarchies should have faith in it.hierarchies should have faith in it.

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VISION - ADVANTAGESVISION - ADVANTAGES

To stay focused on the right track.To stay focused on the right track. To prevent the fall in a activity trap.To prevent the fall in a activity trap. It gives enlightment.It gives enlightment. It gives the impression of a forward-looking It gives the impression of a forward-looking

organisation.organisation. It provides a holistic picture.It provides a holistic picture. It gives a shared platform.It gives a shared platform. It fosters risk taking and experimentation.It fosters risk taking and experimentation. It lends integrity and genuineness.It lends integrity and genuineness.

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MISSIONMISSION

It is a broad and enduring statement that It is a broad and enduring statement that distinguishes it from another organisation. distinguishes it from another organisation. It It helps identify the scope of the organisation in helps identify the scope of the organisation in terms of its products and markets.terms of its products and markets. It also serves It also serves as a as a road–maproad–map to reach the vision; its reason for to reach the vision; its reason for existence. existence. – What business are we in?What business are we in?– It reflects the organisations image and identity.It reflects the organisations image and identity.– Its objective should be broad and enduring.Its objective should be broad and enduring.– It should reflect current realities.It should reflect current realities.– It should be flexible an dynamic.It should be flexible an dynamic.– It is a philosophy.It is a philosophy.

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MISSION – SOME IDEASMISSION – SOME IDEAS

Reliance – We are in the business of Reliance – We are in the business of integration.integration.– We do not offer clothes,We do not offer clothes,

……………………………………. We offer comfort. . We offer comfort. – We do not offer engine oils, We do not offer engine oils,

……………………………………. We offer liquid engineering.. We offer liquid engineering.– We do not offer software's, We do not offer software's,

……………………………………. We offer solutions.. We offer solutions.– We do not offer insurance, We do not offer insurance,

……………………………………. We offer security.. We offer security.– We do not offer steel, We do not offer steel,

……………………………………. We offer strength.. We offer strength.

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GOALS & OBJECTIVESGOALS & OBJECTIVES

Reliance – We want to become a Rs.1,00,000 Reliance – We want to become a Rs.1,00,000 crore company by the year 2010.crore company by the year 2010. It reflects the It reflects the result that an organisation expects to achieve result that an organisation expects to achieve in the distant future.in the distant future.

It adds legitimacy to the mission.It adds legitimacy to the mission. It lends direction – time frame.It lends direction – time frame. It provides a benchmark for evaluation.It provides a benchmark for evaluation. It involves all the SBU’s.It involves all the SBU’s. It motivates the top management to It motivates the top management to

identify the – key success factors.identify the – key success factors.

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PLANSPLANS

Reliance – Desire to invest Rs.25000 crore in Reliance – Desire to invest Rs.25000 crore in telecom business (circa 1999).telecom business (circa 1999). It is the process It is the process of garnering necessary inputs, coordinating of garnering necessary inputs, coordinating appropriate technologies, and gaining access to appropriate technologies, and gaining access to desired markets in the near future. desired markets in the near future.

Backward integrate process technologies.Backward integrate process technologies. Compress project times.Compress project times. Leverage economies of size and scale.Leverage economies of size and scale. Use price-elasticity to break market Use price-elasticity to break market

barriers.barriers. Acquire a market share of indomitable Acquire a market share of indomitable

position.position.

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STRATEGIC DRIFTSTRATEGIC DRIFT

Historical studies have shown that most Historical studies have shown that most organisations tend to continue with their organisations tend to continue with their existing strategies. Therefore, past strategies existing strategies. Therefore, past strategies tend to have a bearing on future strategies. tend to have a bearing on future strategies. This tendency to restore continuity is known as This tendency to restore continuity is known as inertia (resistance to change)inertia (resistance to change)..

When changes in the environment is When changes in the environment is incrementalincremental, equilibrium is maintained. , equilibrium is maintained. However, However, radical radical change may lead to change may lead to disequilibrium. This state of affairs is known as disequilibrium. This state of affairs is known as strategic driftstrategic drift. .

In such a context strategies lose touch with In such a context strategies lose touch with emerging environment.emerging environment.

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STRATEGIC DRIFT FRAMEWORKSTRATEGIC DRIFT FRAMEWORKD

egre

e o

f ch

an

ge

Time

Continuity

Incremental Change

State of Flux

Radical Change

Stage of Atrophy

Environmental Change

Strategic Change

Strategic Drift

Stage of Transformation

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ORGANIZATIONAL POLITICSORGANIZATIONAL POLITICS

Inertia often leads to organizational politics. Inertia often leads to organizational politics. Organizational politics is defined as, Organizational politics is defined as, which which involves intentional acts of influence to enhance involves intentional acts of influence to enhance or protect the self-interest of individuals or or protect the self-interest of individuals or groupsgroups. . It leads to -It leads to -– Formation of powerful groups.Formation of powerful groups.– Creating obligations (reciprocity).Creating obligations (reciprocity).– Hiding vulnerability.Hiding vulnerability.– Using covert tactics to pursue self interests.Using covert tactics to pursue self interests.– Creating a favourable image.Creating a favourable image.– Developing a platform of support.Developing a platform of support.– Distorting information to gain mileage.Distorting information to gain mileage.

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LOGICAL INCREMENTALISMLOGICAL INCREMENTALISM

According to the According to the incrementalism approachincrementalism approach practitioners simply do not arrive at goals and practitioners simply do not arrive at goals and announce them in precise integrated packages. announce them in precise integrated packages. They simply unfold the particulars of the sub-They simply unfold the particulars of the sub-system, system, but the master scheme of the rational but the master scheme of the rational comprehensive scheme is not apparentcomprehensive scheme is not apparent. .

This is not to be treated as This is not to be treated as muddlingmuddling; but as a ; but as a defensible response to the complexities of a large defensible response to the complexities of a large organization that organization that mitigate against publicizing mitigate against publicizing goalsgoals..

Strategy formulation and implementation are Strategy formulation and implementation are linked together in a continuous improvement linked together in a continuous improvement cycle.cycle.

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IMPLEMENTING INCREMENTALISMIMPLEMENTING INCREMENTALISM

General Concern – General Concern – A vaguely felt awareness of A vaguely felt awareness of an issue or opportunityan issue or opportunity..

Macro Broadcasting – Macro Broadcasting – The broad idea is floated The broad idea is floated without details to invite pros and cons leading to without details to invite pros and cons leading to refinementsrefinements..

Agent of Change – Agent of Change – Formal ratification of a Formal ratification of a change planchange plan..

Leveraging Crisis – Leveraging Crisis – A sudden crisis or an A sudden crisis or an opportunity should be used as a trigger to opportunity should be used as a trigger to facilitate acceptance and implementation of facilitate acceptance and implementation of changechange..

Adaptation – Adaptation – As implementation progressesAs implementation progresses..

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LEARNING ORGANIZATIONLEARNING ORGANIZATION

A learning organization is capable of continual A learning organization is capable of continual regeneration from knowledge, experience, and regeneration from knowledge, experience, and skills that fosters experimentation and skills that fosters experimentation and questioning and challenge around a shared questioning and challenge around a shared purpose. It helps overcome organisational politics. purpose. It helps overcome organisational politics. What fosters a learning organisation?What fosters a learning organisation?– Pluralistic –Pluralistic – An environment where different An environment where different

and even conflicting ideas are welcome. and even conflicting ideas are welcome. – Experimentation –Experimentation – Fosters a culture of risk Fosters a culture of risk

taking.taking.– Informal Networks –Informal Networks – Emerging of new ideas. Emerging of new ideas.– Constructive Bargaining –Constructive Bargaining – Agree to disagree. Agree to disagree.– Organisational Slack –Organisational Slack – Enough free space. Enough free space.

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MANAGING UNCERTAINTYMANAGING UNCERTAINTY

Not all organizations face similar Not all organizations face similar environments and they differ in their form environments and they differ in their form and complexity. Therefore, they need to have and complexity. Therefore, they need to have different approaches to strategy. different approaches to strategy.

Dominant logic are the foundations when Dominant logic are the foundations when strategic transformation is apparent. strategic transformation is apparent.

Dominant logic is very rigid and sticky.Dominant logic is very rigid and sticky. Strategic transformation becomes smooth Strategic transformation becomes smooth

through a change in top leadership. As it through a change in top leadership. As it brings with it a different dominant logic. brings with it a different dominant logic.

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ENVIRONMENTAL CONDITIONSENVIRONMENTAL CONDITIONS

Simple Complex

Sta

tic

Dyn

am

ic

LearningScenarioPlanning

DecentralisationForecasting

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INTENDED & REALISED STRATEGIESINTENDED & REALISED STRATEGIES

An An intended strategyintended strategy is an expression of is an expression of interest of a desired strategic direction. A interest of a desired strategic direction. A realised strategyrealised strategy is what the organisation is what the organisation actually translates into practice. Usually actually translates into practice. Usually there is wide gap between the two. Causes –there is wide gap between the two. Causes –– The plans are unworkable.The plans are unworkable.– The environment context has changed.The environment context has changed.– Influential stake-holders back out.Influential stake-holders back out.– Strategies are superimposed.Strategies are superimposed.

An An emergent strategy emergent strategy is one which slowly is one which slowly evolves over time.evolves over time.

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ANALYZING ANALYZING BUSINESS ENVIRONMENTBUSINESS ENVIRONMENT

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FORMAL PLANNING Vs STRATEGIC FORMAL PLANNING Vs STRATEGIC PLANNINGPLANNING

Formal planning is a function of extrapolating Formal planning is a function of extrapolating the past. It is based on the assumption of the past. It is based on the assumption of incremental change. It is reactive.incremental change. It is reactive.

Emergent strategy is a function of discounting Emergent strategy is a function of discounting the future. It is based on the assumption of the future. It is based on the assumption of radical change. It is pro-active.radical change. It is pro-active.

Strategic gap basically points towards a Strategic gap basically points towards a vacuum of where the organisation wants to be vacuum of where the organisation wants to be and where it is. It requires a quantum leap.and where it is. It requires a quantum leap.

Competitive advantage provides the surest way Competitive advantage provides the surest way to fulfill the strategic gap. It points to a position to fulfill the strategic gap. It points to a position of superiority with relation to competition.of superiority with relation to competition.

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ENVIRONMENTAL SCANNINGENVIRONMENTAL SCANNING

The The environmentenvironment is defined as the aggregate of is defined as the aggregate of conditions, events, and influences that affect an conditions, events, and influences that affect an organisations way of doing things. organisations way of doing things.

Factors can be Factors can be externalexternal as well as as well as internalinternal to the to the organisation.organisation.

Environmental scanning is very important Environmental scanning is very important function of strategic planning. Since the pace of function of strategic planning. Since the pace of change in the environment is increasing rapidly, change in the environment is increasing rapidly, a strategic manager has to continuously scan a strategic manager has to continuously scan the environment to ensure fit with its the environment to ensure fit with its strategic strategic intent.intent.

It is It is exploratoryexploratory in nature in nature (PESTEL)(PESTEL)..

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EXTERNAL ENVIRONMENTEXTERNAL ENVIRONMENT

Political EnvironmentPolitical Environment– Government StabilityGovernment Stability– Government AttitudeGovernment Attitude– Economic ModelEconomic Model– Central – State Co-alignmentCentral – State Co-alignment– Subsidies & ProtectionSubsidies & Protection– Licensing & QuotasLicensing & Quotas

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Economic EnvironmentEconomic Environment– GDP, Fiscal deficitGDP, Fiscal deficit– Savings & InvestmentSavings & Investment– Inflation & Interest RatesInflation & Interest Rates– Monsoon & Food stock reservesMonsoon & Food stock reserves– Economic CyclesEconomic Cycles– Capital MarketCapital Market– Forex ReservesForex Reserves– Currency StabilityCurrency Stability– Infra-Structural Investments Infra-Structural Investments

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Social & Cultural EnvironmentSocial & Cultural Environment– PopulationPopulation– Religious CompositionReligious Composition– Literacy LevelsLiteracy Levels– Inter-state immigration & MobilityInter-state immigration & Mobility– Income Distribution – Middle ClassIncome Distribution – Middle Class– Customs, Beliefs, Rituals & PracticesCustoms, Beliefs, Rituals & Practices– Language BarriersLanguage Barriers– Social Values & AttitudeSocial Values & Attitude– Age DistributionAge Distribution

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Environmental - Technological Environmental - Technological – Manufacturing ProcessesManufacturing Processes– Flexible Production SystemsFlexible Production Systems– Obsolescence RateObsolescence Rate– Patent LawsPatent Laws– Research & DevelopmentResearch & Development– Backward IntegrationBackward Integration– Carbon Credits Carbon Credits – Green Supply Chain ManagementGreen Supply Chain Management– Enterprise Resource Planning (ERP)Enterprise Resource Planning (ERP)

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International EnvironmentInternational Environment– Emerging MarketsEmerging Markets– Forex MarketsForex Markets– War & TerrorismWar & Terrorism– FII & FDI InflowsFII & FDI Inflows– Mergers & AcquisitionMergers & Acquisition– Financial Crises – Sub PrimeFinancial Crises – Sub Prime

Legal EnvironmentLegal Environment– Corruption – Transparency International – 89Corruption – Transparency International – 89thth

– Transparency – RTI Act, 2005Transparency – RTI Act, 2005– Speedy Trials & Pending CasesSpeedy Trials & Pending Cases

5151

ECONOMIC LIBERALISATIONECONOMIC LIBERALISATION

New Industrial Policy (NIP) –New Industrial Policy (NIP) –– Liberalising industrial licensing.Liberalising industrial licensing.– FERA Liberalisation.FERA Liberalisation.– MRTP Liberalisation.MRTP Liberalisation.– Curtailment of PSU’s.Curtailment of PSU’s.– Encouraging Foreign Direct Investment.Encouraging Foreign Direct Investment.

Economic Reforms –Economic Reforms –– Fiscal & Monetary Reforms.Fiscal & Monetary Reforms.– Banking Sector Reforms.Banking Sector Reforms.– Capital Market Reforms.Capital Market Reforms.

5252

New Trade Policy (NTP) –New Trade Policy (NTP) –– Lowering import tariffsLowering import tariffs– Abolition of import licensesAbolition of import licenses– Encouraging exportsEncouraging exports– Rupee ConvertibilityRupee Convertibility

Structural Adjustments –Structural Adjustments –– Phasing out subsidiesPhasing out subsidies– Dismantling price controlsDismantling price controls– PSU DisinvestmentsPSU Disinvestments– Exit Policy- VRSExit Policy- VRS

ECONOMIC LIBERALISATIONECONOMIC LIBERALISATION

5353

DISCONTINUITYDISCONTINUITY

Destabilization due to entrepreneurial freedomDestabilization due to entrepreneurial freedom– Cocoon of protection disappearsCocoon of protection disappears– Diversification spreeDiversification spree– Existing notions of size shakenExisting notions of size shaken– Industry structures change radicallyIndustry structures change radically– Economic Darwinism - Survival of the fittestEconomic Darwinism - Survival of the fittest

MNC OnslaughtMNC Onslaught– Enhancing stakes – Power EquationEnhancing stakes – Power Equation– Joint Ventures – Technological AlliancesJoint Ventures – Technological Alliances– Take-over threat, Mergers & AcquisitionsTake-over threat, Mergers & Acquisitions

5454


Hyper CompetitionHyper Competition– MNC’s - GlobalizationMNC’s - Globalization– Cheap ImportsCheap Imports– Access to technologyAccess to technology

Buyers exacting demandsBuyers exacting demands– Shortage to surplus – Price competitionShortage to surplus – Price competition– Life-style changesLife-style changes– Stress on quality, ConsumerismStress on quality, Consumerism

Challenges on the technology frontChallenges on the technology front– Competencies become technology basedCompetencies become technology based– Investment in R&D become inescapableInvestment in R&D become inescapable

5555


Compulsion to find export marketsCompulsion to find export markets– Identifying competitive advantageIdentifying competitive advantage– Technological gapTechnological gap– Global presenceGlobal presence– Depreciating Currency – ExportsDepreciating Currency – Exports

Corporate vulnerabilityCorporate vulnerability– It is no longer business as usualIt is no longer business as usual– Capital inadequacyCapital inadequacy– Lack of product clout and brand powerLack of product clout and brand power– One product syndromeOne product syndrome– Loss of monopolyLoss of monopoly

5656

FIVE FORCES MODEL - PORTERFIVE FORCES MODEL - PORTER

Threat of New Entrants

Threat of Substitutes

Bargaining power of Suppliers

Bargaining power of Suppliers

Bargaining power of Customers

Competition from Existing Players

5757

PORTERS FIVE FORCES ANALYSISPORTERS FIVE FORCES ANALYSIS

Competition from existing players –Competition from existing players –– Industry growth rate, attractive margins.Industry growth rate, attractive margins.– Intermittent overcapacity.Intermittent overcapacity.– Strong product differentiation.Strong product differentiation.– Fragmented market.Fragmented market.– High exit barriers.High exit barriers.– Concentrated market.Concentrated market.– Unorganised sector.Unorganised sector.– Piracy and counterfeits.Piracy and counterfeits.– Dependence on advertising and promotion.Dependence on advertising and promotion.

5858


Threat of New Entrants –Threat of New Entrants –– Economies of size and scale.Economies of size and scale.– Huge investment in CAPEX.Huge investment in CAPEX.– Strong brand power.Strong brand power.– Product differentiation.Product differentiation.– Resource profile, access to inputs.Resource profile, access to inputs.– Learning curve advantages.Learning curve advantages.– Access to distribution channels.Access to distribution channels.– High switching costs.High switching costs.– Licensing & Quotas.Licensing & Quotas.

5959


Bargaining power of Customers – Bargaining power of Customers – – Buyer concentration and volumes.Buyer concentration and volumes.– Scope for backward integration.Scope for backward integration.– Price sensitiveness = Price / Total Purchase.Price sensitiveness = Price / Total Purchase.– Customer age profile, individual - corporate.Customer age profile, individual - corporate.– One-time / repeat purchase .One-time / repeat purchase .– Decision makers’ incentive.Decision makers’ incentive.– Business margins.Business margins.– Credit limits.Credit limits.

6060


Bargaining power of Suppliers – Bargaining power of Suppliers – – Importance of volume to supplier.Importance of volume to supplier.– Presence of substitute inputs.Presence of substitute inputs.– Differentiation of inputs.Differentiation of inputs.– Low scope for vertical integrationLow scope for vertical integration

Threat of Substitutes –Threat of Substitutes –– Source of latent competition – timing.Source of latent competition – timing.– Substitute offering a price advantage and/or Substitute offering a price advantage and/or

performance improvement.performance improvement.– Buyers’ propensity to substitute.Buyers’ propensity to substitute.

6161

FIRM ENVIRONMENTFIRM ENVIRONMENT

Size and Scale of operations. Size and Scale of operations. Inertia – Commitment to past strategies.Inertia – Commitment to past strategies. Cohesiveness – Degree of Bonding.Cohesiveness – Degree of Bonding. Structure – M Form (Profit Centres).Structure – M Form (Profit Centres). Business Portfolio – Composition.Business Portfolio – Composition. Business Scope – Single, Related, Unrelated.Business Scope – Single, Related, Unrelated. Initial Resource Profile.Initial Resource Profile. Skills & Capabilities Skills & Capabilities

– Business Specific CapabilityBusiness Specific Capability– Growth Management CapabilityGrowth Management Capability– Entrepreneurial CapabilityEntrepreneurial Capability

6262

COMPONENTS OF FIRM COMPONENTS OF FIRM ENVIRONMENTENVIRONMENT

CompetenciesCompetencies– Imitability – UniquenessImitability – Uniqueness– Substitutability – Difficult to EmulateSubstitutability – Difficult to Emulate– Sustainability – DurationSustainability – Duration– Leverage – ScopeLeverage – Scope

PerformancePerformance– Accounting, Market, Risk, GrowthAccounting, Market, Risk, Growth– StrategicStrategic

6363

VULNERABILITY ANALYSIS - SWOTVULNERABILITY ANALYSIS - SWOT

Acronym for Acronym for StrengthsStrengths – – WeaknessesWeaknesses – – Opportunities Opportunities – – Threats.Threats. It helps an It helps an organisation to capitalise on the opportunities organisation to capitalise on the opportunities by maximising its strengths and neutralising by maximising its strengths and neutralising the threats minimising the weaknesses. A the threats minimising the weaknesses. A SWOT audit should rely on –SWOT audit should rely on –– Company Records –Company Records – Annual Reports, Annual Reports,

Websites, Press Clippings & Interviews.Websites, Press Clippings & Interviews.– Case Studies –Case Studies – Structured Questionnaires, Structured Questionnaires,

Interviews, Observation.Interviews, Observation.– Business Intelligence –Business Intelligence – Bankers, Suppliers, Bankers, Suppliers,

Customers, Analysts, Competitors.Customers, Analysts, Competitors.

6464

SOURCES OF STRENGTHSOURCES OF STRENGTH

Strong brand identity – Strong brand identity – Eg. Tata.Eg. Tata. High quality products – High quality products – Eg. Sony, Toyota.Eg. Sony, Toyota. Excellent penetration – Excellent penetration – Eg. HLL, ITC.Eg. HLL, ITC. Strong R&D base – Strong R&D base – Eg. Dr. Reddy’s, Ranbaxy.Eg. Dr. Reddy’s, Ranbaxy. Economies of scale – Economies of scale – Eg. Reliance.Eg. Reliance. Good credit rating – Good credit rating – Eg. Infosys.Eg. Infosys. Motivated employees & cordial industrial Motivated employees & cordial industrial

relations – relations – Eg. Tisco.Eg. Tisco. Large resource pool – Large resource pool – Eg. Reliance.Eg. Reliance. Strong after sales & service network –Strong after sales & service network – Eg. Eg.

Caterpillar.Caterpillar.

6565

SOURCES OF WEAKNESSESSOURCES OF WEAKNESSES

Outdated technology – Outdated technology – Eg. Hindustan Motors.Eg. Hindustan Motors. Poor working capital management – Poor working capital management – Eg. Eg.

Kirloskars.Kirloskars. Excess manpower – Excess manpower – Eg. SAIL.Eg. SAIL. Narrow product base – Narrow product base – Eg. Procter & Gamble.Eg. Procter & Gamble. Inefficient top management – Inefficient top management – Eg. Ballarpur Eg. Ballarpur

Inds.Inds. Single product base –Single product base – Eg. Nirma. Eg. Nirma.

6666

SOURCES OF OPPORTUNITIESSOURCES OF OPPORTUNITIES

Delicensing of Industries – Delicensing of Industries – Eg. Telecom.Eg. Telecom. Import relaxations – Import relaxations – Eg. Hardware & Software.Eg. Hardware & Software. Capital market reforms – Capital market reforms – Eg. Abolishing CCI.Eg. Abolishing CCI. Abolishing MRTP – Abolishing MRTP – Eg. Maruti.Eg. Maruti. Consumerism – Consumerism – Eg. Retailing.Eg. Retailing. Growing population –Growing population – Eg. Middle-class buying Eg. Middle-class buying

power.power. Globalisation – Globalisation – Eg. GDR’s, ECB’sEg. GDR’s, ECB’s Free pricing – Free pricing – Eg. Fertilisers, Insurance, SugarEg. Fertilisers, Insurance, Sugar Exit Policy – Exit Policy – Eg. VRSEg. VRS Collaborations & Joint Ventures –Collaborations & Joint Ventures – Bharti – Bharti –

WalMart. WalMart.

6767

SOURCES OF THREATSSOURCES OF THREATS

Political instability – Political instability – Eg. (1985–1990).Eg. (1985–1990). Social activism – Social activism – Eg. Singur SEZ.Eg. Singur SEZ. Terrorist attacks – Terrorist attacks – Eg. 9/11.Eg. 9/11. Import liberalisation – Import liberalisation – Eg. Dumping from China.Eg. Dumping from China. Foreign Direct Investment (FDI) – Foreign Direct Investment (FDI) – Eg. Onida.Eg. Onida. Economic recession – Economic recession – Eg. (1970’s).Eg. (1970’s). Natural disaster – Natural disaster – Eg. Tsunami, Earth Quake.Eg. Tsunami, Earth Quake. Nationalisation – Nationalisation – Eg. TISCO.Eg. TISCO. Hostile take-over – Hostile take-over – Eg. Bajoria – Bombay Dyeing.Eg. Bajoria – Bombay Dyeing. Group disintegration – Group disintegration – Eg. Reliance.Eg. Reliance.

6868

ETOPETOP

Acronym for Environment – Threat – Opportunity Acronym for Environment – Threat – Opportunity – Profile.– Profile. It represents a summary picture of the It represents a summary picture of the environmental factors and their likely impact on environmental factors and their likely impact on the organisation. Stages in the organisation. Stages in ETOPETOP analysis – analysis –– List the different aspects of the environment List the different aspects of the environment

that has a bearing on the organisation.that has a bearing on the organisation.– Assess the nature and extent of impact of the Assess the nature and extent of impact of the

factors.factors.– Holistic view – Prepare a complete overall Holistic view – Prepare a complete overall

picture.picture.– Forecasting – Predict the future (i.e. multi-Forecasting – Predict the future (i.e. multi-

variate, delphi's technique, judge-mental).variate, delphi's technique, judge-mental).

6969

PROFIT IMPACT OF MARKET PROFIT IMPACT OF MARKET

STRATEGYSTRATEGY

PIMS PIMS is a computer based database model is a computer based database model developed by developed by GE GE and later extended by and later extended by HBS HBS to to examine the impact of a wide variety of examine the impact of a wide variety of strategy issues on business performance. It is strategy issues on business performance. It is also a form of vulnerability analysis.also a form of vulnerability analysis.

An organisation can draw upon the experience An organisation can draw upon the experience of its peers in similar situations. of its peers in similar situations. PIMS Findings PIMS Findings – 75% of the variance in performance is due – 75% of the variance in performance is due to:to:– Industry attractiveness.Industry attractiveness.– Industry segmentation and positioning.Industry segmentation and positioning.– Industry pricing and distribution.Industry pricing and distribution.

7070

PIMS - LIMITATIONSPIMS - LIMITATIONS

The analysis is based on The analysis is based on historical datahistorical data and it and it does not take care of does not take care of future challengesfuture challenges. . Therefore,Therefore,– Contexts drawn across one organisation Contexts drawn across one organisation

may not be applicable to another. As every may not be applicable to another. As every organisation is unique in its own way.organisation is unique in its own way.

– Contexts may vary over time, when radical Contexts may vary over time, when radical changes in the economy takes place.changes in the economy takes place.

– Contexts may vary across countries, Contexts may vary across countries, therefore validity may be a question.therefore validity may be a question.

7171

COMPETITIVE ADVANTAGECOMPETITIVE ADVANTAGE

A competitive advantage is a strength relative A competitive advantage is a strength relative to competition.to competition.

It results in a distinct cost advantage or a It results in a distinct cost advantage or a differentiation advantage.differentiation advantage.

A competitive advantage is a back bone for a A competitive advantage is a back bone for a strategy.strategy.

It enlarges the scope of an organisation.It enlarges the scope of an organisation. A collection of competitive advantages A collection of competitive advantages

comprises strategic advantage profile (SAP).comprises strategic advantage profile (SAP). Success of a strategy critically depends on Success of a strategy critically depends on

SAP.SAP.

7272

STRATEGIC ADVANTAGE PROFILE STRATEGIC ADVANTAGE PROFILE (SAP)(SAP)

Organisations have to systematically and Organisations have to systematically and continuously conduct exercises to identify its continuously conduct exercises to identify its SAP.SAP.

In most cases SAP is hidden and dormant.In most cases SAP is hidden and dormant. Identification of SAP is critical for and stretching Identification of SAP is critical for and stretching

and leveraging of resources.and leveraging of resources. In today's world of discontinuity, SAP changes In today's world of discontinuity, SAP changes

from time to time.from time to time. Strategic fit is essential for the top Strategic fit is essential for the top

management to shape its SAP.management to shape its SAP. Most successful organisations around the world Most successful organisations around the world

have a well balanced SAP.have a well balanced SAP.

7373

COMPOSITION OF SAPCOMPOSITION OF SAP

MarketingMarketing– High market standing and steady market High market standing and steady market

share.share.– Continuous product innovation.Continuous product innovation.– Strong market penetration.Strong market penetration.– Market Research – early trend recognition.Market Research – early trend recognition.– Advertising effectiveness.Advertising effectiveness.– Cost leadership.Cost leadership.

FinanceFinance– Low cost of capital.Low cost of capital.– Dynamism in tax planning.Dynamism in tax planning.– Innovative financial instruments.Innovative financial instruments.

7474

COMPOSITION OF SAPCOMPOSITION OF SAP

Human ResourcesHuman Resources– Low attrition rate.Low attrition rate.– Ability to attract talent.Ability to attract talent.

Research & DevelopmentResearch & Development– Large no. of patents.Large no. of patents.– Huge spending in R&D.Huge spending in R&D.– Velocity of R&D multiplier.Velocity of R&D multiplier.

ProductionProduction– Flexible manufacturing systems.Flexible manufacturing systems.– Outsourcing and controlling SCM.Outsourcing and controlling SCM.

7575

KEY SUCCESS FACTORS (KSF)KEY SUCCESS FACTORS (KSF)

KSFKSF relates to identification and putting relates to identification and putting concentrated effort on a particular activity which concentrated effort on a particular activity which forms the very basis of competitive advantage. It forms the very basis of competitive advantage. It involves a three-stage process-involves a three-stage process-– Identify KSF –Identify KSF – What does it take to be What does it take to be

successful in a business?successful in a business?– Drawing KSF –Drawing KSF – What should be the What should be the

organisations response to the same?organisations response to the same?– Benchmarking KSF –Benchmarking KSF – How do we evaluate How do we evaluate

organisation success on this factor?organisation success on this factor? KSF KSF helps organisations spot early opportunities helps organisations spot early opportunities

and convert them into value adding business and convert them into value adding business propositions.propositions.

7676

EXPERIENCE – LEARNING CURVEEXPERIENCE – LEARNING CURVE

The cost of performing an activity declines on a The cost of performing an activity declines on a per-unit basis as they grow more efficient as per-unit basis as they grow more efficient as experience teaches better way of doing things. experience teaches better way of doing things.

With lower costs, it can price its products more With lower costs, it can price its products more competitively, and with lower prices it can competitively, and with lower prices it can increase its sales volume, which further reduces increase its sales volume, which further reduces costs.costs.

Matured firms will always be positioned Matured firms will always be positioned advantageously on the EL Curve than new advantageously on the EL Curve than new entrants.entrants.

The EL Curve thus enables organisations to build The EL Curve thus enables organisations to build entry barriers, leverage it as a competitive entry barriers, leverage it as a competitive advantage.advantage.

Also Refer Slide: 265

7777

EL - CURVEEL - CURVE

Production / Volume

Cost

per

unit

of

outp

ut

Decreases at an increasing rate

Decreases at a constant rate

Decreases at a decreasing rate

Point of inflexion

7878

EL - TRADITIONAL VIEWEL - TRADITIONAL VIEW

Experience = Efficiency

Efficiency = Lower Costs

Lower Costs = Higher Sales

Higher Sales = Lower Costs

Lower Costs = Entry Barriers

Entry Barriers = Better Performance

1

2

3

4

5

6

7979

EL - STRATEGIC VIEWEL - STRATEGIC VIEW

Experience = Inertia

Inertia = Limited Growth

Limited Growth = Diversification

Diversification = New Experience

New Experience Previous Experience

Strategic Failure = Poor Performance

1

2

3

4

5

6

8080

IDENTIFYING ALTERNATIVE IDENTIFYING ALTERNATIVE STRATEGIESSTRATEGIES

8181

CORPORATE STRATEGYCORPORATE STRATEGY

It provides It provides directiondirection to the groups vision and to the groups vision and mission.mission.

A corporate strategy identifies and fixes the A corporate strategy identifies and fixes the strategic gapstrategic gap it proposes to fill. it proposes to fill.

It provides a It provides a platformplatform for subsequent strategic for subsequent strategic decisions.decisions.

It determines the It determines the locus locus a firm encounters with a firm encounters with internal and external environment.internal and external environment.

It indicates the It indicates the typetype and and quality of growthquality of growth an an organisation is looking for.organisation is looking for.

It serves the process of It serves the process of renewalrenewal of the firm.of the firm.

8282

GRAND STRATEGIESGRAND STRATEGIES

Corporate Strategy

GrowthStability Divestment

Combination

Intensification

Diversification

Vertical

Market Penetration

Horizontal

Conglomerate / Unrelated

Market Development Product Development

Concentric / Related

8383

STABILITYSTABILITY

It involves maintaining status-quo or growing in It involves maintaining status-quo or growing in a slow and selective manner. The size and scale a slow and selective manner. The size and scale of present operations remains almost intact. of present operations remains almost intact. Stability however, does not relate to Stability however, does not relate to do-nothing.do-nothing. It still has to adopt a strategy to sustain current It still has to adopt a strategy to sustain current performance levels. performance levels. (Eg. Hindustan Motors).(Eg. Hindustan Motors). The The reasons for stability strategy –reasons for stability strategy –– Lack of attractive opportunities. Lack of attractive opportunities. – The firm may not be willing to take additional The firm may not be willing to take additional

risk associated with new projects.risk associated with new projects.– To stop for a while and assess past records.To stop for a while and assess past records.– Why disturb the existing equilibrium set up?Why disturb the existing equilibrium set up?– Limited resource position.Limited resource position.

8484

GROWTH - ANSOFF’S MODELGROWTH - ANSOFF’S MODELExisting Market New Market

Exis

tin

g P

rod

uct

New

Pro

du

ct

Market Penetration (+)

Market Development (++)

Product Development (++)

Diversification (+++)

Note: (+) indicates type of growth and risk involved.

8585

MARKET PENETRATIONMARKET PENETRATION

It is a strategy where a firm directs its entire It is a strategy where a firm directs its entire resources to the growth of a single product, resources to the growth of a single product, within a well defined market. Market penetration within a well defined market. Market penetration can be achieved by can be achieved by – increasing sales to current – increasing sales to current customers, convert competitors customers, customers, convert competitors customers, direct non-users to users.direct non-users to users. (Eg. Nirma)(Eg. Nirma)– Suitable for industries where scope for Suitable for industries where scope for

technological break-through is limited. technological break-through is limited. – The company carries a risk of product The company carries a risk of product

obsolescence.obsolescence.– Helps firms which are not comfortable with Helps firms which are not comfortable with

unfamiliar terrain. unfamiliar terrain.

8686

MARKET DEVELOPMENTMARKET DEVELOPMENT

It is a strategy where a firm tries to achieve It is a strategy where a firm tries to achieve growth by finding new uses for existing growth by finding new uses for existing products or its close variants and tap a new products or its close variants and tap a new potential customer base altogether. potential customer base altogether. (Eg. Du (Eg. Du Pont – nylon: parachutes, socks & stockings, Pont – nylon: parachutes, socks & stockings, fabrics, tyres, upholstery, carpets,……).fabrics, tyres, upholstery, carpets,……).– The firm should be creative and innovative –The firm should be creative and innovative –

thinking out of the boxthinking out of the box..– Unconventional and flexible channels of Unconventional and flexible channels of

distribution.distribution.– Move across geographical boundaries. Move across geographical boundaries. – It is a classical case ofIt is a classical case of re-engineeringre-engineering..

8787

PRODUCT DEVELOPMENTPRODUCT DEVELOPMENT

It is a strategy where a firm tries to achieve It is a strategy where a firm tries to achieve growth through a new product or an improved growth through a new product or an improved version of an existing product or its variant to version of an existing product or its variant to repeatedly enter the same market. repeatedly enter the same market. (Eg. Honda (Eg. Honda – bikes, cars, generators, lawn mowers).– bikes, cars, generators, lawn mowers).– Leverage on customer loyalty.Leverage on customer loyalty.– Areas of product improvement – quality, Areas of product improvement – quality,

features, styling.features, styling.– Ensure high reach through advertising and Ensure high reach through advertising and

promotion. promotion. – Product development with related Product development with related

technologies – core competencies.technologies – core competencies.

8888

DIVERSIFICATIONDIVERSIFICATION

It marks the entry of a firm into newer markets It marks the entry of a firm into newer markets with new products, thereby creating a new with new products, thereby creating a new business. The new business is distinct from the business. The new business is distinct from the existing business in terms of – existing business in terms of – inputs – inputs – technologies – markets.technologies – markets. More importantly they More importantly they are are strategically dissimilar.strategically dissimilar.

Why do firms diversify?Why do firms diversify?– Risk reduction.Risk reduction.– High transaction costs and institutional gaps.High transaction costs and institutional gaps.– Economies of size, scale, and scope.Economies of size, scale, and scope.– Conglomerate power.Conglomerate power.– Internal capital market.Internal capital market.– Permits - quotas, licenses.Permits - quotas, licenses.

8989

HOW DIVERSIFICATION REDUCES HOW DIVERSIFICATION REDUCES RISK?RISK?

Consider a hypothetical planet, in which a given Consider a hypothetical planet, in which a given year is either under hot or cold wave, either of year is either under hot or cold wave, either of which is equally likely to prevail. Let us assume which is equally likely to prevail. Let us assume that there are two businesses constituting the that there are two businesses constituting the entire market – coffee and ice-cream. If the hot entire market – coffee and ice-cream. If the hot wave dominates the planet, the ice-cream wave dominates the planet, the ice-cream business would register a return of business would register a return of 30%,30%, while while the coffee business would register a return of the coffee business would register a return of 10%.10%. If on the other hand, cold wave dominates If on the other hand, cold wave dominates the planet, ice-cream business would register a the planet, ice-cream business would register a return of return of 10%,10%, while the coffee business would while the coffee business would register a return of register a return of 30%.30%. What would be your What would be your diversification strategy?diversification strategy?

9090

SOLUTIONSOLUTION

If we invested in only one of the two If we invested in only one of the two companies, our expected return will be companies, our expected return will be 20%,20%, with a possible risk of with a possible risk of 10%.10%. If, we split our If, we split our investment between the two companies in investment between the two companies in equal proportion, half of our investment will equal proportion, half of our investment will earn a return of earn a return of 30%,30%, while the other half while the other half would earn would earn 10%,10%, so our expected return would so our expected return would still be still be 20%.20%. But in the second instance there But in the second instance there is no possibility of deviation of returns. is no possibility of deviation of returns. Diversification results in Diversification results in 20%20% expected return expected return without risk, whereas investing in individual without risk, whereas investing in individual businesses was yielding an expected return of businesses was yielding an expected return of 20%20% with a risk factor of with a risk factor of 10%.10%.

9191

WHAT GUIDES DIVERSIFICATION WHAT GUIDES DIVERSIFICATION SUCCESS?SUCCESS?

The newly formed business should be The newly formed business should be consistent with the consistent with the dominant logicdominant logic of the group. of the group. Businesses which are not consistent are said to Businesses which are not consistent are said to be be opportunistic. Conclusion:opportunistic. Conclusion: Higher the Higher the strategic fit; better the performance.strategic fit; better the performance.

The countermanding logic – The countermanding logic – – Appropriate and timely response.Appropriate and timely response.– Better strategic and operational control.Better strategic and operational control.– Unlearning and learning of new skill sets.Unlearning and learning of new skill sets.– Resource commitment from top Resource commitment from top

management.management.– Development of capabilities & competencies.Development of capabilities & competencies.– Override the industry context.Override the industry context.

9292

HORIZONTAL DIVERSIFICATIONHORIZONTAL DIVERSIFICATION It takes place when a company enlarges its It takes place when a company enlarges its

scope of operations by getting into businesses scope of operations by getting into businesses which provides a feeder services to its existing which provides a feeder services to its existing businesses businesses (Eg. Reliance).(Eg. Reliance). On the other way On the other way existing business may recreate new existing business may recreate new businesses, which are distinct, but strategically businesses, which are distinct, but strategically related related (Eg. Bajaj – scooters to motorcycles).(Eg. Bajaj – scooters to motorcycles).– It results in increasing market power.It results in increasing market power.– Distinctive capabilities extended to other Distinctive capabilities extended to other

areas.areas.– Resources can be shared for mutual benefit. Resources can be shared for mutual benefit. – Reduces economic risk, because of Reduces economic risk, because of

differences in business cycles. differences in business cycles.

9393

HORIZONTAL DIVERSIFICATION - HORIZONTAL DIVERSIFICATION - RELIANCERELIANCE

Reliance Industries

Reliance Capital

Reliance Power

Reliance Infrastructure

Reliance Ports

9494

VERTICAL DIVERSIFICATIONVERTICAL DIVERSIFICATION

It allows a firm to enlarge its scale of operations It allows a firm to enlarge its scale of operations either in aeither in a backwardbackward business process or in a business process or in a forwardforward one. Backward integration occurs when one. Backward integration occurs when the company starts manufacturing its inputs.the company starts manufacturing its inputs. Advantages of backward integration –Advantages of backward integration –– Cost competitiveness – entry barrier.Cost competitiveness – entry barrier.– Better operational control – timely supplies, Better operational control – timely supplies,

quality control, coordination – JIT.quality control, coordination – JIT.

Disadvantages of backward integration –Disadvantages of backward integration –– It may spark of a chain reaction.It may spark of a chain reaction.– High gestation (i.e. investment in fixed High gestation (i.e. investment in fixed

assets)assets)

9595

VERTICAL DIVERSIFICATION - VERTICAL DIVERSIFICATION - RELIANCERELIANCE

Textiles

Polyester Filament Yarn

Polyester Staple Fibre

Purified tetra-pthalic acid

Mono-ethylene glycol

Paraxylene

Naptha-cracking

Oil & Gas exploration

(PFY) (PSF)

(PTA) (MEG)

(PX)

Acetic Acid

9696

QUASI & TAPERED INTEGRATIONQUASI & TAPERED INTEGRATION

Full Integration -Full Integration - Where one firm has full Where one firm has full ownership and control over all the stages in the ownership and control over all the stages in the

production of a product production of a product (Eg. Reliance)(Eg. Reliance).. Quasi-integration -Quasi-integration - A firm gets most of its A firm gets most of its

requirements from one or more outside suppliers requirements from one or more outside suppliers that is under its partial ownership and control that is under its partial ownership and control (Eg. Maruti – Sona Steering). (Eg. Maruti – Sona Steering).

Tapered integration -Tapered integration - A firm produces part of its A firm produces part of its own requirements and buys the rest from outside own requirements and buys the rest from outside suppliers with a variable degree of ownership and suppliers with a variable degree of ownership and control. Usually the firm concentrates on its core control. Usually the firm concentrates on its core activities, and out-sources the non-core activities.activities, and out-sources the non-core activities.

9797

A CASE OF TAPERED INTEGRATIONA CASE OF TAPERED INTEGRATION

Very CriticalComponents

Full Ownership

CriticalComponents

Partial Ownership

Ord

inary

C

om

ponen

tsZ

ero

Ow

ners

hip

Engine

Transmission

DesignSteering

Electricals

Windscreen Seats & Carpets

9898

CONGLOMERATE DIVERSIFICATIONCONGLOMERATE DIVERSIFICATION

It relates to businesses which are distinct in It relates to businesses which are distinct in terms of businesses as well as strategically terms of businesses as well as strategically unrelated. Companies usually engage in unrelated. Companies usually engage in conglomerate diversification when industry conglomerate diversification when industry characteristics are very attractive. Drawbacks characteristics are very attractive. Drawbacks of unrelated diversification –of unrelated diversification –– Cost of ignorance.Cost of ignorance.– Cost of failure (i.e. lack of foresight)Cost of failure (i.e. lack of foresight)– Cost of neglect (i.e. core business).Cost of neglect (i.e. core business).– Cost of dysynergy (i.e. synergies pulling in Cost of dysynergy (i.e. synergies pulling in

opposite directions). opposite directions).

9999

CONGLOMERATE DIVERSIFICATION - CONGLOMERATE DIVERSIFICATION - ITCITC

Tobacco

Paper & Packaging

Food & Confectionary

Edible Oils Hotels

100100

DIVESTMENTDIVESTMENT

Divestment is a Divestment is a defensive strategydefensive strategy involving the involving the sale of a business sale of a business (Eg. Bisleri)(Eg. Bisleri) in full to an in full to an independent entity. It is usually taken into account independent entity. It is usually taken into account when performance is disappointing and survival is when performance is disappointing and survival is at stake and nor does the firm have the resources at stake and nor does the firm have the resources to fend off competitive forces. It may also involve to fend off competitive forces. It may also involve a product a product (Eg. Glaxo’s “Glucon-D” to Heinz)(Eg. Glaxo’s “Glucon-D” to Heinz) ;; or an or an SBUSBU (Eg. L&T -Cement Division to Aditya Birla (Eg. L&T -Cement Division to Aditya Birla Group)Group) technically known as divestiture.technically known as divestiture.

It is may also be a It is may also be a pro-active strategypro-active strategy, where a , where a company simply exits because the business no company simply exits because the business no longer contribute to or fit its dominant logic. longer contribute to or fit its dominant logic. (Eg. (Eg. Tatas sale of Goodlass Nerolac, Tata Pharma, Tata Tatas sale of Goodlass Nerolac, Tata Pharma, Tata Press, ACC).Press, ACC).

101101

DIVESTMENT - ROUTESDIVESTMENT - ROUTES

– Outright Sale –Outright Sale – Popularly known as the asset Popularly known as the asset route; where 100% of the assets (including route; where 100% of the assets (including intangibles) are valued and paid for.intangibles) are valued and paid for. (Eg. Sale (Eg. Sale of Diamond Beverages to Coca-Cola for US $ of Diamond Beverages to Coca-Cola for US $ 40 million).40 million).

– Leveraged Buy-Out (LBO) –Leveraged Buy-Out (LBO) – Here the Here the company’s shareholders are bought out company’s shareholders are bought out through a negotiated deal using borrowed through a negotiated deal using borrowed funds. funds. (Eg. Tatas buy-out of Corus for US $ (Eg. Tatas buy-out of Corus for US $ 11.3 billion, involving 608 pence per share).11.3 billion, involving 608 pence per share).

– Spin-Off –Spin-Off – A spin off is the creation of a new A spin off is the creation of a new entity; where the equity is allotted amongst entity; where the equity is allotted amongst the existing shareholders on a pro-rata basis. the existing shareholders on a pro-rata basis.

102102

COMBINATION STRATEGYCOMBINATION STRATEGY

It is a mixture of stability, growth, and It is a mixture of stability, growth, and divestment strategies applied simultaneously or divestment strategies applied simultaneously or sequentially for a portfolio of businesses (i.e. sequentially for a portfolio of businesses (i.e. business group).business group).

It is usually pursued by a business group with It is usually pursued by a business group with diverse interests. diverse interests.

There can be no ideal strategy for every There can be no ideal strategy for every business. Because every business has its own business. Because every business has its own unique business and economic cycle.unique business and economic cycle.

The most popular models used to determine The most popular models used to determine corporate strategies for a business group – BCG corporate strategies for a business group – BCG Model, GE Matrix, Arthur’ D. Little, and Shell.Model, GE Matrix, Arthur’ D. Little, and Shell.

103103

STRATEGY CHOICESTRATEGY CHOICE

104104

WHAT IS A BUSINESS GROUP?WHAT IS A BUSINESS GROUP?Parent Company

Firm 1

Firm 2

Firm 3

Firm 4

Firm 5

105105

BUSINESS GROUP - DEFINITIONBUSINESS GROUP - DEFINITION

A business group is known by various names in A business group is known by various names in various countries – various countries – guanxiqueguanxique in China, in China, keiretsuskeiretsus in Japan, in Japan, chaebolschaebols in Korea, in Korea, business business houseshouses in India. They share some similar in India. They share some similar characteristics – characteristics – – Their origins can be traced back to market Their origins can be traced back to market

imperfections existing in an economy (MRTP imperfections existing in an economy (MRTP Laws, Licenses & Quotas).Laws, Licenses & Quotas).

– High degree of centralised control (GEO, High degree of centralised control (GEO, BRC).BRC).

– Resource sharing.Resource sharing.– Formal and informal ties.Formal and informal ties.

106106

BCG GROWTH MODELBCG GROWTH MODEL

Relative Market Share (%)In

du

stry

Gro

wth

(%

)

?Hig

hHigh

Low

Low

Stars Question Mark

Cash Cow Dogs

107107

BUSINESS ANALYSIS – TATA GROUPBUSINESS ANALYSIS – TATA GROUP

Stars –Stars – They have enormous potentials in the long They have enormous potentials in the long term, provided the industry growth rate continues term, provided the industry growth rate continues and the company is able to maintain its market-and the company is able to maintain its market-share share (i.e. diversify).(i.e. diversify). These businesses are net These businesses are net users of resources users of resources (Eg. TCS).(Eg. TCS).

Question Marks –Question Marks – They have potentials in the long They have potentials in the long term, provided the company is able to build up on term, provided the company is able to build up on its market-share its market-share (i.e. market penetration, market (i.e. market penetration, market development, product development),development, product development), which which remains a big? These businesses are also net remains a big? These businesses are also net users of resources, but their risk profile is higher users of resources, but their risk profile is higher than the stars than the stars (Eg. Trent, Tata Telecom).(Eg. Trent, Tata Telecom).

108108

BUSINESS ANALYSIS – TATA GROUPBUSINESS ANALYSIS – TATA GROUP

Cash Cow –Cash Cow – These are matured businesses, and These are matured businesses, and the company dominates the industry ahead of the company dominates the industry ahead of competition competition (i.e. stability).(i.e. stability). Given that the Given that the growth potential in the business is low, they are growth potential in the business is low, they are generators of resources. However, cash cows generators of resources. However, cash cows may also need to invest provided the industry may also need to invest provided the industry takes an upswing takes an upswing (Eg. Tata Motors, Tata Chem, (Eg. Tata Motors, Tata Chem, TISCO). TISCO).

Dogs –Dogs – They are a drag on the group, and they They are a drag on the group, and they lack on competencies to take on competition lack on competencies to take on competition and are basically and are basically cash traps (Eg. Nelco, Tata cash traps (Eg. Nelco, Tata Pharma).Pharma). Groups prefer to dispose such Groups prefer to dispose such businesses businesses (i.e. divest).(i.e. divest).

109109

GE - MATRIXGE - MATRIX

Ind

ust

ry

Att

ract

iven

ess

Distinctive Capabilities

Strong Medium WeakH

igh

Low

Med

Diversify (++)Intensify (+)

Intensify(+)

Stability Harvest(-) Divest (- -)

Stability

Stability

Harvest(-)

110110

ARTHUR’ D. LITTLEARTHUR’ D. LITTLE

Invest Consolidate

Industry Life-Cycle

Com

peti

tive P

osi

tion

GrowthInception Maturity Decline

Dominant

Strong

Favourable

Tenable

Weak

Selective

Abandon

Niche

Divest

Harvest

Hold

Improve

111111

SHELL – DIRECTIONAL POLICY SHELL – DIRECTIONAL POLICY MATRIX (DPM)MATRIX (DPM)

Business Sector Prospects

Dis

tinct

ive C

apab

iliti

es

Attractive Average Unattractive

Strong

Average

Weak

Market Leadership

Try Harder

DoubleOr

Quit

Growth

Custodial

Expand Divest

PhasedWithdrawal

GenerateCash

PhasedWithdrawal

112112

STRATEGIC CHOICE – SUBJECTIVE STRATEGIC CHOICE – SUBJECTIVE FACTORSFACTORS

Commitment to past strategies - Inertia.Commitment to past strategies - Inertia. Attitude towards risk.Attitude towards risk.

– Risk averse managers.Risk averse managers.– Risk prone managers.Risk prone managers.

Degree of external dependence.Degree of external dependence. Internal political considerations.Internal political considerations. Timing – Pressures, Frame, Horizon.Timing – Pressures, Frame, Horizon. Corporate culture.Corporate culture. Competitive reactions.Competitive reactions. Organisation structure.Organisation structure.

113113

STRATEGIC CHOICE – MACRO TIMINGSTRATEGIC CHOICE – MACRO TIMING

Depression(Stability)

Recovery(Intensification)

Prosperity(Diversification)

Recession(Divestment)

114114

STRATEGIC CHOICE – MICRO TIMINGSTRATEGIC CHOICE – MICRO TIMING

Inception - Stability

Growth - Expansion

Maturity - Diversification

Decline - Divestment

Duration (Yrs)

Gro

wth

(%

)

Re-Engineering

115115

COMPETITIVE STRATEGYCOMPETITIVE STRATEGY

116116

GENERIC STRATEGIESGENERIC STRATEGIES

A generic strategy deals with how a firm A generic strategy deals with how a firm competes in a particular business. The principal competes in a particular business. The principal focus is on meeting competition, protecting focus is on meeting competition, protecting market-share, and earning super-normal profits.market-share, and earning super-normal profits.

The strength of a firm in a particular business The strength of a firm in a particular business usually stems from its competitive advantage. usually stems from its competitive advantage. Competitive advantage refers to a firms Competitive advantage refers to a firms resources or activities in which it is way ahead of resources or activities in which it is way ahead of competition. competition.

Such resources or activities should be distinctive Such resources or activities should be distinctive and sustainable over time. and sustainable over time.

Firms usually build competitive advantage by Firms usually build competitive advantage by initiating certain unique steps.initiating certain unique steps.

117117

GENERIC STRATEGY - TYPESGENERIC STRATEGY - TYPES

Cost Leadership –Cost Leadership – It is a strategy that focuses It is a strategy that focuses on making a firm more competitive by on making a firm more competitive by producing its products more cheaply than its producing its products more cheaply than its competitors. competitors.

The firm may retain the benefits of cost The firm may retain the benefits of cost advantage by enjoying higher margins advantage by enjoying higher margins (Eg. (Eg. Reliance)Reliance) or may pass it to customers to or may pass it to customers to increase market-share increase market-share (Eg. Nirma, Ayur, T-(Eg. Nirma, Ayur, T-Series).Series). Sources of cost advantage – Sources of cost advantage –– Economies of size, backward integration.Economies of size, backward integration.– Cutting project duration.Cutting project duration.– Locational advantage.Locational advantage.– Early entry advantage.Early entry advantage.– Steep experience curve effects.Steep experience curve effects.

118118


Product Differentiation –Product Differentiation – It is a strategy that It is a strategy that attempts to develop products and services that attempts to develop products and services that are differentiated from competitive products in are differentiated from competitive products in terms of value proposition. Usually product terms of value proposition. Usually product differentiation is followed by premium prices. differentiation is followed by premium prices. (Eg. Intel, CitiBank, Sony).(Eg. Intel, CitiBank, Sony). Sources of product Sources of product differentiation - differentiation - – High on brand loyalty.High on brand loyalty.– Unique or package of features, services.Unique or package of features, services.– Investment in R&D, creativity & innovation.Investment in R&D, creativity & innovation.– Patents & Copyrights.Patents & Copyrights.– Market Penetration & Distribution Channels.Market Penetration & Distribution Channels.– Undeterred attention to quality.Undeterred attention to quality.

119119


Focus / Niche –Focus / Niche – It is a combination strategy of It is a combination strategy of cost leadership or product differentiation cost leadership or product differentiation targeting a specific market or buyer segment targeting a specific market or buyer segment (Eg. Rolex, Mercedes, Mont-Blanc, Cartier, (Eg. Rolex, Mercedes, Mont-Blanc, Cartier, Gucci, Armani).Gucci, Armani). Sources of focus – Sources of focus –– Brand image.Brand image.– Matured customer base.Matured customer base.– The customer takes pride in the product (i.e. The customer takes pride in the product (i.e.

sign of prestige, power, and status).sign of prestige, power, and status).– Pricing is a limited consideration.Pricing is a limited consideration.– Limited editions (i.e. planned supply Limited editions (i.e. planned supply

constraint).constraint).– Avoiding brand dilution.Avoiding brand dilution.

120120

PORTERS MODEL OF COMPETITIVE PORTERS MODEL OF COMPETITIVE ADVANTAGEADVANTAGE

Competitive Advantage

Com

peti

tive S

cop

eN

arr

ow

Bro

ad

Cost Leadership Product Differentiation

Cost Leadership(Toyota)

Differentiation Focus

(Mercedes)

Cost Focus(Hyundai)

Differentiation(General Motors)

121121

EMERGING INDUSTRYEMERGING INDUSTRY Emerging Industry –Emerging Industry – An industry characterised by An industry characterised by

radical environmental changes, changing customer radical environmental changes, changing customer needs, technological innovations, ending in a needs, technological innovations, ending in a different cost economics. different cost economics. Eg. Digital photography Eg. Digital photography and printing.and printing. Reasons for emerging – Reasons for emerging –– High level of technological uncertainty.High level of technological uncertainty.– High initial costs, followed by steep cost High initial costs, followed by steep cost

reduction. reduction. – First-time buyers.First-time buyers. Eg. i-Phones.Eg. i-Phones.– Excessive turbulence in the environment.Excessive turbulence in the environment.– Unknown customer and market profile.Unknown customer and market profile.– Low penetration levels.Low penetration levels.

122122

GENERIC STRATEGYGENERIC STRATEGY Rapid industry changes - strategic uncertainty. Rapid industry changes - strategic uncertainty.

(Eg. Pricing in the telecom industry).(Eg. Pricing in the telecom industry). Shaping industry structure.Shaping industry structure. Be a market leader, not market follower.Be a market leader, not market follower. Strictly differentiation, not standardisation.Strictly differentiation, not standardisation. Flexible supplier and distribution channels.Flexible supplier and distribution channels. Shifting mobility barriers.Shifting mobility barriers.

123123

FRAGMENTED INDUSTRYFRAGMENTED INDUSTRY

Fragmented Industry –Fragmented Industry – An industry where no firm An industry where no firm has a significant market share. Reasons for has a significant market share. Reasons for fragmentation –fragmentation –– Low entry barriers.Low entry barriers. Eg. Detergents.Eg. Detergents.– Absence of economies of scale.Absence of economies of scale. Eg. Mineral Eg. Mineral

Water.Water.– High level of creative content.High level of creative content. Eg. Advertising & Eg. Advertising &

Interior Designing.Interior Designing.– Local regulations.Local regulations. Eg. MRTP. Eg. MRTP.– Lack of bargaining power.Lack of bargaining power. Eg. Televisions.Eg. Televisions.– Diverse customer needs.Diverse customer needs. Eg. Blue Star.Eg. Blue Star.– High transportation costs.High transportation costs. Eg. Cement, Fertiliser. Eg. Cement, Fertiliser.

124124

GENERIC STRATEGYGENERIC STRATEGY

Conduct industry wide analysis.Conduct industry wide analysis. Identify causes of fragmentation.Identify causes of fragmentation. Look for ways to overcome fragmentation.Look for ways to overcome fragmentation. Assess consequences of overcoming Assess consequences of overcoming

fragmentation.fragmentation. Locate a defendable position to take Locate a defendable position to take

advantage of industry consolidation.advantage of industry consolidation. Primarily concentrate on differentiation, also Primarily concentrate on differentiation, also

focus on cost advantages.focus on cost advantages.

125125

MATURE INDUSTRY MATURE INDUSTRY

Mature Industry –Mature Industry – An industry characterised by An industry characterised by imperfect competition leading to saturation in imperfect competition leading to saturation in growth rates. growth rates. Eg. FMCG.Eg. FMCG. Reasons for maturing Reasons for maturing ––– Cartel among existing players.Cartel among existing players.– Creating entry barriers.Creating entry barriers.– Lack of innovation.Lack of innovation.– Exhaustive networks.Exhaustive networks.– Increased exposure in working capital.Increased exposure in working capital.– Experience curve effects.Experience curve effects.– International competition.International competition. Eg. Dumping.Eg. Dumping.

126126


Sophisticated cost analysis and correct pricing.Sophisticated cost analysis and correct pricing. Process innovation and efficient designing.Process innovation and efficient designing. Rationalising the product mix.Rationalising the product mix. Increasing scope of existing customers.Increasing scope of existing customers. Buy distressed companies.Buy distressed companies. Move beyond geographical boundaries.Move beyond geographical boundaries. Cost and service main basis of competition.Cost and service main basis of competition.

127127

DECLINING STRATEGYDECLINING STRATEGY

Declining Industry –Declining Industry – An industry which has An industry which has outlived its utility due to the entry of outlived its utility due to the entry of substitutes which radically improves the cost-substitutes which radically improves the cost-benefit relationship, with no sign of recovery. benefit relationship, with no sign of recovery. Eg. Typewriters.Eg. Typewriters. Reasons for decline – Reasons for decline –– Slow to react to environmental changes.Slow to react to environmental changes.– Adverse to investment in R&D.Adverse to investment in R&D.– High exit barriers.High exit barriers.– Corporate espionage.Corporate espionage.– Costly price wars.Costly price wars.– Not inducive for fresh investment.Not inducive for fresh investment.

128128


Leadership through takeovers and mergers. Leadership through takeovers and mergers. Identifying a niche sub-segment.Identifying a niche sub-segment. Harvesting –Harvesting –

– Stop to fresh CAPEX.Stop to fresh CAPEX.– Curtailing working capital exposure.Curtailing working capital exposure.– Minimising adhoc expenditures.Minimising adhoc expenditures.– Maintain a skeleton structure.Maintain a skeleton structure.– Reducing product diversity.Reducing product diversity.– Curtailing distribution channels.Curtailing distribution channels.

Early divestment – Sell early before it becomes Early divestment – Sell early before it becomes dead-wood.dead-wood.

129129


130130


Strategy drives competitive advantage; Strategy drives competitive advantage; competitive advantage is the back-bone of any competitive advantage is the back-bone of any strategy.strategy.

For a competitive advantage to sustain over time, For a competitive advantage to sustain over time, it should be of a higher order in relation to it should be of a higher order in relation to competition (i.e. inimitable, sustainable).competition (i.e. inimitable, sustainable).

A durable and higher order competitive A durable and higher order competitive advantage in turn rests on some fundamental and advantage in turn rests on some fundamental and enduring strengths, which is unique to the firm.enduring strengths, which is unique to the firm.

Such distinct sources of competitive advantage Such distinct sources of competitive advantage are referred to as core competencies.are referred to as core competencies. (Eg. (Eg. miniaturisation abilities of Sony, engine designing miniaturisation abilities of Sony, engine designing abilities of Honda).abilities of Honda).

131131

HOW TO DEVELOP COMPETITIVE HOW TO DEVELOP COMPETITIVE ADVANTAGE?ADVANTAGE?

Building competitive advantage is the task of Building competitive advantage is the task of the top management – the top management – Identify KSF’s.Identify KSF’s.

Internal appraisal and competition analysis Internal appraisal and competition analysis helps identify competitive advantage.helps identify competitive advantage.

Benchmarking – Benchmarking – Internal, Functional, Internal, Functional, Competitive, Generic.Competitive, Generic.

Value chain will be great of use in identifying Value chain will be great of use in identifying and building competitive advantage.and building competitive advantage.

Building competitive advantage is a conscious Building competitive advantage is a conscious long term process.long term process.

132132

UNDERSTANDING VALUE CHAINUNDERSTANDING VALUE CHAIN A value chain segregates a firm into A value chain segregates a firm into

strategically relevant activities to understand strategically relevant activities to understand its cost behaviour.its cost behaviour.

Competitive advantage arises by performing Competitive advantage arises by performing these activities efficiently and differently.these activities efficiently and differently.

The sustainability of the value chain depends The sustainability of the value chain depends on the degree of fit between the activities. on the degree of fit between the activities.

Value chain significantly influences the Value chain significantly influences the competitive scope. How it can be leveraged?competitive scope. How it can be leveraged?– Segment ScopeSegment Scope– Industry ScopeIndustry Scope– Vertical ScopeVertical Scope– Geographical ScopeGeographical Scope

133133

VALUE-CHAIN ANALYSISVALUE-CHAIN ANALYSISS

up

por t

Pri

mary

Human Resource Management

Infrastructure

Technology Development

Procurement

In L

ogis

tic s

Opera

tions

Out

Logis

tics

Mk t

g &

Sale

s

Serv

ice

Com

petit

ive

Advantage

134134

STRATEGIC FIT – THE PORTER WAYSTRATEGIC FIT – THE PORTER WAY

Fit is important because discrete activities result Fit is important because discrete activities result in negative synergy.in negative synergy.– First order fit refers to simple consistency First order fit refers to simple consistency

between each activity and the overall between each activity and the overall strategy.strategy.

– Second order fit occurs when activities are Second order fit occurs when activities are reinforcing.reinforcing.

– Third order fit refers to optimisation of effort.Third order fit refers to optimisation of effort. Competitive advantage arises from a fit across Competitive advantage arises from a fit across

the entire system of activities.the entire system of activities.

135135

CORE COMPETENCECORE COMPETENCE

A core competence represents a fundamental, A core competence represents a fundamental, unique and inimitable strength that –unique and inimitable strength that –– Cannot be replicated / substituted even by its Cannot be replicated / substituted even by its

closest competitors.closest competitors.– Contributes significantly to customer benefits.Contributes significantly to customer benefits.– Can be leveraged across a wide range of Can be leveraged across a wide range of

businesses.businesses.– Can be sustained even in the long run.Can be sustained even in the long run.

A core competence generally has its roots in A core competence generally has its roots in technology. technology.

Core competence implies stretching and Core competence implies stretching and leveraging of resources and not outspending in leveraging of resources and not outspending in R&D.R&D.

Also Refer Slide: 266-268

136136

COMPETITIVE ADVANTAGE - CORE COMPETITIVE ADVANTAGE - CORE COMPETENCECOMPETENCE

A competitive advantage does not necessarily A competitive advantage does not necessarily imply a core competence; a core competence imply a core competence; a core competence always implies a competitive advantage.always implies a competitive advantage.

A competitive advantage may lead to superior A competitive advantage may lead to superior performance, a core competence usually does.performance, a core competence usually does.

A competitive advantage manifests from a A competitive advantage manifests from a function; a core competence has its roots in function; a core competence has its roots in products or businesses.products or businesses.

A competitive advantage is sustainable in the A competitive advantage is sustainable in the short-medium term; a core competence is short-medium term; a core competence is sustainable even the long-term.sustainable even the long-term.

137137

GAME THEORYGAME THEORY

The game theory was developed in The game theory was developed in 19441944 by by Oscar Oscar Morgenstern.Morgenstern. Subsequent work on game theory by Subsequent work on game theory by John NashJohn Nash led to him to a Nobel prize in led to him to a Nobel prize in 19941994..

A game is a contest involving two or more players, A game is a contest involving two or more players, each of whom wants to win. In a game (each of whom wants to win. In a game (similar to asimilar to a businessbusiness) one players win is always another's loss. ) one players win is always another's loss. This is known as a This is known as a zero sumzero sum..

Here the magnitude of gain offsets the magnitude Here the magnitude of gain offsets the magnitude of loss equally.of loss equally.

However, the stringent assumptions of game theory However, the stringent assumptions of game theory and difficulty in ascertaining of pay-offs makes and difficulty in ascertaining of pay-offs makes gamegame theorytheory application difficult in business. application difficult in business.

138138

BIASED AND UNBIASED GAMEBIASED AND UNBIASED GAME

A game is said to be biased when one of the A game is said to be biased when one of the players have a disproportionate chance of players have a disproportionate chance of winning.winning.

Use Radio +2

Firm Y’s Strategy

Firm

X’s

Str

ate

gy

Use Radio

Use Newspaper

Use Newspaper

Firm X’s Pay-Off Matrix

+6

+7

-4

139139

PURE STRATEGY GAMEPURE STRATEGY GAME

In a pure strategy game, the strategy each In a pure strategy game, the strategy each player follows will always be the same player follows will always be the same regardless of the other players strategy. A regardless of the other players strategy. A saddle pointsaddle point is a situation where both the is a situation where both the players are facing pure strategies.players are facing pure strategies.

Use Radio Use Newspaper

Firm Y’s Strategy

Use Radio

Use Newspaper

Firm

X’s

Str

ate

gy

+3 +5

+1 -2

Firm X’s Pay-Off Matrix

Saddle Point

140140

BLUE OCEAN STRATEGYBLUE OCEAN STRATEGY

141141

TWO WORLDS - MARKETSPACE

142142

WHAT IS RED OCEAN?WHAT IS RED OCEAN?

Companies have long engaged in Companies have long engaged in head-to-head-to-head competitionhead competition in search of sustained, in search of sustained, profitable growth. They have fought for profitable growth. They have fought for profits, battled over market-share, and profits, battled over market-share, and struggled for differentiation. struggled for differentiation.

Yet in today’s overcrowded industries, Yet in today’s overcrowded industries, competing head-on results in nothing but a competing head-on results in nothing but a bloody bloody red oceanred ocean of rivals fighting over a of rivals fighting over a shrinking profit pool. shrinking profit pool.

143143

WHAT IS BLUE OCEAN?WHAT IS BLUE OCEAN?

Tomorrow’s leading companies will succeed not Tomorrow’s leading companies will succeed not by battling competitors, but by creatingby battling competitors, but by creating blue blue oceansoceans of uncontested market space ripe for of uncontested market space ripe for growth . Such strategic moves - termedgrowth . Such strategic moves - termed value value innovation - create powerful leaps in value for innovation - create powerful leaps in value for both the firm and its buyers, rendering rivals both the firm and its buyers, rendering rivals obsolete and unleashing new demand.obsolete and unleashing new demand.

Blue Ocean Strategy Blue Ocean Strategy provides a systematic provides a systematic approach to making the competition irrelevant, approach to making the competition irrelevant, by creating uncontested marketplace…………by creating uncontested marketplace…………

144144

RED OCEAN Vs BLUE OCEANRED OCEAN Vs BLUE OCEAN

Compete in existing markets

Beat the competition

Exploit existing demand

Make the value cost tradeoff

Supply is the defining variable

Compete in uncontested markets

Make the competition irrelevant

Create and capture demand

Break the value cost tradeoff

Demand is the defining variable

145145

RECONSTRUCT MARKET BOUNDARIES

IndustryIndustry WithinWithin

CompetitivenesCompetitivenesss

Short - MediumShort - Medium

Buyer GroupBuyer Group ServingServing

ScopeScope ForecastForecast

OrientationOrientation Improving ValueImproving Value

Time/TrendsTime/Trends ReactiveReactive

Beyond Beyond

LongLong

Redefining Redefining

DreamDream

Shifting ValueShifting Value

ProactiveProactive

Issu

es

Structures

146146

BLUE OCEAN STRATEGY - BLUE OCEAN STRATEGY - IMPERATIVESIMPERATIVES

Globalisation.Globalisation. Supply exceeding demand.Supply exceeding demand. Accelerated product life-cycles and Accelerated product life-cycles and

obsolescence.obsolescence. Commodification of products.Commodification of products. Learning curves getting saturated.Learning curves getting saturated. Branding becoming more and more difficult.Branding becoming more and more difficult. Increasing price-wars.Increasing price-wars. Shrinking profit margins.Shrinking profit margins. Efficiency and effectiveness reaching a plateauEfficiency and effectiveness reaching a plateau

147147

BLUE OCEAN STRATEGYBLUE OCEAN STRATEGY

Examining a wide range of strategic moves Examining a wide range of strategic moves across a host of industries, across a host of industries, Blue Ocean Blue Ocean StrategyStrategy highlights the six principles that highlights the six principles that every company can use to successfully every company can use to successfully formulate and execute blue ocean strategies. formulate and execute blue ocean strategies.

The six principles show how to The six principles show how to reconstruct reconstruct market boundaries - focus on the big picture - market boundaries - focus on the big picture - reach beyond existing demand - get the reach beyond existing demand - get the strategic sequence right - overcome strategic sequence right - overcome organizational hurdles - and build execution organizational hurdles - and build execution into strategy. into strategy.

148148

THE CORE PRINCIPLES

Reconstruct market boundaries… overcome beliefs.

Reach beyondexisting demand… go for uncontested space.

Get the strategic sequence right… value (innovation) first.

VI

COST

VALUE

149149

VALUE INNOVATION – GREENER VALUE INNOVATION – GREENER PASTURESPASTURES

A new value curve

Reduce

Eliminate Create

Raise

Which factors to be reduced

below the industrystandard

Which of the industry factors that the industry

takes for grantedshould be eliminated

Which of the factors should be raised above the industry’s standard

Which factors should be created that theindustry has not

offered

150150

REACH BEYOND EXISTING DEMAND

Core Customer Non Costumer

Soon-to-be-NC Refusing Customer

151151

RISK IN BLUE OCEANRISK IN BLUE OCEAN

Search Risk

Planning Risk

Scale Risk

Business Model Risk

Organizational Risk

Management Risk

Formulation Risks

Execution Risks

Reconstruct market boundaries

Focus on the big picture

Reach beyond existing demand

Get the strategy sequence right

Formulation Principles

Execution Principles

Overcome key hurdles

Motivation

152152

BLUE OCEAN STRATEGY SEQUENCEBLUE OCEAN STRATEGY SEQUENCE

Buyer Utility

Is there exceptional buyer utility in your business idea?

Price

Is your price easily accessible to the mass of buyers?

Cost

Can you attain your cost target to profit at your strategic price?

Adoption

What are the adoption hurdles in actualizing your business idea?

Are you addressing them up front?

A Commercially Viable Blue Ocean Strategy

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STRATEGY STRATEGY

IMPLEMENTATIONIMPLEMENTATION

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STRATEGY IMPLEMENTATIONSTRATEGY IMPLEMENTATION It relates to transforming strategy formulations It relates to transforming strategy formulations

into practices. Performance realisation of a into practices. Performance realisation of a strategy depends on the effort behind it to move it strategy depends on the effort behind it to move it forward. Successful implementation depends on forward. Successful implementation depends on the appropriateness of the strategy. It requires –the appropriateness of the strategy. It requires –– Strategy activation.Strategy activation.– Full commitment of the top management.Full commitment of the top management.– Optimum resource allocation; including its Optimum resource allocation; including its

stretching and leveraging.stretching and leveraging.– Proactive leadership and motivating Proactive leadership and motivating

employees.employees.– Compatible organisation structure.Compatible organisation structure.– Strategic evaluation and control.Strategic evaluation and control.

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STRATEGY IMPLEMENTATION - STRATEGY IMPLEMENTATION - ROUTESROUTES

Organic Growth

Mergers & Acquisition

Take Overs

Joint Venture

Strategic Alliance

Strategic Fit - High

Strategic Fit - Low

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ORGANIC GROWTHORGANIC GROWTH

Here a corporate builds up its facilities right from Here a corporate builds up its facilities right from the scratch and continues without any external the scratch and continues without any external participation. The entire infra-structural facilities participation. The entire infra-structural facilities are set up afresh having its own gestation, i.e. are set up afresh having its own gestation, i.e. green-field projects. green-field projects. (Eg. Reliance Industries).(Eg. Reliance Industries).– It has complete control over inputs, It has complete control over inputs,

technologies, and markets.technologies, and markets.– Govt. concessions are available for green-field Govt. concessions are available for green-field

projects. (Eg. SEZ’s, Tax holidays).projects. (Eg. SEZ’s, Tax holidays).– Long gestation leads to delayed market entry.Long gestation leads to delayed market entry.– Risk of cost and time overruns.Risk of cost and time overruns.– Develop competencies.Develop competencies.

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STRATEGIC ALLIANCESTRATEGIC ALLIANCE

It involves a It involves a pro-active pro-active collaboration between collaboration between two companies on a particular domain or two companies on a particular domain or function. It touches upon a limited aspects of a function. It touches upon a limited aspects of a particular business. Alliances are usually in the particular business. Alliances are usually in the areas of technologies or marketing . (areas of technologies or marketing . (Eg. Eg. Reliance & DuPont; Tata Motors & FiatReliance & DuPont; Tata Motors & Fiat).).– There is no funding or equity participation.There is no funding or equity participation.– Both the companies continue to operate Both the companies continue to operate

independently.independently.– It is short-term; lacks committment.It is short-term; lacks committment.– It intends to do away with competition by It intends to do away with competition by

joining a common platform (i.e. capabilities).joining a common platform (i.e. capabilities).

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JOINT VENTURESJOINT VENTURES

A joint venture involves a equity participation A joint venture involves a equity participation between two companies usually of similar intent in between two companies usually of similar intent in a particular business. It is a win-win situation for a particular business. It is a win-win situation for both the companies. both the companies. (Eg. DSP Financial Vs Merrill (Eg. DSP Financial Vs Merrill Lynch).Lynch).– For a joint venture to be successful the For a joint venture to be successful the

dominant logic of both the companies should dominant logic of both the companies should match.match.

– Selecting the right partner is critical for success.Selecting the right partner is critical for success.– A comprehensive MOU is essential.A comprehensive MOU is essential.– Degree and extent of management control must Degree and extent of management control must

be clearly laid down.be clearly laid down.– Significant linkages in value-chain.Significant linkages in value-chain.

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MERGERS & ACQUISITIONMERGERS & ACQUISITION

It refers to the fusion of two or more companies It refers to the fusion of two or more companies into a single entity. Size and synergy are the two into a single entity. Size and synergy are the two main considerations in mergers; it strengthens main considerations in mergers; it strengthens overall competitiveness. overall competitiveness. (Eg. Brooke Bond Vs (Eg. Brooke Bond Vs Lipton - HUL)Lipton - HUL)– Economies in scale and scope through larger Economies in scale and scope through larger

capacities.capacities.– Integrated distribution channel leads to better Integrated distribution channel leads to better

market penetrationmarket penetration ((i.e. synergyi.e. synergy).).– Integration of assets and other financial Integration of assets and other financial

resources.resources.– Revival of a sick-unit through better Revival of a sick-unit through better

management practices.management practices.– Humane side should be handled properly (Humane side should be handled properly (i.e. i.e.

structurestructure).).

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TAKE OVERSTAKE OVERS It refers to the acquisition of significant It refers to the acquisition of significant

management control by buying out a majority management control by buying out a majority stake in the equity of the company stake in the equity of the company (Eg. TISCO Vs (Eg. TISCO Vs Corus). Corus). – A company seeking to acquire control has to A company seeking to acquire control has to

inform SEBI and make a public offer of not less inform SEBI and make a public offer of not less than 20% of the balance equitythan 20% of the balance equity (Also Refer Slide: (Also Refer Slide: 231)231)..

– Hostile takeover.Hostile takeover.– Instant access to capacities and markets.Instant access to capacities and markets.– Integration of organisation cultures becomes a Integration of organisation cultures becomes a

difficult exercise.difficult exercise.– Geographical spread.Geographical spread.– Consolidation in a fragmented industry.Consolidation in a fragmented industry.

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RESOURCE ALLOCATIONRESOURCE ALLOCATION Resources include physical resources Resources include physical resources (Eg. land, (Eg. land,

labour, machines),labour, machines), intangible resources intangible resources (Eg. (Eg. brands, patents),brands, patents), and distinctive capabilities and and distinctive capabilities and competencies. The various methods of resource competencies. The various methods of resource allocation includes –allocation includes –– Historical Budget –Historical Budget – The budgets framed by SBU The budgets framed by SBU

heads for a particular business keeping in mind heads for a particular business keeping in mind past trends.past trends.

– Zero Based Budget –Zero Based Budget – In this case the budget of In this case the budget of a SBU has to worked out from the scratch.a SBU has to worked out from the scratch.

– Performance Budget –Performance Budget – Here the act of Here the act of allocation is a function of the performance of allocation is a function of the performance of the SBU.the SBU.

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STRATEGY & STRUCTURESTRATEGY & STRUCTURE An appropriate organisation structure is An appropriate organisation structure is

essential to implement strategies and achieve essential to implement strategies and achieve stated goals. It refers to the ways authority and stated goals. It refers to the ways authority and responsibility is allocated to individuals and responsibility is allocated to individuals and groups. The following considerations are to be groups. The following considerations are to be kept in mind –kept in mind –– Size –Size – An organisation grows steeper its size An organisation grows steeper its size

increases.increases.– Complexity –Complexity – An organisation grows flatter as An organisation grows flatter as

its business process complexity increases.its business process complexity increases.– People –People – An organisation grows flatter as An organisation grows flatter as

people become more matured.people become more matured.– Technology – Technology – An organisation grows flatter as An organisation grows flatter as

it becomes more technology inducive.it becomes more technology inducive.

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TYPES OF STRUCTURESTYPES OF STRUCTURES

Functional Structure –Functional Structure – Activities grouped Activities grouped together by a common function. together by a common function.

Divisional Structure –Divisional Structure – Units grouped together Units grouped together in terms of products and divisions.in terms of products and divisions.

Strategic Business Units –Strategic Business Units – Businesses Businesses segregated in terms of distinct strategies.segregated in terms of distinct strategies.

Project / Matrix Structure –Project / Matrix Structure – A team formed for A team formed for the completion of a particular project; with the completion of a particular project; with team members having dual line of control.team members having dual line of control.

Team Structure –Team Structure – An informal group formed for An informal group formed for a crisis, based on skills and competencies.a crisis, based on skills and competencies.

Virtual Structure –Virtual Structure – A boundaryless A boundaryless organisation.organisation.

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MOTIVATION & LEADERSHIPMOTIVATION & LEADERSHIP To bring about change and to implement To bring about change and to implement

strategies successfully, companies depend on strategies successfully, companies depend on transformational leaders.transformational leaders.– Design a well crafted and designed strategic Design a well crafted and designed strategic

intent of the organisation.intent of the organisation.– Pragmatism is the ability to make things Pragmatism is the ability to make things

happen and achieve positive results.happen and achieve positive results.– He should be an agent of change.He should be an agent of change.– Install a system of shared beliefs and values.Install a system of shared beliefs and values.– Shift from compliance to commitment.Shift from compliance to commitment.– Bring about transparency.Bring about transparency.

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THE STRATEGIC FIT – 7STHE STRATEGIC FIT – 7S Shared Values –Shared Values – It represents the dominant logic It represents the dominant logic

of the top management.of the top management. Strategy –Strategy – A trade-off aimed at gaining A trade-off aimed at gaining

competitive advantage.competitive advantage. Structure –Structure – An organisation chart that represents An organisation chart that represents

how tasks are divided and integrated.how tasks are divided and integrated. Style –Style – The way in which the top management The way in which the top management

influences the functioning of an organisation.influences the functioning of an organisation. Systems –Systems – It represents the flow of activities. It represents the flow of activities. Staff –Staff – The basic values and beliefs of employees. The basic values and beliefs of employees. Skills –Skills – An organisations capabilities and An organisations capabilities and

competencies.competencies.

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1st Order Fit

2nd Order Fit

3rd Order Fit

MC KINSEY 7-S FRAMEWORK: TOM MC KINSEY 7-S FRAMEWORK: TOM PETERSPETERS

Shared Values

Skills

Structure

Strategy

Systems

Staff

Style

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FUNCTIONAL STRATEGIESFUNCTIONAL STRATEGIES A functional strategy aims at performing a A functional strategy aims at performing a

function differently from its closest function differently from its closest competitors. Linkages occur in any one or more competitors. Linkages occur in any one or more functional area. However, sustainability of functional area. However, sustainability of functional strategies are very low. It involves -functional strategies are very low. It involves -– The strategic choices are smoothly The strategic choices are smoothly

implemented across all divisions.implemented across all divisions.– The various divisions are bound by a set of The various divisions are bound by a set of

integrated policies.integrated policies.– Better coordination of work flow at various Better coordination of work flow at various

levels of hierarchy.levels of hierarchy.– Reduces friction, induces synergy.Reduces friction, induces synergy.

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MARKETING STRATEGIESMARKETING STRATEGIES Segmentation –Segmentation – It involves dividing the market It involves dividing the market

into distinct groups of buyers on the the basis of into distinct groups of buyers on the the basis of income, location, benefits, age, psychographic. It income, location, benefits, age, psychographic. It can be differentiated, undifferentiated or can be differentiated, undifferentiated or concentrated (concentrated (Eg. Ujala, Colorplus, SumeetEg. Ujala, Colorplus, Sumeet).).

Positioning –Positioning – It is an act of designing the It is an act of designing the company’s offerings and image to the target company’s offerings and image to the target market, to portray the company’s standing vis-à-market, to portray the company’s standing vis-à-vis its competitors, USP.vis its competitors, USP.

Pricing –Pricing – It involves determining the price to be It involves determining the price to be paid by the consumer in relation to costs, paid by the consumer in relation to costs, demand, taxes, and competition.demand, taxes, and competition.

Distribution –Distribution – It concerns specific objectives in It concerns specific objectives in terms of market coverage. terms of market coverage.

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FINANCE STRATEGIESFINANCE STRATEGIES Procurement of Funds –Procurement of Funds – It ensures adequate and It ensures adequate and

regular supply of capital at a competitive cost of regular supply of capital at a competitive cost of capital. (capital. (Eg. The Tatas enjoy one of the lowest Eg. The Tatas enjoy one of the lowest cost of debt by virtue of the immense trust their cost of debt by virtue of the immense trust their name generatesname generates). It involves fixed as well as ). It involves fixed as well as working capital through a mix of debt and working capital through a mix of debt and equity.equity.

Utilisation of Funds –Utilisation of Funds – It involves applying various It involves applying various discounting criteria to appraise, rank and select discounting criteria to appraise, rank and select projects in order of their merit. It also includes projects in order of their merit. It also includes decisions like make, buy or lease. (decisions like make, buy or lease. (Eg. When Eg. When Reliance selects a project, they saturate it with Reliance selects a project, they saturate it with resources as much it can absorb. For them time resources as much it can absorb. For them time lost is more important than costslost is more important than costs).).

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HR STRATEGIESHR STRATEGIES Recruitment –Recruitment – It is a process of creating an It is a process of creating an

challenging environment to link the best challenging environment to link the best people with the jobs to be filled (people with the jobs to be filled (Eg. InfosysEg. Infosys).).

Selection –Selection – It is the process of picking the right It is the process of picking the right people to fill up jobs in an organisation. people to fill up jobs in an organisation. Sometimes it is also a process of elimination. Sometimes it is also a process of elimination. ((Eg. Aptitude & Psychometric TestsEg. Aptitude & Psychometric Tests).).

Placement –Placement – The broad objective is to put the The broad objective is to put the right person in the right job. For mid-level right person in the right job. For mid-level placements experiences relating to previous placements experiences relating to previous organisation cultures is an important criteria. organisation cultures is an important criteria. ((Eg. Learning & unlearning of skillsEg. Learning & unlearning of skills).).

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STRATEGIC CHANGESTRATEGIC CHANGE

Market Imperfection

Industry & GroupCharacteristics

Dominant Logic Strategy

A major shift in the company’s course of action.Prior to 1990

Post 1990

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MANAGING STRATEGIC CHANGE - MANAGING STRATEGIC CHANGE - INERTIAINERTIA

When a corporate has been operating in a When a corporate has been operating in a certain fashion for a long time, there is a certain fashion for a long time, there is a tendency to continue along the same lines. tendency to continue along the same lines. Inertia is a basic characteristic of an Inertia is a basic characteristic of an organisation that endures organisation that endures status quo.status quo. It is It is retards the process of strategic change. retards the process of strategic change. Changes in top management and unlearning Changes in top management and unlearning helps overcome inertia. Sources of inertia –helps overcome inertia. Sources of inertia –– Complacency with past successes.Complacency with past successes.– Paradigms & conventional beliefs.Paradigms & conventional beliefs.– Pattern recognition processes.Pattern recognition processes.– Reliance based on limited heuristics.Reliance based on limited heuristics.

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STRATEGY EVALUATIONSTRATEGY EVALUATION Strategy evaluation centers around assessment Strategy evaluation centers around assessment

of strategic fit.of strategic fit. Since the internal and external Since the internal and external environment is in a state of continuous flux, environment is in a state of continuous flux, strategies need to be evaluated on a continuous strategies need to be evaluated on a continuous basis to prevent deviations of fit. basis to prevent deviations of fit.

Deviation of fit is detrimental to performance.Deviation of fit is detrimental to performance. To prevent deviation of fit, corporates should To prevent deviation of fit, corporates should

move beyond move beyond traditional measures of traditional measures of performanceperformance (i.e. Returns, EPS, Margins) to (i.e. Returns, EPS, Margins) to strategic performance.strategic performance.

Strategic performance focuses on Strategic performance focuses on market share, market share, implementation delays, response time.implementation delays, response time.

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STRATEGY CONTROLSTRATEGY CONTROL It is concerned with trafficking a strategy as it is It is concerned with trafficking a strategy as it is

being implemented detecting changes in the being implemented detecting changes in the external and internal environment and taking external and internal environment and taking corrective action wherever necessary. corrective action wherever necessary. (Eg. Reliance (Eg. Reliance Infocomm’s pricing strategy).Infocomm’s pricing strategy). It attempts to answer It attempts to answer questions such as –questions such as –– Are the organisations capabilities still holding Are the organisations capabilities still holding

good?good?– Is the strategic intent appropriate to the Is the strategic intent appropriate to the

changing context?changing context?– Has the company acquired any new competency?Has the company acquired any new competency?– Has the company been able to overcome the Has the company been able to overcome the

environmental threats.environmental threats.– Are competitive advantages becoming Are competitive advantages becoming

competitive disadvantages?competitive disadvantages?

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IMPLEMENTING STRATEGY CONTROLIMPLEMENTING STRATEGY CONTROL

It involves It involves steeringsteering towards the company’s towards the company’s original course of action.original course of action.– Premise Control –Premise Control – Checking the validity of the Checking the validity of the

assumptions on which a strategy is based. assumptions on which a strategy is based. However, checking every premise is costly as However, checking every premise is costly as well as difficult.well as difficult.

– Implementation Control –Implementation Control – It aims at assessing It aims at assessing whether key activities are proceeding as per whether key activities are proceeding as per schedule. It involves assessing – strategic schedule. It involves assessing – strategic thrusts and milestones.thrusts and milestones.

– Special Alert Control –Special Alert Control – It intends to uncover It intends to uncover unanticipated information having critical unanticipated information having critical impact on strategies. It is open-ended as well impact on strategies. It is open-ended as well as unfocussed.as unfocussed.

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MANAGEMENT TOOLS MANAGEMENT TOOLS IN STRATEGYIN STRATEGY

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WHY MANAGEMENT TOOLS?WHY MANAGEMENT TOOLS?

Change is becoming pertinent in the external Change is becoming pertinent in the external environment. Radical change is superseding environment. Radical change is superseding incremental change. The past is ceasing to be incremental change. The past is ceasing to be an indication of the future. an indication of the future. Change provides Change provides enormous opportunities; it is also a source of enormous opportunities; it is also a source of potential threat.potential threat. Companies therefore need to Companies therefore need to adapt to the environment to stay ahead in adapt to the environment to stay ahead in competition. Some tools to ensure that –competition. Some tools to ensure that –– Benchmarking – Adopt certain best practices.Benchmarking – Adopt certain best practices.– Reengineering – Redesigning work Reengineering – Redesigning work

processes.processes.– TQM – Doing the right thing the first time.TQM – Doing the right thing the first time.– Balanced Scorecard – Tracking strategy.Balanced Scorecard – Tracking strategy.

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BENCHMARKINGBENCHMARKING

A A best practicebest practice is defined as an activity is defined as an activity performed by a company in a particular domain performed by a company in a particular domain or function which distinguishes it from others or function which distinguishes it from others

and making them world-class.and making them world-class. These exemplary practices involves the These exemplary practices involves the

stakeholders of the company and helps achieve stakeholders of the company and helps achieve its strategic intent.its strategic intent.

Best practices centers around looking at a Best practices centers around looking at a different way to satisfy various stakeholders.different way to satisfy various stakeholders.

Benchmarking involves the Benchmarking involves the identificationidentification, , understandingunderstanding and and adaptingadapting of certain best of certain best practices and implementing them to enhance practices and implementing them to enhance performance. performance.

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SOME BEST PRACTICESSOME BEST PRACTICES

Dell: Customised configuration of computers.Dell: Customised configuration of computers. Caterpillar: 48 hours delivery.Caterpillar: 48 hours delivery. Axis Bank: Priority banking services.Axis Bank: Priority banking services. Maruti: Certified “true value” cars.Maruti: Certified “true value” cars. Microsoft: ESOP to employees.Microsoft: ESOP to employees. Infosys: Video conferencing potential employees.Infosys: Video conferencing potential employees. TCS: Referencing potential employees.TCS: Referencing potential employees. ITC: Shareholders factory visit.ITC: Shareholders factory visit. AmEx: Outsourcing data mining.AmEx: Outsourcing data mining. MARG: Set-top box to understand viewing MARG: Set-top box to understand viewing

patterns.patterns. Honda: CEO’s visit to dealers.Honda: CEO’s visit to dealers.

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WHAT TO BENCHMARK?WHAT TO BENCHMARK?

Functional –Functional – Used by companies to improve a Used by companies to improve a particular management activity.particular management activity. Eg. Motorola Eg. Motorola learnt delivery scheduling from Domino’s.learnt delivery scheduling from Domino’s.

Process –Process – Improving specific key processes and Improving specific key processes and operations from experiences in similar operations from experiences in similar businesses.businesses. Eg. Ford adopting assembly lay-out Eg. Ford adopting assembly lay-out plan of Toyota.plan of Toyota.

Competitive –Competitive – It involvesIt involves assessing the sources of assessing the sources of competitive advantage and imitating them. competitive advantage and imitating them. Eg. Eg. Samsung leveraging miniaturisation skills of Sony.Samsung leveraging miniaturisation skills of Sony.

Strategic –Strategic – It involves assessing business models It involves assessing business models and replicating them. and replicating them. Eg. Reliance replicating Eg. Reliance replicating AT&T business model.AT&T business model.

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HOW TO BENCHMARK? APPROACHESHOW TO BENCHMARK? APPROACHES

Phase 1: PlanningPhase 1: Planning– What to benchmark?What to benchmark?– Whom to benchmark?Whom to benchmark?– Identify key performance indicators.Identify key performance indicators.– Data source.Data source.

Phase 2: AnalysisPhase 2: Analysis– Assessment of performance gaps.Assessment of performance gaps.– Predict future performance levels.Predict future performance levels.

Phase 3: IntegrationPhase 3: Integration– Communicate findings and gain acceptance.Communicate findings and gain acceptance.– Establish functional goals and Establish functional goals and

implementation plans.implementation plans.

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HOW TO BENCHMARK?HOW TO BENCHMARK?

Phase 4: ActionPhase 4: Action– Implement and monitor progress.Implement and monitor progress.– Measure results against stakeholder wants Measure results against stakeholder wants

and needs.and needs.– Recalibrate benchmarks.Recalibrate benchmarks.

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WHOM TO BENCHMARK?WHOM TO BENCHMARK?

Selecting the benchmarking partner is critical to Selecting the benchmarking partner is critical to solving the problem. Firms should generally solving the problem. Firms should generally avoid selecting the industry leader, because it avoid selecting the industry leader, because it may not always adopt the may not always adopt the best practicesbest practices for for every process or activity. Benchmarking partners every process or activity. Benchmarking partners may also be from unrelated industries. Types –may also be from unrelated industries. Types –– Internal – It involves benchmarking against its Internal – It involves benchmarking against its

own branches, divisions, SBU’s. own branches, divisions, SBU’s. – External – It involves benchmarking against External – It involves benchmarking against

firms that succeeded on account of their best firms that succeeded on account of their best practices.practices.

– International - It involves benchmarking International - It involves benchmarking against world-class firms. against world-class firms.

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BENCHMARKING - ADVANTAGESBENCHMARKING - ADVANTAGES

Finding better ways of meeting stakeholder Finding better ways of meeting stakeholder needs.needs.

Establishing goals based on formal assessment Establishing goals based on formal assessment of external conditions.of external conditions.

Defining effective measure of indicators.Defining effective measure of indicators. Ensuring a learning organisation.Ensuring a learning organisation. Reducing competitive disadvantage.Reducing competitive disadvantage. Organisational turnaround.Organisational turnaround.

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BENCHMARKING - LIMITATIONSBENCHMARKING - LIMITATIONS

More and more companies benchmark, the more More and more companies benchmark, the more similar they end up looking. While strategy is all similar they end up looking. While strategy is all about differentiation. about differentiation.

Benchmarking is useful for bringing about Benchmarking is useful for bringing about operational efficiency; but it cannot be used as a operational efficiency; but it cannot be used as a strategic decision making tool. It can at best strategic decision making tool. It can at best complement it.complement it.

Strategy is more of creating best practices rather Strategy is more of creating best practices rather than copying them.than copying them.

Benchmarking merely reorients profits in the Benchmarking merely reorients profits in the hands of few to profits in the hands in the hands hands of few to profits in the hands in the hands of manyof many (i.e. clustering)(i.e. clustering).. It does not shifts the It does not shifts the growth trajectory of the industry as a whole.growth trajectory of the industry as a whole.

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RE-ENGINEERING RE-ENGINEERING

Redesigning leads to identification of Redesigning leads to identification of superfluous activities and eliminating them superfluous activities and eliminating them (i.e. (i.e. business mapping, Eg. single window clearance). business mapping, Eg. single window clearance).

Re-engineering attempts to radically change an Re-engineering attempts to radically change an organisational products or process by organisational products or process by challenging the basic assumptions surrounding challenging the basic assumptions surrounding it, for achieving performance improvement it, for achieving performance improvement (Eg. (Eg. DOS to Windows) DOS to Windows)

Re-engineering involves complete reconstruction Re-engineering involves complete reconstruction and overhauling of job descriptions from the and overhauling of job descriptions from the scratch (i.e. clean sheet). scratch (i.e. clean sheet).

The task demands a total change in The task demands a total change in organisational culture and mindset.organisational culture and mindset.

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REENGINEERING – KEY TENETSREENGINEERING – KEY TENETS

Ambition

Focus

Attitude

Enabler

Performance

Large scale improvement by questioning basic assumptions about how work is done

Micro Vs MacroBusiness Processes Vs Organisational Processes

Starting right from the scratch Not historical

More IT driven, than people driven

Innovative Vs TraditionalCustomer centric Vs Organisational centric

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REENGINEERING - LEVELSREENGINEERING - LEVELS

Reengineering can be successfully leveraged at Reengineering can be successfully leveraged at all levels of an organisation with varying degree all levels of an organisation with varying degree of results. It can be of the following types –of results. It can be of the following types –– Functional –Functional – It looks into the flow of It looks into the flow of

operationsoperations (i.e. structures, processes, etc)(i.e. structures, processes, etc) and supports the organisation for the and supports the organisation for the present.present.

– Business –Business – It looks into markets, customers It looks into markets, customers and suppliers and protects the organisation and suppliers and protects the organisation from the futurefrom the future (i.e. BPR)(i.e. BPR)..

– Strategic –Strategic – It looks into the process of It looks into the process of strategic planning, resource allocation and strategic planning, resource allocation and prepares the organisation for the futureprepares the organisation for the future (i.e. (i.e. Proactive Vs Reactive)Proactive Vs Reactive)..

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REVERSE ENGINEERINGREVERSE ENGINEERING

It is a process by which a product is dismantled It is a process by which a product is dismantled and analysed in order to understand how the and analysed in order to understand how the product was designed and manufactured, with product was designed and manufactured, with an intention to copy it an intention to copy it (Eg. Cheaper versions of (Eg. Cheaper versions of Intel chips and mother-boards manufactured in Intel chips and mother-boards manufactured in Taiwan).Taiwan).

It generally acts as a threat to innovation. It generally acts as a threat to innovation. However, protection againstHowever, protection against RERE can be had in can be had in the following ways –the following ways –– Early entry advantages.Early entry advantages.– High cost and time acts as a deterrent.High cost and time acts as a deterrent.– Patenting.Patenting.– Causal Ambiguity.Causal Ambiguity.

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STAGES IN REVERSE ENGINEERINGSTAGES IN REVERSE ENGINEERING

Awareness –Awareness – Recognising whether the product is Recognising whether the product is found to be worth the time, cost and effort found to be worth the time, cost and effort necessary for the purpose of reverse engineering.necessary for the purpose of reverse engineering.

Actualisation –Actualisation – Obtaining and dismantling of the Obtaining and dismantling of the product to assess how it functions.product to assess how it functions.

Implementation –Implementation – Developing of a prototype, Developing of a prototype, designing facilities, machine tools to convert ideas designing facilities, machine tools to convert ideas into a marketable product into a marketable product (i.e. nano-technology).(i.e. nano-technology).

Introduction –Introduction – Launching the product in the Launching the product in the market. Usually in such cases segmentation and market. Usually in such cases segmentation and pricing is different from the original innovator. pricing is different from the original innovator.

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WHAT IS QUALITY?WHAT IS QUALITY?

It involves the It involves the totalitytotality of a product or service to of a product or service to meet certain meet certain statedstated or or impliedimplied needs. It has the needs. It has the following dimensions following dimensions (Eg. Car) –(Eg. Car) –– Performance – Mileage of 14 kms to a litre of Performance – Mileage of 14 kms to a litre of

fuel.fuel.– Features – Anti-lock braking systems, Air bags.Features – Anti-lock braking systems, Air bags.– Reliability – Consistency in mileage.Reliability – Consistency in mileage.– Conformance – Preset standards - BIS.Conformance – Preset standards - BIS.– Durability – 1980 manufactured cars still on road.Durability – 1980 manufactured cars still on road.– Serviceability – Large no. of service stations.Serviceability – Large no. of service stations.– Aesthetics – Appeal in design.Aesthetics – Appeal in design.– Perception – Customer notions.Perception – Customer notions.

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TOTAL QUALITY MANAGEMENTTOTAL QUALITY MANAGEMENT

Objective –Objective – Management of quality ensures Management of quality ensures zero defectzero defect products, reduces products, reduces time and cost of time and cost of reworkingreworking and ensures good and ensures good market standing.market standing.

Management of quality was traditionally Management of quality was traditionally inspect it - fix itinspect it - fix it in nature, touching upon a in nature, touching upon a limited aspectlimited aspect of a production process. It had of a production process. It had little impact on improving productivity.little impact on improving productivity.

TQM is a way of creating an organisation TQM is a way of creating an organisation culture committed to the continuous culture committed to the continuous improvement of work processesimprovement of work processes – Deming– Deming..

It is deeply embedded as an aspect of It is deeply embedded as an aspect of organisational life.organisational life.

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TQM – KEY TENETSTQM – KEY TENETS

Do it right the first time –Do it right the first time – From reactively From reactively fixing products to proactively preventing it.fixing products to proactively preventing it.

Be customer centered –Be customer centered – Generate the concept Generate the concept of - internal customer.of - internal customer.

Kaizen –Kaizen – Make continuous improvement a way Make continuous improvement a way of life. Looking at quality as an endless of life. Looking at quality as an endless journey; not a final destination.journey; not a final destination.

Empowerment –Empowerment – It takes place when It takes place when employees are properly trained, provided with employees are properly trained, provided with all relevant information and best possible all relevant information and best possible tools, fully involved in decision-making and tools, fully involved in decision-making and fairly rewarded for results. fairly rewarded for results.

194194

TQM - TECHNIQUESTQM - TECHNIQUES

Outsourcing –Outsourcing – It is the process of self- It is the process of self-contracting services and operations which are contracting services and operations which are routine and mundane, enabling the firm to routine and mundane, enabling the firm to concentrate on core activities. concentrate on core activities.

Quality Circles –Quality Circles – It a small group of shop-floor It a small group of shop-floor employees who meet periodically to take employees who meet periodically to take decisions regarding operational problems and decisions regarding operational problems and crises, saving precious top management time.crises, saving precious top management time.

SQC –SQC – It is a process used to determine how It is a process used to determine how many units of a product should be inspected to many units of a product should be inspected to calculate a probability that the total no. of calculate a probability that the total no. of units meet preset standards units meet preset standards (Eg. 6-Sigma).(Eg. 6-Sigma).

195195

BALANCED SCORE CARDBALANCED SCORE CARD

Some interesting comments Some interesting comments ..................– Efficiency and effectiveness is passé, Efficiency and effectiveness is passé,

strategy implementation has never been strategy implementation has never been more important.more important.

– Less than 10% of strategies effectively Less than 10% of strategies effectively formulated are effectively executed.formulated are effectively executed.

– In the majority of failures – we estimate In the majority of failures – we estimate 70% – the real problem isn’t (bad 70% – the real problem isn’t (bad strategy) ..... it’s bad execution.strategy) ..... it’s bad execution.

Source: Fortune MagazineWhy CEO’s fail?

196196

BARRIERS TO STRATEGY EXECUTIONBARRIERS TO STRATEGY EXECUTION

Vision and strategy not actionable Vision and strategy not actionable – Utopian – Utopian ideas, difficult to translate into practice.ideas, difficult to translate into practice.

Strategy not linked with goals and objectives Strategy not linked with goals and objectives – – Lack of coordination leading to negative Lack of coordination leading to negative synergy.synergy.

Strategy not linked to resource allocation Strategy not linked to resource allocation – – Lacking commitment of top management.Lacking commitment of top management.

Performance measures are defective Performance measures are defective – What to – What to evaluate against? How to measure the evaluate against? How to measure the construct?construct?

197197

BSC - CONCEPTUALISATIONBSC - CONCEPTUALISATION

A company’s performance depends on how it A company’s performance depends on how it measures performance. Most managers tend to measures performance. Most managers tend to rely on traditional measures of performance having rely on traditional measures of performance having its origin in finance its origin in finance (Eg. ROI, OPM, EPS)(Eg. ROI, OPM, EPS) because because they are well tried and tested.they are well tried and tested.

All the above measures are subject to All the above measures are subject to lead-lag lead-lag problems problems (i.e. poor response time).(i.e. poor response time).

As a result modern managers tend to rely on As a result modern managers tend to rely on strategic measures of performance where lead-lag strategic measures of performance where lead-lag is minimum is minimum (Eg. cycle time, defect ratio, market-(Eg. cycle time, defect ratio, market-share, patents).share, patents).

BSC BSC combines the traditional with strategic combines the traditional with strategic measures of performance measures of performance (i.e. cross functional (i.e. cross functional integration).integration).

198198

BSC – KAPLAN & NORTON (1992)BSC – KAPLAN & NORTON (1992)

Firms more often have Firms more often have problemsproblems, because they , because they have have too manytoo many. At the very onset managers must . At the very onset managers must learn to distinguish between operational and learn to distinguish between operational and strategic ones. strategic ones.

A A BSC BSC helps a manager to helps a manager to tracktrack and and communicate communicate the different elements of the different elements of company’s strategy. It has four dimensions –company’s strategy. It has four dimensions –– How do customers see us?How do customers see us?– What must we excel at?What must we excel at?– Can we continue to improve and create value?Can we continue to improve and create value?– How do we look to shareholders?How do we look to shareholders?

The authors view that performance is The authors view that performance is organisationalorganisational and not people and not people centric.centric.

199199

CUSTOMER PERSPECTIVECUSTOMER PERSPECTIVE

GOALS

Products

Supply

Preference

Relationship

MEASURES

Relative market share (%)% of sales from new Vs proprietary products

Timely deliveries and serviceCustomer credit analysis (i.e. ageing schedule)

% of key customer transactionsRanking of key customer accounts

No. of visits or calls made% of bad debts

200200

BUSINESS PERSPECTIVEBUSINESS PERSPECTIVE

GOALS

Skills

Excellence

Exposure

Introduction

MEASURES

New capabilities and competenciesImplementation & gestation period

Bank and supplier credit limitsUnit Costs / Conversion Ratio / Defect Ratio

No. of times covered in media

No. of new product launches Vs competitionProduct pricing Vs competition

201201

LEARNING PERSPECTIVELEARNING PERSPECTIVE

GOALS

Technology

Manufacturing

Focus

Timing

MEASURES

No. of new patents registeredTime to develop next generation products

Average and spread in cycle time

% of products that equal 2/3 sales

No. of product innovations

202202

FINANCIAL PERSPECTIVEFINANCIAL PERSPECTIVE

GOALS

Survival

Success

Prosper

Valuation

MEASURES

Cash flows

Growth in sales and profits

Return on Investment

Market capitalisation / PE ratio

203203

BSC - IMPLEMENTATIONBSC - IMPLEMENTATION

STRATEGY

Mobilise change through effective leadershipTranslate strategy into

operational terms

Align the organisation to the strategy

Make strategy everyone’s job

Make strategy a continual process

12

3 4

5

204204

BSC - ADVANTAGESBSC - ADVANTAGES

Most often top managers face information Most often top managers face information overload. As a result, they don’t know - what overload. As a result, they don’t know - what they don’t know. they don’t know.

The The BSCBSC brings together the different elements brings together the different elements of a company’s strategy at a glance. of a company’s strategy at a glance.

It helps translating strategy into practice It helps translating strategy into practice (i.e. (i.e. sharing of vision).sharing of vision).

Shift from control to strategy Shift from control to strategy (i.e. doing right (i.e. doing right things instead of doing things right).things instead of doing things right).

Focus on Focus on causecause not not effectseffects..

205205

EFFICIENCY Vs EFFECTIVENESSEFFICIENCY Vs EFFECTIVENESS

Ineffective

Goes out ofBusinessquickly

Survives

Dies Slowly

Thrives

Ineffi

cien

tE

ffici

en

t

Effective

206206

CORPORATE CORPORATE RESTRUCTURINGRESTRUCTURING

207207

RESTRUCTURINGRESTRUCTURING

The only thing constant in today's business The only thing constant in today's business environment is change. Radical change brings environment is change. Radical change brings about about strategic variety.strategic variety. Strategic variety may be Strategic variety may be caused by changes in the as caused by changes in the as externalexternal well as well as internal internal environment.environment.

Strategic variety brings paradigm shift, from Strategic variety brings paradigm shift, from survival of the fittestsurvival of the fittest ....... to survival of the most ....... to survival of the most adaptable.adaptable.

To adapt to the changing environment, firms use To adapt to the changing environment, firms use restructuring strategies.restructuring strategies.

Restructuring involves Restructuring involves consciouslyconsciously driving driving significant significant changes in the way an organisations changes in the way an organisations thinksthinks and and looks (Eg. Tata Group).looks (Eg. Tata Group).

208208

RESTRUCTURING – BASIC TENETSRESTRUCTURING – BASIC TENETS

Customer Focus –Customer Focus – Restructuring ideally begins and Restructuring ideally begins and ends with the customer. Company’s should go ends with the customer. Company’s should go beyond just asking what he expects. Instead, they beyond just asking what he expects. Instead, they should strive to provide unimaginable value ahead should strive to provide unimaginable value ahead of their timeof their time (Eg. Walkman, Fax, ATM, etc).(Eg. Walkman, Fax, ATM, etc).

Core Business –Core Business – Company’s should introspect – Company’s should introspect – What business are we in? Business evolved out of What business are we in? Business evolved out of opportunism or myopia should be divested, and opportunism or myopia should be divested, and dividing the core businesses into SBU’sdividing the core businesses into SBU’s (i.e. down-(i.e. down-scoping).scoping).

Structural Changes –Structural Changes – Conventional hierarchical Conventional hierarchical structures should be disbanded in favour of more structures should be disbanded in favour of more flexible onesflexible ones (i.e. downsizing or rightsizing).(i.e. downsizing or rightsizing).

209209

RESTRUCTURING – BASIC TENETSRESTRUCTURING – BASIC TENETS

Cultural Changes –Cultural Changes – A culture represents the A culture represents the values and beliefs of the employees about the values and beliefs of the employees about the organisation. Restructuring also requires organisation. Restructuring also requires cultural orientation. It is created and cultural orientation. It is created and institutionalised by the top managementinstitutionalised by the top management (Eg. (Eg. During the times of JRD the Tatas were During the times of JRD the Tatas were considered a benevolent and charitable considered a benevolent and charitable organisation, organisation, .......... Ratan Tata now drives the Ratan Tata now drives the point the group means business.)point the group means business.)

(Eg. Reliance dismantled their (Eg. Reliance dismantled their industrial industrial embassiesembassies .......... started focusing on their started focusing on their capabilities.)capabilities.)

210210

RESTRUCTURING - STRATEGIESRESTRUCTURING - STRATEGIES

Asset based Restructuring –Asset based Restructuring – The asset The asset composition undergoes a major change –composition undergoes a major change –– Merger, Acquisition, Takeover –Merger, Acquisition, Takeover – It may be It may be

vertical, horizontal, or conglomerate. It may vertical, horizontal, or conglomerate. It may be smooth be smooth (Eg. Mittal – Arcelor)(Eg. Mittal – Arcelor) or hostile or hostile (Eg. (Eg. Chabria - Shaw Wallace; Arun Bajoria – BBay Chabria - Shaw Wallace; Arun Bajoria – BBay Dyeing). Dyeing).

– Asset Swaps –Asset Swaps – It entails divesting and It entails divesting and acquisition simultaneously by two companies, acquisition simultaneously by two companies, where the difference is settled off through where the difference is settled off through cash cash (Eg. Glaxo – Heinz).(Eg. Glaxo – Heinz).

– Hive Off –Hive Off – It can have two forms; It can have two forms; spin-offspin-off and and equity carveequity carve. Further spin-off can be . Further spin-off can be classified as classified as split-offsplit-off and and split-upsplit-up..

211211

HIVE OFFHIVE OFF

Spin-Off –Spin-Off – A spin off is the creation of a new A spin off is the creation of a new entity; where the equity is allotted amongst the entity; where the equity is allotted amongst the existing shareholders on a pro-rata basis existing shareholders on a pro-rata basis (Eg. (Eg. Reliance Ent).Reliance Ent). – Split-Off –Split-Off – In a split-off, the existing In a split-off, the existing

shareholders receive equity in the subsidiary shareholders receive equity in the subsidiary in exchange for the stocks of the parent in exchange for the stocks of the parent company.company.

– Split-Up –Split-Up – In a split-up, the entire parent In a split-up, the entire parent company loses its identity after being split company loses its identity after being split into a number of subsidiaries.into a number of subsidiaries.

Equity Carve –Equity Carve – It involves selling a minority It involves selling a minority stake to a third party while retaining control stake to a third party while retaining control (Eg. (Eg. Tata Industries selling 20% stake to Jardine Tata Industries selling 20% stake to Jardine Matheson for Rs. 120 million). Matheson for Rs. 120 million).

212212

DIVESTITUREDIVESTITURE

It involves the sale of a It involves the sale of a brand brand or a or a divisiondivision of a of a company to a third party, with full management company to a third party, with full management control. It may be sold for a combination of cash control. It may be sold for a combination of cash or equity or both. Generic motives include –or equity or both. Generic motives include –– Raise working capital.Raise working capital.– Repay debts.Repay debts.– Poor performance.Poor performance.– Strategic misfit.Strategic misfit.

In 2001, In 2001, Tata ChemicalsTata Chemicals divested its detergents divested its detergents and cements division but retained its soda ash, and cements division but retained its soda ash, salt, and urea division.salt, and urea division.

In 2002, In 2002, GrasimGrasim divested its divested its GwaliorGwalior textiles textiles unit.unit.

213213

RESTRUCTURING - STRATEGIESRESTRUCTURING - STRATEGIES

Capital Restructuring -Capital Restructuring - The capital composition The capital composition undergoes a major change –undergoes a major change –– LBO –LBO – Acquiring control over a substantially Acquiring control over a substantially

larger company through borrowed funds larger company through borrowed funds (Eg. Tatas take-over of Corus for US $ 11.3 (Eg. Tatas take-over of Corus for US $ 11.3 billion, involving 608 pence per share). billion, involving 608 pence per share).

– Share Buyback –Share Buyback – It is a process of It is a process of cancellation of shares out of free reserves to cancellation of shares out of free reserves to the extent of 25% of paid-up capital the extent of 25% of paid-up capital (Eg. (Eg. Wipro).Wipro).

– Conversion –Conversion – Replacing debt with equity or Replacing debt with equity or vice-versa.vice-versa.

214214

BUSINESS RESTRUCTURING – THE BUSINESS RESTRUCTURING – THE TATASTATAS

Divestments Diversifications

Lakme – Rs. 256 cr

ACC – Rs. 950 cr

Merind - Rs. 42 cr

Tata Timken – Rs 120 cr

Voltas - Rs. 230 cr

Goodlass Nerolac – Rs. 99 cr

Tata Motors – Rs. 1700 cr

Trent – Rs. 120 cr

Tata AIG – Rs. 250 cr

Tata Telecom – Rs. 1170 cr

VSNL – Rs. 1439 cr

Tata Tetley – Rs. 1890 cr

Tata Power – Rs. 1860 cr

CMC – Rs. 150 cr

215215

RESTRUCTURING OUTCOMESRESTRUCTURING OUTCOMES

Organisational

Financial

Business

Reduced labourcosts

AlternativesShort - Term Long - Term

Reduced debt costs

Emphasis onstrategic control

High debt costs

Loss ofhuman capital

Lower performance

Higherperformance

Higherrisk

216216

NUMERATOR & DENOMINATOR NUMERATOR & DENOMINATOR MANAGEMENTMANAGEMENT

Most of the companies in the developing Most of the companies in the developing economies are operating in saturated markets. economies are operating in saturated markets. In order to put back the company on the right In order to put back the company on the right track they are resorting to –track they are resorting to –– Denominator –Denominator – It assumes that turnover It assumes that turnover

cannot be increased hence go in for cannot be increased hence go in for downsizing, downscoping or asset sell off.downsizing, downscoping or asset sell off.

– Numerator –Numerator – It assumes that turnover is not It assumes that turnover is not a barrier; focuses on reengineering, reverse a barrier; focuses on reengineering, reverse engineering and restructuring.engineering and restructuring.

While DM yields results instantaneously; NM is While DM yields results instantaneously; NM is an effective option in the long run. an effective option in the long run.

(Prahalad & Hamel, 1994)

217217

RESTRUCTURING & FIRM VALUERESTRUCTURING & FIRM VALUE

Restructuring largely alters the value of a firm. Restructuring largely alters the value of a firm. It primarily falls into three categories –It primarily falls into three categories –– Asset investments and sell-offs.Asset investments and sell-offs.– Capital structure changes.Capital structure changes.– Dividend policy changes.Dividend policy changes.

218218

TURNAROUND TURNAROUND

MANAGEMENTMANAGEMENT

219219

WHY TURN AROUND MANAGEMENT?WHY TURN AROUND MANAGEMENT?

Some interesting insights ....... Some interesting insights ....... – Only seven of the first fifty business groups Only seven of the first fifty business groups

in 1947 were even in business by the turn of in 1947 were even in business by the turn of this century, and that the thirty-two of the this century, and that the thirty-two of the country’s largest business groups in 1969 country’s largest business groups in 1969 are no longer among the top fifty today. are no longer among the top fifty today.

– Less than 10% of the Fortune 500 Less than 10% of the Fortune 500 companies as first published in 1955, still companies as first published in 1955, still exist as on 2005. exist as on 2005.

Source: (Business Today, January 1997).(Govindarajan and Trimble, 2006).

220220

TURN AROUND MANAGEMENTTURN AROUND MANAGEMENT

It is a course of action that enables firms to It is a course of action that enables firms to consciously move away from deterioration in consciously move away from deterioration in performance to enduring success.performance to enduring success. It results in It results in a permanent reversal in negative trend, a permanent reversal in negative trend, restoring normal health. Usually a growth restoring normal health. Usually a growth strategy follows a turnaround strategy. strategy follows a turnaround strategy. Indications for turn around –Indications for turn around –– Continuous cash flow crises.Continuous cash flow crises.– Dwindling profits and market-share.Dwindling profits and market-share.– High employee turnover.High employee turnover.– Uncompetitive products or services.Uncompetitive products or services.– Rising input costs and availability.Rising input costs and availability.– Continuous recession.Continuous recession.

221221

ACTION PLANS – SHORT TERMACTION PLANS – SHORT TERM

Change in key positions.Change in key positions. Be more customer centric.Be more customer centric. Recalibrate prices, based on elasticity.Recalibrate prices, based on elasticity. Product redesigning or reengineering.Product redesigning or reengineering. Revamp product portfolio.Revamp product portfolio. Focus on power brands, consider extension.Focus on power brands, consider extension. Liquidating dead assets.Liquidating dead assets. Emphasis on promotion and advertising.Emphasis on promotion and advertising. Better internal coordination.Better internal coordination. Prune work-force (i.e. downsizing).Prune work-force (i.e. downsizing).

222222

TURNAROUND PROCESS – STAGE TURNAROUND PROCESS – STAGE THEORY THEORY

Source: Shamsud D. Chowdhury, 2002

Perf

orm

an

ce

Time

Decline

Stage 1 Stage 2 Stage 3 Stage 4

Initiation Transition Outcome

Nadir

Equilibrium LineSuccess

Failure

Indeterminate

223223

DECLINE (STAGE 1)DECLINE (STAGE 1)

Identify the theoretical perspectives that Identify the theoretical perspectives that explains performance decline –explains performance decline –– K-Extinction –K-Extinction – It suggests thatIt suggests that macro macro

economiceconomic andand industry wide factorsindustry wide factors are are responsible for decline. It has its origin in I/O responsible for decline. It has its origin in I/O Economics and subscribes to the view that a Economics and subscribes to the view that a firm has little control over such factors.firm has little control over such factors.

– R-Extinction –R-Extinction – It suggests that organisation It suggests that organisation factors, primarily dwindlingfactors, primarily dwindling resourcesresources and and capabilities are responsible for decline. It has capabilities are responsible for decline. It has its origin in SM and subscribes to the view its origin in SM and subscribes to the view that a firm has substantial power to override that a firm has substantial power to override such factors.such factors.

224224

INITIATION (STAGE 2)INITIATION (STAGE 2)

Initiation indicates the response of the firm with Initiation indicates the response of the firm with regard to performance decline –regard to performance decline –– Operational Response – Operational Response – Usually adopted in Usually adopted in

case of K-Extinction. It focuses on improving case of K-Extinction. It focuses on improving overall firm efficiency. It is short-term in overall firm efficiency. It is short-term in nature.nature.

– Strategic Response –Strategic Response – Usually adopted in case Usually adopted in case of R-Extinction. It is medium to long-term in of R-Extinction. It is medium to long-term in nature. It focuses on in order of priority –nature. It focuses on in order of priority –

Financial RestructuringFinancial Restructuring Asset RestructuringAsset Restructuring Business RestructuringBusiness Restructuring

225225

TRANSITION (STAGE 3)TRANSITION (STAGE 3)

Transition usually reflects first signs of Transition usually reflects first signs of recovery. However, substantial amount of time recovery. However, substantial amount of time usually passes before results begin to show usually passes before results begin to show (i.e. (i.e. lead-lag).lead-lag). However, many a times early signs of However, many a times early signs of recovery fades out. In this stage sustenance is recovery fades out. In this stage sustenance is the key factor. Effective approaches –the key factor. Effective approaches –– Empowerment, transparency.Empowerment, transparency.– Top management as role model.Top management as role model.– Confidence building measures.Confidence building measures.– Prompt decision making.Prompt decision making.– Participative style of management.Participative style of management.– Austerity drive.Austerity drive.

226226

OUTCOME (STAGE 4)OUTCOME (STAGE 4)

Outcome is said to be successful when the firm Outcome is said to be successful when the firm breaches the equilibrium performance level. breaches the equilibrium performance level. Failure is an indication that initial momentum Failure is an indication that initial momentum was not sustainable characterised by was not sustainable characterised by irreversibility. Effective indicators –irreversibility. Effective indicators –– Share price indications.Share price indications.– Media coverage.Media coverage.– Regaining lost market share.Regaining lost market share.– Commanding a premium in the market.Commanding a premium in the market.– Supplier and banker confidence.Supplier and banker confidence.– Revival of key customers.Revival of key customers.– New launches.New launches.

227227

JOINT VENTURESJOINT VENTURES

&&

STRATEGIC ALLIANCESSTRATEGIC ALLIANCES

228228

COOPERATIVE STRATEGIESCOOPERATIVE STRATEGIES

Cooperative strategies are a logical and timely Cooperative strategies are a logical and timely response to response to strategic varietystrategic variety with the objective with the objective to restore to restore strategic fitstrategic fit and enhance and enhance performanceperformance. It can take the following forms –. It can take the following forms –

FranchisingFranchising LicensingLicensing ConsortiaConsortia Strategic AllianceStrategic Alliance Joint VentureJoint Venture

The form of cooperation depends on The form of cooperation depends on duration, duration, degree of involvement, legal regulations, risk, degree of involvement, legal regulations, risk, sizesize and and technologytechnology involved in the project. involved in the project.

Degree ofinvolvement

Low

High

229229

FRANCHISINGFRANCHISING

Franchising –Franchising – It is a contractual agreement It is a contractual agreement between two legally independent firms whereby between two legally independent firms whereby the franchiser grants the right to the franchisee the franchiser grants the right to the franchisee to to sell sell the franchisor’s product or service or do the franchisor’s product or service or do business under its business under its brand-namebrand-name in a given in a given locationlocation for a specified period of for a specified period of timetime for a for a consideration.consideration.

It is an effective strategy to It is an effective strategy to penetrate marketspenetrate markets in a in a shortest possible timeshortest possible time at a at a minimum costminimum cost..– Switz FoodsSwitz Foods, owners of the brand, owners of the brand Monginis Monginis

allows its franchisees to sell its confectionary allows its franchisees to sell its confectionary products.products.

– Titan IndsTitan Inds, owners of the brand, owners of the brand TanishqTanishq allows allows its franchisees to sell its jewellery products.its franchisees to sell its jewellery products.

230230

LICENSINGLICENSING

Licensing –Licensing – It is a contractual agreement It is a contractual agreement between two legally independent firms between two legally independent firms whereby the licensor grants the right to the whereby the licensor grants the right to the licensee to licensee to manufacturemanufacture the licensor’s product the licensor’s product and do business under its and do business under its brand-namebrand-name in a in a given given locationlocation for a specified period of for a specified period of time time for for a a consideration.consideration. Different levels – Different levels –– Manufacturing without embracing any Manufacturing without embracing any

technologytechnology (CBU)(CBU)..– Develop a product, refine it and adopt Develop a product, refine it and adopt

necessary technologiesnecessary technologies (SKD)(SKD)..– Become a systems integratorBecome a systems integrator (CKD)(CKD)..

HMHM manufacturing manufacturing GMGM range of cars in India range of cars in India with a buy-back arrangement.with a buy-back arrangement.

231231

CONSORTIACONSORTIA

Consortia –Consortia – They are defined as large They are defined as large inter-inter-locking informallocking informal relationships between relationships between businesses in a similar industry. Types –businesses in a similar industry. Types –– Multipartner –Multipartner – Intends to share an underlying Intends to share an underlying

technology, leverage upon size to preempt technology, leverage upon size to preempt competition competition (Eg. Airbus – Boeing).(Eg. Airbus – Boeing).

– Cross Holdings –Cross Holdings – A maze of equity holdings A maze of equity holdings through centralised control to ensure through centralised control to ensure earnings stabilityearnings stability (Eg. Tatas, Mitsubishi, (Eg. Tatas, Mitsubishi, Hyundai).Hyundai).

– Collusion –Collusion – Few firms in a matured industry Few firms in a matured industry collude (i.e. bonding) to reduce competitioncollude (i.e. bonding) to reduce competition (Eg. Coke – Pepsi). (Eg. Coke – Pepsi).

232232

STRATEGIC ALLIANCESTRATEGIC ALLIANCE It is an It is an short termshort term understanding between understanding between two two

oror more firmsmore firms in a similar business to in a similar business to share share knowledgeknowledge and skills in a particular domain or and skills in a particular domain or function for mutual benefit function for mutual benefit (Eg. Tata Motors – (Eg. Tata Motors – Daimler Benz, Reliance – Du Pont).Daimler Benz, Reliance – Du Pont).

Generic motives involved are –Generic motives involved are –– Enable learning organisation.Enable learning organisation.– Design next generation products.Design next generation products.– Effective R&D management.Effective R&D management.– Move up on the experience curve.Move up on the experience curve.– Enhance credibility.Enhance credibility.– Preempt competition.Preempt competition.

233233

STRATEGIC ALLIANCE - TYPESSTRATEGIC ALLIANCE - TYPES Collusion –Collusion – Tacit top management understanding Tacit top management understanding

to neutralise price wars to neutralise price wars (Eg. Coke – Pepsi).(Eg. Coke – Pepsi). Complementary Equals –Complementary Equals – Two firms mutually Two firms mutually

promoting each others complimentary products promoting each others complimentary products (Eg. Whirlpool – Tide).(Eg. Whirlpool – Tide).

Bootstrap –Bootstrap – An alliance between a weak and a An alliance between a weak and a strong company with an intention to acquire it.strong company with an intention to acquire it.

Alliances of the Weak –Alliances of the Weak – An alliance is entered An alliance is entered into to preempt competition into to preempt competition (Eg. Airbus – (Eg. Airbus – Boeing).Boeing).

Backward –Backward – An alliance (quasi or tapered) with a An alliance (quasi or tapered) with a supplier of critical components seeking supplier of critical components seeking commitment commitment (Eg. Maruti).(Eg. Maruti).

234234

JOINT VENTUREJOINT VENTURE

A joint venture is a A joint venture is a long termlong term association between association between two equal partners to create an two equal partners to create an independentindependent firm firm (SPV)(SPV) by complementing their by complementing their resources resources and and capabilitiescapabilities to explore to explore newer businessesnewer businesses or or marketsmarkets for achieving a shared vision, whilst the for achieving a shared vision, whilst the partners continue to operate independently. partners continue to operate independently. – It aims at creating new value (i.e. synergy) It aims at creating new value (i.e. synergy)

rather than mere exchange (i.e. combining rather than mere exchange (i.e. combining parts).parts).

– There are substantial linkages in the value-There are substantial linkages in the value-chain. chain.

– It brings in synergy.It brings in synergy.– It lasts till the vision is reached.It lasts till the vision is reached.– Separation is very bitter.Separation is very bitter.

235235

JOINT VENTURE - GENERIC MOTIVESJOINT VENTURE - GENERIC MOTIVES

Entry into newer markets.Entry into newer markets.– Eg. Yamaha – Escorts, Eli Lily – Ranbaxy.Eg. Yamaha – Escorts, Eli Lily – Ranbaxy.

Learning new technologies.Learning new technologies.– Eg. TVS – Suzuki (4-Stroke Engines)Eg. TVS – Suzuki (4-Stroke Engines)

Fill gaps in existing product lines.Fill gaps in existing product lines.– Eg. Renault – Nissan (Minivans – Cars).Eg. Renault – Nissan (Minivans – Cars).

Endorsement from government authorities.Endorsement from government authorities.– Eg. Maruti – Suzuki.Eg. Maruti – Suzuki.

Sharing of resources.Sharing of resources.– Eg. Essar – Hutch (Vodafone).Eg. Essar – Hutch (Vodafone).

Define future industry standards.Define future industry standards.– Eg. Daimler – Chrysler (Premium Cars)Eg. Daimler – Chrysler (Premium Cars)

236236

RISKS INVOLVEDRISKS INVOLVED

Incompatibility – Differences in background.Incompatibility – Differences in background.– Godrej – Procter & Gamble, Century - Enka.Godrej – Procter & Gamble, Century - Enka.

Risk of brain (i.e. technology) drain.Risk of brain (i.e. technology) drain.– Maruti – Suzuki.Maruti – Suzuki.

Risk of over dependence.Risk of over dependence.– Eg. LML - PiaggioEg. LML - Piaggio

Differences in size and resource base.Differences in size and resource base.– Eg. Modi - TelstraEg. Modi - Telstra

What after exit (parenting disadvantage)?What after exit (parenting disadvantage)?– Eg. PAL - FiatEg. PAL - Fiat

237237

PREREQUISITES FOR SUCCESSPREREQUISITES FOR SUCCESS

Commitment – Commitment – Mutual trust, respect, time sharing.Mutual trust, respect, time sharing. Objectives – Objectives – Shared vision.Shared vision. Partner – Partner – Avoid duplication of skills and capabilities.Avoid duplication of skills and capabilities. Agreement – Agreement – Clarity on operational control (i.e. MOU)Clarity on operational control (i.e. MOU) Flexibility – Flexibility – Sufficient space to breathe and adjust.Sufficient space to breathe and adjust. Culture – Culture – Reconcile gaps.Reconcile gaps. Inertia –Inertia – Differences in age and evolution patterns.Differences in age and evolution patterns. Incompatibility –Incompatibility – Performance expectations.Performance expectations. Equality –Equality – Lack of dominance.Lack of dominance. Focus –Focus – Avoid strategic myopia.Avoid strategic myopia.

238238

MERGERS MERGERS

&&

ACQUISITIONACQUISITION

239239

MERGERS & ACQUISITIONMERGERS & ACQUISITION

A merger is a mutually beneficial consent A merger is a mutually beneficial consent between two or more firms between two or more firms (usually of similar (usually of similar size)size) to form a newly evolved firm by absolving to form a newly evolved firm by absolving their individual entities to preempt competition their individual entities to preempt competition (Eg. Brooke Bond – Lipton).(Eg. Brooke Bond – Lipton).

An acquisition is the purchase of a firm by a firm An acquisition is the purchase of a firm by a firm (of larger size)(of larger size) with a view to acquire with a view to acquire conglomerate power and induce synergyconglomerate power and induce synergy (Eg. (Eg. HLL – Tomco).HLL – Tomco).

An acquisition is said be smooth if it is with the An acquisition is said be smooth if it is with the consent of the managementconsent of the management (Eg. Tata – Corus)(Eg. Tata – Corus) and hostile if it is without the consent of the and hostile if it is without the consent of the managementmanagement (Eg. Chabria – Shaw Wallace, (Eg. Chabria – Shaw Wallace, Bajoria – B’B Dyeing).Bajoria – B’B Dyeing).

Most countries have laws that prevents hostile Most countries have laws that prevents hostile takeovers takeovers (Eg. SEBI Takeover Code, 2002).(Eg. SEBI Takeover Code, 2002).

240240

SEBI TAKEOVER CODE, 2002SEBI TAKEOVER CODE, 2002

Promoter –Promoter – A person who has a clear control of A person who has a clear control of atleast atleast 51%51% of the voting rights of the company. of the voting rights of the company.

Stake –Stake – An acquirer who picks up an atleast An acquirer who picks up an atleast 5%5% stake without mandatory disclosure having an stake without mandatory disclosure having an intention to wrest management control intention to wrest management control (i.e. (i.e. creeping acquisition).creeping acquisition).

Hike –Hike – An acquirer who has already picked up a An acquirer who has already picked up a 5%5% has to make a mandatory disclosure for every has to make a mandatory disclosure for every additional additional 1%1% stake. stake.

Preferential –Preferential – A preferential allottee ending up A preferential allottee ending up acquiring acquiring 5%5% stake also comes under its purview. stake also comes under its purview.

Control –Control – A special resolution of A special resolution of 75%75% of the of the shareholders approving change of guard.shareholders approving change of guard.

241241

SEBI TAKEOVER CODE, 2002SEBI TAKEOVER CODE, 2002

Pricing –Pricing – Acquirers will have to offer minority Acquirers will have to offer minority shareholders the past shareholders the past 2626 weeks or past weeks or past 22 weeks average price, whichever is higher as weeks average price, whichever is higher as an exit route an exit route (Eg. Grasim – L&T, Gujarat (Eg. Grasim – L&T, Gujarat Ambuja – ACC). Ambuja – ACC).

Disclosure –Disclosure – All acquirers have to inform the All acquirers have to inform the respective stock exchanges where it is listed respective stock exchanges where it is listed upon acquiring the basic limit and upon every upon acquiring the basic limit and upon every incremental limit thereon.incremental limit thereon.

242242

TYPES OF MERGERSTYPES OF MERGERS

AA businessbusiness is an activity that involves procuring is an activity that involves procuring ofof desired desired inputsinputs to transform it to anto transform it to an outputoutput by by usingusing necessarynecessary technologiestechnologies and creating value and creating value in the process.in the process.

The type of merger is dependent on theThe type of merger is dependent on the degree degree of relatednessof relatedness between the variables.between the variables.– Horizontal –Horizontal – It involves integration of two It involves integration of two

highly related businesses highly related businesses (Eg. Electrolux - (Eg. Electrolux - Kelvinator). Kelvinator).

– Vertical –Vertical – It involves complimentarity It involves complimentarity (partially related) in terms of supply of inputs (partially related) in terms of supply of inputs or marketing activities or marketing activities (Eg. Godrej, Reliance).(Eg. Godrej, Reliance).

– Conglomerate –Conglomerate – It involves integration of two It involves integration of two distinctly unrelated businesses distinctly unrelated businesses (Eg. ITC). (Eg. ITC).

243243

MERGERS & ACQUISITION - MOTIVESMERGERS & ACQUISITION - MOTIVES

Increased market power.Increased market power. Reduction in risk.Reduction in risk. Economies of size, scale and scope.Economies of size, scale and scope. Overcoming entry barriers (Eg. Tisco – Corus).Overcoming entry barriers (Eg. Tisco – Corus). Avoiding risk of new product development.Avoiding risk of new product development. Access to newer segments (Eg. Ranbaxy – Access to newer segments (Eg. Ranbaxy –

Crosslands).Crosslands). Reduced gestation (i.e. quick access).Reduced gestation (i.e. quick access). Tax benefits (Eg. ITC Bhadrachalam).Tax benefits (Eg. ITC Bhadrachalam). Sharing of capabilities and competencies (Eg. Sharing of capabilities and competencies (Eg.

ICICI –ITC Classic).ICICI –ITC Classic). Global image (Eg. Mittal – Arcelor).Global image (Eg. Mittal – Arcelor).

244244

MERGERS & ACQUISITIONS - MERGERS & ACQUISITIONS - PITFALLSPITFALLS

Cultural differences.Cultural differences. Overvaluation of buying firms.Overvaluation of buying firms. Merging of organisational structures.Merging of organisational structures. Inability to achieve synergy.Inability to achieve synergy. Managing over-diversification.Managing over-diversification. Managing size.Managing size. Top management overtly focused on Top management overtly focused on due due

diligence exercisediligence exercise and negotiations; neglecting and negotiations; neglecting core business.core business.

245245

PLC & MERGER TYPEPLC & MERGER TYPE

Introduction –Introduction – A larger firm may acquire a newly A larger firm may acquire a newly formed firm with an objective to preempt new formed firm with an objective to preempt new competition or acquire its license. competition or acquire its license.

Growth –Growth – This stage may witness parallel merger This stage may witness parallel merger of two firms of similar size; or a larger firm may of two firms of similar size; or a larger firm may acquire a growing firm with an objective to acquire a growing firm with an objective to reinforce its growth trajectory.reinforce its growth trajectory.

Maturity –Maturity – A larger firm acquires a smaller firm A larger firm acquires a smaller firm with an objective to achieve economies of scale with an objective to achieve economies of scale and experience curve effects.and experience curve effects.

Decline –Decline – Horizontal mergers are undertaken to Horizontal mergers are undertaken to ensure survival; vertical to save transactions ensure survival; vertical to save transactions costs.costs.

246246

INTERNATIONAL M&A - FRAMEWORKINTERNATIONAL M&A - FRAMEWORK

Positive contribution to the acquired company.Positive contribution to the acquired company. A common shared vision.A common shared vision. A concern of respect for the business of the A concern of respect for the business of the

acquired company.acquired company. Left alone; active top management Left alone; active top management

intervention in phases.intervention in phases. Blanket promotions across entities.Blanket promotions across entities.

Source: Peter Drucker

247247

INTEGRATION - BLUEPRINTINTEGRATION - BLUEPRINT

Take the media into confidence.Take the media into confidence. Shift attention from business portfolio to Shift attention from business portfolio to

people and processes.people and processes. Decide on the new hierarchy; promptly. It will Decide on the new hierarchy; promptly. It will

enable focus on customers and key people.enable focus on customers and key people. Redefine responsibilities and authority.Redefine responsibilities and authority. Decide upon management control systems.Decide upon management control systems. Integrating work processes.Integrating work processes. Determine business strategy.Determine business strategy.

248248

M&A - VALUATIONM&A - VALUATION

The process of valuation is central to M&A. The process of valuation is central to M&A. From the financial point of view the following From the financial point of view the following motives may be considered – motives may be considered – – Undervaluation relative to true value.Undervaluation relative to true value.– Synergy – Potential value gain from Synergy – Potential value gain from

combining operations.combining operations.– Market for corporate control.Market for corporate control.– Unstated reasons – Personal self interest Unstated reasons – Personal self interest

and hubris.and hubris.

249249

VALUING OPERATIONAL SYNERGYVALUING OPERATIONAL SYNERGY

Synergy –Synergy – It refers to the potential value gain where It refers to the potential value gain where the whole is greater than the sum of the parts. the whole is greater than the sum of the parts. Sources of operational synergy -Sources of operational synergy -– Horizontal Synergy –Horizontal Synergy – Gains come from economies Gains come from economies

of scale which reduces costs; or from increased of scale which reduces costs; or from increased market power which increases sales and margins.market power which increases sales and margins.

– Vertical Synergy –Vertical Synergy – Gains come from controlling Gains come from controlling the supply-chain and savings in transaction costs.the supply-chain and savings in transaction costs.

– Conglomerate Synergy –Conglomerate Synergy – Gains come when one Gains come when one firm complements the resources or capabilities of firm complements the resources or capabilities of anotheranother (Eg. Innovative product – Good (Eg. Innovative product – Good distribution network). distribution network).

250250

VALUING FINANCIAL SYNERGYVALUING FINANCIAL SYNERGY

Diversification –Diversification – Reduce variability in earnings by Reduce variability in earnings by diversifying into unrelated industries. However, diversifying into unrelated industries. However, shareholders can accomplish the same at a much shareholders can accomplish the same at a much lesser cost, and without paying take-over lesser cost, and without paying take-over premiums. premiums.

Cash Slack –Cash Slack – It reduces asymmetry between cash It reduces asymmetry between cash starved firms with deserving projects and cash starved firms with deserving projects and cash cows with no investment opportunities. Synergy cows with no investment opportunities. Synergy comes from projects which would not have been comes from projects which would not have been undertaken if the two firms stayed apart undertaken if the two firms stayed apart (Eg. (Eg. Hotmail).Hotmail).

Tax Benefits –Tax Benefits – Tax benefits may accrue from tax Tax benefits may accrue from tax entitlements and depreciation benefits unutilised entitlements and depreciation benefits unutilised by a loss making firm, but availed after being by a loss making firm, but availed after being merged with a profitable firm merged with a profitable firm (Eg. ITC – (Eg. ITC – Bhadrachalam Paper).Bhadrachalam Paper).

251251

VALUING FINANCIAL SYNERGYVALUING FINANCIAL SYNERGY

Co-Insurance Effect –Co-Insurance Effect – If the cash flows of the If the cash flows of the two firms are less than perfectly correlated, two firms are less than perfectly correlated, the cash flow the merged firm will be less the cash flow the merged firm will be less variable than the individual firms. This will variable than the individual firms. This will induce higher debt capacity, higher leverage, induce higher debt capacity, higher leverage, hence better performance. hence better performance. – Default risk comes down and credit rating Default risk comes down and credit rating

improves.improves.– Coupon rates may also be negotiated at Coupon rates may also be negotiated at

lower rates.lower rates.

Source: Lewellen, 1971.

252252

VALUING CORPORATE CONTROLVALUING CORPORATE CONTROL

Premium of M&A are often justified to control the Premium of M&A are often justified to control the management of the firm. The value of wrestling management of the firm. The value of wrestling control is control is inversely proportionalinversely proportional to the perceived to the perceived quality of that management. quality of that management. – Value of Control = Value of firm after Value of Control = Value of firm after

restructuring restructuring – Value of firm before – Value of firm before restructuring.restructuring.

The value of control can be The value of control can be substantialsubstantial for firms for firms that are operating well below optimal value, since a that are operating well below optimal value, since a restructuring can lead to significant increase in restructuring can lead to significant increase in value. value.

While value of corporate control is While value of corporate control is negligible negligible for for firms that are operating close to their optimal value.firms that are operating close to their optimal value.

253253

LEVERAGE BUYOUT (LBO)LEVERAGE BUYOUT (LBO)

The basic difference between a take-over and The basic difference between a take-over and a LBO is the high inherent leverage at the time a LBO is the high inherent leverage at the time of buyout and rapid changes across time.of buyout and rapid changes across time.

Many private firms have been induced to go Many private firms have been induced to go public in the lure of –public in the lure of –– Access to financial markets.Access to financial markets.– Increased liquidity.Increased liquidity.– Continuous valuation.Continuous valuation.– Media attention.Media attention.– Insignificant costs.Insignificant costs.

254254

VALUING LBOVALUING LBO

However, off-late many publicly traded firms However, off-late many publicly traded firms have gone private keeping in mind the following –have gone private keeping in mind the following –– The fear of LBO.The fear of LBO.– The need to satisfy analysts and shareholders.The need to satisfy analysts and shareholders.– Separation of ownership from management.Separation of ownership from management.– Increased information needs.Increased information needs.

A research study showed that A research study showed that 30%30% of the publicly of the publicly listed firms reported above average returns after listed firms reported above average returns after going private. The increased benefit showed in going private. The increased benefit showed in the following way –the following way –– Reduced costs.Reduced costs.– Increased revenue. Increased revenue.

255255

RATIONALE FOR HIGH LEVERAGERATIONALE FOR HIGH LEVERAGE

The high leverage in a LBO can be justified by –The high leverage in a LBO can be justified by –– If the target firm has too little debtIf the target firm has too little debt (relative (relative

to its optimal).to its optimal).– Managers cannot be trusted to invest free Managers cannot be trusted to invest free

cash flows wisely.cash flows wisely.– It is a temporary phenomenon; which It is a temporary phenomenon; which

disappears once assets are liquidated and disappears once assets are liquidated and significant portion of debt is paid off.significant portion of debt is paid off.

– Debts repaid off from increased value after Debts repaid off from increased value after successful restructuring.successful restructuring.

– Cost of debt coming downCost of debt coming down (i.e. co-insurance (i.e. co-insurance effect).effect).

256256

EFFECT OF HIGH LEVERAGEEFFECT OF HIGH LEVERAGE

Increases the riskiness of dividend flows to Increases the riskiness of dividend flows to shareholders by increasing the interest cost to shareholders by increasing the interest cost to debt holders. Therefore, initial rise in leverage debt holders. Therefore, initial rise in leverage is anticipated.is anticipated.

As the firm liquidates assets and pays off debt, As the firm liquidates assets and pays off debt, leverage is expected to decrease over time.leverage is expected to decrease over time.

Any discounting has to reflect these changing Any discounting has to reflect these changing discounting rates. discounting rates.

A LBO has to pass two tests to be viable – A LBO has to pass two tests to be viable – – Restructuring to pay-off increased debt.Restructuring to pay-off increased debt.– Increase equity valuation.Increase equity valuation.

257257

REVERSE MERGERREVERSE MERGER

Reverse Merger –Reverse Merger – The acquisition of a public The acquisition of a public company, which has discontinued its operations company, which has discontinued its operations (i.e. shell)(i.e. shell) by a private company, small in size but by a private company, small in size but having a promising business, allowing the private having a promising business, allowing the private company to bypass the usually lengthy and company to bypass the usually lengthy and complex process of going public. Objectives –complex process of going public. Objectives –– Traditional route of filing prospectus and Traditional route of filing prospectus and

undergoing an IPO is costly, time-barred, or undergoing an IPO is costly, time-barred, or costly.costly.

– Prevents dilution of equity.Prevents dilution of equity.– Automatic listing in major exchanges.Automatic listing in major exchanges.– Tax shelter.Tax shelter.

258258

EFFECT OF TAKE-OVER EFFECT OF TAKE-OVER ANNOUNCEMENTANNOUNCEMENT

The shareholders of target firms are the clear The shareholders of target firms are the clear winners. winners. – Takeover announcements reported 30% Takeover announcements reported 30%

excess returns.excess returns.– Merger announcements reported 20% Merger announcements reported 20%

excess returns. excess returns. Excess returns also vary across time periods. Excess returns also vary across time periods.

During bearish periods excess returns were During bearish periods excess returns were 19%;19%; and and 35%35% during bullish periods. during bullish periods.

However, takeover failures have only initial However, takeover failures have only initial negative effects on stock prices. Most target negative effects on stock prices. Most target firms are taken over within firms are taken over within (60-90)(60-90) days. days.

259259

EFFECT OF TAKE-OVER EFFECT OF TAKE-OVER ANNOUNCEMENTANNOUNCEMENT

The effect of take-over announcement on The effect of take-over announcement on bidder firm stock prices are not clear cut. bidder firm stock prices are not clear cut. – Most studies reported insignificant excess Most studies reported insignificant excess

returns around take-over offers or merger returns around take-over offers or merger announcements. announcements.

– However, in the event of take-over or However, in the event of take-over or merger failures reflected negative returns to merger failures reflected negative returns to the extent ofthe extent of 5%5% on bidder firm stock prices.on bidder firm stock prices.

Source: Jensen and Ruback, 1983.Bradley, Desai, and Kim, 1983.Jarrel, Brickley, and Netter, 1988.

260260

DEFENSIVE STRATEGIESDEFENSIVE STRATEGIES

Golden Parachute –Golden Parachute – An employment contract An employment contract that compensates top managers for loss of jobs that compensates top managers for loss of jobs as a result of change in management control.as a result of change in management control.

Poison Put –Poison Put – Premature retirement of bonds at Premature retirement of bonds at attractive rates to pour surplus cash and make attractive rates to pour surplus cash and make target investment unattractive.target investment unattractive.

Poison Pill –Poison Pill – An offer to existing shareholders to An offer to existing shareholders to buy shares at a substantial discount to buy shares at a substantial discount to increase their voting rights. increase their voting rights.

Asset Stripping –Asset Stripping – The targeted company hives The targeted company hives off its key assets to another subsidiary, so that off its key assets to another subsidiary, so that nothing is left for the raider.nothing is left for the raider.

261261

DEFENSIVE STRATEGIESDEFENSIVE STRATEGIES

White Knight –White Knight – It is the placing of stocks to a It is the placing of stocks to a cash rich investor and bargaining for protection cash rich investor and bargaining for protection in return. But often the White Knight turns a in return. But often the White Knight turns a betrayer himself betrayer himself (Eg. Raasi Dement – Indian (Eg. Raasi Dement – Indian Cements – Reliance).Cements – Reliance).

Pac Man –Pac Man – The target company makes a counter The target company makes a counter bid to take over the raider company, thus bid to take over the raider company, thus diverting the raider company’s attention.diverting the raider company’s attention.

Gray Knight –Gray Knight – The target company takes the help The target company takes the help of friendly company to buy the shares of the of friendly company to buy the shares of the raiding company.raiding company.

Green Mail –Green Mail – The targeted company buys large The targeted company buys large blocks from holders either through premium or blocks from holders either through premium or through pressure tactics through pressure tactics (Eg. Shapoorji Pallonji).(Eg. Shapoorji Pallonji).

262262

COMPETING FORCOMPETING FOR

THETHE

FUTUREFUTURE

263263

GETTING OFF THE TREADMILLGETTING OFF THE TREADMILL

CanonCanon overpoweringoverpowering Xerox; HondaXerox; Honda overpowering overpowering Volkswagen; NokiaVolkswagen; Nokia overpoweringoverpowering Motorola; Motorola; HitachiHitachi overpowering overpowering Westinghouse; Wal-MartWestinghouse; Wal-Mart overpowering overpowering Sears; CompaqSears; Compaq overpoweringoverpowering IBM.IBM. Are the companies too preoccupied with the Are the companies too preoccupied with the present than the future?present than the future?

A survey A survey Prahalad & HamelPrahalad & Hamel revealed that revealed that 90%90% of of the companies overpowered, were spending the companies overpowered, were spending 90%90% of their precious time dealing with present.of their precious time dealing with present.

What were they doing with the present? What What were they doing with the present? What were they pre-occupied with? What went wrong?were they pre-occupied with? What went wrong?

264264

THE PAST OF COMPETITIONTHE PAST OF COMPETITION

Beyond Restructuring –Beyond Restructuring – When a competitiveness When a competitiveness problem problem (stagnant growth, declining margins, (stagnant growth, declining margins, falling market share)falling market share) become inescapable, they become inescapable, they brutally pick up the knife and ruthlessly carve brutally pick up the knife and ruthlessly carve away layers of corporate fat away layers of corporate fat (delayering, (delayering, decluttering, downsizing).decluttering, downsizing).

Not knowing when to stop; most often they ended Not knowing when to stop; most often they ended up cutting up cutting corporate musclecorporate muscle as well and became as well and became anorexic.anorexic. Thus Thus efficiency efficiency was grievously hurt. was grievously hurt.

These denominator based managers were stuck These denominator based managers were stuck to their restructuring strategiesto their restructuring strategies (like pharaohs) (like pharaohs) and didn't know what to do next?and didn't know what to do next?

Thus they became history?Thus they became history?

265265

THE PRESENT OF COMPETITIONTHE PRESENT OF COMPETITION

Beyond Reengineering –Beyond Reengineering – Numerator based Numerator based managers managers (products, processes, technologies)(products, processes, technologies) atleast offers partial hope. However, atleast offers partial hope. However, incrementalism of effectiveness has reached a incrementalism of effectiveness has reached a plateau, ensuring only survival of the present; plateau, ensuring only survival of the present; but not of the future. but not of the future.

A poll in A poll in circa 2000circa 2000 revealed that revealed that 80%80% of the of the US US managersmanagers polled that Quality will be a source of polled that Quality will be a source of competitive advantage of the future. On the competitive advantage of the future. On the contrary only contrary only 20%20% of of Japanese managersJapanese managers polled polled that Quality will be a source of competitive that Quality will be a source of competitive advantage of the future. advantage of the future.

The future is not about catching up; but getting The future is not about catching up; but getting ahead.ahead.

266266

THE FUTURE OF COMPETITIONTHE FUTURE OF COMPETITION

Regenerating –Regenerating – Leaner, better, faster; as important Leaner, better, faster; as important as these may be, are not enough to get a company as these may be, are not enough to get a company to the future. They need to fundamentally to the future. They need to fundamentally reconcieve itself; reinvent its industry;reconcieve itself; reinvent its industry; and and regenerate its strategiesregenerate its strategies (consciously choosing to (consciously choosing to be different). Successful companies steer be different). Successful companies steer themselves to the future. It involves the following -themselves to the future. It involves the following -– Dream about the company’s future;Dream about the company’s future; don’t don’t

predict.predict.– Transform the industry;Transform the industry; not just the not just the

organisation.organisation. – Empower from bottom to top;Empower from bottom to top; not from top to not from top to

bottom.bottom.

267267

ABOUT THE DREAMABOUT THE DREAM

Which customers will you be serving?

What will the potential customer look like?

Who will be your future competitors?

What will be the basis of your competitive advantage?

Where would your margins come from?

What will be your future competencies?

Which end product markets would you cater?

(5-10 years) Future

268268

ABOUT THE TRANSFORMATIONABOUT THE TRANSFORMATION

The future does not belong to those who take The future does not belong to those who take the industry for granted. the industry for granted. Successful companies Successful companies have a complete grip over the industry, do not have a complete grip over the industry, do not fall sick in the first place.fall sick in the first place.

It is about deliberately creating a It is about deliberately creating a strategic strategic misfit.misfit. It creates a hunger and a passion to It creates a hunger and a passion to transform. transform. – Change in some fundamental way the rules Change in some fundamental way the rules

of engagement in an industry.of engagement in an industry.– Redraw the boundaries between industries.Redraw the boundaries between industries.– Create entirely new industries.Create entirely new industries.

269269

ABOUT THE EMPOWERMENTABOUT THE EMPOWERMENT

Bring about a revolution Bring about a revolution (a paradigm shift)(a paradigm shift) in the in the organisation. More importantly, the revolution organisation. More importantly, the revolution must start at the bottommust start at the bottom and spread in all and spread in all directions of the organisation. A revolution that is directions of the organisation. A revolution that is thrust upon from the top seldom sustains.thrust upon from the top seldom sustains.

Most successful revolutions Most successful revolutions (Gandhi to Mandela)(Gandhi to Mandela) rose from the dispossessed.rose from the dispossessed.

The The middle managementmiddle management plays a strong plays a strong moderating role. moderating role.

Transformational leaders merely show the way.Transformational leaders merely show the way. Such a process is called Such a process is called institutionalisation institutionalisation (from (from

people centric to organisational centric).people centric to organisational centric).

270270

THE FUTURE OF STRATEGYTHE FUTURE OF STRATEGY

What does it take to get to the future first?What does it take to get to the future first?– Understanding howUnderstanding how competitioncompetition for the for the

future is different.future is different.– A process for finding and gaining insight A process for finding and gaining insight

into tomorrows opportunitiesinto tomorrows opportunities (Eg. Toshiba - (Eg. Toshiba - FSDFSD). It requires a lot of). It requires a lot of common sensecommon sense and and a little bit ofa little bit of out of the box thinking.out of the box thinking.

– An ability toAn ability to energiseenergise the company.the company.– Get to theGet to the future firstfuture first, without taking, without taking undue undue

risk.risk. Thus Thus efficiencyefficiency and and effectivenesseffectiveness may may be passé; but still it has an important role to be passé; but still it has an important role to play.play.

271271

HOW DOES THE FUTURE LOOK LIKE?HOW DOES THE FUTURE LOOK LIKE?

There is no rule which says that for every There is no rule which says that for every leader there will be a follower. Similarly, there leader there will be a follower. Similarly, there is not one future; but hundreds.is not one future; but hundreds.

We are in the midst of a We are in the midst of a 3603600 0 vacuum; each vacuum; each point in space represents an unique business point in space represents an unique business opportunity. The further a company can see in opportunity. The further a company can see in this endless space, the farther it will be away this endless space, the farther it will be away from competition.from competition.

What distinguishes a leader from a laggard; What distinguishes a leader from a laggard; greatness from mediocrity, is the ability to greatness from mediocrity, is the ability to imagine in a different way what the future imagine in a different way what the future could be.could be.

272272

THE NEW STRATEGY PARADIGM - ITHE NEW STRATEGY PARADIGM - I

Reengineering Processes

Organisational Transformation

Competing for Market Share

Strategy as Learning

Strategy as Positioning

Regenerating Strategy

Industry Transformation

Competing for Opportunity Share

Strategy as Unlearning

Strategy as Dream

Not Only But Also

The Competitive Challenge

Finding the Future

Strategy as Engineering Strategy as Architecture

273273

THE NEW STRATEGY PARADIGM - IITHE NEW STRATEGY PARADIGM - II

Strategic Fit

Resource Allocation

Product Leadership

Single Entity

Strategic Misfit

Resource Stretch & Leverage

Competency Leadership

Dominant Coalitions

Not Only But Also

Mobilising for the Future

Getting to the Future First

Product Hits & Timing Market Learning & Preemption

Existing Industry Structure Future Industry Structure

274274

LEARNING TO FORGETLEARNING TO FORGET

Time

Deg

ree o

f Le

arn

ing

Unlearning Curve

Learning Curve

P1: The degree of learning in current period is directly proportional to the degree of unlearning in the previous period.

P2: Unlearning in previous period does notnecessarily ensure learning in the current period.

t2 t3 t4t1 t5

275275

CORE COMPETENCECORE COMPETENCE

A core competence relates to a bundle of skills A core competence relates to a bundle of skills (not an asset or a business).(not an asset or a business). A high degree A high degree causal ambiguity between these skills yield causal ambiguity between these skills yield sustainable competitive advantage. A core sustainable competitive advantage. A core competency is characterised by the following –competency is characterised by the following –– Unique –Unique – It provides unimaginable customer It provides unimaginable customer

value ahead of its times.value ahead of its times.– Inimitable & Insubstitutable –Inimitable & Insubstitutable – It cannot be It cannot be

matched even by its closest competitors.matched even by its closest competitors.– Leverage –Leverage – They are the gateways to They are the gateways to

tomorrows markets.tomorrows markets.

276276

MORE ABOUT CORE COMPETENCEMORE ABOUT CORE COMPETENCE

Sony – Sony – miniaturisation;miniaturisation; Honda – Honda – engines;engines; Wal- Wal-Mart – Mart – logistics;logistics; SKF – SKF – antifriction and precision,antifriction and precision, Coca Cola – Coca Cola – brand,brand, Nike – Nike – designing;designing; Canon – Canon – imaging;imaging; Intel –Intel – nano-electronics;nano-electronics; Toyota –Toyota – lean lean manufacturing;manufacturing; Toshiba –Toshiba – flat panel displays.flat panel displays.– Although a core competence may lose value Although a core competence may lose value

over time; over time; it gets more refined and valuable it gets more refined and valuable through use.through use.

– A core competency cannot be outsourcedA core competency cannot be outsourced; it is ; it is deeply embedded in the heart of the deeply embedded in the heart of the organisation.organisation.

– Most companies around the world do not Most companies around the world do not possess one; possess one; successful companies have one, successful companies have one, at the most three to four.at the most three to four.

277277

CONCEPTUALISING A DIVERSIFIED CONCEPTUALISING A DIVERSIFIED FIRMFIRM

Core Group

Core Businesses

Core Products

Core Competencies

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RESOURCE LEVERAGERESOURCE LEVERAGE

Initial resource position is a very poor indicator Initial resource position is a very poor indicator of future performance. It leads to atrophy and of future performance. It leads to atrophy and stagnation. Resource crunch was a common stagnation. Resource crunch was a common factor amongst all those firms that faced a factor amongst all those firms that faced a wealthy rival, outperformed them. Strategies wealthy rival, outperformed them. Strategies to manage a resource gap - to manage a resource gap - – By concentrating existing resources.By concentrating existing resources.– By accumulating existing resources.By accumulating existing resources.– By complementing existing resources.By complementing existing resources.– By conserving existing resources.By conserving existing resources.– By recovering existing resources.By recovering existing resources.

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CONCENTRATING RESOURCESCONCENTRATING RESOURCES

Concentrating –Concentrating – It involves effectively directing It involves effectively directing portfolio of resources on key strategic goals. It is a portfolio of resources on key strategic goals. It is a balance between balance between individual mediocrityindividual mediocrity and and collective brilliance.collective brilliance. It is achieved through - It is achieved through - – Converging –Converging – Redirecting multiple competing Redirecting multiple competing

(i.e. fragmented)(i.e. fragmented) short term goals into one long short term goals into one long term goal. It is then resources can stretched term goal. It is then resources can stretched over time.over time.

– Focusing –Focusing – Making Making trade-offstrade-offs and preventing and preventing dilution of resources at a particular point of time. dilution of resources at a particular point of time.

– Targeting –Targeting – Focusing on the Focusing on the right innovationsright innovations that are likely to have the biggest impact on that are likely to have the biggest impact on perceived customer value.perceived customer value.

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ACCUMULATING RESOURCESACCUMULATING RESOURCES

Accumulating –Accumulating – Using existing reservoir of Using existing reservoir of resources to build new resources. It is achieved resources to build new resources. It is achieved through -through - – Mining –Mining – Extracting learning experiences from Extracting learning experiences from

existing body of each additional experience existing body of each additional experience (i.e. (i.e. success or failure).success or failure). It is an attitude that can be It is an attitude that can be acquired, but never learnt. It leads to a acquired, but never learnt. It leads to a substantial jump in the experience curve. substantial jump in the experience curve.

– Borrowing –Borrowing – Utilising resources outside the firm Utilising resources outside the firm through licensing, alliances, joint ventures. A through licensing, alliances, joint ventures. A firms absorptive capacity is as important as its firms absorptive capacity is as important as its inventive capacity inventive capacity (Eg. Bell Labs invented the (Eg. Bell Labs invented the transistor, but it was Sony who popularised it).transistor, but it was Sony who popularised it).

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COMPLEMENTING RESOURCESCOMPLEMENTING RESOURCES

Complementing –Complementing – Using resources of one type Using resources of one type with another to create higher order value. It is with another to create higher order value. It is achieved through – achieved through – – Blending –Blending – Interweaving discrete capabilities Interweaving discrete capabilities

to create world class technologies to create world class technologies (GM – (GM – Honda)Honda) through integration and imagination. through integration and imagination. Different functional skills can also be blended Different functional skills can also be blended to create a world class product to create a world class product (Yamaha – (Yamaha – Keyboard). Keyboard).

– Balancing –Balancing – Taking ownership of resources Taking ownership of resources that accelerate the value of a firms own that accelerate the value of a firms own competencies competencies (Eg. GE acquiring the (Eg. GE acquiring the technological rights of EMI’s CT Scan).technological rights of EMI’s CT Scan).

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CONSERVING RESOURCESCONSERVING RESOURCES

Conserving –Conserving – Sustaining competencies over Sustaining competencies over time.time.– Recycling –Recycling – Increasing the velocity of use of a Increasing the velocity of use of a

competencies over time. As a result core competencies over time. As a result core competencies can be leveraged across an competencies can be leveraged across an array of products array of products (Eg. Sony).(Eg. Sony). It includes brand It includes brand extensions as well.extensions as well.

– Co-Opting –Co-Opting – Enticing resources of potential Enticing resources of potential competitors to exercise influence in an competitors to exercise influence in an industry industry (Fujitsu – IBM).(Fujitsu – IBM).

– Protecting –Protecting – It uses competitors strength to It uses competitors strength to one’s own advantage, by deflecting it, rather one’s own advantage, by deflecting it, rather than absorbing it.than absorbing it.

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RECOVERING RESOURCESRECOVERING RESOURCES

Recovering - It is the process of reducing the Recovering - It is the process of reducing the elapsed time between investing in resources and elapsed time between investing in resources and the recovery of those resources in the form of the recovery of those resources in the form of revenues via the market-place.revenues via the market-place.– Prior to the 1980’s Detroit’s majors took an Prior to the 1980’s Detroit’s majors took an

average of 8 years to develop an entirely new average of 8 years to develop an entirely new model; the Japanese reduced it to less than model; the Japanese reduced it to less than 4.5 years, with major new variants in 2 years. 4.5 years, with major new variants in 2 years.

– This forced the Japanese players to recover This forced the Japanese players to recover their resources in about half the time; giving their resources in about half the time; giving customers more opportunities to switch customers more opportunities to switch allegiance. allegiance.

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INTERNATIONALINTERNATIONAL

BUSINESS & ENVIRONMENTBUSINESS & ENVIRONMENT

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EMERGING MARKETSEMERGING MARKETS

Emerging markets Emerging markets (India, China, Korea, Chile)(India, China, Korea, Chile) provide a different context provide a different context (i.e. high levels of (i.e. high levels of marketmarket imperfection).imperfection). Therefore, strategies suited Therefore, strategies suited for the developed markets may not be appropriate for the developed markets may not be appropriate for emerging markets.for emerging markets.

Emerging markets are characterised by Emerging markets are characterised by infrastructural bottlenecks, institutional gaps,infrastructural bottlenecks, institutional gaps, and and high transaction costs.high transaction costs. Therefore focused strategies Therefore focused strategies based on core competence may not be suitable for based on core competence may not be suitable for emerging markets emerging markets (Khanna & Palepu, 1997). (Khanna & Palepu, 1997).

Diversified groups in operating in emerging markets Diversified groups in operating in emerging markets therefore benefit from therefore benefit from unrelatedunrelated diversification. diversification.

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DIVERSITY - PERFORMANCE (I)DIVERSITY - PERFORMANCE (I)

Diversity

Perf

orm

an

ce

Diversity attempts to measure the degree and extent of diversification (Herfindahl, Concentric, Entropy).

Diversity is initially positively related with performance, subsequently negatively related across developed markets.

Synergy, Size & Scale, Experience

Strategic Fit

Optimum level of diversification

Palich, et al. (2000)

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DIVERSITY - PERFORMANCE (II)DIVERSITY - PERFORMANCE (II)

Diversity

Perf

orm

an

ce

Diversity is initially negatively related with performance, subsequently positively related across emerging markets.

Threshold level of diversification

Huge initial investment, brand building

Risk diversification,conglomerate power

(Khanna & Palepu, 2001)

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INTERNATIONAL IDENTITYINTERNATIONAL IDENTITY

MNC’sMNC’s consciously engage in consciously engage in FDIFDI in different in different parts of the globe to forge cultural diversity as a parts of the globe to forge cultural diversity as a distinct advantage. Characteristics –distinct advantage. Characteristics –– It should have a spread of affiliates or It should have a spread of affiliates or

subsidiaries.subsidiaries.– It should have a spread of manufacturing It should have a spread of manufacturing

operations.operations.– It should have a spread of assets, revenues It should have a spread of assets, revenues

and profits.and profits.– It should have a spread of interest groups.It should have a spread of interest groups.– It should think globally; act locallyIt should think globally; act locally (Eg. (Eg.

McDonalds)McDonalds)..

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GLOBAL BUSINESS ENVIRONMENTGLOBAL BUSINESS ENVIRONMENT

Power Distance –Power Distance – It reflects the disparities in It reflects the disparities in income and intellectual development income and intellectual development (Eg. low (Eg. low power distance in developed markets and vice power distance in developed markets and vice versa for emerging markets).versa for emerging markets).

Feminity Index -Feminity Index - It reflects the disparities in women It reflects the disparities in women in workforce in workforce (Eg. high feminity index in developed (Eg. high feminity index in developed markets and vice versa for emerging markets).markets and vice versa for emerging markets).

Risk Profile –Risk Profile – It reflects the risk attitude of the top It reflects the risk attitude of the top management management (Eg. low risk profile in developed (Eg. low risk profile in developed markets and vice versa for emerging markets).markets and vice versa for emerging markets).

Group Scale -Group Scale - It reflects the relative role of team It reflects the relative role of team building building (Eg. low group scale in developed (Eg. low group scale in developed markets and vice versa for emerging markets).markets and vice versa for emerging markets).

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INTERNATIONAL BUSINESS INTERNATIONAL BUSINESS ENVIRONMENTENVIRONMENT

Cultural Adaptability –Cultural Adaptability – It reflects the adaptive It reflects the adaptive ability to a changing environment - culture, way ability to a changing environment - culture, way of life, attitude, code of conduct, dress sense, of life, attitude, code of conduct, dress sense, customs, time value, flexibility customs, time value, flexibility (Eg. high cultural (Eg. high cultural adaptability in developed markets and vice adaptability in developed markets and vice versa for emerging markets).versa for emerging markets).

Country Risk –Country Risk – It reflects the political and It reflects the political and economic risk economic risk (Eg. political stability, credit (Eg. political stability, credit rating, currency, FOREX reserves, inflation, rating, currency, FOREX reserves, inflation, interest rates, terrorism (9/11), corruption, interest rates, terrorism (9/11), corruption, judiciary)judiciary) of doing business in a particular of doing business in a particular country country (Eg. low country risk in developed (Eg. low country risk in developed markets and vice versa for emerging markets).markets and vice versa for emerging markets).

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INTERNATIONAL BUSINESS INTERNATIONAL BUSINESS ENVIRONMENTENVIRONMENT

Time Sensitiveness –Time Sensitiveness – Developed country Developed country managers regard time as precious, however, in managers regard time as precious, however, in most emerging markets meetings are delayed most emerging markets meetings are delayed and lasts unusually long. and lasts unusually long. Other factors – local Other factors – local celebrations, time-zones.celebrations, time-zones.

Language Barriers –Language Barriers – Developed country managers Developed country managers expect foreign partners to communicate in their expect foreign partners to communicate in their languages; in most emerging markets use of an languages; in most emerging markets use of an interpreter may be a standard protocol.interpreter may be a standard protocol.

Ethnocentrism –Ethnocentrism – Developed country managers Developed country managers tend to regard their own culture as superior; and tend to regard their own culture as superior; and vice-versa. High levels of ethnocentrism usually vice-versa. High levels of ethnocentrism usually has a negative effect on business.has a negative effect on business.

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GATTGATT

GATTGATT was a bi-lateral treaty initiated between was a bi-lateral treaty initiated between US US and some member countries in and some member countries in 19471947 to promote to promote free trade. In free trade. In 1995 (Uruguay Round) GATT1995 (Uruguay Round) GATT was was renamed to renamed to WTOWTO. It a multi-lateral treaty with . It a multi-lateral treaty with 143 143 (as on 2002)(as on 2002) member countries to reduce tariff member countries to reduce tariff and non-tariff and non-tariff (quota)(quota) barriers. It focused largely barriers. It focused largely on on TRIPS TRIPS (patents, copyrights, trademarks). It (patents, copyrights, trademarks). It also initiated provisions on also initiated provisions on anti-dumping.anti-dumping.

The The 1999 (Seattle Round)1999 (Seattle Round) saw a lot of protest saw a lot of protest amidst bringing agriculture under the purview of amidst bringing agriculture under the purview of TRIPS. It also highlighted the nexus between US & TRIPS. It also highlighted the nexus between US & WTO.WTO.

The The 2001 (Doha Round)2001 (Doha Round) focused on power blocks focused on power blocks (NAFTA, ASEAN, BRIC). (NAFTA, ASEAN, BRIC).

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EURO – SINGLE CURRENCYEURO – SINGLE CURRENCY

In In 1999 twelve1999 twelve member countries joined hands member countries joined hands to move over to a single currency to move over to a single currency (i.e. Euro);(i.e. Euro); three countries joined in three countries joined in 20022002 increasing it to increasing it to fifteen fifteen members. The notable exception was members. The notable exception was Great Britain which still continues with its local Great Britain which still continues with its local currency currency (i.e. Pound). (i.e. Pound).

The Euro was significantly devalued against the The Euro was significantly devalued against the Dollar till Dollar till 2002.2002. However with current recession However with current recession in the US 2002 onwards, in the US 2002 onwards, the Euro slowly started the Euro slowly started outperforming the Dollar.outperforming the Dollar.

However, the However, the Dollar Dollar still remains the most still remains the most preferred currency globally; primarily the preferred currency globally; primarily the OPECOPEC countries. countries.

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SINGLE Vs MULTIPLE CURRENCYSINGLE Vs MULTIPLE CURRENCY

Transaction Costs –Transaction Costs – Though the initial cost of Though the initial cost of introduction of a single currency is very introduction of a single currency is very complicatedcomplicated and costlyand costly; it helps avoiding ; it helps avoiding transaction coststransaction costs associated with a multiple associated with a multiple currency.currency.

Rate Uncertainty –Rate Uncertainty – A single currency eliminates A single currency eliminates the risk of the risk of competitive devaluations.competitive devaluations. However, a However, a multiple currency is preferable where the multiple currency is preferable where the business business cyclescycles of member nations are different. of member nations are different.

Transparency –Transparency – A single currency is transparent A single currency is transparent and competitive, but it may have and competitive, but it may have spill-over effects.spill-over effects.

Trade Block –Trade Block – It will strengthen the It will strengthen the EU identityEU identity which would not have been possible otherwise.which would not have been possible otherwise.

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FII Vs FDI INVESTMENTFII Vs FDI INVESTMENT Classical economists believed that foreign Classical economists believed that foreign

investment investment (in any form)(in any form) is basically a zero sum is basically a zero sum game game (i.e. the gain of one country is loss of (i.e. the gain of one country is loss of another).another). Neo classical economists believe that Neo classical economists believe that foreign investment may in fact be a foreign investment may in fact be a win-win win-win game.game.– FDI (transfer of tangible resources)FDI (transfer of tangible resources) is slow but is slow but

steady for the purpose of economic growth. It is steady for the purpose of economic growth. It is long term with high levels of commitment.long term with high levels of commitment.

– FII (transfer of tangible resources)FII (transfer of tangible resources) is fast but is fast but may have strong repercussions may have strong repercussions (i.e. hot money).(i.e. hot money). It is short-medium term with comparatively low It is short-medium term with comparatively low levels of commitment.levels of commitment.

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INTERNATION MARKETINGINTERNATION MARKETING

Product –Product – The various attributes of a product The various attributes of a product may receive different degrees of emphasis may receive different degrees of emphasis depending on differences in - depending on differences in - culture culture (food (food habits), habits), economic economic (middle class buying power), (middle class buying power), technologytechnology (micro-chip). (micro-chip).

Pricing –Pricing – It depends on the It depends on the competitive structurecompetitive structure (PLC – Kellogg's), (PLC – Kellogg's), customer awarenesscustomer awareness (micro- (micro-waves), waves), usageusage (talk time), (talk time), promotion promotion (surrogate (surrogate advertising).advertising).

Distribution –Distribution – It depends on the It depends on the market market characteristicscharacteristics (fragmented – concentrated), (fragmented – concentrated), buying patternsbuying patterns (spread), (spread), lifestylelifestyle (petroleum (petroleum outlets – departmental stores).outlets – departmental stores).

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INTERNATION FINANCEINTERNATION FINANCE

Currency Risk –Currency Risk – Many Indian IT companies Many Indian IT companies (Rs)(Rs) having business in having business in US (Dollar)US (Dollar) are asking for are asking for quotes in quotes in (Euro)(Euro) or are shifting bases in US to or are shifting bases in US to avoid risk of devaluation of Dollar. avoid risk of devaluation of Dollar.

Accounting Norms –Accounting Norms – The accounting norms of The accounting norms of one country one country (AS - India)(AS - India) may be different from may be different from that another trading country that another trading country (US – GAAP).(US – GAAP).

Leverage –Leverage – The leverage may vary across The leverage may vary across countries depending upon money and capital countries depending upon money and capital market conditions market conditions (Eg. debt is cheap in US; (Eg. debt is cheap in US; equity is cheap in India).equity is cheap in India).

Cost Structure –Cost Structure – Companies in India need to Companies in India need to investment in investment in fixed costsfixed costs due to poor due to poor infra-infra-structure structure compared to developed markets.compared to developed markets.

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INTERNATIONAL HRINTERNATIONAL HR

An An uniform HRuniform HR policy is idealistic to enable parity policy is idealistic to enable parity in performance appraisal; however, in most cases in performance appraisal; however, in most cases it is not desirable nor practiced.it is not desirable nor practiced.

Recruitment –Recruitment – In local recruitment, skills are more In local recruitment, skills are more important that cultural fit and vice-versa.important that cultural fit and vice-versa.

Compensation –Compensation – Differential pay packages exists Differential pay packages exists because of differences in purchasing power, because of differences in purchasing power, social security, double taxation, labour laws. social security, double taxation, labour laws.

Training –Training – It is a pre-requisite for international It is a pre-requisite for international business to reduce language, technology business to reduce language, technology (convergence, shortened life cycles),(convergence, shortened life cycles), and cultural and cultural barriers barriers (language)(language) vis-à-vis emerging markets. vis-à-vis emerging markets.

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INTERNATIONAL OPERATIONSINTERNATIONAL OPERATIONS

Locational Incentives –Locational Incentives – FDI in emerging markets FDI in emerging markets should explore options for should explore options for SEZ’sSEZ’s to explore to explore benefits benefits (tax holidays, reduce power costs)(tax holidays, reduce power costs) vis-à- vis-à-vis vis infrastructural bottlenecks.infrastructural bottlenecks.

Technology –Technology – The cost to be evaluated in terms of The cost to be evaluated in terms of latest technology latest technology (Euro VI)(Euro VI) vis-à-vis effective cost vis-à-vis effective cost of appropriate technology of appropriate technology (Euro II).(Euro II).

Outsourcing –Outsourcing – A company having a core A company having a core competence may be the source of global competence may be the source of global outsourcing outsourcing (Eg. Bosch spark plugs are used by (Eg. Bosch spark plugs are used by car manufacturers worldwide).car manufacturers worldwide).

SCM –SCM – Use of Use of ERPERP to network the extended to network the extended enterprise across the globe.enterprise across the globe.

Business

Business

strategic management

strategic management

strategic management

evolution of management

business strategy

strategy effects

strategy origin

germany strategy