Strategic

Strategic Management

(3YPT)University Assessment (100 marks)Prof. Dr. B. K. MukherjeeB.E.(Chem), DMS, Ph.D (Bus. Admin.)MIE, CE(I), LMIIChE, MIMA

Topics of Discussion1. Introduction: Definitions and an overview of the Business environment.2. Strategy Concept : Strategic Planning - Core competence, Synergy, Value creation and Delivery – Porter’s Generic Strategies.3. Environmental analysis. 4. The Strategic Mgmt process : Evaluating Strategies - TOWS Matrix.

Formulating Strategies – a) Corporate level : i) Ansoff’s matrix ii) BCG matrix

b) Business level : Porter’s 5-Forces Model c) Functional level : Porter’s Value-Chain

Implementing Strategies: a) McKinsey’s 7-S Framework b) Diversification, Mergers and Acquisitions c) Organizational structure, systems, culture and power.

5. Vision, Mission, Objectives. Corporate philosophy and governance.6. Strategy during various stages of life-cycle.7. Global Strategy.8. Managing Change.

List of Reference BooksMichael E. Porter, ‘COMPETITIVE ADVANTAGE’. Michael E. Porter, ‘COMPETITIVE STRATEGY’.Henry Mintzberg & James B. Quinn, ‘THE STRATEGY PROCESS: Concepts, Contexts & Cases’.C. Hill & G. Jones, ‘STRATEGIC MGMT:An Integrated Approach’.Francis Cherunilam, ‘STRATEGIC MANAGEMENT’.N. S. Gupta, ‘BUSINESS POLICY & STRATEGY MGMT’.G. Johnson & K. Scholes, ‘EXPLORING CORPORATE STRATEGY’.N. G. Nair & Latha Nair, ‘BUSINESS POLICY & STRATEGY MGMT’.Samuel Certo & J. Paul Peter, ‘STRATEGIC MANAGEMENT’.S. C. Sharma & T. R. Banga, ‘INDUSTRIAL ORGANIZATION & ENGINEER-ING ECONOMICS’.Fred R. David, ‘STRATEGIC MANAGEMENT—CONCEPTS & CASES’.

Introduction

NOMENCLATURE

What is “Management’? There are numerous definitions of “Management” offered by various authors but it es-sentially involves the elements of

a) Efficiency;b) Optimization of Resources; andc) Work involving people (Mary Parker Follett).

It also involves Improvisation/Innovation (jugaad), decision-making and perfor-mance of certain defined ‘functions’ to achieve pre-determined objectives.

What is “Strategy”?TOMORROW NEVER HAPPENS BY CHANCE. IT NEEDS TO BE PLANNED. And those who are prepared for tomorrow, benefit the most. The art of planning ac-tion to achieve a specific goal is called strategizing and the action plan is called ‘Strategy’ (Rajan Saxena).The term “Strategy” was originally applied to warfare as an ‘art of planning and directing large military movements and the operations of war’ (etymology: Greek “strategos”, 450 BC).In business, Strategy Management is now accepted as the “discipline of man-aging resources to achieve long term objectives” (Sharma & Banga).Richard L. Daft has defined Strategy as “The plan of action that prescribes resource allocation and other activities for dealing with the environ-ment and helping the organization attain its goals.”

Organization and Strategy

Strategy: the 5 P’s Prof. Henry Mintzberg of McGill University says, “Just as Marketing has its 4 P’s, so also Strategy may be looked upon as comprising the 5 P’s, or 5 formal definitions, i.e, Plan, Ploy, Pattern, Position, and Perspective.”STRATEGY AS PLAN: Some sort of consciously intended course of action, a guideline or a set of guidelines to deal with a situation. They have two essential characteristics: they are made in advance of the actions to which they apply, and they are developed consciously and purposefully. As plans, strategies may be general or specific.STRATEGY AS PLOY: Really just a specific ‘maneuver’ intended to outwit an op-ponent or competitor, eg. a corporation may threaten to expand plant capacity to stop a competitor from building a new plant. Here the real strategy ( as plan, that is the real intention) is the threat, not the expansion itself, and is therefore a ploy.

STRATEGY AS PATTERN: Consistency in behaviour, specifically a pattern in a stream of actions, whether or not intended, eg. Henry Ford offering the Model T only in black colour, ultimately resulting in loss of market share to General Motors.

STRATEGY AS POSITION: The position where an organization chooses to locate it-self in the external environment, usually a market, eg, niche players.

STRATEGY AS PERSPECTIVE: Culture, ideology and paradigms shared by the members of an organization/group through their intentions and/or actions so that ac-tion comes to be exercised on a collective yet consistent basis.

Some organizations, for example, are aggressive pacesetters, creating new technologies and exploiting new markets (eg, 3M Corp.); others are laid-back and complacent in long established markets, relying more on political influence than eco-nomic efficiency.

There are organizations that favour marketing, and build a whole ideology around it (a HUL); others treat engineering in this way (a L&T); while still others concentrate on their sheer productive efficiency (a McDonalds). Another example: the value systems shared by Tata group in India.In practice, all these different definitions of Strategy are inter-related and complemen-tary, and may ultimately contribute to the formulation of the firm’s overall strategy.

Strengths and WeaknessesSince most businesses operate as Open systems managers must, in addition to inter-acting with the internal environment, also constantly respond to and interact with the environment external to the enterprise.

INTERNAL (MICRO) ENVIRONMENT throws up the STRENGTHS and WEAK-NESSES of the enterprise, such as1. Preoperative expenses – Cost of Capital, Market Research, R&D, Product/Process design, Project implementation, etc. 2. Manufacturing – a) technology, b) plant location, c) capacity, d) raw materials, e) labour, f) utilities.3. Marketing – a) sales, b) promotion, c) distribution, d) advertising, e) packaging, f) after-sales service, g) warranty, h) resale value.

Strength perceptions

Threat perceptions

The Strategy Concept

Opening Case: DELL COMPUTERS

Started in 1984 by Michael Dell in his dorm room at the University Of Texas in Austin. Sales in 2002 was USD 30 billion, and presently about USD 10 million per day.Direct selling strategy;Customization of product over the Internet; and Using the Web for Supply Chain Mgmt (JIT), resulting in lowest (5 days’) Inven-tory on hand.

Competitive AdvantageMajor authority currently is Prof. Michael E. Porter of Harvard Business School (‘Competitive Strategy: Techniques for Analyzing Industries and Competitors’, 1980).According to Porter, competitive advantage grows fundamentally out of value a firm is able to create for its buyers that exceeds the firm’s cost of creating it. Value (Benefits/Cost)is what buyers are willing to pay, and superior value stems from offer-ing lower prices than competitors for equivalent benefits or providing unique benefits that more than offset a higher price.Today, every enterprise operates in a complex business environment, hence Strategy must necessarily change over time to fit the prevalent environmental conditions. However, to remain competitive, companies must focus on a) Core competence, b) Synergy, and c) Value creation.

Core Competence

Core competence: a business activity that an organization does particularly well in comparison to its competitors – should be 1) Distinctive – only for me / non-duplicable / based on culture (herbal - Dabur), relationship (ICICI Bank), etc. 2) Reproducible – in terms of Technology, Value (VFM), etc.SOME EXAMPLES OF CORE COMPETENCE

BRITANNIA INDUSTRIES – real expertise lies in handling perishable goods. However, AMUL is one step ahead of Britannia in the value chain be-cause of its own milk-producing unit.

HINDUSTAN LEVER LTD.– Distribution of FMCGs, Toiletries, Food prod-ucts, etc.- vast and efficient distribution network – long shelf life.

LARSEN & TOUBRO LTD – Engineering, Design and fabrication/erection of complex plants/infrastructure projects, incl. Nuclear reactors.

TOYOTA MOTORS, JAPAN : The Japanese have further promulgated this view by developing the “Five Zeros” and “Seven Wastes” concepts. Actually, Toyota’s core-competence lies not in making and selling cars, but in follow-ing the 5-zeros and 7-wastes strategies.

Toyota’s 5-zeros strategy

FIVE ZEROS STRATEGY: 1. Zero Customer feedback time – continuous customer feedback after sale.

2. Zero Product improvement time – ongoing R&D activities, prompt intro-duction of improved variants.

3. Zero Purchase time – JIT system, reduced inventory, lower costs.4. Zero Set-up time – Flexible design of tools, jigs, robotics, processes.5. Zero Defect – Frequent inspections, In-process QC, Flawless finish.

Toyota’s 7-wastes strategy

SEVEN WASTES TO BE AVOIDED:1. Waste of time on hand (i.e, waiting time) – because men, m/c, raw materi-

als, stocks are waiting, by proper planning and scheduling.2. Waste in Transportation – by planned logistics and material movements.3. Waste in over-productions – by proper production planning and estimations.4. Waste in stocks-on-hand – by effective sales forecasts.5. Waste in Processing – efficient use of technology.6. Waste in movement – by detailed Work-study.7. Waste in making defective products – state of mind

Core (Internal) Competences [Chaston]

INNOVATIONEffective or requiringimprovement?

WORKFORCEAppropriatestructure,motivated andcompetent or requiring Improvement?

PRODUCTIVITYAdequate,supported by ongoing invest-ment in Techno-logy or requiringimprovement

QUALITYAdequate andregularly assessed orrequiring improvement?

SYSTEMSInformation flows permit rapid problem resolution orrequiring Improvement?

Organizational competences

Clearly defined Market Opportunity

Formal Plan to exploit identified opportunity

Adoption of appropriate Market PositioningStrategicCompetences

Financial Resources capable of supporting Plan Resource Competences

Core (Internal) Competences

STRATEGIC COMPETENCE : Complacency is dangerous in a world full of competition. An organization’s strategic competence can be evaluated by test-ing whether the strategies are distinctive, appropriate, usable, measurable and sustainable.

FINANCIAL RESOURCE COMPETENCE : may be achieved by way of con-servative financial management rather than ambitious over-expansion through cavalier acquisitions of competitors’ businesses.

INNOVATION : To prosper and grow all organizations need to continually in-novate and improve their products and process technologies (eg. 3M)

WORKFORCE : HRM practices within the organization often play a decisive role, because a motivated and appropriately structured workforce can contrib-ute significantly towards building market competitiveness.

QUALITY : In the 1970s, countries like Japan and Korea were able to pene-trate global markets solely on the basis of superior quality of their products (concepts like TQM, Kaizen, etc). Over the years, it has been clearly demon-strated that companies whose products are perceived to be of a higher quality will enjoy higher profits and a larger market share.

PRODUCTIVITY (measured as level of value-added activities per employee per number of hours worked): The secret of Japanese competitiveness lies in adoption of concepts such as lean production, concurrent engineering and JIT, thereby making them world leaders and, at the same time, generating very healthy profits.

INFORMATION SYSTEMS : The advent of low-cost, extremely powerful computers offers opportunities through which to develop integrated Mgmt In-formation Systems

Synergy

‘Synergy’ occurs when the various parts of an organization interact to produce a joint effect which is greater than the sum of the parts acting alone, i.e, 1+1+1+1>4. This involves a process of ‘Vertical Integration’ and also a strong psy-chological element. Examples are:

OIL COMPANIES : Exploration(Crude oil, Natural gas) > Drilling(Technology) > Crude Transportation (Pipelines, Tank ships) > Crude Storage (Tank Farms) > Refining (Different fractions – CNG/LPG/ Petrol/Diesel/Kerosene/ATF/Naphtha/Lubes/Fuel Oil) > Product storage(Tanks) >Product Transportation > Retail pumps. This is an example of Forward Integration.

RELIANCE INDS : Textiles(VIMAL) >Yarn(Polyester Filament Yarn/Partially Oriented Yarn, etc) > Petrochemicals(Purified Terephthalic Acid, MonoEthylene Glycol, PolyPropylene, etc) > Oil Refining (Naphtha) > Exploration (Crude). This is an example of Backward Integration.

These are Integrated corporations who participate in the entire Value chain, right from Exploration to Retail Pumps or from Textiles to Oil Exploration.

Value Creation & Value Delivery

‘Value’ can be defined as the perception of benefits received against price paid by the customer, hence the term,”Value for money”. Value must be greater than the cost of resources for the business to be profitable.

The task of any business is to deliver customer value at a profit. Traditional view was that a firm makes something and then sells it. The econ-

omy is marked by shortages and customers are not fussy about quality, features or style (eg. Henry Ford’s Model-T).

However, this view will not hold in more competitive economies where peo-ple face abundant choices. The smart competitor must design and de-liver offerings for well-defined target markets.

This places Market at the beginning of the planning process and companies now have to develop a proper ‘Value-creation & Value- delivery’ se-quence in order to remain competitive.

Value Creation & Delivery (contd.)

Traditional Physical process sequence

Value Creation & Delivery

Traditional Physical process sequence

1.Make the product

Make/manufacture the product

Procure materialsDesign the product

2.Sell the product Advertise / Promote

Sell the productPrice the product

Distribute

Service after sales

Value creation & Value delivery

Value Creation & Delivery sequence

Emergent strategies: The case of Honda

According to Henry Mintzberg, emergent strategies are the unplanned responses to unforeseen circumstances, often arising from autonomous action by individual man-agers or from serendipitous discoveries or events. Mintzberg maintains that emergent strategies are often successful and may be more appropriate than intended strategies.In 1959, Honda Motor Co. decided to enter the U.S. motorcycle market. A number of Honda executives arrived in Los Angeles from Japan to establish the U.S. operation. Their original aim (intended strategy) was to focus on selling 250-cc and 350-cc ma-chines to confirmed motorcycle enthusiasts rather than the 50-cc Honda Cubs, which were a big hit in Japan. Their instinct told them that the Honda-50s were not suitable for the U.S. market where everything was bigger and more luxurious than Japan (eg, Harley-Davidsons, big sedans, etc).However, sales of the 250-cc and 350-cc bikes were sluggish, and the bikes them-selves were plagued by mechanical problems. It looked like Honda’s strategy was go-ing to fail.At the same time, the Japanese executives who were using the Honda-50s to run er-rands around Los Angeles were attracting a lot of attention.

Position the value

Focus Target audience

Customer Segmentation

2. Create the value Procurement/sourcing

Price

Product/Service developmt

Manufacturing

1. Select the value (“Homework” by Co.)

Distribution

3. Communicate the value Sales process

Sales Promotion

Advertising

Servicing

Sales force

S-T-P Strategic Mktg

Tactical Mktg.

The case of Honda (contd.)

One day they got a call from Sears, Roebuck who wanted to sell the 50-cc bikes to a broad market of Americans who were not necessarily already motorcycle enthusiasts. The Honda executives were initially hesitant to sell the small bikes for fear of alienat-ing serious bikers, who might then associate Honda with “wimpy” machines. In the end, they were pushed into doing so by the failure of he 250-cc and 350-cc models.Honda had thus stumbled onto a previously untouched market segment that was to prove huge: the average American who had never owned a motorbike.Honda had also found an untried channel of distribution: general retailers rather than specialty motorbike stores. By 1964, nearly one out of every two motorcycles sold in the United States was a Honda.In this case, the company’s meticulously planned intended strategy was a near disas-ter. What ultimately worked was the emergent strategy, not through planning but through unplanned action in response to unforeseen circumstances.

Serendipity and Strategy

Business history is full of examples which suggest that many successful strategies emerge not out of well-thought-out plans but out of serendipity, i.e, stumbling upon good things unexpectedly.THE CASE OF THE MINNESOTA MINING & MANUFACTURING CO (3M) In the 1920s, 3M was a small manufacturer of sandpaper. Its best-selling product, wet-and-dry sandpaper, was introduced in 1921 and was primarily sold to automobile companies for sanding auto bodies between paint coats. A problem with the paper, however, was that the grit did not always stay bound to the sandpaper and ended up damaging the paint surface. To tackle the problem in the early 1920s, a young CEO, William McKnight, hired 3M’s first research scientist, Richard Drew, who was fresh out of college on his first job. While experimenting with adhesives, Drew happened to develop a weak adhesive that did not seem very promising. However, it had an interesting quality: when ap-plied to paper, it would easily peel off from a surface without damaging it or leaving any adhesive residue. This led to the advent of “masking tape”, which would be ex-tensively used in all auto paint shops and, years later, the product “Post-it” pads.Sticky (“Scotch”) Tape subsequently became a major business for 3M and for 40 years McKnight and Drew together helped build 3M and shape its organizational cul-ture: that of encouraging initiative and innovation.

Serendipity and Strategy (contd.)

Another such example happened in the 1960s. At that time, 3M was producing fluoro-carbons for the air-conditioning industry. One day a researcher working with fluoro-carbons in a 3M lab spilled some of the liquid on her shoes. Later that day when she spilled coffee on her shoes, she was surprised to notice that the coffee formed into lit-tle beads of liquid and ran off the shoes without leaving any stain.Further research led to the development of ‘Scotch Guard’, a fluorocarbon-based product for protecting fabrics from liquid stains. Subsequently, Scotch Guard became one of 3M’s most profitable products and took the company into the fabric protection business, an area it had never planned to enter.But some companies have missed out on profitable serendipitous opportunities be-cause of strategic myopia. A century ago, the telegraph company Western Union turned down an opportunity to purchase the rights to an invention made by Alexander Graham Bell.The invention was the telephone, a technology that subsequently made the telegraph obsolete.

Strategic PlanningMarkets today are a far cry from the days of Henry Ford, Sr. (“They can have it any colour, so long as it is black”). A key factor that decides the success or failure of business at the marketplace is the competitive edge it enjoys over its competitors. This calls for careful planning.

Why plan?To take advantage of opportunities.Anticipate the keys for solving future problems.Develop courses of action (Strategies and Tactics).Computerize the risks of various options.Foster organizational learning.Impose odds of attaining goals (Probability, Productivity, Innovation, Change, etc.)

Competitive Strategy

NOTES ON MICHAEL PORTER’S COMPETITIVE STRATEGIES(‘Competitive Strategy: Techniques for Analyzing Industries and Competitors’, 1980)

Competitive advantage grows fundamentally out of value a firm is able to create for its buyers that exceeds the firm’s cost of creating it. Value is what buyers are willing to pay, and superior value stems from offering lower prices than competitors for equivalent benefits or providing unique bene-fits that more than offset a higher price. There are thus two basic types of competitive advantage: Cost leadership and Differentiation.

Goals indicate what a business unit wants to achieve. Strategy is a game plan for getting there, eg. Marketing strategy, Technology

strategy, Sourcing strategy, and so on.

Porter’s Generic StrategiesProf. Michael Porter has suggested three Generic strategies:Overall Cost Leadership: The business works hard to achieve the lowest costs in production & distribution, service, R&D, etc. so it can price lower than its competitors and win large market share. Firms must be good at Engg., Purchasing, Mfg, and physical Distribution. However, problem is that other firms will compete with still lower costs (eg. FDC).Product Differentiation : The firm comes up with a unique product in the market. Concentrates on achieving Technological superiority/ Specialized skills/Inno-vations that enables it to offer superior performance in an important customer benefit area valued by a large part of the market. Quality leadership by using best components, put them together expertly, inspect them carefully and effectively, com-municate their quality, eg. Intel Corp (Microprocessors) and NOKIA (Cell phones) in-troducing new products at breakneck speed.Focus: On one or more narrow market segments. The firm gets to know these segments intimately and pursues either cost leadership or differentiation within the target segment (eg., Pet foods/Pet products/ Pet parlours).’Pedigree’/’Nutripet’(stan-dard),‘Propac’/’Purine’(premium), ‘Royal Canin’/’Eucanoba’(super premium).

The Competitive edge

In order to succeed, companies need:a. Excellence : Thomas J. Peters & Robert H. Waterman, Jr., “In search of Ex-cellence: Lessons from America’s best run Cos.”Eight Characteristics of Excellent Management Practice

1. Bias for Action – Do it, Fix it, Try it. (Dynamism)2. Closeness to the customer – listen intently and regularly to the customer and

provide quality, service and reliability in response to customer needs.3. Autonomy and Entrepreneurship – innovation and risk-taking as an ex-

pected way of doing things, rather than conformity and conservatism.4. Productivity through people – employees are seen as the source of quality

and productivity.5. Hands-on, Value driven – the basic philosophy of the organization is well-

defined and articulated.6. Stick to the knitting – stay close to what you can do well.7. Simple form, lean staff – structural arrangements and systems are simple,

with small headquarters staff.8. Simultaneous loose-tight properties – centralized control of values, but op-

erational decentralization and autonomy.

b. Innovation: Strong R&D efforts, leading to innovative products, processes and operations. This will help in both Cost leadership as well as Differentiation.

c. Anticipation: Effective forecasting and efficient Market Research, enabling the company to know in advance the emerging market trends and future customer pref-erences.

BUSINESS DRIVERS: In order to enjoy the competitive edge companies have to be good in any or all of the following:

Operational Excellence – eg, case of the Toyota ‘zeros’. Product Leadership – through leading edge Technology and Innovation, eg,

3M Corp.with more than 3000 new products introduced every year. NOKIA comes out with average one new model a week!

Customer intimacy – closeness to the customer that fosters brand loyalty, eg, Colgate, Amul.

Business Strategic Questions

QuestionWhat to sell and whereWhy will people buy?How will you be a Market Leader?What makes your business hum?

IssueProducts/Risks/ MarketsCompetitive advantageCore Competence

Leading Drivers of business

ModelIgor Ansoff matrix

Michael Porter’s Generic strategiesPorter’s Value Chain

Noel Tracy & Fred Wiesen – Value driven

The Micro and Macro Environments

• Every enterprise possesses certain Strengths and Weaknesses within its inter-nal environment, be it in the areas of R&D, Technology, Mfg, Engg, Infra-structure, Marketing, Distribution, Human Resources, and so on. These vari-ables are within the firm’s control.

• At the same time, every enterprise operates in an external business environ-ment which poses certain Opportunities and Threats in terms of Economic, Political, Legal, Social and other such factors, which are outside the firm’s control.

Environmental Analysis

THE EXTERNAL (MACRO) ENVIRONMENTAll managers, whether they operate in a business, a Govt. agency, a church/religious orgn., a charitable foundation or a university, must

the forces external to the enterprise that may affect its operations, i.e, pose OPPOR-TUNITIES and THREATS.

Hence, forecasting and anticipating changes is important. Environments may be clas-sified as:

1. ECONOMIC ENV : is of the greatest importance to all types of organized en-terprise. In addition to such things as Inflation, Budgetary deficit, Monetary Policy, Bank Rate, Compulsory Reserve Ratio, etc.it includesa) Capital, in most cases, is a scarce resource. All kinds of operations are de-

pendent on the availability and prices of the required capital items (Machinery/Build-ings/Inventories of goods/Office eqpmt./Tools/Cash, etc.) Many of these items may be controlled by the Govt.

b) Labour : Availability (qualified personnel), Quality (trained and willing workers) and Price (USA v/s Europe v/s Asia) of labour is important.

Technologyy

Structure

Attitudes Processes

InternalEnvironment

External Env.

FIT

R&D

Mktg.

HR

(S&W)

O&T

Economic

PoliticalLegal

SocialDemographic

Geographic

Technical

Mfg..

Environmental Analysis

c) Price levels : Inflation not only upsets businesses but also has highly disturbing in-fluences on every kind of orgn. through its effects on costs of labour, material and other items.d) Productivity : is extremely important in addition to availability and price. In USA, prody. Is particularly strong in farming. Japan and China have very high levels of prody. in manufacturing businesses.

Productivity is partly dependent on the state of technology.e) Entrepreneurship : An Entrepreneur is usually regarded as one who

- sees a business opportunity;- obtains the needed resources;- knows how to put together an operation successfully; and - has the willingness to take a personal risk of success or failure.

2. TECHNOLOGICAL ENVIRONMENT : “Technology” may be regarded as the sum total of the knowledge we have of ways of doing things, includ-ing inventions, innovations and techniques.

Business must of necessity keep abreast of latest technology to survive in to-day’s competitive environment. Staffing and Leadership in an organization also vary with the level of technology.

Environmental Analysis

3. LEGAL ENV : Complex of laws, regulations and court decisions – Managers are expected to know the legal implications and requirements applicable to their actions. Hence, need for expert legal advice at all times. Laws may also create Opportunities and Threats.

PRIOR TO 1991, industries were regulated under Industrial Dev.& Regulation Act, 1951. Later, licensing system was abolished and MRTPA came into the picture. This was then replaced by the Consumer Protection Act, 1986 which provided

i) right to choice, ii) right to safety,iii) right to information,iv) right to be heard, and v) right to privacy – resale price maintenance not allowed.

TRADE RELATED INTELLECTUAL PROPERTY RIGHTS (TRIPR) : covers intel-lectual properties, copyrights, patents, trademarks, etc. which are assuming increasing importance, especially in the post-WTO regime.

Environmental Analysis

a) Patents Act : Patent is an exclusive document or legal protection given for an in-vention of a product or process. All categories except a few will get a Patent whose life is 14 years, but for Pharma and Agro-based industries it is 4 years. This may be an Opportunity for some and Threat for others.

b) Copyrights Act : Legal protection is given for a work of creative art or liter-ature, commercial exploitation of which is prevented. Its life lasts to 60 years after the death of its creator. c) Trade & Merchandise Act : Trademark is a legal protection for brand (logo, letter, name, slogan, etc), commercial exploitation of which is prevented. There is no life of trademarks. Sometimes, a product gets associated with its trademark, rather than its generic name – ultimate proof of success (eg.,Dalda, Xerox, Tempo).

4. LABOUR ENV : The labour climate, militancy and attitude varies from region to region (eg, Mumbai, Gujarat, Punjab, Tamilnadu, W.Bengal, Kerala, Kashmir, Goa). Also, labour laws play a role, eg. (a) number of members in a trade union, (b) political leaders heading a trade union.

Environmental Analysis

5. SOCIO-CULTURAL/DEMOGRAPHIC ENV : a) Cultural perceptions/Social norms : National holidays, level of corruption,

advertising standards, public morals, etc.b) Language connotations : differ from country to country, eg: Chevrolet –

‘NOVA’ (No-va = “Does not go” in Spanish);GM – “Body by Fisher” (connotation of Dead body in some languages);PEPSI – “Come alive” (“Rise from the Dead”, in Chinese).c) Demographic factors : i) earlier joint families, now nuclear families;

ii) More and more working women; iii) move toward metro-centric lifestyle, etc.

6. COMPETITIVE ENV : governed by the Porter’s Five-forces Model, i.e, threats from present rivals, suppliers, consumers, new entrants and substitutes.

7. ECOLOGICAL ENV : Environmental Safety awareness and conformity, Green-house Gas emissions, Ozone depletion, Env. Management Systems, Environmental Laws, etc.

Environmental Analysis

ETHICAL ENV : ‘Ethics’ are sets of generally accepted and practiced standards of personal

conduct. Often ethical standards are enacted into laws, but not all can be codi-fied.

Ethical standards vary with people’s culture and sense of values and from na-tion to nation or from society to society (Eg, election donations, payoffs, profi-teering, etc.).

9. CORPORATE SOCIAL RESPONSIBILITY: In recent years, there has been an increasing growth of strong social beliefs

pertaining to a better quality of life, for an environment cleansed of water and air pollution, decent housing, safe streets, efficient transportation and better health, educational and cultural facilities.

A society, awakened and vocal with respect to the urgency of social problems, is asking the managers of all kinds of organizations, particularly those at the top, what they are doing to discharge their social responsibilities and why they are not doing more (eg, Mithi River Development Project in Mumbai).

The Strategic Management Process

EVALUATECurrentMissionGoalStrategy

Scan Int.EnvmentCore comp. Synergy Value Creation

IdentifyStr.factors-StrengthsWeak- nesses

Scan Ext.Envment- National- Global

IdentifyStr.factors- Opports.- Threats

DefineNew: Mission Goals Grand Strategy

IMPLEMENTStrategy viaChanges inLeadership/ Culture- Structure Human Res Info/Control system

Top management in an enterprise plays a very important role in the formal Strategic Planning process which has the following main steps. These steps need to be fol-lowed sequentially:

The Strategic Management Model

MAIN STEPS IN STRATEGIC PLANNING: 1. EVALUATE/SELECT the corporate mission and corporate goals.

Scan/analyze the organization's external competitive environment to identify opportunities and threats.

Scan/analyze the organization’s internal operating environment and identify the organization’s strengths and weaknesses.

If necessary, define the new mission, goal and grand strategy. 2. FORMULATE strategies at the Corporate, Business and Functional levels that

- build on the organization’s strengths, and - correct its weaknesses, in order to take advantage of external opportunities

and counter external threats.3. IMPLEMENT the strategy through changes in organizational leadership or culture, corporate performance, structure, human resources or ethics.

Strategy Evaluation - The TOWS Matrix

Internal Factors

External Factors

ExternalOpportunities (O)

External Threats (T)

Internal Strengths (S) Internal Weaknesses (W)

eg, stregths in Mfg, R&D, Engg/Tech., Marketing, Finance, HR, etc.

Weaknesses in areas shown

SO Strategy: Maxi-Maxi Utilizing organization’s strengths to take advantage of opportunities – potentially most successful strategy Eg.,RELIANCE ,(KELLOGGS)

WO Strategy: Mini-Maxi Developmental strategy to overcome weaknesses and take advantage of opportunities eg., RASNA v/s TANG

ST Strategy: Maxi-Mini Use of strengths to cope with/ avoid threats. eg., MANGOLA

WT Strategy: Mini-Mini Retrenchment, Liquidation or Joint Venture to minimize both weaknesses and threats. eg., GOLD SPOT

Heinz Weihrich: “TOWS Matrix – A Tool for Situational Analysis”, 1982

Strategy Formulation - The Ansoff Matrix

Review of opportunities for improving the existing businesses’ performance

MARKETS

PRODUCTSExisting Products New Products

ExistingMarketsCC

NewMarkets

Market Penetration Strategy

Market Development Strategy

Product Development Strategy

Diversification Strategy

Increase Market share by - creating a SCA (Sustainable Competitive Advantage) with enhanced customer value. Increase product usage through - increase in frequency of use, - increase in quantity of use, and - new applications for current users.

Add product features, product refinement Develop a new-generation product Develop new (related) products for the same market (through brand extension).

Expand geographically Target new segments

Related Unrelated

Hierarchy of Organizational Strategy

PepsiCo were also into the Restaurants business(Taco Bell, Pizza Hut, KFC) but have now divested.

FORMULATING STRATEGIES: Corporate levelMulti-business corporations have to consciously decide as to what lines of businesses they would like to be in. If, at the same time, they are Multi-national corporations then they have to also decide which countries they would like to do business in. These de-cisions are of crucial importance which have a direct bearing on the fortunes of the enterprise and are made at the Corporate level.

Corporate level Strategies

PORTFOLIO STRATEGY The firm decides on a mix of business units and product-lines that fit to-

gether in a logical way to provide synergy and competitive advan-tage for the corporation.

Such a balanced mix of business divisions are called Strategic Business Units (SBUs).

Each SBU may have a unique business mission, product-lines, competitors and markets relative to the other SBUs (eg. SBUs of Hindustan Lever are Soaps & Detergents; Personal products; Fats & culinary items; Animal feeds; Beverages; Frozen foods; Speciality chemicals; Agribusiness; and Exports.)

Functional level

Business level

Corporate levelMultibusiness Corporation PepsiCo Inc.

SBU-5

Sports DrinksDole juicesLipton Tea

SBU-4

Other BeveragesTropicana, Aquafina

SBU-1

Soft DrinksPepsi, Mountain Dew, Slice

R&D Mfg Marketing HRD Finance

SBU-3

SnacksFrito Lay,

Rolled Gold Pretzels

SBU-2

Quaker Oats

Bruce Henderson, President, The BOSTON CONSULTING GROUP (BCG) and his team in 1970, evaluated SBUs with respect to two dimensions, namely- Business growth rate, i.e., how rapidly is the entire industry increasing, and- Market share, showing whether a business unit has larger or smaller share than its competitors.

The combinations of Growth and Share provide four categories of SBUs for a Corporate portfolio.

The BCG Matrix

The BCG Growth-Share Matrix, 1970

Analysis of the BCG Matrix

The combinations of Growth and Share, as seen in the BCG Matrix, provide four cate-gories of SBUs for a Corporate Portfolio:

1. The ‘STAR’ enjoys large market share in a rapidly growing industry – impor-tant because of additional growth potential. Profits should be ploughed back into the business for future growth and profits. Stars are visible and attractive, hence to be nurtured and developed.

2. The ‘CASH COW’ is a dominant business in a mature, slow-growth industry with a large market share, hence heavy investments in advertising and expan-sion are no longer required. Profits to be invested in other riskier businesses.

3. The ‘QUESTION MARK’ exists in a new, rapidly growing industry but has only a small market share. Hence risky, could become a Star or could fail.

Low

71

2

5

High LowMarket Share

Business Growth Rate

STARSRapid Growth And Expansion

QUESTION MARKSNew ventures, Risky –a few go on to become Stars, others divested

CASH COWSMilk to financeQuestion Marks and Stars

DOGSNo further investment,Keep if profitable.Consider divestment

3

4

6

Profits from Cash Cows may be invested in QMs in order to nurture them into future Stars.

4. The ‘DOG’ is a poor performer, enjoys small share of a slow-growth market and brings in little profit to the company. May be divested.

Most corporations have businesses in more than one quadrant, where circle size repre-sents the relative size of each business.

Business level Strategies

Porter’s Five Forces Model

1. Threat of Potential new entrants : Capital requirements and economies of scale are examples of two potential “barriers to entry”, eg,Automobile industry v/s small mail-order business, Times of India v/s Hindustan Times and DNA.

2. Bargaining power of buyers : ‘Informed’ customers become empowered cus-tomers because they now have a range of options at the market-place, eg, Eco-labeling. This situation is more pronounced if there are one or two large, pow-erful customers.

3. Bargaining power of Suppliers : Concentration of suppliers and availability of substitute suppliers are significant factors – whether supplier can survive with-out a particular purchaser or whether purchaser can threaten to self-manufac-ture the product.

4. Threat of substitute products : If the industry has a few close substitutes (eg, Coffee industry v/s Tea, Soft drinks or Fruit juices, all serving the customer needs for non-alcoholic drinks), then the customer may switch preferences due to cost changes, increased health-consciousness or any other such reason.

5. Rivalry among competitors : Scrambling and jockeying for position, eg, Pepsi v/s Coke ad campaigns.

Functional level Strategies

INDUSTRY COMPETITORSRivalry among existing firms

POTENTIAL NEW ENTRANTS

SUBSTITUTES

SUPPLIERS BUYERS

Threat of New entrants

Threat of substitute productsfrom other industry

Bargaining power of Suppliers

Bargaining power of Buyers

PORTER’S FIVE FORCES MODEL

Competitive Forces that determine Industry Profitability

The Porter’s Value Chain (“Competitive Advantage”, 1985)provides a valuable tool for identifying ways to create more customer value. Every firm is a collectionof activities performed to design, produce, market, deliver and support its product.The Value Chain identifies nine strategically relevant activities that create value and cost in a business.

The Porter’s Value Chain

PRIMARY ACTIVITIESThese comprise of the sequence of bringing materials into the business (Inbound Lo-gistics), converting them to final products (Operations), shipping out final products

Porter’s Value ChainM

A R G I N

M A R G

I NFirm Infrastructure

Human Resources Management

Technology DevelopmentProcurement

InboundLogistics

Operations

Outbound

Logistics

Mktg. &

SalesService

Primary Activities

Support Activities

(Outbound Logistics), marketing them (Marketing & Sales), and servicing them (Ser-vice). All these are Line functions.

SUPPORT ACTIVITIESThese are activities handled for the entire organization by certain specialized de-partments, hence these are Staff functions.

Infrastructure covers the costs of general management, planning, finance, ac-counting, legal, and govt. affairs that are borne by all the primary and support activities.

Procurement involves the sourcing of various inputs for each primary activity. Similarly, Human Resources Mgmt and Technology Development are spe-

cialized activities covering all areas of the firm’s business.

The Porter’s Value Chain (contd.)

COMPETITIVE ADVANTAGEThe firm’s task is to examine its costs and performance in each value-creating activity and look for ways to improve it.This is done by estimating its competitor's costs and performance as “benchmarks”. To the extent it can improve its performance vis-à-vis competitors, it can achieve competitive advantage.

HOW TO LEVERAGE COMPETITIVE ADVANTAGEEmphasis on close coordination and cooperation in areas involving cross-functional inputs, eg, marketing and production.Close monitoring and sustained improvements in core business processes, such as:

New product realization process Inventory management process Order-to-remittance process Customer service process.

Vision

VISION is a dream, maybe unachievable, but a beacon or “shining light” that guides the business of an organization.

It answers the question, “What do we want to become?”. It is an aspirational statement which is challenging and explainable in five

minutes. VISION is a dream with a deadline. It is a picture of the future that pulls us

into the future. A VISION statement is an attempt to capture that dream in words. It tells us

where we are going. A VISION statement, to be worth anything,has to differentiate our company

from the competition. Our VISION must connect with the hearts and dreams of our people.

Vision

Definitions

Andrew J. DuBrin defines Strategy as “the organization’s plan, or comprehensive program, for achieving its vision, mission and goals.”

Although Vision and Mission are often used synonymously, sometimes a distinction is made in which case Mission evolves from the Vision.

VISIONMISSION

OBJECTIVESPOLICIES &

PROCEDURES

PROGRAMS

STRATEGIES

VISION incorporates the philosophy of the founders or top management, while MISSION defines the value-systems that guide the operation of an enterprise (eg, TISCO Art. Of Assocn.)OBJECTIVES are goals/ends towards which activities of an organization are directed.POLICIES are guidelines for managerial decision making. PROCEDURES are detailed specifications describing how work is to be done.PROGRAMS are precise plans for single, one-time use.STRATEGY is the game-plan for achieving the company’s long-term objectives.

From an organizational perspective, VISION must have the following:1. A sense of worthiness – must be desirable.2. An ability to inspire. 3. An invitation to share – appeals to long-term interest of stakeholders.4. Clear and understandable detail – must be focused.5. Achievability – must be realistic and feasible.6. Flexibility – can accommodate change.7. Communicability – should be explainable.

Vision statements

VISION STATEMENT OF MICROSOFT“To empower people through great software, any time, any place, on any device”.

VISION OF GENERAL ELECTRIC“We have a vision that includes helping our clients be successful, satisfying our stake-holders, and maintaining a competitive edge.But our vision starts with being the employer-of-choice, because it is our people who are the key to making us successful“.

VISION OF BOEING COMPANY in 2016“People working together as a global enterprise for aerospace leadership”.

VISION OF GOOGLE“To organize the world’s information and make it universally accessible and useful”.

Vision statements (contd.)

VISION OF INFOSYS“To be a globally respected corporation that provides best-of-breed business solu-tions, leveraging technology, delivered by best-in-class people.”VISION OF ITC GROUP“Sustain ITC’s position as one of India’s most valuable corporations through world-class performance, creating growing value for the Indian economy and the Company’s stakeholders.”VISION OF ICICI BANK“To develop ICICI Bank into an organization that is empowered by bright and tal-ented individuals, working in teams and riding on the backbone of world-class tech-nology.”VISION OF AIRTELBy 2010 Airtel will be the most admired brand in India: Loved by most customers, Targeted by top talent, Benchmarked by most businesses”.

Vision & Mission statements

VISION elements of MAHINDRA-LIFESPACES LTD To be the largest real estate developer.

To be the preferred real estate developer at the national level. To be the provider of housing solutions. To be the provider of dream houses.

MISSION STATEMENTWE ARE PASSIONATE ABOUT WHAT WE BUILD

We believe that buildings are much more than bricks and mortar. Buildings are ultimately places where people laugh, love, work and play. It is where our children grow up and dream their dreams. A building must also be a fine expression of our time. That is why you will find that every Mahindra property has a distinctive look

and expresses a clear architectural idea.

Vision & Mission statements

VISION STATEMENT OF METTo shape professionals, to conquer the present and future challenges to the socio-eco-nomic fabric of our society, by institutionalizing search, development, research, and dissemination of relevant knowledge through structured learning programs.

OUR MISSIONTo evolve, develop and deliver dynamic learning systems to equip professionals with conscience and commitment to excellence and courage to face busi-ness challenges.

Mission

MISSION is a statement of intention and value-systems. It answers the ques-tion, “What is our business?” and seeks to define the firm’s purpose and where it fits into the world.

It may describe an organization in terms of satisfying customer needs, goods/services it produces, market segments it services, and so on.

A MISSION STATEMENT is a clear and compelling statement that serves to unify the efforts of an organization.

It must stretch and challenge the organization and yet be achievable. Also, the MISSION STATEMENT must answer the following questions:

1. What is our reason for being?2. What is our basic purpose?3. What business are we in?4. What is unique or distinctive about our organization?5. What do we stand for?

Missions Statements

MISSION STATEMENT ofADITYA BIRLA GROUP OF COMPANIES“To be a premium global conglomerate with a clear focus at each business level…..to deliver superior value to all our stakeholders”.

MISSION STATEMENT ofTITAN INDUSTRIES LTD“To be Innovative, World Class, Contemporary and build India’s most desirable brands.”

MISSION STATEMENT of LARSEN & TOUBRO LTD’s HR Dept.“Building a vibrant, professional work environment that attracts, nurtures and retains good performers, and Developing the expertise to be a strategic partner to fulfill present and future business needs.”(“Imageering”)

Mission (contd.)Characteristics of Mission statementa) Focus on limited goalsb) Stress on major Policies and Valuesc) Definition of major scopes

Local, Regional,National, International

Range of Technologies you wish to apply Which part of the value chain you will participate in

Which market to service (rural, urban,…)Refers to range of products and applications

Refers to degree of diversification

Major scopes

Industry scopeProduct Appln scope

Mkt segmentscope

Vertical scope

Competence scope

Geographical scope

Mission

MISSION STATEMENT OF ARVIND MILLS CO. LTD“To achieve global dominance in select businesses built around its core competencies through continuous product and technical innovations and customer orientation with a focus on cost effectiveness.”MR. DHIRUBHAI AMBANI (on what made Reliance one of Asia’s most competitive enterprises) “It has been a combination of vision, entrepreneurship and profes-sionalism.”MR. K. B. DADISETH, former Chairman of Hindustan Lever :“…the excitement of attaining the unachievable is a huge motivator for growth.”PETER DRUCKER has remarked: “Without an effective mission statement there will be no performance…The mission statement has to express the contribution the enterprise plans to make to society, to econ-omy, to the customer. It has to express the fact that the business enterprise is an institution of society, and serves to produce social benefits.”

J.R.D. TATA’S MISSION STATEMENT(Excerpts)

Strive for Perfection and you will reach Excellence. No success or achievement in material terms is worthwhile, unless it serves

the needs or interest of the country and its people and is achieved by fair and honest means.

Good human relations not only bring great personal rewards, but are essential to the success of any organization.

Objectives

OBJECTIVES are goals/ends towards which activities of an organization are directed . They provide direction to various activities and serve as benchmarks for measuring efficiency and effectiveness of an enterprise. Objectives may be short-range or long-range, and to be effective, objectives must be SMART, ie, Specific, Measurable, Achievable, Realistic and Time-bound. However, for strategic planning, only long-term objectives (ranging over 5 years or more) are considered.Example: VISION (Where do I want to be?) : To win the New York Marathon and be known as the “Marathon Man”.MISSION (How do I get there?) : To be fit, healthy and strong with exceptional stamina.OBJECTIVE (What must I do?) : To lose 10 kgs by x date and to participate in the In-dian Marathon.STRATEGY (Ways & means?) : 1) Rent a house close to Fitness centre, 2) Join Ath-letic Club, 3)compete in local sports, 4) monitor weight, 5) proper diet, etc.

Policies

POLICIES are guidelines for managerial activities. They provide the framework within which decisions are to be made.

All critical areas which are important should have clearly defined policies. Policies are flexible and are subject to interpretation. When policy is interpreted identically over a period of time it becomes a

Rule. RULE is a desired form of conduct/behaviour which is not flexible, because

it is a matter of Yes/do or No/don’t. Rule does not change by individual/person and has to be enforced rigidly.

TYPES OF POLICIES1. Originated policies: Formulated by top management, they become rules to be

followed. They are basic policies.2. Appealed policies: Clarifications asked for by subordinates when the stated

policies are not clear.3. Imposed policies: Forced by Govt., courts etc, eg. Taxes, levies, job reserva-

tions, and so on.4. Functional policies: Production, Mktg, Purchase, Finance, HR, etc.

Procedures

PROCEDURES are clear-cut administrative specifications prescribing the time-se-quence for work to be done. They lay down in detail how an activity is to be carried out. However,they are good only for repetitive activity. [Manmohan Prasad]

DISTINCTION BETWEEN POLICIES AND PROCEDURES1. Policies are a guide to decision-making, whereas Procedures are a guide to ac-

tion only.2. In case of Policies there is some room for interpretation and discretion,

but in case of Procedures, as they are more rigid and specific, there is no scope for discretion.

3. Policies are basic and formulated by top management; Procedures are based on Policies and are generally decided at somewhat lower levels of manage-ment.

PROGRAMS: are generally used for single-use or one-time planning. A precise plan which lays down the operations to be carried out to accomplish

a given task, eg. Program to open ten branches in the next year. Result-oriented and involve planning for future events.

McKinsey’s 7-S Framework

McKinsey’s 7-S Framework [Source: Peters & Waterman, “In search of

Excellence…”]

According to McKinsey & Co, Strategy is only one of seven elements in successful businesspractice, hence real change in largeinstitutions is a function of at least seven areas of complexity.Some of these may be regarded asthe hardware while some others maybe regarded as software of business.

Style: Company employees share a common way of thinking and behaving, eg. McDonald’s employees smile at the customer, while IBM employees are very professional in their customer dealings. Skills: Employees have the necessary skills to carry out the company’s strategy.Staff: Co. has hired able people, trained them well and assigned them to the right jobs.Shared values: act as a bond whereby employees share the same set of guiding values, eg. Tata companies. When all these elements are present, companies are usually more successful at strategy implementation.

Staff

// Shared values

Strategy

Skills Style

Structure

Systems

Hardware of successSoftware of success

// Bond

Growth Strategies

Integrative Growth

Forward integration

Backward integration

Horizontalintegration

Intensive Growth

Marketpenetration

Productdevelopmt

Marketdevelopmt

Diversification Growth

Conglomeratediversification

Horizontaldiversification

Concentric Diversification

ANSOFF’S MATRIX

Intensive Growth - The Ansoff’s Matrix

Review of opportunities for improving the existing businesses’ performance

H.Igor Ansoff’s ‘Product - Market Expansion Matrix, HBR, 1957 [Ref: Aaker David, Ch.11]

Diversification

DIVERSIFICATION: process of making the production base wider by bringing in the element of variety. A business enterprise may diversify

to utilise the existing infrastructure better so as to improve efficiency; to reduce the risk of ‘putting all the eggs in one basket’; to reap the fruits of synergy accruing out of “joint efforts and shared costs”.

These synergies may be identified as Production synergy (same plant/machinery), Marketing synergy (same dealers, ad agency/campaigns, etc), Financial synergy, and Organizational synergy (same staff, infrastructure, etc).

TYPES OF DIVERSIFICATION:

MARKETS

PRODUCTSExisting Products New Products

ExistingMarkets

NewMarkets

Market Penetration Strategy

Market Development Strategy

Product Development Strategy

Diversification Strategy

Increase Market share by - creating a SCA (Sustainable Competitive Advantage) with enhanced customer value. Increase product usage through - increase in frequency of use, - increase in quantity of use, and - new applications for current users.

Add product features, product refinement Develop a new-generation product Develop new (related) products for the same market (through brand extension).

Expand geographically Target new segments

Related Unrelated

1. CONCENTRIC Diversification is the process of adding products/ services that are related to the existing products/services (“sticking to the knitting”). They fall within the framework of the organization’s knowhow and experience in technology, product line, distribution channels or customer base. Example, ‘Amul’ has diversified into chocolates, ice creams, butter, ghee, cheese, etc., Honda from motor cycles into scoot-ers, three-wheelers, cars, generators, etc.2. HORIZONTAL Diversification: is where the organization adds unrelated prod-ucts/services for existing customers, eg. Reliance Textiles (Vimal) into Petrochem-icals and now Petroleum products.

Less risky, because the customers are known; May be accomplished by acquiring the shareholding of the competitor, by pur-

chase of assets or by pooling of interests of two organizations.

3. CONGLOMERATE Diversification: refers to the strategy where significantly different products/services are added to the present product line, with a view to

cash in on expanding/new market opportunities, or bringing about some turnaround by way of conversion of losses into profits.

Examples, the Godrej group diversifying from its core steel business (locks, safes, cupboards, office furniture, etc.) into cosmetics, consumer durables, toiletries, vanas-pati, food, mosquito repellants, and so on.Similarly, DCM diversifying from textiles into chemicals, calculators, sugar, automo-biles, etc. ITC diversifying from tobacco into hotels, edible oils, financial services, etc.

Some of the important mechanics for adopting Conglomerate Diversification may be summarised as follows:

Supporting some divisions with cash flow from other divisions during the pe-riod of development or temporary difficulty;

Using the profits of one division to cover the expenses of another division without paying the taxes from the first division;

Taking advantage of unusually attractive growth opportunities; Distributing risk by serving several different markets; Gaining better access to capital markets and better stability or growth in earn-

ings; Increasing the price of an organization’s stock, and Reaping the benefits of synergy (as already discussed).

‘DIVERSIFICATION INTO DISASTERS’Business World has identified the following factors which could lead to disasters:

1. If you are not big enough, do not try it.2. If you lack in staying power, stay clear of grandiose diversification.3. Look before you leap.4. If possible, be the first.5. Where feasible, float a separate company.6. Check whether you have the marketing skills necessary in the new business.7. Be ready to accept your limitations and compromise.8. If you are a small player, it is better to have a small ego.9. Tax saving alone is not a good enough reason to diversify.10. Ultimately, it is no crime to remain undiversified.

Turnaround strategies

DEFINITION: ‘Turnaround’ is the process of re-activating a deteriorating, sick unit which is facing a “‘survival crisis” due to consistent down-ward trend in operating profits. This could be attributed to several reasons:

DANGER SIGNALS – THE CAUSES OF CORPORATE SICKNESS

1. Inadequate Financial Controls : Ignorance of market dynamics and/or lack of adequate control over cash inflows/outflows.

2. Ineffective Management : on account of the following factors

a) One-man rule: All power is concentrated in the CEO, hence he keeps on repeating his past follies.

b) Combined Chairman and Chief Executive: Weakens not only the process of execu-tion but also effective monitoring and controlling.

c) Ineffective Board of Directors: Rubbers stamps, signing on the dotted line, thereby organisation continues to falter on all fronts.

d) Other managerial shortcomings: Managers, who have sneaked into the organisation either through inheritance or other backdoor entries, have neither the capability/will to develop nor the aptitude to learn from others. They remain in their own shells sur-rounded by sycophants and continue to be a constant liability to the company.

3. Competition : Inefficient and irrational organisations, which do not keep pace with consumer preferences in a competitive market, will face serious prob-lems. Substituting products before they reach the decline stage will provide energy and dynamism to the organisation.

4. High Cost structure (compared to competitors): due toa) Inability to take advantage of economies of scale;b) Cost disadvantage due to ineffective control of strategic variables;c) Under-utilization of capacity/ill-maintenance of plant & machinery;d) Other operating inefficiencies/unfavourable Govt. policies.

5. Changes in Market demand : either due to shift in consumer preferences or other innovations resulting in emergence of better product in the market, re-sulting in huge financial losses to the company.

6.Lack of Marketing effort: resulting from managerial complacency in the declining phase. Failure to keep up the tempo of sales/promo-tions or make the product appear attractive and presentable.

7.Big Projects & Acquisitions: Over-ambitious organisations sometimes go in for projects/acquisitions for which they have neither the resources nor the expertise to manage, thereby blocking funds without ROI.

8. Irrational Financial policy : either due to high Debt/Equity ratio or use of inap-propriate financing sources/cash management.

9. Inadequate Reinvestment in Business : Adequate reinvestment in plant, equip-ment and machinery is necessary for a company to remain competitive.

TURNAROUND MANAGEMENT is defined as the measures adopted to re-verse the negative trends in the performance indicators of a com-pany, i.e, to turn a sick company back to healthy one. The exact nature of turnaround management and the relative importance of different factors may vary from company to company.

TURNAROUND STRATEGIES: Prof. Pradeep N. Khandwalla (ex-IIM-A) has iden-tified the following 10 elements of a successful turnaround strategy:

1. Change in top management: An efficient new CEO is usually appointed, who will not only streamline things but may also have to change the corporate cul-ture.

2. Initial credibility-building measures: with both stakeholders and shareholders, especially the employees.

3. Neutralizing external pressures: economic, political, trade-unions, vested inter-ests, etc.

4. Initial control: Quick, firm grip over the affairs of the organisation.5. Identifying quick pay-off activities: Marketing/promotional efforts.6. Rapid cost-reductions: may require laying off surplus manpower.7. Revenue generation: emphasis on recoverables, etc.

8. Asset liquidation for generating cash: SBUs, real estate, etc.9. Mobilization of the organization: infusing a sense of urgency and dynamism in

the existing work-force, improvement in HR through training and recruitment of competent people, if necessary.

10. Better internal coordination: lack of which is often a cause of the decline, in the first place.

Case Study 1 : Tata-Corus Ltd

THE GENESIS: In late 2005, Corus plc, an Anglo-Dutch Steel giant (formed by the merger in 1999 of erstwhile British Steel and Koninklijke Hoogovens of the Netherlands), was in the midst of a Euro 650 million cost-reduction drive and looking for a low-cost base. Headquartered in London, Corus has plants in Britain, Holland, Germany, France, Norway and Belgium and employs 43,300 people across the world. Tata Steel, on the other hand, was looking to move up the value-chain and sell in de-veloped US and European markets where per-capita steel consumption was 10 times that of India.One had cheap iron ore and a low-cost manufacturing base, the other the technology. One wanted higher margins, the other lucrative markets. The fit seemed perfect.At first, the negotiations progressed for a merger. But the question of dilution of eq-uity of Tata Sons in Tata Steel to as low as 15% prompted the Tatas to later suggest a straightforward proposal on ownership and control – an all-cash, friendly takeover deal for the UK steel giant, which would catapult Tata Steel to the global 5th position with a combined annual output of 28 million tonnes .

THE TAKEOVER PROCESSOctober 2006: Tata Steel proposes a $7.6 billion takeover of Corus at 455 pence a share in cash. Corus Board approves the Tata bid and calls for EGM on December 4 for shareholder approval.November 2006: Brazil’s Companhia Siderurgica Nacional (CSN) enters the scene with a proposal of 475 pence/share. Corus postpones the EGM to December 20 to allow CSN more time.December 2006: Tata Steel revises its bid to $9.2 billion at 500 pence/share, shortly thereafter CSN revises its offer to $9.6 billion at 515 pence/share in cash.January 2007: In view of the interest shown by both parties, the Takeover Panel at Corus decides to conduct an auction on 31 January, 2007.January 30-31, 2007: Tata Steel kickstarts the auction at 10 pm IST with a 520 pence/share bid. Around 5.30 am, after nine rounds of rapid-fire bidding, Tata Steel emerges the winner with a $12.1 billion (608 pence/share) offer for Corus, trumping CSN’s final bid of 603 pence/share. Final price: Rs.53,400 crores. [Source: TOI, 1.2.2007]

THE FALLOUTAdvantages

Becomes 5th largest steel producer from 55th position; Combined steel production to be over 28 MTPA; Capacity achieved immediately, at half the cost of new green-field plants; Gets a ready market in Europe; Additional net profit to be up to $350 million a year; Cost of production down to $700-770 per tonne from $1200-1300 per tonne

for new project;Challenges

Acquiring CSN’s stake in Corus; Synchronising Corus’ operations; Three years for realising optimum profits; Job-cuts possibly needed at Corus – vehemently opposed by Unions; Gaining shareholders’ confidence at home; Corus’ margins lower than world average at 10% (Tata Steel itself has margin

of about 40%!) [Source: Mumbai Mirror, Feb 1, 2007]

A NEW ORDER (early 2007)Indians now dominate the global Steel business with Mittal and Tata among the top 5.

Rank Company Nationality Output (MTPA)

1 Arcelor Mittal Luxembourg 110

2 Nippon Steel Corp Japan 32

3 POSCO Korea 30.5

4 JFE Holdings Inc Japan 29.9

5 Tata-Corus India 28

6 Baoshan Iron & Steel Co China 22.7

7 United States Steel USA 19.3

8 Nucor Corp USA 18.4

9 Riva Italy 17.5

10 CSN Brazil 5.2

RECENT ACQUISITIONS BY THE TATA GROUP

OCTOBER, 2006: Tata Tea bought 33% in South African tea company Joekels through its subsidiary Tetley Group (undisclosed amount).AUGUST: Tata Tea acquired 30% in US’ Glaceau (Energy Brands) for USD 677 mil-lion (Rs.3000 crores).JUNE: Tata Tea acquired US-based Eight O’clock Coffee for USD 220 million (Rs.1050 crores). DECEMBER, 2005: Tata Chemicals picks up 63.5% in UK’s Brunner Mond Group for Rs.508 crores.DECEMBER: Tata Steel acquires Millennium Steel of Thailand for around USD 404 million (Rs.1800 crores).NOVEMBER: TCS buys out Chilean BPO firm Comicorn for USD 23 million (Rs.107.02 crores)OCTOBER: TCS acquires Sydney-based FNS for USD 260 million (Rs.1100 cr).OCTOBER: Tata Technologies purchases INCAT International, UK for USD 91 mil-lion (Rs.411 crores).OCTOBER: Tata Tea acquires Good Earth for USD 320 million (Rs.1400 cr).JULY: Tata’s VSNL acquires Teleglobe for USD 239 million (Rs.1050 crores).AUGUST, 2004: Tata Steel buys Singapore’s NatSteel for Rs.1300 crores.MARCH: Tata Motors takes over Daewoo Commercial Vehicles Co. for Rs.459 crores.FEBRUARY, 2000: Tata Tea buys Tetley, UK for Rs.1870 crores.

Mergers & Acquisitions[Nair & Nair, “Business Policy & Strategy Mgmt”]

a) Characteristics: There are three popular terms to describe this strategy.

1. Acquisition : One firm (acquiring firm) acquires (buys) another (acquired firm). The acquired one loses its identity, eg. HLL acquiring TOMCO, Nicholas Piramal acquiring Roche Products.

2. Merger : This happens when two firms join together to become a third one. In this process the following things can happen:

Both firms lose their identity, Both may retain their identity, or Any one firm may lose its identity.

eg., Reliance Petroleum merged with Reliance Industries Ltd.3. Amalgamation: More than two firms join together and form a new firm losing the identity of original firms, eg. ACC was formed in 1937 by amalgamating 11 cement companies.

In all the above cases the activity taking place is merger, whether through ac-quisition or amalgamation, hence “Merger” is a common term which includes acquisi-tion and amalgamation. Amalgamation is sometimes also called ‘Consolidation’.

b) Purpose: The Orgn for Economic Cooperation & Devpmt (OECD) conducted a study in 1974 and listed the following motives for M&A:A. Economies of Scale 1. Obtain real economies of scale

2. Acquire capacity at reduced prices

B. Market Share reasons 3. Increase market power4. Expand production without price reduction5. Build an empire6. Rationalize production

C. Financial Synergy 7. Obtain tax advantage8. Obtain monetary economies of

scale (eg., manufacturing of goods purchased earlier)

9. Use of complementary resources 10. Gain promotional profits

D. Risk-related reasons 11. Spread risks by diversification 12. Avoid firm’s failure

c) Types: Merger can be between firms of similar or dissimilar products/services. Ac-cordingly, merger can be also be classified under the following categories:

Vertical (i.e, Forward or Backward) integration (eg, Sugar Mills into industrial/potable alcohol, Reliance Industries Ltd.);

Horizontal integration, i.e, seeking ownership or increased control over competitors through either Amicable Merger or Acquisition or Hostile Takeovers (eg, Coke’s acquisition of Parle Products or Wall’s acquisition of Kwality in India);

Concentric expansion, i.e, expansion into related products/services (eg, RPG Group’s acquisition of Philips Carbon Black and Harrisons Malay-alam, both related to the Tyre industry);

Conglomerate expansion, i.e, expansion into unrelated markets, eg, UB conglomerate of Vijay Mallya includes Best & Crompton (engineering), Man-galore Chemicals & Fertilizers Ltd., Kissan (foods), Unitel (telecom), King-fisher Airways, in addition to several liquor companies (United Breweries, Carew Phipson, Herbertsons, McDowell, etc.)

GUIDELINES FOR SUCCESSFUL MERGERS & ACQUISITIONSWillard F. Rockwell, Jr, former Chairman of Rockwell International, has outlined the following for successfully implementing Mergers & Acquisitions:

1. Pinpoint and spell out the objectives clearly.2. Specify the gains for the stockholders of both organizations.3. Clearly define the business of the acquiring company.4. Ensure that the management of the acquired company is, and or at least could

be made, competent.5. Ensure that the resources of both the companies mesh together. This results in

synergy.6. Involve the CEOs of both companies in the entire merger program.7. Determine the strengths, weaknesses and other key performance factors of

both the acquiring and target organizations.8. Create a climate of mutual trust by anticipating problems and discussing them

early with the target company.9. Make the right advances. Avoid clumsy overtures, thoughtless actions and

carelessly voiced sentiments.10. In assimilating the newly acquired company, maintain and, if possible, im-

prove the status of the newly acquired mgmt team.

Case Study 1 (contd.)

THE FUTURE : MIXED REACTIONS ON THE INTEGRATION ISSUERatan Tata, in his typically low-key announcement, stated: “Tata Steel saw a strategic fit with Corus in the UK and the Netherlands, which will give it a global reach in Europe and synergies with low-cost interme-diates in India.”However, for the Tatas, the Corus acquisition is only half the battle won. While the fi-nancial and strategic issues may sound rational, much depends on the post-merger in-tegration. An estimate suggests that 70% of all failed M&As have come apart due to cultural issues and ego clashes.Peter Killing, Professor of Strategy at the International Institute of Management De-velopment says, “The integration issues in the case of Tata-Corus are all the more complex because Corus is the result of a cross-border merger. They have a mix of Dutch and English culture and now add an Indian element as well.”The Tatas, on their part, have started by retaining the existing CEO of Corus and are initiating some changes, but refraining from a complete overhaul of the top manage-ment overnight.

Jay Bourgeois, Professor at Darden School of Business, University of Virginia says, “If there is a rival company in close proximity, it will take advantage of this (vulnerable) situation by snapping up customers as well as (key) management.”Phanish Puranam, Professor, London Business School, feels that at such times.. “Pro-ductivity drops, competition takes away business and soon the value of the deal is gone even before integration starts.”

There has to be clear and honest communication. The Tatas need to identify the key people at Corus and ways to retain them. The Tatas have put two Corus people on the Tata board, indicating that they don’t view the acquired company as a loser.

Bourgeois further continues that Tetley, the Tata’s previous UK buy, ran into cultural and racial obstacles because of concerns that British employees would resent having managers from a former British colony.“The trick here is for the Tatas to learn from their Tetley acquisition and maybe use some of the managers who handled that integra-tion,” says IIMD’s Peter Killing.

FACTORS TO BE AVOIDED FOR SUCCESSFUL M&AsStevan Prokesch & William Powell, Jr. have suggested the following:

1. Paying too much.2. Straying too far afield (“Stick to the knitting”).3. Marrying disparate corporate cultures (US companies in Japan).4. Counting on key managers staying on.5. Assuming a boom market won’t crash.6. Leaping before looking.7. Swallowing too large a company.

PROCESS OF MERGERS AND ACQUISITIONS involves the following steps:1. Screening process.2. Assessing suitability of the project.3. Valuation of mergers and takeovers.

(For more details, refer to N.S.Gupta, ‘Business Policy & Strategic Mgmt’, Himalaya Publishing House)

Change

An English Humorist once said: “There are only two things certain in life: Death and Taxes”. However, there is a third : ChangeThe only constant feature in life is Change.Change is necessary for life; in fact, change is all around people – in the seasons, in their social environment, in their biological processes, and in their work organiza-tions.Beginning with the first few moments of life, a person learns to meet change by being adaptive. A persons very first breath depends upon the ability to adapt from one environment to another. In an organizational situation, the forces for change may come from the external envi-ronment, from within the organization, or from the individuals themselves.There are various ways to respond to these forces. One approach is simply to react to a crisis. Unfortunately, this is usually not the most effective response.Another approach is to deliberately plan the change. This may require new objectives or policies, organizational rearrangements, or a change in leadership style and organi-zational culture.

The Change process

KURT LEWIN’S ‘FIELD FORCE’ THEORY (1951) states that organizations may be in a state of equilibrium, as a result of a dynamic balance of forces pushing for change on the one hand and forces resisting change by trying to maintain the status quo on the other.

In initiating change, the tendency is to increase the driving forces, which usu-ally also increases resistance by strengthening the resisting forces.

KURT LEWIN’S THREE-STEP CHANGE PROCESS

According to Lewin, successful change can be planned and requiresa) Unfreezing the status-quo or equilibrium state in an organization by creat-

ing motivation for change. The need for change is made so obvious that indi-viduals and teams can easily recognize and accept it. It can be achieved by in-creasing the ‘driving forces’, which are forces that direct behaviour away from the status quo, by decreasing the ‘restraining forces’, which are forces that resist change and push behaviour toward the status quo, or by combining the two approaches.

b) The Change itself, which may occur through assimilation of new information, exposure to new concepts, or development of a different perspective, thereby

INTERVENTION1. Unfreezing2. Changing3. Refreezing

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leading to adoption of new values, attitudes and behaviour by the individuals or teams..

c) Refreezing: The new practices are locked into place by supporting and rein-forcing mechanisms so that they become the new norm, thus preventing peo-ple from reverting back to the old status quo.

Thus, Lewin’s three-step process treats change simply as a break in the organization’s equilibrium state.

Managing Change

To survive and eventually to prosper, an organization must monitor its external envi-ronment and align itself with changes that occur, or tend to occur. There are various ways to respond to the forces of change. One approach is simply to react to a crisis. Unfortunately, this is usually not the most effective response.Another approach is to deliberately plan for, implement and manage change. This may require new objectives or policies, organizational rearrangements, or a change in leadership style and organizational culture. Ultimately, this seems to be the core factor that separates successful organizations from unsuccessful ones.Successful organizations do not believe in change per se but in proactive (rather than reactive) change, radical when required, and reinvent themselves as and when necessary.

Organizational Culture

Just as individuals have personalities, so do organizations. Just as tribal cultures have totems and toboos that dictate how each member will act toward fellow members and outsiders, organizations have cultures that influence employee actions toward clients, competitors, bosses, peers and subordinates.Defn:”A system of shared meaning within an organization that deter-mines, in large degree, how employees act.” (Robbins and Coulter). An organization’s culture conveys important perceptions, assumptions and norms governing values, activities and goals – it tells employees how things are done, what’s not done, and what’s important.In every organization there are systems or patterns of values, symbols, rituals, myths and practices that have evolved over time. This culture – the “way we do things around here” -- influences how employees conceptualize, define, analyse and resolve issues. Culture is something people acquire through living and from those around: one is not born with it. Individuals perceive organizational culture on the basis of what they see, hear or experience within the organization. It takes time and sometimes rather harrowing experiences, either personal or observed in the case of others, to ac-quire this culture.

THE SOURCE OF CULTURELargely based on what has been done before and the degree of success achieved with those endeavours. The original source of culture usually reflects the vision or mission of the organiza-tion’s founders and the biases on how to carry out the idea.The founders establish the early culture by projecting an image of what the organiza-tion should be. They are not constrained by previous customs or approaches.Employees learn culture through Stories, Rituals, Material symbols and Language/Jar-gon.

HOW CULTURE AFFECTS MANAGERSCulture is of particular relevance to managers because it constrains what they can and cannot do and these constrains are rarely explicit. They are not written down and hardly ever spoken about. But they exist, eg.

Look busy even if you’re not. If you take risks and fail around here, you’ll pay dearly for it. Pedigree is more important than degree.

Resistance to Change

“The world hates change, yet it is the only thing that has brought progress”

--- Charles F. KetteringIndividuals in the social system tend to resist many types of change because new habit patterns or sacrifices are called for. People resist change for three reasons: uncertainty, concern over personal loss and the belief that the change is not in the organization’s best interest. This applies both to managers as well as other employees.Sometimes, managers are the biggest barriers to the introduction of change, largely due to a feeling of insecurity.There are two types of opposition to change:

Rational opposition, based on reasonable analysis that determines costs to be greater than benefits; and

Irrational opposition, based on fear, emotionalism, or selfish desires that ig-nores benefits to others.

However, not all changes are resisted. At times the tendency is offset by people’s de-sire for new experiences or the accompanying rewards. Any change can either be successful or can develop into a behavioural problem, de-pending on how skillfully it is managed.

Management of Change

In order to successfully manage change, managers must build into the organization

an awareness of change, an ability to forecast change, and an attitude of welcoming change.

The manager’s options for change essentially fall into three categories:

Structure – Departmentalization, chain of command, span of control, job redesign, delegation, structural design, etc.

ProcessesWork methods,

systems, equipments, etc.

AttitudesPerceptions, expectations,

Behaviour, etc.

Organisation