Business Strategy

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BUSINESS STRATEGY BUSINESS STRATEGY

Course Code: 611 & 612Course Code: 611 & 612Dr. Subir Sen – Faculty Member, IBSDr. Subir Sen – Faculty Member, IBSE-Mail:E-Mail: [email protected], [email protected], 98306973681) Crafting & Executing Strategy – 1) Crafting & Executing Strategy – Thompson & Thompson & Strickland.Strickland.2) Strategic Management – 2) Strategic Management – Pearce & Robinson.Pearce & Robinson.3) Strategic Management – 3) Strategic Management – Fred. R. David.Fred. R. David.4) Exploring Corporate Strategy – 4) Exploring Corporate Strategy – Johnson & Scholes.Johnson & Scholes.5) Competitive Advantage – 5) Competitive Advantage – Michael E. Porter.Michael E. Porter.6) HBR – 6) HBR – Articles.Articles.7) HBR & ICMR - 7) HBR & ICMR - Case Studies.Case Studies.

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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 allocating choices across various businesses and allocating resources among them.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 finding It is all about finding newer ways to perform existing processes, or newer ways to perform existing processes, or better still adopting new processes altogether.better still adopting new processes altogether.

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STRATEGIC MANAGEMENT - STRATEGIC MANAGEMENT - DEFINITIONDEFINITION

Strategic managementStrategic management attempts to attempts to integrateintegrate the the traditional management functions and traditional management functions and alignalign the the organization as a whole with the broader organization as a whole with the broader environment to make resource allocations in a way environment to make resource allocations in a way to achieve the to achieve the strategic intent strategic intent of the organization. of the organization.

This alignment is called This alignment is called strategic fitstrategic fit.. It serves as a It serves as a road-maproad-map for the organization in its for the organization in its

growth trajectory. It provides the growth trajectory. It provides the direction – extent direction – extent – pace – timing– pace – timing..

It depends on the It depends on the turbulenceturbulence of the environment of the environment and the and the aggressivenessaggressiveness of the organization.of the organization.

It distinguishes the It distinguishes the winnerswinners from the from the loserslosers..

PILLARS OF STRATEGIC MANAGEMENTPILLARS OF STRATEGIC MANAGEMENT

Differentiation – Differentiation – Differentiation of key inputs and Differentiation of key inputs and technologies helps a firm to consciously move away technologies helps a firm to consciously move away from homogeneous to heterogeneous markets from homogeneous to heterogeneous markets enabling them to earn super-normal profits from enabling them to earn super-normal profits from normal profits.normal profits.

Integration – Integration – Whenever dealing with a complex task of Whenever dealing with a complex task of managing a business (i.e. involving a no. of variables managing a business (i.e. involving a no. of variables with cross linkages) it is in the interest of simplicity with cross linkages) it is in the interest of simplicity that the task be broken up in smaller components. that the task be broken up in smaller components. However, for effective control, integration is essential. However, for effective control, integration is essential.

Alignment – Alignment – Since differentiation is prone to Since differentiation is prone to replication, it is in the interest of the firm to replication, it is in the interest of the firm to differentiate continuously by aligning the resources differentiate continuously by aligning the resources with environmental opportunities.with environmental opportunities. 55

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FitFit

STRATEGIC MANAGEMENT - STRATEGIC MANAGEMENT - FRAMEWORKFRAMEWORK

FitPoliticalPoliticalStrategic Intent

Strategic

Management

Finance

Marketing

Economical

Social & Cultural

Fit

Fit

Fit

Fit

Polit

ical

Tech

nolo

gica

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HR

Oper

atio

nStr a

t eg i

c

Man

agem

ent

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STRATEGIC MANAGEMENT - FEATURESSTRATEGIC MANAGEMENT - FEATURES

It forms the core activity of the top It forms the core activity of the top management.management.

It requires full commitment of the top It requires full commitment of the top management.management.

It is long-term in nature.It is long-term in nature. It is all about creativity and innovation.It is all about creativity and innovation. It is about adaptation and response to the It is about adaptation and response to the

same.same. It involves substantial resource outlay.It involves substantial resource outlay. It is irreversible.It is irreversible. It is a holistic and integrated approach.It is a holistic and integrated approach. It provides broad guidelines.It provides broad guidelines. It is a top to bottom process.It is a top to bottom process. It can make or destroy a company.It can make or destroy a company.

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STRATEGIC MANAGEMENT – MYTHS STRATEGIC MANAGEMENT – MYTHS

It involves short-cuts.It involves short-cuts. It is about forecasting.It is about forecasting. It is about a definite formula.It is about a definite formula. It attempts to minimize risk.It attempts to minimize risk. It brings instant success.It brings instant success. It about mere data and facts.It about mere data and facts. It involves nitty-gritty's.It involves nitty-gritty's. It a bundle of techniques or even tricks.It a bundle of techniques or even tricks. It involves only the top management.It involves only the top management. It is fool-proof in nature.It is fool-proof in nature. It is rocket science.It is rocket science.

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STRATEGIC MANAGEMENT - STRATEGIC MANAGEMENT - IMPERATIVESIMPERATIVES

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 innovate, again and again …….To innovate, again and again ……. To be proactive, rather than reactive.To be proactive, rather than reactive. To develop core–competencies.To develop core–competencies.

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STRATEGY - ORIGINSTRATEGY - ORIGIN

The word The word strategystrategy has its origin from the Greek word has its origin from the Greek word strategiastrategia meaning Military Commander. In the ancient meaning Military Commander. In the ancient days battles were fought over days battles were fought over landland. In contrast, today's . In contrast, today's battles are fought over battles are fought over marketsmarkets..

In the ancient days battles were won not by virtue of In the ancient days battles were won not by virtue of size of the army or armory; but by virtue of their size of the army or armory; but by virtue of their courage, obsession, and more importantly - strategies.courage, obsession, and more importantly - strategies.

Even in today’s markets, battles fought on the market Even in today’s markets, battles fought on the market front are won by companies by virtue of their front are won by companies by virtue of their obsession & strategies, whose origin can be traced to obsession & strategies, whose origin can be traced to some of the greatest battles fought in the ancient some of the greatest battles fought in the ancient days.days.

It is an old wine in a new bottle; but with a lot a rigour It is an old wine in a new bottle; but with a lot a rigour and robustness.and robustness.

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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 Ford.Toyota’s entry in the US, challenging GM and Ford.

US attack of Morocco to capture Germany US attack of Morocco to capture Germany – Strategy: Pin-hole strategyStrategy: Pin-hole strategy– Wal-Mart challenging Sears by entering small Wal-Mart challenging Sears by entering small

towns.towns. Allied Forces Vs Germany (WW-II)Allied Forces Vs Germany (WW-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.

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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 in the business environment brings about business environment brings about discontinuitydiscontinuity. The . The things happening around the firm when totally things happening around the firm when totally disconnected from the past leads to a disconnected from the past leads to a paradigm shiftparadigm shift..

A paradigm is a dominant belief about how the A paradigm is a dominant belief about how the business and its environment operates.business and its environment operates.

The first major discontinuity in the history of global The first major discontinuity in the history of global business environment was the - business environment was the - Industrial RevolutionIndustrial Revolution..– Mass ProductionMass Production– Complicated ProcessesComplicated Processes Organization Size– Complex StructuresComplex Structures

Evolving of an emerging paradigm – Evolving of an emerging paradigm – survival of the survival of the fittestfittest (Fayol & Taylor, 1910).(Fayol & Taylor, 1910).

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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 (i.e. push to pull).Affluence of the new customer (i.e. push to pull).– Changes in the technology fore-front.Changes in the technology fore-front.– Homogeneous to heterogeneous products.Homogeneous to heterogeneous products.

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). Efficiency management paradigm (Ansoff, 1960). Efficiency and effectiveness are no longer sufficient.and effectiveness are no longer sufficient.

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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

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Prior to 1950

1950 to 19701970 to

1990

1990 onwards

3

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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 mutually Strategy can be segregated into certain mutually

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

– 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.

– Biases and prejudices has a very little role to Biases and prejudices has a very little role to play in strategic choices pursued by managers. play in strategic choices pursued by managers. Learning always begin on a clean sheet of paper.Learning always begin on a clean sheet of paper.

– It is primarily the top management’s prerogative.It is primarily the top management’s prerogative.

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

initially decides which industry to enter, how it initially decides which industry to enter, how it will compete, who will be the top managers. will compete, who will be the top managers.

– The top managers then decide on the type of The top managers then decide on the type of organization structure & systems to be in place.organization structure & systems to be in place.

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

– Management control systems has a dominating Management control systems has a dominating role in influencing firm performance. Once the role in influencing firm performance. Once the control systems are in place, everything else control systems are in place, everything else follows.follows.

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Positioning Approach – Michael E. Porter (1980)Positioning Approach – Michael E. Porter (1980)– Choose a consumer segment and position your Choose a consumer segment and position your

product accordingly.product accordingly.– A firms performance is inversely related with the A firms performance is inversely related with the

bargaining power of environmental forces to bargaining power of environmental forces to which it is exposed.which it is exposed.

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

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

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

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Core Competence – C. K. Prahalad (1990)Core Competence – C. K. Prahalad (1990)– The key to superior performance is not doing the The key to superior performance is not doing the

same as other organizations, locating in most same as other organizations, locating in most attractive industries and pursuing the same attractive industries and pursuing the same strategy; but exploiting the resource differences strategy; but exploiting the resource differences among them.among them.

– Core competencies are a set of skills that are unique Core competencies are a set of skills that are unique and can be leveraged. They are complex resources and can be leveraged. They are complex resources and undermines a firms competitive advantage.and undermines a firms competitive advantage.

– It enables a firm to deliver unimaginable value It enables a firm to deliver unimaginable value ahead of time.ahead of time.

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

If you cannot see the future, you cannot reach there. If you cannot see the future, you cannot reach there. A strategic intent is a statement of purpose of A strategic intent is a statement of purpose of

existence. It involves an obsession to be the best or existence. It involves an obsession to be the best or outperform the best. It is the cornerstone of an outperform the best. It is the cornerstone of an organizations strategic architecture reflecting its organizations strategic architecture reflecting its desired future state or its aspirations. desired future state or its aspirations.

It provides a sense of direction and destiny.It provides a sense of direction and destiny. It’s a philosophy that distinguishes it from its It’s a philosophy that distinguishes it from its

competitors.competitors. It implies a significant stretch. A substantial gap It implies a significant stretch. A substantial gap

between its resources and aspirations. A gap that between its resources and aspirations. A gap that consciously manages between stagnation and consciously manages between stagnation and atrophy.atrophy.

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Dominant

STRATEGIC INTENT - HIERARCHYSTRATEGIC INTENT - HIERARCHY

VisionMission

Objectives

GoalsPlans

Integrative

Specific

Single

Many

Dominant Logic

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DOMINANT LOGICDOMINANT LOGIC

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

To put it more simply, it can be perceived as a set To put it more simply, it can be perceived as a set of working rules 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 can be what can be donedone and more importantly and more importantly what cannot be donewhat cannot be done. .

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

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

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VISIONVISION

It is a dream It is a dream (not a forecast) (not a forecast) about what the company about what the company wants to become in the foreseeable future. wants to become in the foreseeable future. It provides It provides an unity of purpose amidst diversity of personal an unity of purpose amidst diversity of personal goals. It ensures that the company does not wander goals. It ensures that the company does not wander off into off into unrelated zones unrelated zones or fall into an or fall into an activity trapactivity trap. It . It enables the top management to remain focused.enables the top management to remain focused.

It is a combination of three basic elements –It is a combination of three basic elements –– An organizations fundamental reason for existence; An organizations fundamental reason for existence;

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

company.company.– It represents the company’s audacious, but It represents the company’s audacious, but

achievable aspirations.achievable aspirations.

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VISION - CHARACTERISTICSVISION - CHARACTERISTICS

Reliance – Where growth is a way of life. In Reliance Reliance – Where growth is a way of life. In Reliance when a new project becomes operational top when a new project becomes operational top managers hand over charge to the SBU heads and managers hand over charge to the SBU heads and move on to a new project.move on to a new project.

Clarity –Clarity – Vividly descriptive image of what the Vividly descriptive image of what the company wants to be known for in the future.company wants to be known for in the future.

Reachable –Reachable – It should be within a reasonable target It should be within a reasonable target in the known future; not an utopian dream.in the known future; not an utopian dream.

Brevity –Brevity – It should be short, clear, and memorizable. It should be short, clear, and memorizable. Empathy –Empathy – It should reflect the company’s beliefs to It should reflect the company’s beliefs to

which it is sensitive.which it is sensitive. Sharing –Sharing – The company across all hierarchies should The company across all hierarchies should

have faith in it.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. It makes strategic alignment easier.It makes strategic alignment easier. It facilitates development of skills & capabilities.It facilitates development of skills & capabilities.

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MISSIONMISSION

Mission defines the space that a business wants to Mission defines the space that a business wants to create for itself in a competitive terrain. It enables the create for itself in a competitive terrain. It enables the firm to define its business landscape and identify its firm to define its business landscape and identify its competitive forces.competitive forces.

It is intuitive for managers to conceive their business It is intuitive for managers to conceive their business in terms of the customer needs they are serving -in terms of the customer needs they are serving -

– What business are we in?What business are we in?– Which customer needs are we serving?Which customer needs are we serving? It should be It should be broad based broad based and and relevantrelevant to all stake- to all stake-

holders. Although the purpose may change over time. holders. Although the purpose may change over time. A broad mission statement helps in fending A broad mission statement helps in fending competitors. competitors.

It serves as a road map to reach the vision; its reason It serves as a road map to reach the vision; its reason for existence.for existence.

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MISSION – SOME IDEASMISSION – SOME IDEAS

Reliance – We are in the business of integration. Reliance – We are in the business of integration. All the businesses of the company are strongly All the businesses of the company are strongly integrated with their main business, though some integrated with their main business, though some may seem unrelated in nature. may seem unrelated in nature. Some other Some other examples - examples - – We do not offer shoes,We do not offer shoes,

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

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

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GOALS & OBJECTIVESGOALS & OBJECTIVES

Reliance – We want to become a Rs.100K crore Reliance – We want to become a Rs.100K crore company by the year 2005.company by the year 2005. It is an end result It is an end result (quantifiable) something a firm aims and tries to (quantifiable) something a firm aims and tries to reach in a time bound frame. It provides a reach in a time bound frame. It provides a quantitative feel to an abstract proposition.quantitative feel to an abstract proposition.– It lends direction – time frame in the medium It lends direction – time frame in the medium

term.term.– It provides a benchmark for evaluation.It provides a benchmark for evaluation.– It helps identifying key success factors.It helps identifying key success factors.– It is based on Management by Objectives (MBO).It is based on Management by Objectives (MBO).– It adds legitimacy and motivation.It adds legitimacy and motivation.– It keeps the mid management pre-occupied.It keeps the mid management pre-occupied.– It prevents deviation.It prevents deviation.

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PLANSPLANS

Reliance – Desire to invest 25K crore in telecom Reliance – Desire to invest 25K crore in telecom business by circa 2010.business by circa 2010. It is the process of It is the process of garnering necessary inputs, coordinating garnering necessary inputs, coordinating appropriate technologies, and gaining access to appropriate technologies, and gaining access to desired markets to achieve the desired goals and desired markets to achieve the desired goals and objectives. It is specific to a particular business. objectives. It is specific to a particular business. The details of the plan Reliance Telecom adopted The details of the plan Reliance Telecom adopted were - were - – 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 barriers.Use price-elasticity to break market barriers.– Acquire a market share of indomitable position.Acquire a market share of indomitable position.

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STRATEGIC DRIFTSTRATEGIC DRIFT

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

When changes in the environment is When changes in the environment is incrementalincremental, , equilibrium is maintained. However, equilibrium is maintained. However, radical radical change change may lead to disequilibrium. may lead to disequilibrium. This state of affairs is This state of affairs is known as strategic drift. It often leads to an known as strategic drift. It often leads to an organizational crisis.organizational crisis.

In such a context, strategies lose touch with the In such a context, strategies lose touch with the emerging realities.emerging realities.

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STRATEGIC DRIFT FRAMEWORKSTRATEGIC DRIFT FRAMEWORKDe

gree

of c

hang

e

Time

Continuity

Incremental ChangeState of Flux

Radical Change

Stage of Atrophy

Environmental ChangeStrategic Change

Strategic DriftStage of Transformation

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ORGANIZATIONAL POLITICSORGANIZATIONAL POLITICS

Strategic drift often leads to organizational politics. Strategic drift often leads to organizational politics. Organizational politics involves intentional acts of Organizational politics involves intentional acts of influence to enhance or protect the self-interest of influence to enhance or protect the self-interest of individuals or groups over organizational goalsindividuals or groups over organizational goals. . Some instances of organizational politics -Some instances of organizational politics -– Formation of powerful groups or coteries.Formation of powerful groups or coteries.– Creating obligations of reciprocity.Creating obligations of 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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INTENDED & REALISED STRATEGIESINTENDED & REALISED STRATEGIES

An intended strategy is an expression of An intended strategy is an expression of interest of a desired strategic direction. A interest of a desired strategic direction. A realized strategy is what the top management realized strategy is what the top management actually translates into practice. Usually there actually translates into practice. Usually there is wide gap between the two when is wide gap between the two when organizational politics is evident. Other causes organizational politics is evident. Other causes ––– The plans are unworkable and utopian.The plans are unworkable and utopian.– The environment context has changed.The environment context has changed.– Influential stake-holders back out.Influential stake-holders back out.– Persons responsible for strategy Persons responsible for strategy

conceptualization and implementation are conceptualization and implementation are divergent. divergent.

An An emergent strategy emergent strategy evolves over time and evolves over time and takes shape with the changing environment. A takes shape with the changing environment. A lot of inter-active learning takes place when lot of inter-active learning takes place when strategies emerge.strategies emerge.

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LOGICAL INCREMENTALISMLOGICAL INCREMENTALISM

According to the According to the incrementalism approachincrementalism approach (contrary to (contrary to integrated approachintegrated approach) practitioners simply do not arrive ) practitioners simply do not arrive at goals and announce them in crafted and well defined at goals and announce them in crafted and well defined packages. They simply unfold the particulars of the packages. They simply unfold the particulars of the sub-system in stagessub-system in stages, , but the master scheme of the but the master scheme of the rational comprehensive scheme is not apparentrational comprehensive scheme is not apparent. .

However, this is not to be treated as However, this is not to be treated as “muddling”“muddling”; but as ; but as a defensible response to the complexities of a large a defensible response to the complexities of a large organization that organization that mitigate against publicizing goalsmitigate against publicizing goals..

Strategy formulation and implementation are linked Strategy formulation and implementation are linked together in a continuous improvement cycle. Learning together in a continuous improvement cycle. Learning is an integral part of logical incrementalism.is an integral part of logical incrementalism.

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IMPLEMENTING INCREMENTALISMIMPLEMENTING INCREMENTALISM

General Concern – General Concern – A vaguely felt awareness of an A vaguely felt awareness of an issue or opportunityissue 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 finer without details to invite pros and cons leading to finer refinementsrefinements..

Agent of Change – Agent of Change – Formal ratification of a change Formal ratification of a change plan through MBOplan through MBO..

Leveraging Crisis – Leveraging Crisis – A sudden crisis or an opportunity A sudden crisis or an opportunity should be used as a trigger to facilitate acceptance should be used as a trigger to facilitate acceptance and implementation of change. The broader objective and implementation of change. The broader objective should serve the overall interest of the organization.should serve the overall interest of the organization.

Adaptation – Adaptation – As implementation progressesAs implementation progresses..

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STRATEGIC TRANSFORMATIONSTRATEGIC TRANSFORMATION

Strategic transformation (a complete Strategic transformation (a complete overhauling of the strategic architecture) overhauling of the strategic architecture) becomes inevitable whenever a strategic drift becomes inevitable whenever a strategic drift takes place. Tampering with surface level takes place. Tampering with surface level factors often leads to atrophy.factors often leads to atrophy.

Dominant logic’s are the cornerstones of Dominant logic’s are the cornerstones of change when strategic transformation is change when strategic transformation is apparent. apparent.

Dominant logic’s are very rigid and sticky and Dominant logic’s are very rigid and sticky and prone to inertia. It creates blinders. prone to inertia. It creates blinders.

Strategic transformation becomes smooth Strategic transformation becomes smooth through a change in top leadership. As it brings through a change in top leadership. As it brings with it a different dominant logic. with it a different dominant logic.

A new mindset provides additional lenses for A new mindset provides additional lenses for the top managers look at existing problems.the top managers look at existing problems.

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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 skills regeneration from knowledge, experience, and skills that fosters experimentation and questioning and that fosters experimentation and questioning and challenge around a shared purpose. It helps prevent a challenge around a shared purpose. It helps prevent a strategic drift from occurring at the first place. A strategic drift from occurring at the first place. A learning organization must continuously focus on learning organization must continuously focus on unlearning as well. unlearning as well. Factors that fosters a learning Factors that fosters a learning organization - organization - – Pluralistic –Pluralistic – An environment where different and even An environment where different and even

conflicting ideas are welcome. conflicting ideas are welcome. – Experimentation –Experimentation – Fosters a culture of risk taking. Fosters a culture of risk 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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ENVIRONMENTAL CONDITIONSENVIRONMENTAL CONDITIONS

Simple Complex

Stat

icDy

nam

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Forecasting

ScenarioPlanning

Decentralization

Learning Organization

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ANALYZING ANALYZING BUSINESS ENVIRONMENTBUSINESS ENVIRONMENT

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PLANNING & STRATEGIC PLANNINGPLANNING & STRATEGIC PLANNING

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

Strategic planning is a function of discounting the Strategic planning is a function of discounting the future. It is based on the assumption of radical future. It is based on the assumption of radical change. It is pro-active in nature.change. It is pro-active in nature.

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

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

4242

ENVIRONMENTAL SCANNINGENVIRONMENTAL SCANNING

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

Environmental scanning is very important component Environmental scanning is very important component of strategic planning. A manager has to continuously of strategic planning. A manager has to continuously scan the environment to ensure alignment of the scan the environment to ensure alignment of the strategies with the radically changing environmentstrategies with the radically changing environment. .

Environmental factors can be external as well as Environmental factors can be external as well as internal to the organization. It is exploratory in nature; internal to the organization. It is exploratory in nature; not guided by any boundaries. The world is flat, not guided by any boundaries. The world is flat, resources and ideas move unhindered.resources and ideas move unhindered.

The segments of the environment a top manager The segments of the environment a top manager scans selectively depends upon his dominant logics.scans selectively depends upon his dominant logics.

PESTELPESTEL

PESTEL attempts to provide a broad framework on PESTEL attempts to provide a broad framework on how the broader environmental forces affects an how the broader environmental forces affects an organization and influences the way it practices organization and influences the way it practices strategy.strategy.

It is not intended to be used as an exhaustive list. It is not intended to be used as an exhaustive list. It is particularly important that PESTEL be used to It is particularly important that PESTEL be used to

look at the future impact of environmental factors, look at the future impact of environmental factors, which may be different from the past impact.which may be different from the past impact.

It is important not only to identify the structural It is important not only to identify the structural drivers of change, but also to analyze the complex drivers of change, but also to analyze the complex linkages across them.linkages across them.

Understanding the composite effect is critical, for Understanding the composite effect is critical, for which a holistic picture is required.which a holistic picture is required. 4343

4444

PESTEL FRAMEWORKPESTEL FRAMEWORK

Political – Political – Government Stability, Government Government Stability, Government Attitude, Economic Model, Central – State Co-Attitude, Economic Model, Central – State Co-alignment, Subsidies & Protection, Licensing & alignment, Subsidies & Protection, Licensing & Quotas.Quotas.

Economic – Economic – GDP, Fiscal Deficit, Savings & GDP, Fiscal Deficit, Savings & Investment, Inflation & Interest Rates, Monsoon & Investment, Inflation & Interest Rates, Monsoon & Food Grains Reserves, Economic Cycles, Capital Food Grains Reserves, Economic Cycles, Capital Market & Forex Reserves, Currency Stability, Infra-Market & Forex Reserves, Currency Stability, Infra-Structural Investments, FDI Inflows.Structural Investments, FDI Inflows.

Social – Social – Population Diversity, Religious Sentiments, Population Diversity, Religious Sentiments, Literacy Levels, Income & Age Distribution, Language Literacy Levels, Income & Age Distribution, Language Barriers, Social Values.Barriers, Social Values.

4545

PESTEL FRAMEWORKPESTEL FRAMEWORK

Technological – Technological – Innovation,Innovation, Obsolescence Rate, Obsolescence Rate, Patents, Research & Development, ERP, Patents, Research & Development, ERP, Technological Convergence.Technological Convergence.

Environmental – Environmental – Global Warming & CSR, Product Global Warming & CSR, Product Design, Environmentally Preferable Purchasing, Design, Environmentally Preferable Purchasing, Extended Producer Responsibility, Waste Disposal Extended Producer Responsibility, Waste Disposal & Emissions, Non-Fossil & Alternative Fuels, & Emissions, Non-Fossil & Alternative Fuels, Carbon Credits, Pollution Control Laws. Carbon Credits, Pollution Control Laws.

Legal – Legal – Monopolies Legislation, Employment Laws, Monopolies Legislation, Employment Laws, Product Safety & Health Hazards, Direct & Indirect Product Safety & Health Hazards, Direct & Indirect Taxes, Patent Laws, Consumer Protection Laws.Taxes, Patent Laws, Consumer Protection Laws.

4646

ECONOMIC LIBERALISATIONECONOMIC LIBERALISATION

New Industrial Policy (NIP) – New Industrial Policy (NIP) – Liberalizing industrial Liberalizing industrial licensing, FERA Liberalization, MRTP Liberalization, licensing, FERA Liberalization, MRTP Liberalization, Curtailment of PSU’s, Encouraging FDI.Curtailment of PSU’s, Encouraging FDI.

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

New Trade Policy (NTP) – New Trade Policy (NTP) – Lowering import tariffs, Lowering import tariffs, Abolition of import licenses, Encouraging exports, Abolition of import licenses, Encouraging exports, Rupee convertibility.Rupee convertibility.

Structural Adjustments – Structural Adjustments – Phasing out subsidies, Phasing out subsidies, Dismantling price controls, PSU Disinvestments, Dismantling price controls, PSU Disinvestments, Exit Policy- VRS.Exit Policy- VRS.

4747

DISCONTINUITYDISCONTINUITY

Destabilization due to entrepreneurial freedom - Destabilization 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

4848


Hyper CompetitionHyper Competition– MNC’s - GlobalizationMNC’s - Globalization– Cheap Imports & DumpingCheap Imports & Dumping– Push to Pull MarketingPush to Pull Marketing

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

4949


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

5050

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

FIVE FORCES MODEL - FIVE FORCES MODEL - ASSUMPTIONSASSUMPTIONS

The model is to be used at the SBU level and The model is to be used at the SBU level and not at the industry level. It is even wiser to not at the industry level. It is even wiser to apply the same at the product – market level.apply the same at the product – market level.

It depicts the attractiveness of an industry (i.e. It depicts the attractiveness of an industry (i.e. profit potential) per se.profit potential) per se.

The model should not be used as a snapshot in The model should not be used as a snapshot in time; the forces are subject to changes, time; the forces are subject to changes, incremental or otherwise.incremental or otherwise.

It should not only be used to understand the It should not only be used to understand the forces, but also used to understand how they forces, but also used to understand how they can be countered and overcome.can be countered and overcome.

The five forces have strong cross-linkages.The five forces have strong cross-linkages. 5151

5252

PORTERS FIVE FORCES ANALYSISPORTERS FIVE FORCES ANALYSIS

Threat to Entry – Threat to Entry – Economies of size and scale, Economies of size and scale, Product differentiation through proprietary Product differentiation through proprietary technology or brand power, Capital requirements, technology or brand power, Capital requirements, Learning curve advantages, Access to distribution Learning curve advantages, Access to distribution channels, Government policy, Resource profile & channels, Government policy, Resource profile & fear of retaliation, High switching costs, Industry fear of retaliation, High switching costs, Industry stagnation.stagnation.

Threat of Customers – Threat of Customers – Buyer concentration and Buyer concentration and volumes, Undifferentiated product, Low relative volumes, Undifferentiated product, Low relative importance of the segment, Low margins & importance of the segment, Low margins & stagnancy, Unimportance of product quality, Scope stagnancy, Unimportance of product quality, Scope for backward integration, Presence of substitutes or for backward integration, Presence of substitutes or unorganized sector, Low customer switching costs.unorganized sector, Low customer switching costs.

5353

PORTERS FIVE FORCES ANALYSISPORTERS FIVE FORCES ANALYSIS

Threat of Suppliers – Threat of Suppliers – Supplier monopoly, Supplier monopoly, Differentiated inputs, Lack of substitute inputs, High Differentiated inputs, Lack of substitute inputs, High customer switching costs, Scope for forward customer switching costs, Scope for forward integration, Low relative importance of the segment.integration, Low relative importance of the segment.

Threat of Substitutes – Threat of Substitutes – Improvement in price -Improvement in price -performance trade-off, Produced by industries performance trade-off, Produced by industries earning high profits, Buyer’s propensity to substitute.earning high profits, Buyer’s propensity to substitute.

Jockeying for position – Jockeying for position – Fragmented market, Industry Fragmented market, Industry stagnancy, Intermittent overcapacity, Low level of stagnancy, Intermittent overcapacity, Low level of differentiation, High exit barriers, Unorganised sector, differentiation, High exit barriers, Unorganised sector, Piracy and counterfeits, Product perishability, Piracy and counterfeits, Product perishability, Diversity of players.Diversity of players.

5454

FIRM ENVIRONMENTFIRM ENVIRONMENT

Size and Scale of Operations – Size and Scale of Operations – It is a very important It is a very important component of competitiveness in today's global component of competitiveness in today's global context (Bharti – MTN, Reliance).context (Bharti – MTN, Reliance).

Business Scope – Business Scope – The intention whether the firm wants The intention whether the firm wants to be in a single business, or related diversified or to be in a single business, or related diversified or unrelated diversified (Tata, Aditya Birla).unrelated diversified (Tata, Aditya Birla).

Inertia – Inertia – Excessive commitment to past strategies Excessive commitment to past strategies prevents firms from tapping emerging opportunities.prevents firms from tapping emerging opportunities.

Cohesiveness – Cohesiveness – Degree of bonding existing across Degree of bonding existing across affiliated firms.affiliated firms.

Resource Profile – Resource Profile – It highlights the capabilities It highlights the capabilities (business specific or generic) or competencies of the (business specific or generic) or competencies of the firm.firm.

5555

EXPERIENCE CURVEEXPERIENCE CURVE

The cost of performing an activity declines on per-unit The cost of performing an activity declines on per-unit basis as a firm becomes more efficient; experience basis as a firm becomes more efficient; experience teaches better and more effective way of doing things. teaches better and more effective 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 increase its competitively, and with lower prices it can increase its sales volume, which further reduces costs. sales volume, which further reduces costs.

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

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

Experience curve has strong linkages with Experience curve has strong linkages with performance. However, an E-Curve can prove to be performance. However, an E-Curve can prove to be futile during discontinuity.futile during discontinuity.

5656

EXPERIENCE CURVEEXPERIENCE CURVE

Production / Volume

Cost

per

uni

t of o

utpu

t

Decreases at an increasing rate

Decreases at a constant rate

Decreases at a decreasing rate

Point of inflexion

5757

EXPERIENCE CURVE - TRADITIONAL EXPERIENCE CURVE - TRADITIONAL VIEWVIEW

Experience = Efficiency

Efficiency = Lower Costs

Lower Costs = Higher Sales

Higher Sales = Lower Costs

Lower Costs = Entry Barrier

Entry Barrier = Better Performance

12

3

4

56

5858

EXPERIENCE CURVE - STRATEGIC EXPERIENCE CURVE - STRATEGIC VIEWVIEW

Experience = Inertia

Inertia = Limited Growth

Limited Growth = Diversification

Diversification = New Experience

New Experience Old Experience

Strategic Failure = Poor Performance

1

2

3

4

56

5959

VULNERABILITY ANALYSIS - SWOTVULNERABILITY ANALYSIS - SWOT

The framework was originally conceptualized by The framework was originally conceptualized by Kenneth Andrews in 1970. Kenneth Andrews in 1970. Acronym for Acronym for StrengthsStrengths – – WeaknessesWeaknesses – – Opportunities Opportunities – – Threats.Threats. It helps an It helps an organisation to capitalize on the opportunities by organisation to capitalize on the opportunities by maximizing its strengths and neutralizing the threats maximizing its strengths and neutralizing the threats minimizing the weaknesses. It is one of the earliest minimizing the weaknesses. It is one of the earliest models in environmental scanning. A SWOT audit models in environmental scanning. A SWOT audit involves –involves –

Company Records –Company Records – Annual Reports, Websites, Press Annual Reports, Websites, Press Clippings & Interviews.Clippings & Interviews.

Case Studies –Case Studies – Structured Questionnaires, Interviews, Structured Questionnaires, Interviews, Observation.Observation.

Business Intelligence –Business Intelligence – Bankers, Suppliers, Customers, Bankers, Suppliers, Customers, Analysts, Competitors.Analysts, Competitors.

6060

SWOT ANALYSIS - FRAMEWORKSWOT ANALYSIS - FRAMEWORK

StrengthsWeaknessesOp

portu

nitie

sTh

reat

s

Leverage strengths to make use of opportunities

Utilise strengths to counter threats (?)

Minimize weaknesses whichprevents you from countering threats

Nullify weaknesses which prevents you from exploiting opportunities

6161

SOURCES OF STRENGTHSOURCES OF STRENGTH

Strong brand identity – Strong brand identity – Eg. Tata.Eg. Tata. High quality products – High quality products – Eg. Sony, Toyota, Honda.Eg. Sony, Toyota, Honda. Excellent penetration – Excellent penetration – Eg. HUL, ITC.Eg. HUL, ITC. Strong R&D base – Strong R&D base – Eg. Dr. Reddy’s, Ranbaxy, Eg. Dr. Reddy’s, Ranbaxy,

Biocon.Biocon. Economies of scale – Economies of scale – Eg. Reliance.Eg. Reliance. Good credit rating – Good credit rating – Eg. Infosys, SBI.Eg. Infosys, SBI. Motivated employees & cordial industrial relations – Motivated employees & cordial industrial relations –

Eg. Tata Steel, Infosys.Eg. Tata Steel, Infosys. Large resource pool – Large resource pool – Eg. Aditya Birla, Reliance.Eg. Aditya Birla, Reliance. Strong after sales & service network –Strong after sales & service network – Eg. Eg.

Caterpillar.Caterpillar. Engineering Skills – Engineering Skills – Eg. Volkswagen, Siemens.Eg. Volkswagen, Siemens.

6262

SOURCES OF WEAKNESSESSOURCES OF WEAKNESSES

Outdated technology – Outdated technology – Eg. Hindustan Motors.Eg. Hindustan Motors. Strategic myopia – Strategic myopia – Eg. CESC.Eg. CESC. Excess manpower – Excess manpower – Eg. SAIL.Eg. SAIL. Single product syndrome – Single product syndrome – Eg. Procter & Gamble.Eg. Procter & Gamble. Inefficient top management – Inefficient top management – Eg. Ballarpur Inds.Eg. Ballarpur Inds. Narrow business scope –Narrow business scope – Eg. Nirma. Eg. Nirma. Excessive diversification –Excessive diversification – Eg. Tatas. Eg. Tatas. Inertia – Inertia – Eg. J. K. Group - Raymond.Eg. J. K. Group - Raymond. Lacking experimentation culture –Lacking experimentation culture – Eg. B. K. Modi Eg. B. K. Modi

Group.Group. Lack of product / brand clout – Lack of product / brand clout – Eg. Bijoligrill.Eg. Bijoligrill. Organizational Politics – Organizational Politics – Eg. CMC (Tata Group)Eg. CMC (Tata Group)

6363

SOURCES OF OPPORTUNITIESSOURCES OF OPPORTUNITIES

Delicensing of Industries – Delicensing of Industries – Eg. Telecom, Banking.Eg. Telecom, Banking. Capital market reforms – Capital market reforms – Eg. Abolishing CCI.Eg. Abolishing CCI. Abolishing MRTP – Abolishing MRTP – Eg. Maruti.Eg. Maruti. Life style changes – Life style changes – Eg. Retailing.Eg. Retailing. Growing population –Growing population – Eg. Middle-class buying Eg. Middle-class buying

power.power. Globalization – Globalization – Eg. GDR’s, ECB’s.Eg. GDR’s, ECB’s. Free pricing – Free pricing – Eg. Fertilizers, Insurance, Sugar.Eg. Fertilizers, Insurance, Sugar. Exit Policy – Exit Policy – Eg. VRS.Eg. VRS. Collaborations & Joint Ventures –Collaborations & Joint Ventures – Bharti & WalMart. Bharti & WalMart. Market driven Interest rates – Market driven Interest rates – Eg.Tata Motors.Eg.Tata Motors. Market driven Pricing – Market driven Pricing – Eg. Fertilizer, Sugar.Eg. Fertilizer, Sugar.

6464

SOURCES OF THREATSSOURCES OF THREATS

Political instability – Political instability – Eg. (1985–1990).Eg. (1985–1990). Land acquisition - Social activism – Land acquisition - Social activism – Eg. Singur Eg. Singur

SEZ.SEZ. Terrorist attacks – Terrorist attacks – Eg. 11/9, 26/11.Eg. 11/9, 26/11. Import relaxation – Import relaxation – 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. (2008).Eg. (2008). Natural disaster – Natural disaster – Eg. Tsunami, Earth Quake.Eg. Tsunami, Earth Quake. Nationalisation – Nationalisation – Eg. Tata Steel.Eg. Tata Steel. Hostile take-over – Hostile take-over – Eg. Bajoria – Bombay Dyeing.Eg. Bajoria – Bombay Dyeing. Group disintegration – Group disintegration – Eg. Reliance.Eg. Reliance. Lack of Corporate Governance – Lack of Corporate Governance – Eg. Satyam.Eg. Satyam.

6565

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 external environmental factors and their likely impact external environmental factors and their likely impact on the organization. Stages in on the organization. Stages in ETOPETOP analysis – analysis –

List the aspects of the environment that has a List the aspects of the environment that has a bearing on the organization.bearing on the organization.

Assess the extent of impact of the factors.Assess the extent of impact of the factors. Holistic view – Prepare a complete overall picture.Holistic view – Prepare a complete overall picture. Forecasting – Predict the future (i.e. time series, Forecasting – Predict the future (i.e. time series,

Delphi's technique, scenario analysis).Delphi's technique, scenario analysis). Strategic responses (including adaptation) to Strategic responses (including adaptation) to

opportunities and threats is critical for survival and opportunities and threats is critical for survival and success.success.

6666

PROFIT IMPACT OF MARKET PROFIT IMPACT OF MARKET STRATEGYSTRATEGY

PIMS PIMS is a database model developed by is a database model developed by GE GE and and later extended by later extended by HBS HBS to examine the impact of a to examine the impact of a wide range of strategy variables on business wide range of strategy variables on business performance. It is also a form of assessing performance. It is also a form of assessing vulnerability through longitudinal analysis.vulnerability through longitudinal analysis.

An organization can draw upon the experience of An organization can draw upon the experience of its peers in similar situations. Some key findings on its peers in similar situations. Some key findings on major performance drivers major performance drivers that explains 75% that explains 75% deviations in performance –deviations in performance –

Product quality and relative market share.Product quality and relative market share. High investment intensity acts as a drag.High investment intensity acts as a drag. Relative attractiveness of the market.Relative attractiveness of the market. Vertical integration is a powerful strategy; Vertical integration is a powerful strategy;

selectively.selectively.

6767

PIMS - LIMITATIONSPIMS - LIMITATIONS

The analysis is based on The analysis is based on historical datahistorical data and it does and it does not take care of not take care of future challengesfuture challenges. Managers should . Managers should be particularly cautious while referring to such data be particularly cautious while referring to such data during times of during times of discontinuitydiscontinuity as it makes past as it makes past patterns futile. Authenticity of data is of prime patterns futile. Authenticity of data is of prime importance - importance - – Contexts drawn across one organization may not Contexts drawn across one organization may not

be applicable to another. As every organization is be applicable to another. As every organization is unique in its own way.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, therefore Contexts may vary across countries, therefore validity may be a question.validity may be a question.

6868

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 or concentrated effort on a particular activity or process which forms the very basis of competitive process which forms the very basis of competitive advantage. It enables the top management to draw advantage. It enables the top management to draw focus. focus. KSF KSF helps organizations spot early helps organizations spot early opportunities and convert them into value adding opportunities and convert them into value adding business propositions. It involves a three-stage business propositions. It involves a three-stage process –process –

Identify KSF –Identify KSF – What does it take to be successful in a What does it take to be successful in a business?business?

Drawing KSF –Drawing KSF – What should be the organizations What should be the organizations response to the same?response to the same?

Benchmarking KSF –Benchmarking KSF – How do we evaluate How do we evaluate organization success on this factor?organization success on this factor?

6969

IDENTIFYING ALTERNATIVE IDENTIFYING ALTERNATIVE STRATEGIESSTRATEGIES

7070

CORPORATE - GRAND STRATEGYCORPORATE - GRAND STRATEGY

It is concerned with the overall business (single, It is concerned with the overall business (single, related, unrelated) and geographical (local, related, unrelated) and geographical (local, national, global) scope of a firm and deals with national, global) scope of a firm and deals with choices of allocating resources across them.choices of allocating resources across them.

It provides broad directionIt provides broad direction 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 gap it proposes to fill.strategic gap it proposes to fill.

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

It indicates the quality of growth an organization is It indicates the quality of growth an organization is looking for.looking for.

It reflects the customer needs it intends to satisfy.It reflects the customer needs it intends to satisfy.

7171

Related

CORPORATE STRATEGY MATRIXCORPORATE STRATEGY MATRIX

GrowthStability

Vertical

Market Penetration

Horizontal

Unrelated

Corporate Strategy

Stability Growth DivestmentCombination

Intensification Diversification

Market Development Product Development

7272

STABILITYSTABILITY

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

associated with new projects.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; erosion of capabilities.Limited resource position; erosion of capabilities.

7373

GROWTH - ANSOFF’S MODELGROWTH - ANSOFF’S MODEL

Existing Market New MarketEx

istin

g Pr

oduc

tNe

w Pr

oduc

t

Market Penetration (+)

Market Development (++)

Product Development (++)

Diversification (+++)

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

7474

MARKET PENETRATIONMARKET PENETRATION

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

break-through is limited. break-through is limited. – Elongated product life-cycle.Elongated product life-cycle.– Helps firms which are not comfortable with Helps firms which are not comfortable with

unfamiliar terrain. unfamiliar terrain. – The company carries a risk of product obsolescence.The company carries a risk of product obsolescence.

7575

MARKET DEVELOPMENTMARKET DEVELOPMENT

It is a strategy where a firm tries to achieve growth by It is a strategy where a firm tries to achieve growth by finding new uses of existing products or its close finding new uses of existing products or its close variants and tap a new potential customer base variants and tap a new potential customer base altogether. altogether. (Eg. Du Pont – Nylon: parachutes, socks & (Eg. Du Pont – Nylon: parachutes, socks & stockings, fabrics, tyres, upholstery, carpets,…… or stockings, fabrics, tyres, upholstery, carpets,…… or Teflon: aircraft technologies to cutlery to paints or Teflon: aircraft technologies to cutlery to paints or Raytheon Corp – Microwaves: radars to kitchen Raytheon Corp – Microwaves: radars to kitchen appliances).appliances).– Creativity and innovation – thinking out of the box.Creativity and innovation – thinking out of the box.– Stretches product life cycles.Stretches product life cycles.– Unconventional and flexible distribution channels.Unconventional and flexible distribution channels.– Moves across geographical boundaries. Moves across geographical boundaries. – Immense customer reach & flexible advertising.Immense customer reach & flexible advertising.

7676

PRODUCT DEVELOPMENTPRODUCT DEVELOPMENT

It is a strategy where a firm tries to achieve growth It is a strategy where a firm tries to achieve growth through a radical new product through a radical new product (Eg. Microsoft: DOS to (Eg. Microsoft: DOS to Windows) Windows) or a substantial improved version or a substantial improved version (incremental) of an existing product to repeatedly (incremental) of an existing product to repeatedly enter the same market enter the same market (Eg. Close Up: Fluoride – Gel (Eg. Close Up: Fluoride – Gel toothpaste or VIP - Strolleys)toothpaste or VIP - Strolleys). . – Areas of product improvement – performance, Areas of product improvement – performance,

features, reliability, conformance, durability, features, reliability, conformance, durability, serviceability, aesthetics, perception.serviceability, aesthetics, perception.

– Deliverable through – redesigning or Deliverable through – redesigning or reengineering.reengineering.

– Leverage on customer and brand loyalty.Leverage on customer and brand loyalty.– Leveraging through – innovation.Leveraging through – innovation.– Substitutes that serve the same needs (Eg. Refills) Substitutes that serve the same needs (Eg. Refills)

7777

DIVERSIFICATIONDIVERSIFICATION

It marks the entry of a firm into newer markets with It marks the entry of a firm into newer markets with new products, thereby creating a new business. new products, thereby creating a new business. From the traditional point of view, the new business From the traditional point of view, the new business is distinct from the existing business in terms of – is distinct from the existing business in terms of – inputs – technologies – markets. From the modern inputs – technologies – markets. From the modern point of view they are strategically dissimilar. Why point of view they are strategically dissimilar. Why do firms diversify in the Indian context?do firms diversify in the Indian context?– Shift the growth trajectory or opportunistic.Shift the growth trajectory or opportunistic.– Risk reduction.Risk reduction.– High transaction costs and institutional gaps.High transaction costs and institutional gaps.– Internal capital market.Internal capital market.– Permits: quotas, licenses (i.e. industrial Permits: quotas, licenses (i.e. industrial

embassies).embassies).– Conglomerate or market power (i.e. dominance).Conglomerate or market power (i.e. dominance).

7878

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 the while the coffee business would register a return of coffee business would register a return of 10%.10%. If If on the other hand, cold wave dominates the on the other hand, cold wave dominates the planet, ice-cream business would register a return planet, ice-cream business would register a return of of 10%,10%, while the coffee business would register a while the coffee business would register a return of return of 30%.30%. What would be your ideal What would be your ideal diversification strategy through optimization?diversification strategy through optimization?

7979

DIVERSIFICATION STRATEGYDIVERSIFICATION STRATEGY

If we diversified in either of the two businesses, If we diversified in either of the two businesses, our expected return will be our expected return will be 20%,20%, with a possible with a possible risk of risk of 10%.10%. If, we split our investment between If, we split our investment between the two businesses in equal proportion, half of our the two businesses in equal proportion, half of our investment will earn a return of investment will earn a return of 30%,30%, while the while the other half would earn other half would earn 10%,10%, so our expected return so our expected return would still be would still be 20%.20%. But in the second instance But in the second instance there is no possibility of deviation of returns (i.e. there is no possibility of deviation of returns (i.e. risk). Diversification results in risk). Diversification results in 20%20% expected return expected return with zero risk, whereas investing in individual with zero 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%. The pivotal point is that The pivotal point is that the two businesses are negatively correlated. the two businesses are negatively correlated.

8080

HORIZONTAL INTEGRATIONHORIZONTAL INTEGRATION

It takes place when a company increases the It takes place when a company increases the breadth of a firms business or geographical scope breadth of a firms business or geographical scope by getting into product – market segments which by getting into product – market segments which compliments its existing businesses compliments its existing businesses (Eg. Reliance).(Eg. Reliance). Alternatively, existing business may recreate new Alternatively, existing business may recreate new businesses, which are distinct, but supplements its businesses, which are distinct, but supplements its existing business existing business (Eg. Bajaj – scooters to (Eg. Bajaj – scooters to motorcycles, Dove – soaps to shampoo).motorcycles, Dove – soaps to shampoo).– It results in increased market power.It results in increased market power.– Leveraging existing capabilities.Leveraging existing capabilities.– Resources can be shared for mutual benefit. Resources can be shared for mutual benefit. – Reduces economic risk (i.e. business cycles). Reduces economic risk (i.e. business cycles). – Enables brand or product line extension.Enables brand or product line extension.

8181

HORIZONTAL INTEGRATION HORIZONTAL INTEGRATION

Reliance Industries

Reliance Capital

Reliance Power

Reliance Infrastructure Reliance Ports

8282

VERTICAL INTEGRATIONVERTICAL INTEGRATION

It increases the depth of its business scope either in a It increases the depth of its business scope either in a backward business process or in a forward one. backward business process or in a forward one. Backward integration occurs when the company starts Backward integration occurs when the company starts manufacturing its inputs or catalysts.manufacturing its inputs or catalysts. In forward In forward integration a firm moves into marketing of its products integration a firm moves into marketing of its products and services. and services. Advantages of backward integration –Advantages of backward integration –– Cost competitiveness – entry barrier.Cost competitiveness – entry barrier.– Better operational control – timely supplies, quality Better operational control – timely supplies, quality

control, coordination – JIT, savings in indirect taxes.control, coordination – JIT, savings in indirect taxes.Disadvantages of backward integration –Disadvantages of backward integration –– It may spark of a chain reaction - contagion effect.It may spark of a chain reaction - contagion effect.– Long gestation & break even - investment in CAPEX.Long gestation & break even - investment in CAPEX.

8383

VERTICAL INTEGRATIONVERTICAL INTEGRATION

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

8484

DIVERSIFICATION SUCCESS ?DIVERSIFICATION SUCCESS ?

While diversifying into new businesses, the scope of While diversifying into new businesses, the scope of relatedness or unrelatedness should not be judged relatedness or unrelatedness should not be judged from the traditional static view, but from the modern from the traditional static view, but from the modern dynamic view which incorporates strategic factors like dynamic view which incorporates strategic factors like capabilities and dominant logic. Countermanding capabilities and dominant logic. Countermanding reasons – reasons –

Potential to reap economies of scope across SBU’s that Potential to reap economies of scope across SBU’s that can share the same strategic asset.can share the same strategic asset.

Potential to use an existing capability to help improve Potential to use an existing capability to help improve the quality of a strategic asset in another business.the quality of a strategic asset in another business.

Potential to use an existing capability to create a new Potential to use an existing capability to create a new strategic asset in another business.strategic asset in another business.

Potential to expand the existing pool of capabilities.Potential to expand the existing pool of capabilities. Dominant logic ensures timely & appropriate responseDominant logic ensures timely & appropriate response..

8585

QUASI & TAPERED INTEGRATIONQUASI & TAPERED INTEGRATION

Full Integration -Full Integration - Where one firm has full ownership Where one firm has full ownership and control over all the stages of a value-chain in and control over all the stages of a value-chain in the manufacturing of a product the manufacturing 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. (Eg. Ranbaxy, Dr. Reddy’s).Ranbaxy, Dr. Reddy’s).

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 (Eg. Maruti – Sona Steering). (Eg. Maruti – Sona Steering).

8686

A CASE OF TAPERED INTEGRATIONA CASE OF TAPERED INTEGRATION

Very CriticalComponents

Full Ownership

CriticalComponents

Partial Ownership

Ordi

nary

Co

mpo

nent

sZe

ro O

wner

ship

Engine

Transmission

Design SteeringElectricalsWindscreen Seats & Carpets

8787

CONGLOMERATE DIVERSIFICATIONCONGLOMERATE DIVERSIFICATION

It relates to entry of firms into businesses which are It relates to entry of firms into businesses which are distinct in terms of – inputs – technologies – markets. distinct in terms of – inputs – technologies – markets. and are also strategically dissaimilar. Firms usually and are also strategically dissaimilar. Firms usually engage in conglomerate diversification when engage in conglomerate diversification when emerging opportunities are very attractive and emerging opportunities are very attractive and offers potential growth opportunities. Drawbacks of offers potential growth opportunities. Drawbacks of unrelated diversification –unrelated diversification –– Cost of failure (i.e. lack of strategic intent, Cost of failure (i.e. lack of strategic intent,

myopia).myopia).– Cost of ignorance (i.e. lack of knowledge of Cost of ignorance (i.e. lack of knowledge of

competitive forces).competitive forces).– 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).

8888

CONGLOMERATE DIVERSIFICATION CONGLOMERATE DIVERSIFICATION

Tobacco

Paper & Packaging

Food & Confectionary

Edible Oils Hotels

8989

DIVESTMENTDIVESTMENT

Divestment is a Divestment is a defensive strategydefensive strategy involving the sale involving the sale of entire stake of entire stake (Eg. ACC)(Eg. ACC) in full to an independent in full to an independent entity. It is usually taken into account when entity. It is usually taken into account when performance is disappointing and survival is at stake performance is disappointing and survival is at stake and nor does the firm have the resources to fend off and nor does the firm have the resources to fend off competitive forces. It may also involve a SBUcompetitive forces. It may also involve a SBU (Eg. L&T-(Eg. L&T-Cement Division to Aditya Birla Group)Cement Division to Aditya Birla Group) technically technically known as known as divestituredivestiture. or a product . or a product (Eg. Glaxo’s (Eg. Glaxo’s “Glucon-D” to Heinz)“Glucon-D” to Heinz). In strategy there is no scope for . In strategy there is no scope for sentimentality with divestment.sentimentality with divestment.

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 longer company simply exits because the business no longer contribute to or fit its dominant logic. contribute to or fit its dominant logic. (Eg. Tatas sale of (Eg. Tatas sale of Goodlass Nerolac, Tata Pharma, Tata Press).Goodlass Nerolac, Tata Pharma, Tata Press).

9090

DIVESTMENT - ROUTESDIVESTMENT - ROUTES

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

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

Hive-Off – A hive off is the creation of a new entity Hive-Off – A hive off is the creation of a new entity followed by transfer of assets; where the equity is followed by transfer of assets; where the equity is allotted amongst the existing shareholders on a pro-allotted amongst the existing shareholders on a pro-rata basis. However, the Companies Act, 1956 does rata basis. However, the Companies Act, 1956 does not permit this mode.not permit this mode.

9191

COMBINATION STRATEGYCOMBINATION STRATEGY

It is a mixture of stability, growth, and divestment It is a mixture of stability, growth, and divestment strategies applied simultaneously or sequentially for strategies applied simultaneously or sequentially for a portfolio of businesses.a portfolio of businesses.

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

There can be no ideal strategy for every business, There can be no ideal strategy for every business, because every business has its own unique external because every business has its own unique external and internal environment.and internal environment.

A combination strategy can be implemented through A combination strategy can be implemented through green-field projects (i.e. developing facilities right green-field projects (i.e. developing facilities right from the scratch) or through brown-field projects from the scratch) or through brown-field projects (i.e. mergers and acquisition, joint ventures).(i.e. mergers and acquisition, joint ventures).

9292

STRATEGY CHOICESTRATEGY CHOICE&&

PORTFOLIO ANALYSISPORTFOLIO ANALYSIS

STRATEGIC CHOICESTRATEGIC CHOICE

A strategic choice seeks to determine the alternative A strategic choice seeks to determine the alternative courses of action available before top managers to courses of action available before top managers to achieve its strategic intent. It attempts to answer the achieve its strategic intent. It attempts to answer the following questions –following questions –

How effective has the existing strategy been?How effective has the existing strategy been? How effective will that strategy be in the future?How effective will that strategy be in the future? What will be the effectiveness of alternative What will be the effectiveness of alternative

strategies?strategies? It is impossible for a manager to assess all the It is impossible for a manager to assess all the

alternatives. Dominant logic enables top managers to alternatives. Dominant logic enables top managers to selectively scan the environment and make trade-selectively scan the environment and make trade-offs. In most cases the trade-off is between resources offs. In most cases the trade-off is between resources and opportunities. What then is the magical number?and opportunities. What then is the magical number?

9393

SELECTIVITY IS THE KEYSELECTIVITY IS THE KEY

The role of a top manager is not to solve a problem, The role of a top manager is not to solve a problem, nor is to a define a problem for others to solve. The nor is to a define a problem for others to solve. The key task before a top manager is to identify the right key task before a top manager is to identify the right problems. To identify the right problems, managers problems. To identify the right problems, managers need to ask the right questions.need to ask the right questions.

They must choose problems which will lead to the They must choose problems which will lead to the right kind of opportunities; if addressed, will help the right kind of opportunities; if addressed, will help the firm achieve its intent. For an optimal choice the firm achieve its intent. For an optimal choice the following four issues need to be resolved – following four issues need to be resolved –

Is the strategy clearly identifiable?Is the strategy clearly identifiable? Is it consistent with the resources of the firm?Is it consistent with the resources of the firm? Will it be able to exploit the opportunities in full?Will it be able to exploit the opportunities in full? Is it in tune with the values and beliefs of the firm?Is it in tune with the values and beliefs of the firm?

9494

95959595

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 housesbusiness houses in in India. Their India. Their roots can be traced to a single family roots can be traced to a single family or clan and share broad similarities.or clan and share broad similarities.

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, Managing Agency).Laws, Licenses & Quotas, Managing Agency).

Proximity to the corridors of power (i.e. Proximity to the corridors of power (i.e. embassies).embassies).

High degree of centralized control (GEO, BRC).High degree of centralized control (GEO, BRC). Resource sharing, formal and informal ties.Resource sharing, formal and informal ties. Succession planning is critical to continuity.Succession planning is critical to continuity. Does group affiliation enhance performance?Does group affiliation enhance performance?

969696969696

RESOURCE SHARING ACROSS FIRMSRESOURCE SHARING ACROSS FIRMS

Parent Company

Firm 1

Firm 2

Firm 3

Firm 4

Firm 5

9797

STRATEGIC CHOICE – MACRO TIMINGSTRATEGIC CHOICE – MACRO TIMING

Depression(Divestment) Recovery

(Intensification)

Prosperity(Diversification)

Recession(Stability)

9898

STRATEGIC CHOICE – MICRO TIMINGSTRATEGIC CHOICE – MICRO TIMING

Maturity - Stability

Inception - Intensification

Growth - Diversification

Decline - Divestment

Duration (Yrs)

Grow

th (%

)Re-Engineering

PORTFOLIO ANALYSISPORTFOLIO ANALYSIS

Resource allocation across a portfolio of businesses Resource allocation across a portfolio of businesses is an important strategic choice, next only to choice is an important strategic choice, next only to choice of business. Why?of business. Why?

Businesses are not about liquid assets; therefore, Businesses are not about liquid assets; therefore, there are high costs associated with entry and exit. there are high costs associated with entry and exit.

Relatedness across resources are difficult to realize; Relatedness across resources are difficult to realize; sometimes impossible.sometimes impossible.

Investing in emerging businesses may not actually Investing in emerging businesses may not actually be so simple as it appears to be. Rules of the game be so simple as it appears to be. Rules of the game are different.are different.

Redeployment of resources upsets the established Redeployment of resources upsets the established power bases of a group. Power and resources often power bases of a group. Power and resources often goes hand in hand.goes hand in hand. 9999

100100

BCG GROWTH MODELBCG GROWTH MODEL

Relative Market Share (%)In

dust

ry G

rowt

h (%

)

?High

High Low

Stars Question Mark

Cash Cow Dogs

Low

101101

BUSINESS ANALYSIS – TATA GROUPBUSINESS ANALYSIS – TATA GROUP

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 net users of remains a big? These businesses are net users of resources, and their risk profile is high resources, and their risk profile is high (Eg. Trent, (Eg. Trent, Tata Telecom, Tata-AIG).Tata Telecom, Tata-AIG).

Stars –Stars – They achievers in the near term, provided They achievers in the near term, provided the industry growth rate continues and the the industry growth rate continues and the company is able to maintain its growth company is able to maintain its growth (i.e. (i.e. diversification).diversification). These businesses are also net users These businesses are also net users of resources of resources (Eg. TCS, Tata Steel), (Eg. TCS, Tata Steel), but to larger but to larger extent than a question mark.extent than a question mark.

102102

BUSINESS ANALYSIS – TATA GROUPBUSINESS ANALYSIS – TATA GROUP

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

Dogs –Dogs – They are a drag on the group, and they lack on They are a drag on the group, and they lack on competencies to take on competition and are competencies to take on competition and are basically basically cash traps (Eg. Nelco, Tata Pharma, Tata cash traps (Eg. Nelco, Tata Pharma, Tata Press).Press). Groups prefer to dispose off such businesses Groups prefer to dispose off such businesses (i.e. harvest, divest) (i.e. harvest, divest) as achieving a dominant position as achieving a dominant position in these businesses is a difficult task.in these businesses is a difficult task.

BCG - LIMITATIONSBCG - LIMITATIONS

It does not address the concerns of a business which It does not address the concerns of a business which is in the average category (usually the majority); is in the average category (usually the majority); neither in high or low.neither in high or low.

Certain businesses in the low market share category Certain businesses in the low market share category may be the result of a conscious strategy (i.e. niche – may be the result of a conscious strategy (i.e. niche – Rolex, Cartier, Mercedes Benz, Armani).Rolex, Cartier, Mercedes Benz, Armani).

Cash cows may actually need substantial Cash cows may actually need substantial investments to retain their market position (Eg. HUL). investments to retain their market position (Eg. HUL).

The model does not provide specific solutions within The model does not provide specific solutions within a particular category. a particular category.

The terminologies used are somewhat prohibitive.The terminologies used are somewhat prohibitive. Data may be prohibitive; factors are limited.Data may be prohibitive; factors are limited.

103103

104104

GE - MATRIXGE - MATRIXIn

dust

ry

Attra

ctiv

enes

sDistinctive Capabilities

Strong Medium Weak

High

Low

Med

Diversify (++) Intensify (+)

Intensify(+)

Stability Harvest (-) Divest (- -)

Stability

Stability

Harvest (-)

105105

ARTHUR’ D. LITTLEARTHUR’ D. LITTLE

Invest Consolidate

Industry Life-Cycle

Com

petit

ive

Posit

ion

GrowthInception Maturity Decline

Dominant

Strong

Favourable

Tenable

Weak

Selective

Abandon

Niche

Divest

Harvest

Hold

Improve

106106

SHELL – DIRECTIONAL POLICY SHELL – DIRECTIONAL POLICY MATRIX MATRIX

Business Sector Prospects

Dist

inct

ive

Capa

bilit

ies

Attractive Average Unattractive

Strong

Average

Weak

Market Leadership

Try Harder

DoubleOr

Quit

Growth

Custodial

Expand Divest

PhasedWithdrawal

GenerateCash

PhasedWithdrawal

TERMINOLOGIESTERMINOLOGIES

Harvest – It entails minimizing investments while Harvest – It entails minimizing investments while trying to maximize short-run profits and cash flow trying to maximize short-run profits and cash flow with the intention to exit the business in the near with the intention to exit the business in the near future.future.

Divest – Selling a part or the entire business at one Divest – Selling a part or the entire business at one go. Disinvestment involves selling in phases.go. Disinvestment involves selling in phases.

SBU – A business unit which is strategically different SBU – A business unit which is strategically different from another and also shares a different SIC code.from another and also shares a different SIC code.

Portfolio – An organization is perceived as a portfolio Portfolio – An organization is perceived as a portfolio of businesses.of businesses.

BCG – Boston Consulting Group.BCG – Boston Consulting Group. Gap Analysis – It emphasizes what a firm wants to Gap Analysis – It emphasizes what a firm wants to

achieve.achieve. 107107

108108

BUSINESS STRATEGYBUSINESS STRATEGY&&

COMPETITIONCOMPETITION

109109

COMPETITIVE STRATEGYCOMPETITIVE STRATEGY

A competitive strategy deals with how a firm A competitive strategy deals with how a firm competes in a particular business or product-market competes in a particular business or product-market segment. The principal focus is on meeting segment. The principal focus is on meeting competition, building market-share, and earning competition, building market-share, and earning super-normal profits (i.e. rent).super-normal profits (i.e. rent).

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 resources or Competitive advantage refers to a firms resources or activities in which it is way ahead of competition. activities in which it is way ahead of competition.

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

Competitive advantage is the back-bone of strategy.Competitive advantage is the back-bone of strategy.

110110

BUSINESS STRATEGY - BUSINESS STRATEGY - FRAMEWORKSFRAMEWORKS

How to be distinctive and yet sustainable –How to be distinctive and yet sustainable – Differentiation – Differentiation – Understanding of the dynamics of Understanding of the dynamics of

competition, identifying critical success factors, competition, identifying critical success factors, developing competitive advantage developing competitive advantage (Porter). (Porter).

Resource Based View – Resource Based View – Obsession with competence Obsession with competence building, involving harmonizing and integrating building, involving harmonizing and integrating multiple streams of technologies multiple streams of technologies (Wernerfelt, (Wernerfelt, Prahalad).Prahalad).

Delta Lock In – Delta Lock In – Two dominant players co-opt to self-Two dominant players co-opt to self-reinforce and create or escalate an entry barrier, reinforce and create or escalate an entry barrier, preventing new entry and/or competition preventing new entry and/or competition (Hax & (Hax & Wilde).Wilde).

Blue Ocean – Blue Ocean – Consciously moving away from Consciously moving away from overcrowded industries to uncharted territories and overcrowded industries to uncharted territories and making competition irrelevant making competition irrelevant (Kim & Mauborgne).(Kim & Mauborgne).

111111

PORTERS – COST LEADERSHIPPORTERS – COST LEADERSHIP

Cost Leadership –Cost Leadership – It is a strategy that focuses on It is a strategy that focuses on making a firm more competitive by producing its making a firm more competitive by producing its products more cheaply than its competitors. The firm products more cheaply than its competitors. The firm may retain the benefits of cost advantage by enjoying may retain the benefits of cost advantage by enjoying higher margins higher margins (Eg. Reliance)(Eg. Reliance) or may pass it to or may pass it to customers to increase market-share customers to increase market-share (Eg. Nirma, Ayur, (Eg. Nirma, Ayur, T-Series).T-Series). Sources of cost advantage are varied and Sources of cost advantage are varied and depends on the structure of the industry –depends on the structure of the industry –

Economies of size, backward integration, proprietary Economies of size, backward integration, proprietary technology, preferential access to raw materials.technology, preferential access to raw materials.

Compress project duration through crashing.Compress project duration through crashing. Locational or early entry advantage.Locational or early entry advantage. Steep experience curve effects.Steep experience curve effects.

112112

PORTERS – PRODUCT PORTERS – PRODUCT DIFFERENTIATIONDIFFERENTIATION

Product Differentiation –Product Differentiation – It is a strategy that It is a strategy that attempts to provide products or services that are attempts to provide products or services that are differentiated from competitive products in terms of differentiated from competitive products in terms of its value proposition and uniqueness. It selects one its value proposition and uniqueness. It selects one or more attributes that buyers perceive as or more attributes that buyers perceive as important. Means of product differentiation are important. Means of product differentiation are peculiar to each industry. Successful product peculiar to each industry. Successful product differentiation is often followed by premium pricing. differentiation is often followed by premium pricing. (Eg. Intel, Sony, Rayban)(Eg. Intel, Sony, Rayban)..

Creativity, innovation and out of the box thinking. Creativity, innovation and out of the box thinking. Culture of experimentation, and sufficient slack.Culture of experimentation, and sufficient slack. Focus on brand loyalty, avoiding brand dilution, Focus on brand loyalty, avoiding brand dilution,

undeterred attention to quality.undeterred attention to quality. Feeling the pulse of the customer.Feeling the pulse of the customer.

113113

PORTERS NICHE OR FOCUSPORTERS NICHE OR FOCUS

Focus / Niche –Focus / Niche – It is a variant strategy of cost It is a variant strategy of cost leadership or product differentiation targeting a leadership or product differentiation targeting a specific market or buyer sub-segment with the specific market or buyer sub-segment with the exclusion of others exclusion of others (Eg. Rolex, Maybach, Mont-Blanc, (Eg. Rolex, Maybach, Mont-Blanc, Cartier, Armani).Cartier, Armani). A focuser seeks to achieve a A focuser seeks to achieve a competitive advantage in its target segment, though competitive advantage in its target segment, though it may not possess an overall competitive advantage.it may not possess an overall competitive advantage.

The target segment must have unusual needs or the The target segment must have unusual needs or the delivery system catering to this segment must be delivery system catering to this segment must be unique. unique.

They are poorly served by mainstream players. They are poorly served by mainstream players. Sub optimization alone may not be a source of Sub optimization alone may not be a source of

superior performance; coupled with fear of structural superior performance; coupled with fear of structural erosion.erosion.

114114

COMPETITIVE POSITIONSCOMPETITIVE POSITIONS

Competitive Advantage

Com

petit

ive

Scop

eN

arro

wBr

oad

Cost Differentiation Product Differentiation

Cost Leadership(Toyota)

Differentiation Focus

(Mercedes)Cost Focus(Hyundai)

ProductDifferentiation

(General Motors)

HYBRID STRATEGYHYBRID STRATEGY

A hybrid strategy is the simultaneous pursuit of cost A hybrid strategy is the simultaneous pursuit of cost leadership and differentiation, and usually leadership and differentiation, and usually outperforms a stand alone generic strategy. outperforms a stand alone generic strategy.

Though cost leadership and differentiation are Though cost leadership and differentiation are inconsistent, in a hyper competitive context the two inconsistent, in a hyper competitive context the two strategies need not be mutually exclusive.strategies need not be mutually exclusive.

Reducing cost does not always involve a sacrifice in Reducing cost does not always involve a sacrifice in differentiation; similarly differentiation may not differentiation; similarly differentiation may not always lead to rising costs.always lead to rising costs.

FirmsFirms focusing on a hybrid strategy typically aim at focusing on a hybrid strategy typically aim at shifting the productivity frontier and recreating a shifting the productivity frontier and recreating a new product-market segment altogether (Eg. Tata new product-market segment altogether (Eg. Tata Nano). Nano). 115115

STUCK IN THE MIDDLESTUCK IN THE MIDDLE

A firm that engages in a hybrid strategy and fails to A firm that engages in a hybrid strategy and fails to achieve a competitive advantage because it was ill achieve a competitive advantage because it was ill conceived will be - stuck in the middle.conceived will be - stuck in the middle.

It will have a competitive disadvantage vis-à-vis a It will have a competitive disadvantage vis-à-vis a clearly positioned generic player. clearly positioned generic player.

Industry maturity will usually widen the gap, unless Industry maturity will usually widen the gap, unless such a player is capable of discovering a profitable such a player is capable of discovering a profitable segment.segment.

It is usually the result of a firm not willing to make It is usually the result of a firm not willing to make trade offs, leading to what is called – straddling. It trade offs, leading to what is called – straddling. It tries to compete through every means, but achieves tries to compete through every means, but achieves none. none. The positioning therefore gets – blurred. The positioning therefore gets – blurred.

116116

117117

EMERGING INDUSTRYEMERGING INDUSTRY

Emerging Industry –Emerging Industry – An evolving industry characterized An evolving industry characterized by - radical environmental changes, changing customer by - radical environmental changes, changing customer needs, technological innovations, ending in a needs, technological innovations, ending in a differential cost economics. differential cost economics. Eg. Digital imaging, Data Eg. Digital imaging, Data Storage, Artificial intelligence).Storage, Artificial intelligence). It is characterized by – It is characterized by –

High level of technological uncertainty, leading to a High level of technological uncertainty, leading to a blurred productivity frontier and steep learning curve. blurred productivity frontier and steep learning curve.

First-time buyers. Consumer behaviour pattern First-time buyers. Consumer behaviour pattern unstable and evolving. Eg. Speech recognition unstable and evolving. Eg. Speech recognition software's. software's.

Excessive turbulence in the dynamics of the Excessive turbulence in the dynamics of the environment, coupled with low penetration levels.environment, coupled with low penetration levels.

Market segmentation not well defined. There is a lot of Market segmentation not well defined. There is a lot of scope to define the rules of competition. scope to define the rules of competition.

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GROWTH / FRAGMENTED INDUSTRYGROWTH / FRAGMENTED INDUSTRY

Growth Industry –Growth Industry – An industry characterized by high An industry characterized by high growth potential in the long run and where no firm has growth potential in the long run and where no firm has a significant market share (an edge over another) a significant market share (an edge over another) leading to clear fragmentation. It is characterized by – leading to clear fragmentation. It is characterized by –

Low entry barriers, because of lack of economies of Low entry barriers, because of lack of economies of size and scale.size and scale. Eg. Consumer durables. High exit Eg. Consumer durables. High exit barriers because of huge investment in CAPEX. Eg. barriers because of huge investment in CAPEX. Eg. Retail and telecom. Retail and telecom.

Government regulations in the form Eg. MRTP may also Government regulations in the form Eg. MRTP may also cause fragmentation. cause fragmentation.

Diverse customer needs.Diverse customer needs. Eg. Air Conditioning, Paints.Eg. Air Conditioning, Paints. Scope for players to change the rules of the game. Scope for players to change the rules of the game.

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MATURED INDUSTRY MATURED INDUSTRY

Matured Industry –Matured Industry – An industry characterized by An industry characterized by saturation in growth rates, technological maturity, saturation in growth rates, technological maturity, established industry dynamics, well defined established industry dynamics, well defined consumer behavioral patterns and imperfect consumer behavioral patterns and imperfect competition leading to near monopoly. competition leading to near monopoly.

Cartel among existing players through collusion, Cartel among existing players through collusion, collaboration and cooption.collaboration and cooption.

Strong entry barriers, because of economies of size Strong entry barriers, because of economies of size and learning curve effects, distribution networks, and learning curve effects, distribution networks, early entry and location advantages.early entry and location advantages.

Limited scope for innovation - technological maturity.Limited scope for innovation - technological maturity. Firms are rule takers in the segment as productivity Firms are rule takers in the segment as productivity

frontier is well defined. frontier is well defined.

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DECLINING INDUSTRYDECLINING INDUSTRY

Declining Industry –Declining Industry – An industry which has outlived its An industry which has outlived its utility due to the entry of close substitutes and or utility due to the entry of close substitutes and or radical product innovations which results in a shift of the radical product innovations which results in a shift of the productivity frontier, with little or no signs of recovery. productivity frontier, with little or no signs of recovery. Eg. Typewriters, scooters, dot-matrix printers. Eg. Typewriters, scooters, dot-matrix printers.

Firms facing a declining phase are characterized by Firms facing a declining phase are characterized by inertia and slow to react to environmental changes.inertia and slow to react to environmental changes.

Learning abilities have been stunted and firms adverse Learning abilities have been stunted and firms adverse to investment in R&D and make fresh investments.to investment in R&D and make fresh investments.

Exit barriers are extremely high because of limited Exit barriers are extremely high because of limited prospective buyers, backed by corporate espionage, prospective buyers, backed by corporate espionage, and costly price wars.and costly price wars.

Nature of competition extremely high.Nature of competition extremely high.

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COMPETITIVE STRATEGIESCOMPETITIVE STRATEGIES

Emerging Industry – Emerging Industry – Set benchmarks, strictly Set benchmarks, strictly product differentiation and not standardization, product differentiation and not standardization, premium pricing, aggressive building of distribution premium pricing, aggressive building of distribution networks, branding and promotion. networks, branding and promotion.

Fragmented Industry – Fragmented Industry – Identify, assess and Identify, assess and overcome fragmentation. Locate a defendable overcome fragmentation. Locate a defendable position, focus more on product differentiation or position, focus more on product differentiation or even a hybrid one.even a hybrid one.

Matured Industry – Matured Industry – Sophisticated cost analysis, Sophisticated cost analysis, process innovation, increasing scope, mergers and process innovation, increasing scope, mergers and acquisition, strictly cost differentiation.acquisition, strictly cost differentiation.

Declining Industry – Declining Industry – Redesign, reengineer, Redesign, reengineer, regenerate, move beyond boundaries, recreate new regenerate, move beyond boundaries, recreate new markets, strike alliances, or else exit the segment. markets, strike alliances, or else exit the segment.

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RESOURCE BASED VIEW RESOURCE BASED VIEW

Differentiation based on cost or products saturates Differentiation based on cost or products saturates and ceases to exist in the medium term. However, and ceases to exist in the medium term. However, positions based on resources which are unique and positions based on resources which are unique and inimitable are far more sustainable even in the long inimitable are far more sustainable even in the long term. A firms resources can be classified into –term. A firms resources can be classified into –

Tangible – Tangible – These refer to real assets. They are a These refer to real assets. They are a standard in nature, hence very rarely confer standard in nature, hence very rarely confer competitive advantage as can be easily acquired or competitive advantage as can be easily acquired or replicated.replicated.

Intangible – Intangible – These refer to goodwill, patents, brands, These refer to goodwill, patents, brands, and complex learning experiences in integrating and and complex learning experiences in integrating and harmonizing technologies harmonizing technologies (distinctive capabilities) (distinctive capabilities) that play an important role in delivering competitive that play an important role in delivering competitive advantage through causal ambiguity.advantage through causal ambiguity.

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CAPABILITIES & COPMPETENCIESCAPABILITIES & COPMPETENCIES

These include a complex combinations of tangible These include a complex combinations of tangible and intangible resources that organizations use to and intangible resources that organizations use to convert inputs to outputs. Typically, they are woven convert inputs to outputs. Typically, they are woven around technologies; but not necessarily. around technologies; but not necessarily. There is a There is a high degree of internal and external causal high degree of internal and external causal ambiguity involved in it. Hence, differentiation based ambiguity involved in it. Hence, differentiation based on capabilities can be sustained even in the long run.on capabilities can be sustained even in the long run.

They play a very critical role in shaping competitive They play a very critical role in shaping competitive advantage. Therefore firms should concentrate on advantage. Therefore firms should concentrate on developing complex resources that forms the very developing complex resources that forms the very basis of differentiation. Capabilities can be generic basis of differentiation. Capabilities can be generic (i.e. can be leveraged across businesses) or specific (i.e. can be leveraged across businesses) or specific to a particular business. to a particular business.

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COMPETITIVE ADVANTAGECOMPETITIVE ADVANTAGE

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COMPETITIVE ADVANTAGECOMPETITIVE ADVANTAGE

A competitive advantage is a position of superiority A competitive advantage is a position of superiority relative (i.e. not absolute) to competition.relative (i.e. not absolute) to competition.

It results in a distinct differentiation advantage or a It results in a distinct differentiation advantage or a cost advantage or hybrid as well.cost advantage or hybrid as well.

Strategy drives competitive advantage; competitive Strategy drives competitive advantage; competitive advantage subsequently becomes the back bone for advantage subsequently becomes the back bone for a competitive strategy.a competitive strategy.

It enlarges the scope of an organization, and results It enlarges the scope of an organization, and results in well springs of new business development.in well springs of new business development.

A portfolio of competitive advantage comprises A portfolio of competitive advantage comprises strategic advantage profile (SAP).strategic advantage profile (SAP).

Success of a strategy critically depends on SAP.Success of a strategy critically depends on SAP.

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

Organizations have to systematically and Organizations have to systematically and continuously conduct exercises to identify its SAP.continuously conduct exercises to identify its 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 from In today's world of discontinuity, SAP changes from

time to time.time to time. Internal strategic fit between its strategy and Internal strategic fit between its strategy and

dominant logics is essential for the top dominant logics is essential for the top management to stretch and leverage SAP.management to stretch and leverage SAP.

Most successful organizations around the world Most successful organizations around the world have a well balanced SAP.have a well balanced SAP.

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VALUE CHAIN ANALYSISVALUE CHAIN ANALYSIS

A value-chain segregates a firm into strategically A value-chain segregates a firm into strategically relevant activities to understand its individual behaviour. relevant activities to understand its individual behaviour. Inventory Mgt to Logistics Mgt to Supply Chain Mgt. Inventory Mgt to Logistics Mgt to Supply Chain Mgt. Today SCM is integrated with greening the environment Today SCM is integrated with greening the environment as CSR practices. as CSR practices.

A VC is often compared with a relay team; each of the A VC is often compared with a relay team; each of the players need to be efficient backed by sufficient players need to be efficient backed by sufficient coordination at the contact points (i.e. kaizen or internal coordination at the contact points (i.e. kaizen or internal customer). Competitive advantage arises not from an customer). Competitive advantage arises not from an individual activity but a stream of inter-related activities.individual activity but a stream of inter-related activities.

VC pay-offs: better product availability, faster product VC pay-offs: better product availability, faster product launches, and enhanced customer tracking – higher launches, and enhanced customer tracking – higher market share. Substantial cost reductions also follow.market share. Substantial cost reductions also follow.

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STRATEGIC FIT – THE PORTER WAYSTRATEGIC FIT – THE PORTER WAY

The sustainability of the value chain depends on the The sustainability of the value chain depends on the degree of fit between the activities.degree of fit between the activities. Fit is important Fit is important because discrete activities result in negative synergy because discrete activities result in negative synergy and can also be easily copied by competitors. and can also be easily copied by competitors. Operational effectiveness is not strategy.Operational effectiveness is not strategy.– First order fit refers to simple consistency between First order fit refers to simple consistency between

each activity and the overall strategy.each activity and the overall strategy.– Second order fit occurs when activities are Second order fit occurs when activities are

reinforcing amongst them.reinforcing amongst them.– Third order fit refers to optimization of effort.Third order fit refers to optimization of effort.

A learning organization helps create strategic fit. A A learning organization helps create strategic fit. A high fit involving a complex chain of activities drives high fit involving a complex chain of activities drives both competitive advantage and its sustainability. both competitive advantage and its sustainability.

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CORE COMPETENCECORE COMPETENCE

A core competence represents the collective A core competence represents the collective learning's of an organization around diverse streams learning's of an organization around diverse streams of technologies. It forms the very basis of competitive of technologies. It forms the very basis of competitive advantage. These skills results in distinctive activities advantage. These skills results in distinctive activities and processes. It should satisfy the following and processes. It should satisfy the following conditions - conditions - – Contributes significantly to customer benefits.Contributes significantly to customer benefits.– Cannot be easily imitated or substituted.Cannot be easily imitated or substituted.– Can be leveraged across businesses.Can be leveraged across businesses.– Can be sustained even in the long run.Can be sustained even in the long run.

A core competence usually has its roots in technology, A core competence usually has its roots in technology, but not necessarily. but not necessarily.

Core competence has a high degree of external and Core competence has a high degree of external and internal causal ambiguity embedded in it.internal causal ambiguity embedded in it.

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

A competitive advantage may or may not lead to A competitive advantage may or may not lead to superior performance, a core competence usually superior performance, a core competence usually does.does.

A competitive advantage manifests from a function; A competitive advantage manifests from a function; a core competence has its roots in a set of skills.a core competence has its roots in a set of skills.

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

Majority of the firms have competitive advantage, Majority of the firms have competitive advantage, only leaders possess a core competence. only leaders possess a core competence.

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GAME THEORYGAME THEORY

The game theory was developed in 1944 by Oscar The game theory was developed in 1944 by Oscar Morgenstern. Subsequent work on game theory by Morgenstern. Subsequent work on game theory by John Nash led him to win the Nobel prize in 1994.John Nash led him to win the Nobel prize in 1994.

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 (similar to a each of whom wants to win. In a game (similar to a business) one players win is always another's loss. business) one players win is always another's loss. This is known as a zero-sum game.This is known as a zero-sum game.

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

However, the stringent assumptions of game theory However, the stringent assumptions of game theory and difficulty in ascertaining of pay-offs makes game and difficulty in ascertaining of pay-offs makes game theory application difficult in business. In fact there theory application difficult in business. In fact there are no. illustrations depicting a win-win situation. are no. illustrations depicting a win-win situation.

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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. An unbiased game is one where both winning. An unbiased game is one where both the players have equal chances of winning. the players have equal chances of winning.

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PURE STRATEGY GAMEPURE STRATEGY GAME

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

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TYPES OF GAMESTYPES OF GAMES

Simultaneous Games – Simultaneous Games – This is a situation where the This is a situation where the players have an option to choose to cooperate or players have an option to choose to cooperate or not through collusion, collaboration or cooption. It not through collusion, collaboration or cooption. It represents the classical represents the classical “prisoner’s dilemma”“prisoner’s dilemma”. . However, there is likely to be temptation by any of However, there is likely to be temptation by any of the players to try to steal the advantage over the the players to try to steal the advantage over the other by breaking the rules of the game other by breaking the rules of the game (E.g. Coke (E.g. Coke Vs Pepsi)Vs Pepsi)..

Repeated Games – Repeated Games – In this situation the players In this situation the players interact repeatedly with each other sub-optimizing interact repeatedly with each other sub-optimizing the outcome possibilities. This is usually through the outcome possibilities. This is usually through learning by learning by “experience” “experience” (i.e. iteration) rather than (i.e. iteration) rather than through collusion through collusion (E.g. Yahoo Vs Microsoft).(E.g. Yahoo Vs Microsoft). 135135

CHANGING THE RULES OF THE GAMECHANGING THE RULES OF THE GAME

In a situation where a player is unable to compete In a situation where a player is unable to compete with the existing rules of the game may attempt to with the existing rules of the game may attempt to change the rules of the game altogether. It results in change the rules of the game altogether. It results in a shift in the productivity frontier. a shift in the productivity frontier.

In a market dominated by price-based differentiation In a market dominated by price-based differentiation one may attempt to change the rules of the game one may attempt to change the rules of the game by/when – by/when – – Bases of differentiation dependent on clear Bases of differentiation dependent on clear

identification of what customer wants or value.identification of what customer wants or value.– Building incentives for customer loyalty.Building incentives for customer loyalty.– Making pricing more transparent.Making pricing more transparent.

Game theory relies on the principle of rationality; but Game theory relies on the principle of rationality; but players do not always behave rationally.players do not always behave rationally. 136136

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DELTA MODEL & LOCK-INDELTA MODEL & LOCK-IN

Its a systematic approach where-in two or more Its a systematic approach where-in two or more industry majors, who by default has achieved a industry majors, who by default has achieved a proprietary position proprietary position (Microsoft – Software / IBM – (Microsoft – Software / IBM – Computers) Computers) which are not necessarily best-products which are not necessarily best-products in the industry, co-opt to create a lock-in.in the industry, co-opt to create a lock-in.

A lock-in implies that other players has to conform or A lock-in implies that other players has to conform or relate to that standard in order to prosper.relate to that standard in order to prosper.

Becoming the industry standard requires – strong Becoming the industry standard requires – strong brand, causal ambiguity, and close relationship with brand, causal ambiguity, and close relationship with other companies offering complimentary services.other companies offering complimentary services.

Lock-in is self reinforcing and escalating (i.e. Lock-in is self reinforcing and escalating (i.e. accelerating effect).accelerating effect).

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THE THREE STRATEGIC POSITIONSTHE THREE STRATEGIC POSITIONS

Enabled througheffective useof technology

System Lock-InSystem EconomicsMarket Dominance

Complementary Share

Proprietary ProductProduct Economics

RivalryProduct Share

Total Customer Solutions

Customer EconomicsCooperation

Customer Share

LOCK-IN PAYOFFS

Bill Gates is the richest man in the world not necessarily because he has developed the world’s best software's or excels at customer satisfaction; but he has got an army of people working for him who are not on his payroll – all the application software providers who are writing programs based on “Windows” compatible operating platform.

Once you create the lock-in it is sustainable because of the “network effects”; which creates the proverbial “virtuous cycle” – customers want to buy the computer with largest set of applications and software developers want to write programs for the computers with the largest installed base.

LOCK-IN SUSTAINABILITY

The proponents (Hax & Wilde) believe that every organization has the ability to create and sustain a “lock-in” positioning (though in varying degree).

This “system lock-in” is referred to as “delta” – delta being the Greek letter that stands for transformation and change amongst the players.

The lock-in once created becomes very difficult for a firm to penetrate, and becomes a distinct entry barrier.

The model is based on the belief that it compliments Porter’s differentiation model and RBV framework instead of contradicting them.

In a lock-in strategy the performance outcomes are dependent on the success of another.

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STRATEGY STRATEGY IMPLEMENTATIONIMPLEMENTATION

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STRATEGY IMPLEMENTATIONSTRATEGY IMPLEMENTATION

It relates to translating strategy formulations into It relates to translating strategy formulations into practice. Performance realization of a strategy practice. Performance realization of a strategy depends on the implementation effort. Successful depends on the implementation effort. Successful implementation also depends on the appropriateness implementation also depends on the appropriateness of the strategy. of the strategy.

Since strategy implementation is a time bound Since strategy implementation is a time bound process, process, alignment (i.e. strategic fit) alignment (i.e. strategic fit) is a key variable is a key variable during times of radical change. Some of the other during times of radical change. Some of the other levers of successful strategy implementation are –levers of successful strategy implementation are –

Transformational leadership and motivating power.Transformational leadership and motivating power. Resource allocation; its stretching and leveraging.Resource allocation; its stretching and leveraging. Compatible organization structure & control systems.Compatible organization structure & control systems. Inertia & resistance to change.Inertia & resistance to change.

IMPORTANCE OF STRATEGIC FITIMPORTANCE OF STRATEGIC FIT

Strategic fit has a central role to play in strategic Strategic fit has a central role to play in strategic management. While external strategic fit (strategy management. While external strategic fit (strategy – environment) is relevant for strategy formulation; – environment) is relevant for strategy formulation; internal strategic fit (dominant logic – strategy) is internal strategic fit (dominant logic – strategy) is critical to strategy implementation. A high strategic critical to strategy implementation. A high strategic fit (co alignment) is useful because it enables – fit (co alignment) is useful because it enables – – Appropriate and timely response.Appropriate and timely response.– Unlearning & learning of new skill sets.Unlearning & learning of new skill sets.– Better strategic and operational control.Better strategic and operational control.– Resource commitment from top management.Resource commitment from top management.– Development of capabilities & competencies.Development of capabilities & competencies.– Changing the rules of the game.Changing the rules of the game. 143143

FORMULATION FORMULATION VsVs IMPLEMENTATION IMPLEMENTATION

Traditionally, strategy formulation and implementation Traditionally, strategy formulation and implementation has been perceived to be distinct & independent. has been perceived to be distinct & independent.

In such a situation, while control is very effective; In such a situation, while control is very effective; learning levels are very low.learning levels are very low.

According to Mintzberg, effective strategies are better According to Mintzberg, effective strategies are better crafted when there is a subtle overlapping between the crafted when there is a subtle overlapping between the two.two.

In such a situation, learning levels are very high; at the In such a situation, learning levels are very high; at the cost of sacrificing a lesser degree of control. In fact, cost of sacrificing a lesser degree of control. In fact, formulation & implementation can occur simultaneously.formulation & implementation can occur simultaneously.

Some of the key strategic learning's exists at the Some of the key strategic learning's exists at the contact point between the organization and its contact point between the organization and its customer.customer. 144144

ROLE OF TOP MANAGEMENTROLE OF TOP MANAGEMENT

To bring about change and to implement strategies To bring about change and to implement strategies successfully, companies depend more on successfully, companies depend more on transformational leaders transformational leaders thanthan transactional leaders. transactional leaders. A A transactional leader is usually confined to allocating transactional leader is usually confined to allocating tasks & responsibilities and extracting performance.tasks & responsibilities and extracting performance. In contrast, transformational leaders go one step In contrast, transformational leaders go one step beyond –beyond –

Design a well crafted and designed strategic intent of Design a well crafted and designed strategic intent of the organization. Install a system of shared beliefs and the organization. Install a system of shared beliefs and values.values.

Pragmatism is the ability to make things happen.Pragmatism is the ability to make things happen. He should be an agent of change; shift from He should be an agent of change; shift from

compliance to commitment; bring about transparency.compliance to commitment; bring about transparency.145145

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RESOURCE ALLOCATIONRESOURCE ALLOCATION

Resources allocation includes tangible resources (Eg. Resources allocation includes tangible resources (Eg. land, labour, machines) referred to as land, labour, machines) referred to as threshold threshold resourcesresources (i.e. minimum requirement). Intangible (i.e. minimum requirement). Intangible resources (Eg. brands, patents), also includes resources (Eg. brands, patents), also includes distinctive resources - capabilities distinctive resources - capabilities and and competenciescompetencies. . The various methods of resource allocation includes -The various methods of resource allocation includes -

Historical Budget –Historical Budget – The budgets framed by HQ for a The budgets framed by HQ for a particular SBU keeping in mind past trends.particular SBU keeping in mind past trends.

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

Performance Budget – Performance Budget – SBU managers need to justify SBU managers need to justify the distinctive resources in terms of the opportunity the distinctive resources in terms of the opportunity it is pursuing yields the highest possible pay-offs.it is pursuing yields the highest possible pay-offs.

CAPABILITIES & COMPETENCIESCAPABILITIES & COMPETENCIES

Technology and business are slowly becoming in – Technology and business are slowly becoming in – separable. Moreover, convergence of multiple streams of separable. Moreover, convergence of multiple streams of technologies at the product – market level is becoming technologies at the product – market level is becoming increasingly evident (Eg. Flat Screen Displays).increasingly evident (Eg. Flat Screen Displays).

Distinctive capabilities are complex set of skills woven Distinctive capabilities are complex set of skills woven around technologies; though not necessarily in the case around technologies; though not necessarily in the case of emerging markets.of emerging markets.

Distinctive capabilities helps in stretching and leveraging Distinctive capabilities helps in stretching and leveraging resources thereby overcoming two major constraints resources thereby overcoming two major constraints involved in strategy implementation – times & costs.involved in strategy implementation – times & costs.

Due to causal ambiguity (complexity), these capabilities Due to causal ambiguity (complexity), these capabilities are sustainable even in the medium to long term.are sustainable even in the medium to long term.

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STRATEGY & STRUCTURESTRATEGY & STRUCTURE

It is a framework within which individual efforts It is a framework within which individual efforts are coordinated to bring synergy. are coordinated to bring synergy. An appropriate An appropriate organization structure & adequate control systems organization structure & adequate control systems are essential to implement strategies and achieve are essential to implement strategies and achieve stated goals. The level of stated goals. The level of centralizationcentralization and and decentralizationdecentralization is decisive. is decisive. Once the structure is Once the structure is in place, processes become people independentin place, processes become people independent. .

A single product or a dominant business firm A single product or a dominant business firm usually employs a functional structure.usually employs a functional structure.

A firm in several related businesses usually A firm in several related businesses usually employs a divisional structure.employs a divisional structure.

A firm in several unrelated businesses usually A firm in several unrelated businesses usually employs a SBU structure.employs a SBU structure.

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TYPES OF STRUCTURESTYPES OF STRUCTURES

Functional Structure –Functional Structure – Activities grouped together by a Activities grouped together by a common function (Eg. Marketing, Finance). common function (Eg. Marketing, Finance).

Divisional Structure –Divisional Structure – Units grouped together in terms of Units grouped together in terms of products, processes, or geographical locations.products, processes, or geographical locations.

SBU Structure –SBU Structure – Businesses segregated in terms of Businesses segregated in terms of strategic dissimilarities (Eg. Inputs ,Technology, Output).strategic dissimilarities (Eg. Inputs ,Technology, Output).

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

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

Virtual Structure –Virtual Structure – A boundary less or hollow A boundary less or hollow organization.organization.

FACTORS INFLUENCING STRUCTUREFACTORS INFLUENCING STRUCTURE

Size – As an organizations size increases there is Size – As an organizations size increases there is more specialization and differentiation leading to the more specialization and differentiation leading to the top management moving away from operational top management moving away from operational issues and control, leading to a tall structure.issues and control, leading to a tall structure.

Technology – With more and more convergence of Technology – With more and more convergence of technologies in business, structures are becoming technologies in business, structures are becoming flatter and more simpler, as span is broader.flatter and more simpler, as span is broader.

Environment & People – Economic and political Environment & People – Economic and political conditions have a major bearing on structure coupled conditions have a major bearing on structure coupled with the attitude and aspirations of the people in the with the attitude and aspirations of the people in the organization. It includes the desire for independence, organization. It includes the desire for independence, assuming responsibility, facing challenges & crises. assuming responsibility, facing challenges & crises.

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INERTIAINERTIA

When a firm has been operating in a certain When a firm has been operating in a certain fashion for a long time, there is a tendency to fashion for a long time, there is a tendency to continue along the same lines. continue along the same lines. Inertia is a Inertia is a characteristic of a firm that endures status quo.characteristic of a firm that endures status quo. Most firms undergo periods of Most firms undergo periods of strategic continuity strategic continuity rather than rather than strategic changestrategic change. .

Inertia acts as an impediment in strategy Inertia acts as an impediment in strategy implementation. Changes in top management implementation. Changes in top management and and unlearningunlearning helps overcome inertia. Top helps overcome inertia. Top managers resist change, irrespective whether it is managers resist change, irrespective whether it is from worse to good or good to worse. Common from worse to good or good to worse. Common sources of inertia –sources of inertia – Complacency with past successes. Complacency with past successes. Commitment to past strategies; size and age. Commitment to past strategies; size and age. Beliefs & biases (i.e. dominant logic).Beliefs & biases (i.e. dominant logic).

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STRATEGY EVALUATION STRATEGY 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 an ongoing strategies need to be evaluated on an ongoing basis to prevent deviations of fit. basis to prevent deviations of fit.

Deviation of fit is detrimental to performance and Deviation of fit is detrimental to performance and may lead to strategic failure. However, certain may lead to strategic failure. However, certain authors propose misfit as a source of superior authors propose misfit as a source of superior performance.performance.

Firms should knowFirms should know how to learn, unlearn and how to learn, unlearn and relearn.relearn.

To prevent deviation of fit, firms should move To prevent deviation of fit, firms should move beyond beyond financial performancefinancial performance to to strategic strategic performance as organization systems are performance as organization systems are becoming complex.becoming complex.

Continuous learning prevents trap of inertia.Continuous learning prevents trap of inertia.

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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 necessarycorrective action wherever necessary.. It attempts It attempts to answer the following questions –to answer the following questions –

Is the strategic intent appropriate to the changing Is the strategic intent appropriate to the changing context?context?

Are the organizations capabilities still holding Are the organizations capabilities still holding good, competitive advantages becoming good, competitive advantages becoming disadvantages?disadvantages?

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 the strategic assumptions still valid?Are the strategic assumptions still valid?

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STRATEGY CONTROL - STRATEGY CONTROL - IMPLEMENTATIONIMPLEMENTATION

It involves It involves steeringsteering the company towards its the company towards its original growth trajectory & stated goals.original growth trajectory & stated goals.

Premise Control –Premise Control – Checking the validity of the Checking the validity of the assumptions on which a strategy was based. assumptions on which a strategy was 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 thrusts schedule. It involves assessing – strategic thrusts and milestones.and milestones.

Special Alert Control –Special Alert Control – It intends to uncover It intends to uncover unanticipated information having critical impact unanticipated information having critical impact on strategies. It is open-ended as well as on strategies. It is open-ended as well as unfocussed. If not tackled appropriately they may unfocussed. If not tackled appropriately they may throw the entire strategy into hay-wire.throw the entire strategy into hay-wire.

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

Strategy not linked to resource allocation & Strategy not linked to resource allocation & capabilities capabilities – Lacking commitment of top – Lacking commitment of top management, low strategic fit.management, low strategic fit.

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? As a saying goes, “If you cannot construct? As a saying goes, “If you cannot measure it, you cannot improve it”.measure it, you cannot improve it”.

7S FRAMEWORK OF Mc KINSEY7S FRAMEWORK OF Mc KINSEY

The The 7-S Framework of McKinsey 7-S Framework of McKinsey is a management is a management model that describes 7 factors model that describes 7 factors to organize a company to organize a company in an holistic and effective wayin an holistic and effective way. Together these factors . Together these factors determine the way in which a corporation operates. determine the way in which a corporation operates. Managers should take into account all seven of these Managers should take into account all seven of these factors, to be sure of factors, to be sure of successful implementation of a successful implementation of a strategystrategy. Large or small, important or not . Large or small, important or not they're all they're all interdependentinterdependent, so if one fails to pay proper attention , so if one fails to pay proper attention to one of them, this may effect all others as well. On to one of them, this may effect all others as well. On top of that, the relative importance of each factor may top of that, the relative importance of each factor may vary over time and context. vary over time and context. Today it is considered one Today it is considered one of the most powerful tools for strategy implementation of the most powerful tools for strategy implementation determining success or failure. determining success or failure.

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BACKGROUND & ORIGINBACKGROUND & ORIGIN

The 7-S Framework was first mentioned in The 7-S Framework was first mentioned in "The Art Of "The Art Of Japanese Management" Japanese Management" by by Richard Pascale Richard Pascale and and Anthony Athos Anthony Athos in in 19811981. They had been investigating . They had been investigating how Japanese industry had been so successful. At how Japanese industry had been so successful. At around the same time in the US around the same time in the US Tom Peters Tom Peters and and Robert Waterman Robert Waterman were exploring what made a were exploring what made a company excellent. The 7-S model was born at a company excellent. The 7-S model was born at a meeting of these four authors in meeting of these four authors in 19781978. It appeared . It appeared also in also in "In Search of Excellence""In Search of Excellence" by Peters and by Peters and Waterman, Waterman, and was taken up as a basic tool by the and was taken up as a basic tool by the global management consultancy company McKinsey. global management consultancy company McKinsey. Since then it is known as their 7-S model and is Since then it is known as their 7-S model and is extensively used by corporations worldwide to extensively used by corporations worldwide to implement their strategies.implement their strategies. 157157

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THE 7’STHE 7’S

Shared Values –Shared Values – It represents what the organization It represents what the organization stands for and what it believes in. stands for and what it believes in.

Strategy –Strategy – Trade-offs for the allocation of a firms Trade-offs for the allocation of a firms scarce resources, over time, to reach identified & scarce resources, over time, to reach identified & stated goals.stated goals.

Structure –Structure – The way in which the organization's units The way in which the organization's units relate to each other in terms of their commonalities.relate to each other in terms of their commonalities.

Style –Style – The way in which the top management The way in which the top management influences the functioning of an organization.influences the functioning of an organization.

Systems –Systems – The procedures, processes and routines that The procedures, processes and routines that characterize how work should be done.characterize how work should be done.

Staff –Staff – Human inter-relationships, formal & informal . Human inter-relationships, formal & informal . Skills –Skills – An organizations capabilities and competencies. An organizations capabilities and competencies.

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1st Order Fit 2nd Order Fit3rd Order Fit

STRATEGIC FITSTRATEGIC FIT

Shared Values

Skills

Structure

Strategy

Systems

Staff

Style

A CRITIC OF THE 7S MODELA CRITIC OF THE 7S MODEL

While the While the hard S’s (strategy, structure, systems) hard S’s (strategy, structure, systems) are are comparatively easy to identify and influence. In comparatively easy to identify and influence. In contrast, the contrast, the soft S’s (skill, staff, style, shared values) soft S’s (skill, staff, style, shared values) are very malleable and comparatively more difficult are very malleable and comparatively more difficult to identify & influence, to identify & influence, because most often they are because most often they are culturally embedded culturally embedded and often neglected during M&A. and often neglected during M&A.

While the American co’s focuses on the While the American co’s focuses on the hard S’s; hard S’s; their their Japanese counterparts focus more on the Japanese counterparts focus more on the soft S’s soft S’s for for their early success and sustainability.their early success and sustainability.

A choice of an alphabet often limits the scope and A choice of an alphabet often limits the scope and skews the interpretation of a model. Consider the 4P’s skews the interpretation of a model. Consider the 4P’s of marketing or 3R’s of SCM.of marketing or 3R’s of SCM.

Ineffective in case of a virtual company.Ineffective in case of a virtual company.160160

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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 firm builds up its facilities right from the Here a firm builds up its facilities right from the scratch and continues to do so without any scratch and continues to do so without any external participation. The entire infra-structural external participation. The entire infra-structural facilities are set up afresh having its own facilities are set up afresh having its own gestation and break-even, i.e. green-field gestation and break-even, i.e. green-field projects. projects. (Eg. Reliance Industries).(Eg. Reliance Industries).

It has complete control over inputs, technologies, It has complete control over inputs, technologies, and markets, i.e. the entire value chain.and markets, i.e. the entire value chain.

Govt. concessions are available for green-field Govt. concessions are available for green-field projects. (Eg. SEZ’s, tax holidays, soft loans, projects. (Eg. SEZ’s, tax holidays, soft loans, subsidized power).subsidized power).

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 capabilities & competencies.Develop capabilities & competencies. Manage time as a source of competitive Manage time as a source of competitive

advantage.advantage.

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STRATEGIC ALLIANCESTRATEGIC ALLIANCE

It involves a It involves a pro-active pro-active collaboration between two collaboration between two or more firms on a particular domain or function or more firms on a particular domain or function for mutual gain. It touches upon a limited aspects for mutual gain. It touches upon a limited aspects of a firms value chain. Alliances are usually in the of a firms value chain. Alliances are usually in the areas of technologies or markets (areas of technologies or markets (Eg. Tata Motors Eg. Tata Motors & Fiat& Fiat). Alliances are usually short-lived and ). Alliances are usually short-lived and disbanded once the purpose is achieved. disbanded once the purpose is achieved.

There is no funding or equity participation from There is no funding or equity participation from the alliance partner & both the firms continue to the alliance partner & both the firms continue to operate independently.operate independently.

It has limited intervention power and usually lacks It has limited intervention power and usually lacks holistic commitment from the alliance partner.holistic commitment from the alliance partner.

It is a form of competitive collaboration.It is a form of competitive collaboration. It paves the way for future associations.It paves the way for future associations.

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JOINT VENTURESJOINT VENTURES

A joint venture involves an equivalent equity A joint venture involves an equivalent equity participation between two firms usually of similar participation between two firms usually of similar strategic intent and comparable size to enter a strategic intent and comparable size to enter a particular market through a newly formed entity. particular market through a newly formed entity. It is a win-win situation for both the companies. It is a win-win situation for both the companies. (Eg. Tata – AIG, Hero - Honda).(Eg. Tata – AIG, Hero - Honda).

Dominant logic of both the companies should be Dominant logic of both the companies should be complimentary, leaving minimum scope of complimentary, leaving minimum scope of overlapping.overlapping.

Selecting the right partner is critical for success.Selecting the right partner is critical for success. A comprehensive MOU is essential. Degree and A comprehensive MOU is essential. Degree and

extent of management control must be clearly extent of management control must be clearly laid down.laid down.

Both the partners should have significant linkages Both the partners should have significant linkages in value-chain to combine expertise.in value-chain to combine expertise.

Usually has a longer tenure than an alliance.Usually has a longer tenure than an alliance.

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MERGERS & ACQUISITIONMERGERS & ACQUISITION

It refers to the fusion of two or more firms into a It refers to the fusion of two or more firms into a single entity; with the individual firms ceasing to single entity; with the individual firms ceasing to exist any more exist any more (Eg. Brooke Bond & Lipton)(Eg. Brooke Bond & Lipton). . Acquisition is an outright purchase of a firm Acquisition is an outright purchase of a firm assets by another independent entity assets by another independent entity (Eg. ITC - (Eg. ITC - Tribeni Tissues, Coca Cola – Thums Up)Tribeni Tissues, Coca Cola – Thums Up). .

Economies in scale leading to lowering of costs.Economies in scale leading to lowering of costs. Integrated distribution channel leads to better Integrated distribution channel leads to better

market penetrationmarket penetration and overalland overall synergy.synergy. Integration of assets and other financial resources.Integration of assets and other financial resources. Revival of a sick-unit through better management Revival of a sick-unit through better management

practices is a major motive behind an acquisition practices is a major motive behind an acquisition strategy.strategy.

Structural side should be handled properly; Structural side should be handled properly; otherwise it can lead to failure (i.e. left alone otherwise it can lead to failure (i.e. left alone syndrome).syndrome).

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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 majority management control by buying out majority stake in a firm through due diligence or hostility stake in a firm through due diligence or hostility (Eg. Tata Steel - Corus). (Eg. Tata Steel - Corus).

Integration of organization structure & cultures Integration of organization structure & cultures is difficult, often the new firm is “left alone”. is difficult, often the new firm is “left alone”.

Instant access to capacities and markets. Larger Instant access to capacities and markets. Larger geo-graphical diversity. Consolidation in a geo-graphical diversity. Consolidation in a fragmented industry.fragmented industry.

Most countries have stringent laws that prevents Most countries have stringent laws that prevents hostile take over. hostile take over.

Inform SEBI / Stock Exchange after 5% stake is Inform SEBI / Stock Exchange after 5% stake is acquired. Make a public offer of not less than acquired. Make a public offer of not less than 20% of the balance equity after take-over. 20% of the balance equity after take-over.

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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 business Change is becoming pertinent in the business environment. environment. Radical change Radical change is superseding is superseding incremental incremental changechange. The past is ceasing to be an indication of the . The past is ceasing to be an indication of the future. future. Change provides enormous opportunities; it is Change provides enormous opportunities; it is also a source of potential threat.also a source of potential threat. Companies therefore Companies therefore need to ensure need to ensure competitive advantages competitive advantages doesn’t become doesn’t become competitive disadvantagescompetitive disadvantages. Some tools to ensure that –. Some tools to ensure that –

Benchmarking –Benchmarking – Adopt certain best practices, or better Adopt certain best practices, or better still create next practicesstill create next practices

Reengineering – Reengineering – Redesigning work processes right from Redesigning work processes right from the scratch.the scratch.

TQM –TQM – Doing the right thing the first time, every time. Doing the right thing the first time, every time. Balanced Scorecard – Balanced Scorecard – Tracking strategy 360Tracking strategy 36000..

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BENCHMARKINGBENCHMARKING

A A best practicebest practice is defined as an activity performed by a is defined as an activity performed by a company in a particular domain or function which company in a particular domain or function which distinguishes it from others and making them world-distinguishes it from others and making them world-class.class.

These exemplary practices involves the stakeholders These exemplary practices involves the stakeholders of the company and helps achieve its strategic intent.of the company and helps achieve its strategic intent.

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

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

Firms are moving towards Firms are moving towards next practices next practices as as best best practicespractices make firms look more and more make firms look more and more homogeneoushomogeneous. .

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SOME BEST PRACTICESSOME BEST PRACTICES

Dell: Customized configuration of computers.Dell: Customized configuration of computers. Caterpillar: 48 hours delivery anywhere in the Caterpillar: 48 hours delivery anywhere in the

world.world. Citi Bank : Priority banking services.Citi Bank : Priority banking services. Maruti: Certified “true value” pre-owned cars.Maruti: Certified “true value” pre-owned cars. Microsoft: ESOP to employees.Microsoft: ESOP to employees. Infosys: Customized work-stations.Infosys: Customized work-stations. TCS: Referencing potential new recruits.TCS: Referencing potential new recruits. ITC: Shareholders factory visit.ITC: Shareholders factory visit. AmEx: Outsourcing data warehousing mining.AmEx: Outsourcing data warehousing mining. MARG: Set-top box to study viewing patterns.MARG: Set-top box to study viewing patterns. Honda: CEO’s visit to dealers.Honda: CEO’s visit to dealers.

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TYPES OF BENCHMARKINGTYPES OF BENCHMARKING

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 businesses.operations from experiences in similar businesses. Eg. Ford adopting assembly lay-out plan of Toyota.Eg. Ford adopting assembly lay-out 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 miniaturization skills of Sony.Samsung leveraging miniaturization skills of Sony.

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

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HOW TO BENCHMARK? HOW TO BENCHMARK?

Phase 1: PlanningPhase 1: Planning– What to benchmark? Whom to benchmark?What to benchmark? Whom to benchmark?– Identify key performance indicators & Data source.Identify key performance indicators & 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 its implementation.Establish functional goals and its implementation.

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

needs.needs.– Recalibrate or outperform benchmarks.Recalibrate or outperform 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. solving the problem. Firms should generally avoid Firms should generally avoid selecting the selecting the industry leaderindustry leader, because it may not , because it may not always adopt the best practices for every process or always adopt the best practices for every process or activity. Benchmarking partners may also be from activity. Benchmarking partners may also be from different industries. Types –different industries. Types –– Internal – Internal – It involves benchmarking against its own It involves benchmarking against its own

branches, divisions, SBU’s. Proximity to data and branches, divisions, SBU’s. Proximity to data and cooperation is taken care of automatically. cooperation is taken care of automatically.

– External – External – It involves benchmarking against firms It involves benchmarking against firms that succeeded on account of their best practices. It that succeeded on account of their best practices. It may also involve benchmarking against world-class may also involve benchmarking against world-class firms. Friction may arise due to presence in firms. Friction may arise due to presence in competing industries.competing industries.

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BENCHMARKING - ADVANTAGESBENCHMARKING - ADVANTAGES

Finding better ways of meeting stakeholder needs. Finding better ways of meeting stakeholder needs. Organizational learning comes from internal as well Organizational learning comes from internal as well as external sources.as external sources.

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

Defining effective measure of indicators, facilitate Defining effective measure of indicators, facilitate comparison, adopt from other organizations. comparison, adopt from other organizations.

Ensuring a continuous learning organization.Ensuring a continuous learning organization. Reducing competitive disadvantage.Reducing competitive disadvantage. Organizational turnaround, especially effective in Organizational turnaround, especially effective in

case of a wide strategic drift when differentiation case of a wide strategic drift when differentiation strategies fail to work. strategies fail to work.

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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 and not looking alike. about differentiation and not looking alike.

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

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RE-ENGINEERING RE-ENGINEERING

Redesigning leads to identification of superfluous Redesigning leads to identification of superfluous activities or product features activities or product features (i.e. process mapping) (i.e. process mapping) and eliminating or improving them and eliminating or improving them (E.g. Windows (E.g. Windows 95 to 97).95 to 97).

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

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

The task demands a total change in organisational The task demands a total change in organisational culture and mindset.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 organization with varying degree all levels of an organization 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 operationsIt looks into the flow of operations (i.e. products, structures, processes, etc)(i.e. products, structures, processes, etc) and and supports the organization for the present.supports the organization for the present.

Business –Business – It looks into markets, customers and It looks into markets, customers and suppliers and protects the organization from the suppliers and protects the organization from the futurefuture (i.e. BPR)(i.e. BPR)..

Strategic –Strategic – It looks into the process of strategic It looks into the process of strategic planning, resource allocation and prepares the planning, resource allocation and prepares the organization for the future through a reorientation organization for the future through a reorientation of the entire strategic architecture. .of the entire strategic architecture. .

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REVERSE ENGINEERINGREVERSE ENGINEERING

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

While traditional manufacturing is a bottom-up While traditional manufacturing is a bottom-up approach; reverse engineering is a top-bottom approach; reverse engineering is a top-bottom approachapproach. .

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

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STAGES IN REVERSE ENGINEERINGSTAGES IN REVERSE ENGINEERING

Awareness –Awareness – Recognizing whether the product is Recognizing whether the product is found to be worth the time, cost and effort necessary found to be worth the time, cost and effort necessary for the purpose of reverse engineering. Inaccurate for the purpose of reverse engineering. Inaccurate assessment at this stage may lead to a failure of the assessment at this stage may lead to a failure of the entire project. entire project.

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

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WHAT IS QUALITY?WHAT IS QUALITY?

It involves the totality of a product or service in It involves the totality of a product or service in meeting certain stated or implied needs. meeting certain stated or implied needs. More and More and more companies are moving towards meeting implied more companies are moving towards meeting implied rather than stated needs. It has eight dimensions (Eg. rather than stated needs. It has eight dimensions (Eg. Car) –Car) –– Performance – Mileage of 14 kms to a litre of fuel.Performance – Mileage of 14 kms to a litre of fuel.– Features – Anti-lock braking systems, Air bags.Features – Anti-lock braking systems, Air bags.– Reliability – Consistency in mileage.Reliability – Consistency in mileage.– Conformance – Emission standards - Euro IV.Conformance – Emission standards - Euro IV.– 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 conformance to certain conformance to certain pre-set standardspre-set standards, , zero zero defectsdefects, which ensures good , which ensures good market standing.market standing.

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

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

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

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TQM – KEY TENETSTQM – KEY TENETS

Do it right, the first time –Do it right, the first time – From reactively fixing From reactively fixing error in products to proactively preventing errors error in products to proactively preventing errors from occurring at the first place from occurring at the first place (Juran)(Juran)..

Be customer centric –Be customer centric – Generate the concept of - Generate the concept of - internal customer internal customer (Ishikawa)(Ishikawa)..

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

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

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TQM - STRATEGIESTQM - STRATEGIES

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

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

Quality Circles –Quality Circles – It a small group of shop-floor It a small group of shop-floor employees who meet periodically to take decisions employees who meet periodically to take decisions regarding operational problems and crises, saving regarding operational problems and crises, saving precious top management time. It is based on the precious top management time. It is based on the principles of MBO (i.e. equal participation). principles of MBO (i.e. equal participation).

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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?

BSC - CONCEPTUALISATIONBSC - CONCEPTUALISATION

A company’s performance depends on how it measures A company’s performance depends on how it measures performance. performance. Most managers tend to rely on traditional Most managers tend to rely on traditional measures of performance having its origin in finance as measures of performance having its origin in finance as they are well tried and tested.they are well tried and tested.

These measures worked well when organizational These measures worked well when organizational systems were simple and unidirectional and more systems were simple and unidirectional and more importantly the environment was static.importantly the environment was static.

In today’s context when organizational systems have In today’s context when organizational systems have become complex and multi-directional we need to have become complex and multi-directional we need to have a holistic view of performance to cut the lag effects.a holistic view of performance to cut the lag effects.

Organizations need to move from financial to strategic Organizations need to move from financial to strategic performance. performance. Focus more on causes, rather than Focus more on causes, rather than effects. effects. 186186

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

A A BSC BSC helps a manager to helps a manager to tracktrack and and communicate communicate the different elements of company’s strategy. It the different elements of company’s strategy. It has four dimensions –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? Firms more often have problems, because they Firms more often have problems, because they

have too many. have too many. The most critical element of a BSC is to The most critical element of a BSC is to

measure these four dimensions, and distinguish measure these four dimensions, and distinguish strategic problems from operational ones.strategic problems from operational ones.

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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 NPA’s

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BUSINESS PERSPECTIVEBUSINESS PERSPECTIVE

GOALS

Skills

Excellence

Exposure

Introduction

MEASURES

New capabilities and competenciesImplementation & gestation period

Bank and supplier credit limits & PLRUnit Costs / Conversion Ratio / Defect Ratio

No. of times covered in media

No. of new product launches Vs competitionProduct pricing Vs competition

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LEARNING PERSPECTIVELEARNING PERSPECTIVE

GOALS

Technology

Manufacturing

Focus

Timing

MEASURES

No. of new patents registeredTime to develop next generation products

Average and spread in operating cycle

% of products that equal 2/3 sales

No. of product innovations

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FINANCIAL PERSPECTIVEFINANCIAL PERSPECTIVE

GOALS

Survival

Success

Prosper

Divestment

MEASURES

Cash flows

Growth in Sales and Profits

EPS, Return on Investment

Market Capitalization / PE ratio

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BSC - IMPLEMENTATIONBSC - IMPLEMENTATION

STRATEGY

Mobilize change through effective leadershipTranslate strategy into

operational terms

Align the organization to the strategy

Make strategy everyone’s job

Make strategy a continual process

12

3 4

5

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BSC - ADVANTAGESBSC - ADVANTAGES

Most often top managers face information Most often top managers face information overload. overload. As a result, they don’t know - what As a result, they don’t know - what they don’t know. Modern managers should be they don’t know. Modern managers should be poised to ask the right questions.poised to ask the right questions.

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. Seek excellence, . Seek excellence, performance will automatically follow. performance will automatically follow.

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EFFICIENCY Vs EFFECTIVENESSEFFICIENCY Vs EFFECTIVENESS

Ineffective

Goes out ofBusinessquickly

Survives

Dies Slowly Thrives

Ineffi

cient

Efficie

nt

Effective

EFFECTIVENESS + STRATEGYEFFECTIVENESS + STRATEGY

A company which is effective as well as A company which is effective as well as strategic, not only thrives, but also sustains strategic, not only thrives, but also sustains it.it.

- Michael E. - Michael E. PorterPorter

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CORPORATE CORPORATE RESTRUCTURINGRESTRUCTURING

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CORPORATE RESTRUCTURINGCORPORATE RESTRUCTURING

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

Strategic variety brings paradigm shift, from survival of Strategic variety brings paradigm shift, from survival of the fittestthe fittest ....... to survival of the most adaptable........ to survival of the most 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 organizations changes in the way an organizations thinksthinks and and looks looks (Eg. Tata Group).(Eg. Tata Group).

As Peter Drucker pointed out, As Peter Drucker pointed out, “every organization must “every organization must be prepared to abandon everything it does.”be prepared to abandon everything it does.”

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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 of should strive to provide unimaginable value ahead of its timeits time (Eg. Walkman, Fax, ATM, etc). (Eg. Walkman, Fax, ATM, etc). Internal Internal customers should also not be neglected.customers should also not be neglected.

Core Business –Core Business – Company’s should introspect – What Company’s should introspect – What business are we in? Business evolved out of 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).

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RESTRUCTURING – BASIC TENETSRESTRUCTURING – BASIC TENETS

Cultural Changes –Cultural Changes – A culture represents the values and A culture represents the values and beliefs of the people about the organization. beliefs of the people about the organization. Restructuring also requires cultural reorientation. It is Restructuring also requires cultural reorientation. It is created and institutionalized by the top management.created and institutionalized by the top management.

During the times of During the times of JRD, the Tatas JRD, the Tatas were considered a were considered a benevolent and charitable organization, benevolent and charitable organization, .......... Ratan Tata Ratan Tata now drives the point the group means business.) now drives the point the group means business.)

RelianceReliance dismantled their industrial embassies dismantled their industrial embassies ..... ..... started focusing on their capabilities.)started focusing on their capabilities.)

The The Aditya Birla Aditya Birla group typically relied on the “marwari” group typically relied on the “marwari” community for key management positions community for key management positions .......... Kumar Kumar Birla today is more dependent on professionals.Birla today is more dependent on professionals.

MOVING CLOSER TO THE CUSTOMERMOVING CLOSER TO THE CUSTOMER

As companies evolve, they tend to move away from As companies evolve, they tend to move away from the customer. Restructuring provides a platform to the customer. Restructuring provides a platform to close this gap.close this gap.

Communicating to the media about organization Communicating to the media about organization efforts to deliver quality products. efforts to deliver quality products.

Getting feedback & addressing customer complaints.Getting feedback & addressing customer complaints. Organizing customer and supplier meets.Organizing customer and supplier meets. Publicizing welfare projects to demonstrate CSR.Publicizing welfare projects to demonstrate CSR. Carry out PR campaigns. Carry out PR campaigns. Use the reach of networking technologies.Use the reach of networking technologies. Honda’s ad says, “ … one reason our customers are Honda’s ad says, “ … one reason our customers are

satisfied is that we aren’t.”satisfied is that we aren’t.”200200

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ASSET RESTRUCTURINGASSET RESTRUCTURING

Asset Restructuring –Asset Restructuring – The asset composition of a firm The asset composition of a firm undergoes a major change, including its intangibles –undergoes a major change, including its intangibles –

Mergers –Mergers – It may be vertical, horizontal, or conglo-It may be vertical, horizontal, or conglo-merate. Further, it may be smooth merate. Further, it may be smooth (Eg. Tata – Corus)(Eg. Tata – Corus) or hostile or hostile (Eg. Mittal – Arcelor) (Eg. Mittal – Arcelor) and can take various and can take various forms.forms.

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

Hive Off –Hive Off – It involves siphoning of assets under It involves siphoning of assets under control. It may include brands as well. It can have control. It may include brands as well. It can have two forms; two forms; spin-offspin-off and and equity carveequity carve. Further spin-off . Further spin-off can be classified as can be classified as split-offsplit-off and and split-upsplit-up. .

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HIVE OFFHIVE OFF

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

receive equity in the subsidiary in exchange for receive equity in the subsidiary in exchange for the stocks of the parent company.the stocks of the parent 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 into a company loses its identity after being split into a number of subsidiaries. Most of these practices number of subsidiaries. Most of these practices are not in consonance with Indian laws. are not in consonance with Indian laws.

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

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DIVESTITUREDIVESTITURE

It involves the sale of a brand or a division of a It involves the sale of a brand or a division of a company to a third party, for a specified market or company to a third party, for a specified market or in general with full management control. Generic in general with full management control. Generic motives include –motives include –– Raise working capital; repay long-term debts.Raise working capital; repay long-term debts.– Poor performance; strategic misfit.Poor performance; strategic misfit.

In 1995, Parle sold its In 1995, Parle sold its Thums Up Thums Up brand to Coke for brand to Coke for $40 million apprehending fierce competition.$40 million apprehending fierce competition.

In 2005, In 2005, L&T L&T sold its cements division to Aditya Birla sold its cements division to Aditya Birla group, but retained its engineering division.group, but retained its engineering division.

A complete sell-out is known as divestment A complete sell-out is known as divestment (TOMCO).(TOMCO).

Selling out in phases is called disinvestment (IPCL). Selling out in phases is called disinvestment (IPCL).

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CAPITAL RESTRUCTURINGCAPITAL RESTRUCTURING

Capital Restructuring -Capital Restructuring - The internal & external The internal & external liability composition undergoes a major change –liability composition undergoes a major change –

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

Share Buyback –Share Buyback – It is a process of cancellation of It is a process of cancellation of shares out of free reserves to the extent of shares out of free reserves to the extent of 25%25% of of paid-up capital paid-up capital (Eg. Wipro). It provides greater (Eg. Wipro). It provides greater leverage as well as management control.leverage as well as management control.

Conversion –Conversion – Replacing debt with equity or vice-versa Replacing debt with equity or vice-versa or costlier with cheaper debt or cross currency debt.or costlier with cheaper debt or cross currency debt.

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BUSINESS RESTRUCTURING – TATASBUSINESS RESTRUCTURING – TATAS

Divestments DiversificationsLakme – Rs. 256 crACC – Rs. 950 crMerind - Rs. 42 cr

Tata Timken – Rs 120 crVoltas - Rs. 230 cr

Goodlass Nerolac – Rs. 99 cr

Tata Motors – Rs. 1700 crTrent – Rs. 120 cr

Tata AIG – Rs. 250 crTata Telecom – Rs. 1170 cr

VSNL – Rs. 1439 cr

Tata Tetley – Rs. 1890 crTata Power – Rs. 1860 cr

CMC – Rs. 150 cr

ORGANIZATIONAL RESTRUCTURINGORGANIZATIONAL RESTRUCTURING

Organizational structure and systems calls for a Organizational structure and systems calls for a change when strategic variety is apparent. It can be change when strategic variety is apparent. It can be carried out in the following ways –carried out in the following ways –

Downsizing – Downsizing – It is a systematic one-time reduction in It is a systematic one-time reduction in the no. of a firm’s employees and sometimes in the the no. of a firm’s employees and sometimes in the no. of operating units, usually as a result external no. of operating units, usually as a result external turbulence, keeping the composition of business turbulence, keeping the composition of business intact intact (Jet Airways)(Jet Airways). . Survival is the primary motive.Survival is the primary motive.

Rightsizing – Rightsizing – It is phasing of excess and redundant It is phasing of excess and redundant employees resulted out of faulty internal planning employees resulted out of faulty internal planning (SAIL)(SAIL). . Turnaround is the primary motive.Turnaround is the primary motive.

Downscoping – Downscoping – It involves reducing the business It involves reducing the business and/or geographical scope of a firm and/or geographical scope of a firm (Aditya Birla (Aditya Birla group)group). . 206206

STRATEGIC CHANGESTRATEGIC CHANGE

One of the most difficult components of organization One of the most difficult components of organization restructuring is the mindset of the top management restructuring is the mindset of the top management represented through its dominant logic and its shared represented through its dominant logic and its shared values reflected in cultural orientation. values reflected in cultural orientation.

The dominant logic represents the perceptions and The dominant logic represents the perceptions and biases biases (i.e. thumb rules)(i.e. thumb rules) of the top management. of the top management.

Dominant logic becomes deep-rooted in organizational Dominant logic becomes deep-rooted in organizational contexts depending on the period it is in place contexts depending on the period it is in place (tenure (tenure of the CEO)of the CEO). The longer the period, the more difficult it . The longer the period, the more difficult it becomes to uproot the paradigm becomes to uproot the paradigm (i.e. inertia)(i.e. inertia)..

Strategy change is unviable without a preceding Strategy change is unviable without a preceding change in its dominant logics, as strategies are based change in its dominant logics, as strategies are based on such beliefs and biases. on such beliefs and biases.

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FORCES AGAINST STRATEGIC FORCES AGAINST STRATEGIC CHANGECHANGE

The problem with strategic change is that the The problem with strategic change is that the whole burden typically rests on few people (i.e. whole burden typically rests on few people (i.e. 20% of the people carry out 80% of the changes).20% of the people carry out 80% of the changes).

Companies achieve real agility only when people Companies achieve real agility only when people at every level rise above the ordinary to face the at every level rise above the ordinary to face the challenges – revitalization or transformation.challenges – revitalization or transformation.

In most organizations, the factor that stifled In most organizations, the factor that stifled change & performance was – culture.change & performance was – culture.

Successful transformation requires Successful transformation requires – – incorporating employees fully into the process –incorporating employees fully into the process – leading from a different place so as to maintain leading from a different place so as to maintain employee involvement – instill mental disciplines employee involvement – instill mental disciplines that will enable employees to behave differentlythat will enable employees to behave differently..208208

SUCCESSFUL TRANSFORMATIONSUCCESSFUL TRANSFORMATION

Build an intricate understanding of the business Build an intricate understanding of the business model at all levels of the organization.model at all levels of the organization.

Encourage uncompromising straight talk.Encourage uncompromising straight talk. Manage from the future. The best way is to alter the Manage from the future. The best way is to alter the

institutional point of view.institutional point of view. Harness setbacks, it is not about winning but about Harness setbacks, it is not about winning but about

learning.learning. Promote inventive accountability; process ownership.Promote inventive accountability; process ownership. Understand and deliver the quid pro quo.Understand and deliver the quid pro quo. Create relentless discomfort with the status quo. Create relentless discomfort with the status quo.

Questioning every basic action of the organization, Questioning every basic action of the organization, never take no for an answer.never take no for an answer.

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FORCE-FIELD ANALYSISFORCE-FIELD ANALYSIS

A force-field analysis provides an initial overview of A force-field analysis provides an initial overview of change problems that needs to tackled, by identifying change problems that needs to tackled, by identifying forces for and against change. forces for and against change.

Culture and style of management are two main Culture and style of management are two main impediments in force-field analysis, also known as impediments in force-field analysis, also known as cultural-web. It involves identifying –cultural-web. It involves identifying –

Aspects of current culture which needs to be Aspects of current culture which needs to be reinforced.reinforced.

Aspects of current culture which needs to be overcome.Aspects of current culture which needs to be overcome. Identify and implement facilitators of cultural change.Identify and implement facilitators of cultural change. It involves diagnosing a change situation – systems & It involves diagnosing a change situation – systems &

structures, that can be both enablers and blockages to structures, that can be both enablers and blockages to change and restructuring.change and restructuring. 210210

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RESTRUCTURING - OUTCOMESRESTRUCTURING - OUTCOMES

Organizational

Business

Capital

Reduced labourcosts

AlternativesShort - Term Long - Term

Reduced debt costs

Emphasis onstrategic control

High debt costs

Loss ofhuman capital

Lower performance

Higherperformance

Higherrisk

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NUMERATOR & DENOMINATOR MGTNUMERATOR & DENOMINATOR MGT

Most firms across emerging markets undergo Most firms across emerging markets undergo strategic discontinuity and as a result are forced to strategic discontinuity and as a result are forced to restructure their businesses. In order to put back restructure their businesses. In order to put back the company on the right track they are resort to – the company on the right track they are resort to –

Denominator – It assumes that turnover cannot be Denominator – It assumes that turnover cannot be increased, hence go in for downsizing, down-increased, hence go in for downsizing, down-scoping or asset stripping.scoping or asset stripping.

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

While the first strategy produces results While the first strategy produces results instantaneously; the second one is a more viable instantaneously; the second one is a more viable strategy and sustainable option in the long run. strategy and sustainable option in the long run.

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TURNAROUND TURNAROUND MANAGEMENTMANAGEMENT

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WHY TURN AROUND MANAGEMENT?WHY TURN AROUND MANAGEMENT?

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

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

Why do firms atrophy?Why do firms atrophy?

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

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TURN AROUND MANAGEMENTTURN AROUND MANAGEMENT

A turnaround is said to occur when a firm perseveres A turnaround is said to occur when a firm perseveres through an existence threatening performance through an existence threatening performance decline; ends the threat with a combination of decline; ends the threat with a combination of strategies, skills, systems, and capabilities; and strategies, skills, systems, and capabilities; and achieves sustainable performance recovery. achieves sustainable performance recovery. Both Both content content (what) (what) and process and process (how) (how) are equally are equally important for a successful turnaround. important for a successful turnaround.

While content focuses on endogenous and While content focuses on endogenous and exogenous variables; process focuses on –exogenous variables; process focuses on –

A logic to explain a causal relationship between A logic to explain a causal relationship between intervening variables.intervening variables.

A category of underlying principles and concepts.A category of underlying principles and concepts. As a sequence of events describing how things As a sequence of events describing how things

change and why they change change and why they change (i.e. Stage Theory).(i.e. Stage Theory).

TURNAROUND INDICATORSTURNAROUND INDICATORS

Most firms atrophy simply because they fail to Most firms atrophy simply because they fail to diagnose the indicators that acts as threat to diagnose the indicators that acts as threat to organizational existence. organizational existence. Some indicators - Some indicators -

Continuous cash flow crises as a result of dwindling Continuous cash flow crises as a result of dwindling market-share and profits.market-share and profits.

Substantial shifts in consumer preferences. Substantial shifts in consumer preferences. Low employee morale leading to high employee Low employee morale leading to high employee

attrition at all levels, especially in key positions.attrition at all levels, especially in key positions. Uncompetitive products or services, leading to lack Uncompetitive products or services, leading to lack

of acceptability from distributors and customers.of acceptability from distributors and customers. Rising input costs, unavailability or radical lowering Rising input costs, unavailability or radical lowering

of substitute costs or technological obsolescence. of substitute costs or technological obsolescence. Low stakeholder confidence; suppliers and bankers.Low stakeholder confidence; suppliers and bankers.

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TURNAROUND ILLUSIONTURNAROUND ILLUSION

The first step to a successful turnaround is the basic The first step to a successful turnaround is the basic acceptance of the fact that ….. “all is not well”, acceptance of the fact that ….. “all is not well”, which most top managers fail to appreciate. Hence, which most top managers fail to appreciate. Hence, they adopt surface level measures they adopt surface level measures (disprin popping) (disprin popping) which most often fail. which most often fail. Common approaches adopted - Common approaches adopted -

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, focus on power brands,

consider extension, consider extension, liquidating dead assets.liquidating dead assets. Emphasis on advertising and market penetration.Emphasis on advertising and market penetration. Extending work hours, Extending work hours, prune work-force.prune work-force.

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TURNAROUND STAGE THEORY TURNAROUND STAGE THEORY Pe

rform

ance

Time

Decline

Stage 1 Stage 2 Stage 3 Stage 4

Response Transition Outcome

Nadir

Equilibrium Line Success

Failure

Indeterminate

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DECLINEDECLINE

Decline is the first stage in the turnaround process. It Decline is the first stage in the turnaround process. It involves the identification of the theoretical involves the identification of the theoretical perspectives that explains performance decline –perspectives that explains performance decline –

K-Extinction –K-Extinction – It suggests that macro economic and It suggests that macro economic and industry wide factors are responsible for decline. industry wide factors are responsible for decline. It has It has its origin in its origin in “environment led fit” “environment led fit” that subscribes to the that subscribes to the view that a firm has little control over external factors.view that a firm has little control over external factors.

R-Extinction –R-Extinction – It suggests that organization factors, It suggests that organization factors, primarily dwindling resources and capabilities are primarily dwindling resources and capabilities are responsible for decline. responsible for decline. It has its origin in It has its origin in “resource led “resource led stretch”stretch” and subscribes to the view that a firm has and subscribes to the view that a firm has substantial power to override the context. Identification substantial power to override the context. Identification of the stimulus leads to the arrest of the downfall.of the stimulus leads to the arrest of the downfall.

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RESPONSE INITIATION RESPONSE INITIATION

Turnaround responses are typically categorized as Turnaround responses are typically categorized as operating or strategic. Operating responses operating or strategic. Operating responses typically typically focuses on the way the firm conducts business and focuses on the way the firm conducts business and involves tactics geared towards –involves tactics geared towards – cost cutting and cost cutting and process redesigning (BPR).process redesigning (BPR).

Strategic responses Strategic responses focus on changing or adjusting focus on changing or adjusting the business the firm is engaged in through long term the business the firm is engaged in through long term moves such as – moves such as – integration, diversification, new integration, diversification, new market initiatives, asset reduction. market initiatives, asset reduction.

The response must match the cause of the decline. If The response must match the cause of the decline. If the decline stems from structural shifts, the response the decline stems from structural shifts, the response should be strategic.should be strategic. If the underlying cause is internal If the underlying cause is internal efficiency, the response should be operational. efficiency, the response should be operational.

RESPONSE DICHOTOMYRESPONSE DICHOTOMY

The response initiation is somewhat dichotomous and The response initiation is somewhat dichotomous and cannot be universally applicable. Untangling this cannot be universally applicable. Untangling this question brings into focus three events –question brings into focus three events –

Domain – Domain – Many of the strategic cures have limited Many of the strategic cures have limited applicability for an affiliated firm. Similarly new market applicability for an affiliated firm. Similarly new market initiatives is feasible only for multi-product firms.initiatives is feasible only for multi-product firms.

Scope – Scope – A diversified conglomerate may acquire a A diversified conglomerate may acquire a distressed business to turn it around and gain valuable distressed business to turn it around and gain valuable synergies; which may be unavailable to a focused firm. synergies; which may be unavailable to a focused firm.

Contour –Contour – It is easier to reverse decline in the earlier It is easier to reverse decline in the earlier stages through operational measures; when decline stages through operational measures; when decline deepens shifts in strategic position becomes essential. deepens shifts in strategic position becomes essential.

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TRANSITION TRANSITION

Transition usually reflects the first signs of recovery. Transition usually reflects the first signs of recovery. However, substantial amount of time usually passes However, substantial amount of time usually passes before results begin to show before results begin to show (i.e. lead – lag)(i.e. lead – lag). .

Empirical studies show that average time is Empirical studies show that average time is 7.7 years 7.7 years with a range of with a range of (4-16) years(4-16) years. However, many a times . However, many a times early signs of recovery fades out. Sustenance is the early signs of recovery fades out. Sustenance is the key factor in this stage. Effective levers of transition.key factor in this stage. Effective levers of transition.

The top management has a key role to play through - The top management has a key role to play through - empowerment, transparency, role model, confidence empowerment, transparency, role model, confidence building measures, participative management (i.e. building measures, participative management (i.e. consensus).consensus).

Support from all the stake holders through resource Support from all the stake holders through resource commitment.commitment.

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OUTCOME OUTCOME

Outcome is said to be successful when a firm Outcome is said to be successful when a firm breaches the equilibrium performance level. Failure breaches the equilibrium performance level. Failure is an indication that initial momentum was not is an indication that initial momentum was not sustainable characterized by irreversibility. sustainable characterized by irreversibility.

Instead of focusing on financial parameters alone, it Instead of focusing on financial parameters alone, it should adopt a holistic approach. Cut off points must should adopt a holistic approach. Cut off points must be unequivocal. be unequivocal.

Share price indications and media coverage.Share price indications and media coverage. Regaining lost market share and distributor Regaining lost market share and distributor

confidence.confidence. Revival of key customers and new product launches.Revival of key customers and new product launches. Commanding a premium in the market.Commanding a premium in the market. Supplier and banker confidence.Supplier and banker confidence.

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COOPERATIVE STRATEGIESCOOPERATIVE STRATEGIES&&

ALLIANCESALLIANCES

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COOPERATIVE STRATEGIESCOOPERATIVE STRATEGIES

Cooperative strategies are a logical and timely Cooperative strategies are a logical and timely response to changes in business dynamics, response to changes in business dynamics, technology, and globalization . It can assume any of technology, and globalization . It can assume any of the following forms – the following forms – franchising, licensing, franchising, licensing, consortia, supply-chain partnership, strategic consortia, supply-chain partnership, strategic alliance, or joint venture. alliance, or joint venture.

Any cooperative strategy maybe between firms Any cooperative strategy maybe between firms within the same country or cross border as well.within the same country or cross border as well.

In the cooperative strategy continuum as firms move In the cooperative strategy continuum as firms move up the value order, the commitment and the up the value order, the commitment and the involvement between the firms increases manifold. involvement between the firms increases manifold.

More and more companies worldwide are moving More and more companies worldwide are moving away from competition to co-option to leverage their away from competition to co-option to leverage their resources and enhance bargaining power.resources and enhance bargaining power.

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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 to the franchiser grants the right to the franchisee 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 in a a shortest possible timeshortest possible time at a at a minimum costminimum cost. . Branding is critical to franchising.Branding is critical to franchising.

Switz FoodsSwitz Foods, owners of the brand, owners of the brand Monginis Monginis allows allows its franchisees to sell its confectionary products.its franchisees to sell its confectionary products.

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

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LICENSINGLICENSING

Licensing –Licensing – It is a contractual agreement between two It is a contractual agreement between two legally independent firms whereby the licensor grants legally independent firms whereby the licensor grants the right to the licensee to the right to the licensee to manufacturemanufacture the licensor’s the licensor’s product and do business under its product 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 a for a consideration.consideration. Different levels of licensing - Different levels of licensing -

Manufacturing without embracing any technologyManufacturing without embracing any technology (CBU).(CBU).

Develop a product through its crude stage, refine Develop a product through its crude stage, refine processes and adopt necessary technologiesprocesses and adopt necessary technologies (SKD).(SKD).

Become a systems integratorBecome a systems integrator (CKD), as in (CKD), as in Tata IndicaTata Indica.. HM manufacturing GM range of cars in India with a HM manufacturing GM range of cars in India with a

buy-back arrangement is a perfect example of CBU.buy-back arrangement is a perfect example of CBU.

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CONSORTIACONSORTIA

Consortia –Consortia – They are defined as large They are defined as large inter-locking inter-locking relationshipsrelationships & & cross holdings cross holdings between businesses in a between businesses in a similar industry. It can be of the following types –similar industry. It can be of the following types –

Multipartner –Multipartner – Intends to share an underlying technology Intends to share an underlying technology or asset, leverage upon size to preempt competition by or asset, leverage upon size to preempt competition by escalating entry barriers escalating entry barriers (Eg. Airbus – Boeing).(Eg. Airbus – Boeing).

Cross Holdings –Cross Holdings – A maze of equity holdings through A maze of equity holdings through centralised control to ensure earnings stabilitycentralised control to ensure earnings stability & & threshold resources for critical mass threshold resources for critical mass (Eg. Tata, Hyundai).(Eg. Tata, Hyundai).

Collusion –Collusion – Few firms in a matured industry collude to Few firms in a matured industry collude to reduce industry output below the equilibrium level, reduce industry output below the equilibrium level, enabling them to increase pricesenabling them to increase prices (Eg. Coke – Pepsi). (Eg. Coke – Pepsi).

SUPPLY CHAIN PARTNERSHIPSUPPLY CHAIN PARTNERSHIP

It is a pro-active & collaborative arrangement It is a pro-active & collaborative arrangement between supplier and customer aimed at achieving between supplier and customer aimed at achieving better control over the value chain (Eg. Tata Motors better control over the value chain (Eg. Tata Motors – IDEA). – IDEA).

Companies in different industries with different but Companies in different industries with different but complimentary skills, link their capabilities to create complimentary skills, link their capabilities to create value for end users.value for end users.

It usually provides a platform to sort out differences It usually provides a platform to sort out differences between conceptualization and implementation to between conceptualization and implementation to suit local market needs.suit local market needs.

Continuous sharing of knowledge is critical to the Continuous sharing of knowledge is critical to the success of a supply chain partnership, otherwise it success of a supply chain partnership, otherwise it becomes routine outsourcing. becomes routine outsourcing. 229229

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STRATEGIC ALLIANCESTRATEGIC ALLIANCE

It is an short to medium term understanding between It is an short to medium term understanding between two or more firms to share knowledge and risk, to two or more firms to share knowledge and risk, to gain knowledge and to obtain access to new markets gain knowledge and to obtain access to new markets (Eg. Tata Motors – Fiat, Reliance – Du Pont).(Eg. Tata Motors – Fiat, Reliance – Du Pont).

Despite their popularity (50-60)% of the alliances fail Despite their popularity (50-60)% of the alliances fail to accomplish their stated objectives. Partner to accomplish their stated objectives. Partner selection is one of the critical success factors.selection is one of the critical success factors.

Firm’s should undertake a long courtship with Firm’s should undertake a long courtship with potential partners, instead of hurrying into a potential partners, instead of hurrying into a relationship. relationship.

Generic motives involved are - Generic motives involved are - learning organization, learning organization, design next generation products, effective R&D design next generation products, effective R&D management, enhance credibility, preempt management, enhance credibility, preempt competition, enter newer markets.competition, enter newer markets.

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STRATEGIC ALLIANCE - TYPESSTRATEGIC ALLIANCE - TYPES

Collusion –Collusion – Tacit top management understanding Tacit top management understanding to neutralize price wars to neutralize 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, Bajaj – Castrol).(Eg. Whirlpool – Tide, Bajaj – Castrol).

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 into An alliance is entered into to preempt competition to preempt competition (Eg. Airbus – Boeing).(Eg. Airbus – 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).

PARTNER SELECTION CRITERIAPARTNER SELECTION CRITERIA

It is likely that partners will not have complete consent It is likely that partners will not have complete consent on alliance objectives because the institutional on alliance objectives because the institutional context in which the alliance embedded varies from context in which the alliance embedded varies from country to country.country to country.

Cultural orientation has been found to have a Cultural orientation has been found to have a profound effect on top management’s strategic profound effect on top management’s strategic orientation orientation (Eg. – Japan Vs US).(Eg. – Japan Vs US).

Differences in level of economic development can Differences in level of economic development can produce differences in alliances motives. Firms from produce differences in alliances motives. Firms from developed markets seek access to markets and firms developed markets seek access to markets and firms from emerging markets seeking access to technology. from emerging markets seeking access to technology.

Too much stress on financials & structure be avoided.Too much stress on financials & structure be avoided.232232

PARTNER CHARACTERISTICSPARTNER CHARACTERISTICS

Complimentarity of Capabilities – The degree to Complimentarity of Capabilities – The degree to which partners resources can be used in conjunction.which partners resources can be used in conjunction.

Dominant Logic’s – Similarity in beliefs & biases.Dominant Logic’s – Similarity in beliefs & biases. Unique Resources – Abilities or skills which cannot Unique Resources – Abilities or skills which cannot

be easily duplicated.be easily duplicated. Intangible Assets – Move beyond the financials of the Intangible Assets – Move beyond the financials of the

firm.firm. Willingness to share knowledge and skills.Willingness to share knowledge and skills. Partner’s ability to acquire fresh skills.Partner’s ability to acquire fresh skills. Experience related to previous alliances.Experience related to previous alliances. Managerial capabilities, including ability to provide Managerial capabilities, including ability to provide

quality products and services.quality products and services.233233

MANAGING ALLIANCESMANAGING ALLIANCES

Alliances are more than just a deal; instead of focusing Alliances are more than just a deal; instead of focusing controlling the relationship, partners should nurture it.controlling the relationship, partners should nurture it.

Selection & Courtship – It involves self analyzing, Selection & Courtship – It involves self analyzing, understanding the chemistry, degree of compatibility.understanding the chemistry, degree of compatibility.

Getting Engaged – It should incorporate a specific joint Getting Engaged – It should incorporate a specific joint activity; vows to include commitment to expand the activity; vows to include commitment to expand the relationship; incorporating clear signs of continuing relationship; incorporating clear signs of continuing independence for all partners.independence for all partners.

Setting up the housekeeping, the value chain.Setting up the housekeeping, the value chain. Learning to collaborate – strategic, operational & Learning to collaborate – strategic, operational &

cultural integration.cultural integration. Changing within; differences not anticipated earlier.Changing within; differences not anticipated earlier.

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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, for achieving a shared vision, whilst the partners whilst the partners continue to operate independentlycontinue to operate independently. .

Conceptually, a joint venture is a selection among Conceptually, a joint venture is a selection among modes by which two or more firms can transact.modes by which two or more firms can transact.

It aims at creating new value (i.e. synergy) rather It aims at creating new value (i.e. synergy) rather than mere exchange (i.e. combining parts).than mere exchange (i.e. combining parts).

There are substantial linkages in the value-chain. There are substantial linkages in the value-chain. It lasts till the vision is reached; separation is very It lasts till the vision is reached; separation is very

bitter.bitter.

JOINT VENTURE – GENERIC MOTIVES JOINT VENTURE – GENERIC MOTIVES

Transaction Cost – Transaction Cost – The situational characteristics best The situational characteristics best suited for a JV are high performance uncertainty; in suited for a JV are high performance uncertainty; in addition to a high degree of asset specificity.addition to a high degree of asset specificity.

The market fails as sellers are unwilling to reveal their The market fails as sellers are unwilling to reveal their technology and buyers are unwilling to purchase in the technology and buyers are unwilling to purchase in the absence of inspection.absence of inspection.

Strategic Behaviour – Strategic Behaviour – Firms may override transaction Firms may override transaction costs, though more profitable alternative to other costs, though more profitable alternative to other choices. It may also be linked to deterring entry or choices. It may also be linked to deterring entry or eroding competitors position.eroding competitors position.

Organizational Learning – Organizational Learning – It is a means through which a It is a means through which a firm learns or seeks to retain their capabilities.firm learns or seeks to retain their capabilities.

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OTHER MOTIVESOTHER 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)

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RISKS INVOLVEDRISKS INVOLVED

Incompatibility – Differences in cultural Incompatibility – Differences in cultural background.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

If the cost of continuing exceeds the exit costs?If the cost of continuing exceeds the exit costs?– Eg. Tata – Aditya Birla in Idea CellularEg. Tata – Aditya Birla in Idea Cellular

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PRE-REQUISITES FOR SUCCESSPRE-REQUISITES 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. Clarity on operational control. 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. Costs –Costs – Other modes of transaction becomes Other modes of transaction becomes

cheaper.cheaper.

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MERGERS MERGERS &&

ACQUISITIONACQUISITION

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MERGERS & ACQUISITIONMERGERS & ACQUISITION

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

An acquisition is the purchase of a firm by a firm An acquisition is the purchase of a firm by a firm (of (of larger size, however, reverses are also taking place larger size, however, reverses are also taking place through LBO)through LBO) with a view to acquire conglomerate with a view to acquire conglomerate power and induce synergypower and induce synergy (Eg. HLL – Tomco). (Eg. 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. Ranbaxy - Daichi)(Eg. Ranbaxy - Daichi) and hostile if it is without the consent of the and hostile if it is without the consent of the managementmanagement (Eg. Mittal - Arcelor).(Eg. Mittal - Arcelor).

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

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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 and confidence of all the major stakeholders.and confidence of all the major stakeholders.

Acquirer –Acquirer – Someone (individual or firm) who picks Someone (individual or firm) who picks up an atleast up an atleast 5%5% stake without mandatory stake without mandatory disclosure having an intention to wrest disclosure having an intention to wrest management control management control (i.e. creeping acquisition).(i.e. 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 that it acquires. stake that it acquires.

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 share of the share holders approving the change of guard.holders approving the change of guard.

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SEBI TAKEOVER CODE, 2002SEBI TAKEOVER CODE, 2002

Pricing –Pricing – Acquirers will have to offer minority Acquirers will have to offer minority shareholders (shareholders (at least 20%) at least 20%) the past the past 2626 weeks or past weeks or past 22 weeks average price, whichever is higher as an exit weeks average price, whichever is higher as an exit route route (Eg. Grasim – L&T Cement, Gujarat Ambuja – (Eg. Grasim – L&T Cement, Gujarat Ambuja – ACC). ACC).

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

SEBI – SEBI – In case of a hostile take over, the SEBI can In case of a hostile take over, the SEBI can intervene and block share transfers if: the acquirer has intervene and block share transfers if: the acquirer has ulterior motives ulterior motives (i.e. asset stripping)(i.e. asset stripping), credentials or , credentials or track record is at stake, and/or does not enjoy the track record is at stake, and/or does not enjoy the confidence of the different stake holders. confidence of the different stake holders.

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TYPES OF MERGERSTYPES OF MERGERS

AA businessbusiness is an activity that involves procuring ofis an activity that involves procuring of desired desired inputsinputs to transform it to anto transform it to an outputoutput by usingby using appropriate appropriate technologiestechnologies and thereby creating value and thereby creating value for its stake holders in the process.for its stake holders in the process.

The type of merger is depends on the degree of The type of merger is depends on the degree of relatednessrelatedness (strategic) between the two businesses. (strategic) between the two businesses.

Horizontal –Horizontal – It involves integration of two highly It involves integration of two highly related businesses related businesses (Eg. Electrolux - Kelvinator). (Eg. Electrolux - Kelvinator).

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

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

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MERGERS & ACQUISITION - MOTIVESMERGERS & ACQUISITION - MOTIVES

Increased market / conglomerate power.Increased market / conglomerate power. Reduction in risk.Reduction in risk. Economies of size, scale and scope.Economies of size, scale and scope. Overcoming entry barriers (Eg. Tata Steel – Corus).Overcoming entry barriers (Eg. Tata Steel – Corus). Avoiding risk of new product development.Avoiding risk of new product development. Access to newer segments (Eg. Ranbaxy – Crosslands).Access to newer segments (Eg. Ranbaxy – Crosslands). Reduced gestation (i.e. quick access).Reduced gestation (i.e. quick access). Tax benefits (Eg. ITC Bhadrachalam).Tax benefits (Eg. ITC Bhadrachalam). Acquiring assets or capabilities (Eg. ICICI –ITC Classic).Acquiring assets or capabilities (Eg. ICICI –ITC Classic). Global image (Eg. Mittal – Arcelor).Global image (Eg. Mittal – Arcelor). Ulterior motives – (Eg. Asset Stripping – Shaw Wallace).Ulterior motives – (Eg. Asset Stripping – Shaw Wallace). Coinsurance effect – Higher debt raising capability.Coinsurance effect – Higher debt raising capability.

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MERGERS & ACQUISITIONS - MERGERS & ACQUISITIONS - PITFALLSPITFALLS

Cultural differences (Eg. Tata – Corus).Cultural differences (Eg. Tata – Corus). Overvaluation of buying firms Overvaluation of buying firms (Eg. When Tata Steel (Eg. When Tata Steel

started negotiations with Corus, their initial offer started negotiations with Corus, their initial offer was around was around 420 pence/share420 pence/share; while the ultimate ; while the ultimate acquisition was made at acquisition was made at 607 pence/share607 pence/share). ). Overvaluation is often as a result of an ego drive Overvaluation is often as a result of an ego drive and substantially affects future returns. and substantially affects future returns.

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 diligence due diligence

exerciseexercise and negotiations; neglecting core business. and negotiations; neglecting core business.

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MERGER TYPE & PLCMERGER TYPE & PLC

Introduction –Introduction – A larger firm may acquire a newly formed A larger firm may acquire a newly formed entity with an objective to preempt new competition or entity with an objective to preempt new competition or acquire its license acquire its license (Eg. Kingfisher – Air Deccan)(Eg. Kingfisher – Air Deccan). .

Growth –Growth – This stage may witness parallel merger of two This stage may witness parallel merger of two firms of similar size; with an objective to reinforce its firms of similar size; with an objective to reinforce its growth trajectory or to take on the might of a growth trajectory or to take on the might of a comparatively larger player comparatively larger player (Eg. Brooke Bond – Lipton)(Eg. Brooke Bond – Lipton)..

Maturity –Maturity – A larger firm acquires a smaller firm with an A larger firm acquires a smaller firm with an objective to achieve economies of scale and experience objective to achieve economies of scale and experience curve effects curve effects (Eg. Tata Steel – Corus).(Eg. Tata Steel – Corus).

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

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INTERNATIONAL M&A - FRAMEWORKINTERNATIONAL M&A - FRAMEWORK

Positive contribution to the acquired company. An Positive contribution to the acquired company. An acquisition just for the sake of it or reputation yields acquisition just for the sake of it or reputation yields very little value in the long term.very little value in the long term.

A common shared vision. Strong differences may A common shared vision. Strong differences may stifle plans and its execution.stifle plans and its execution.

A concern of respect and trust for the business of the A concern of respect and trust for the business of the acquired company.acquired company.

Left alone syndrome; active top management Left alone syndrome; active top management intervention in phases. Immediate attempts to super intervention in phases. Immediate attempts to super impose structure and culture may cause bottle necks. impose structure and culture may cause bottle necks.

Blanket promotions across entities and confidence Blanket promotions across entities and confidence building exercises needs to be practiced.building exercises needs to be practiced.

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INTEGRATION - BLUEPRINTINTEGRATION - BLUEPRINT

Take the media into confidence. They can carry Take the media into confidence. They can carry the message to the various stake holders. the message to the various stake holders.

Shift attention from business portfolio to people Shift attention from business portfolio to people and processes.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. Do not ignore the “people factor”.Do not ignore the “people factor”.

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M&A - VALUATIONM&A - VALUATION

The process of valuation is central to M&A. While under The process of valuation is central to M&A. While under valuation may be a significant opportunity; over valuation may be a significant opportunity; over valuation can become a curse. valuation can become a curse.

Valuation decisions are arrived through a due diligence Valuation decisions are arrived through a due diligence process when the prospective acquirer gets access to process when the prospective acquirer gets access to the books of accounts of acquiring company. The the books of accounts of acquiring company. The process takes (6-12) months. Financial motives -process takes (6-12) months. Financial motives -– Undervaluation relative to true value.Undervaluation relative to true value.– Market for corporate control.Market for corporate control.– Unstated reasons – Personal self interest and hubris.Unstated reasons – Personal self interest and hubris.– Synergy – Potential value gain from combining Synergy – Potential value gain from combining

operations (i.e. operational & financial).operations (i.e. operational & financial).

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VALUING OPERATIONAL SYNERGYVALUING OPERATIONAL SYNERGY

Synergy –Synergy – It refers to the potential value gain where the It refers to the potential value gain where the whole is greater than the sum of the parts. Synergy can whole is greater than the sum of the parts. Synergy can be negative as well; when the “fit” between the two be negative as well; when the “fit” between the two entities is very poor. Sources of operational synergy -entities is very poor. Sources of operational synergy -– Horizontal Synergy –Horizontal Synergy – Gains come from economies of Gains come from economies of

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

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

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

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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 premiums. lesser cost, and without paying take-over premiums.

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

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

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VALUING FINANCIAL SYNERGYVALUING FINANCIAL SYNERGY

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

The likelihood of default decreases when two firms' assets The likelihood of default decreases when two firms' assets and liabilities are combined through a M&A compared to and liabilities are combined through a M&A compared to the likelihood of default in the individual companies. It the likelihood of default in the individual companies. It relates to the concept of diversification, as risky debt is relates to the concept of diversification, as risky debt is spread across the new firm's operations. spread across the new firm's operations. – Default risk comes down and credit rating improves.Default risk comes down and credit rating improves.– Coupon rates may also be negotiated at lower rates.Coupon rates may also be negotiated at lower rates.

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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 restructuring Value of Control = Value of firm after restructuring

– Value of firm before restructuring. – Value of firm before restructuring. The value of control can be The value of control can be substantialsubstantial for firms that for firms that

are operating well below optimal value, since a are operating well below optimal value, since a restructuring can lead to significant increase in value. restructuring can lead to significant increase in value.

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

Assessment of perceived quality is critical.Assessment of perceived quality is critical.

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LEVERAGE BUYOUT (LBO)LEVERAGE BUYOUT (LBO)

The basic difference between a take-over and a LBO The basic difference between a take-over and a LBO is the high inherent leverage (i.e. debt component) is the high inherent leverage (i.e. debt component) at the time of buyout and rapid changes in capital at the time of buyout and rapid changes in capital structure over time.structure over time.

LBO facilitates a relatively smaller firm to bid for a LBO facilitates a relatively smaller firm to bid for a comparatively larger firm in the bid for management comparatively larger firm in the bid for management control. Confidence of investment bankers and the control. Confidence of investment bankers and the international financial community is essential.international financial community is essential.

It is a very costly and risky proposition. It is a very costly and risky proposition. The assets of the acquired company are used as The assets of the acquired company are used as

collateral for the borrowed capital, sometimes in collateral for the borrowed capital, sometimes in combination with the assets of the acquiring combination with the assets of the acquiring company.company.

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TO GO PUBLIC OR NOT?TO GO PUBLIC OR NOT?

However, off-late many publicly traded firms have However, off-late many publicly traded firms have gone private keeping in mind the following –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 the going private. The increased benefit showed in the following way – following way – reduced costs and increased revenue. reduced costs and increased revenue. However, the advantages of going public includes - However, the advantages of going public includes -

access to financial markets, liquidity, on-going access to financial markets, liquidity, on-going valuation. valuation.

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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 to its (relative to its

optimal capital structure).optimal capital structure).– Managers cannot be trusted to invest free cash flows Managers cannot be trusted to invest free cash flows

wisely.wisely.– It is a temporary phenomenon; which disappears once It is a temporary phenomenon; which disappears once

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

– Debts repaid off from increased value after successful Debts repaid off from increased value after successful restructuring and wresting management control.restructuring and wresting management control.

– Cost of debt coming downCost of debt coming down (i.e. co-insurance effect).(i.e. co-insurance effect).– Cash trapped company unable to utilize opportunities.Cash trapped company unable to utilize opportunities.

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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 debt shareholders by increasing the interest cost to debt holders. Therefore, initial rise in leverage is anticipated.holders. Therefore, initial rise in leverage is anticipated.

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

Any discounting has to reflect these changing cost of Any discounting has to reflect these changing cost of capital. capital.

Lack of sufficient cash flows to repay costly debts Lack of sufficient cash flows to repay costly debts resulting in a possible debt trap.resulting in a possible debt trap.

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.

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REVERSE MERGERREVERSE MERGER

Reverse Merger –Reverse Merger – The acquisition of a public company, The acquisition of a public company, which has discontinued its operations which has discontinued its operations (i.e. shell (i.e. shell company)company) 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 complex company to bypass the usually lengthy and complex process of going public. Objectives –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 costly.undergoing an IPO is costly, time-barred, or costly.– Prevents dilution of equity.Prevents dilution of equity.– Automatic listing in major exchanges.Automatic listing in major exchanges.– Tax shelter.Tax shelter.– Facilitates better valuation and forthcoming Facilitates better valuation and forthcoming

offerings.offerings.

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EFFECT OF TAKE-OVER EFFECT OF TAKE-OVER ANNOUNCEMENTANNOUNCEMENT

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

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

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

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

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

Initial anomaly in stock prices usually normalizes over Initial anomaly in stock prices usually normalizes over a period of time a period of time (6-12) (6-12) months.months.

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EFFECT OF TAKE-OVER EFFECT OF TAKE-OVER ANNOUNCEMENTANNOUNCEMENT

The effect of take-over announcement on bidder The effect of take-over announcement on bidder firm’s stock prices are not clear cut. firm’s 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 failure However, in the event of take-over failure negative returns to the extent ofnegative returns to the extent of 5%5% on on bidder firm stock prices is reflected.bidder firm stock prices is reflected.

– However, as stock markets become more and However, as stock markets become more and more perfect such anomalies would reduce more perfect such anomalies would reduce over time. over time.

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

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DEFENSIVE STRATEGIESDEFENSIVE STRATEGIES

Golden Parachute –Golden Parachute – An employment contract that An employment contract that compensates top managers for loss of jobs as a compensates top managers for loss of jobs as a result of change in management control.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 increase buy shares at a substantial discount to increase their voting rights. their voting rights.

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

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DEFENSIVE STRATEGIESDEFENSIVE STRATEGIES

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

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

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

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COMPETING FORCOMPETING FORTHETHE

FUTUREFUTURE

265265

GETTING OFF THE TREADMILLGETTING OFF THE TREADMILL

CanonCanon overpoweringoverpowering Xerox; HondaXerox; Honda overpowering overpowering Volkswagen; Honda Volkswagen; Honda overpowering overpowering GMGM; ; NokiaNokia overpoweringoverpowering Motorola; HitachiMotorola; Hitachi overpowering overpowering Westinghouse; Wal-MartWestinghouse; Wal-Mart overpowering overpowering Sears; Sears; CompaqCompaq overpoweringoverpowering IBM; British Air IBM; British Air overpoweringoverpowering Pan Am.Pan Am.

Most companies were too preoccupied with the Most companies were too preoccupied with the present than the future? present than the future? 99%99% of the companies of the companies overpowered, were spending overpowered, were spending 99%99% of their precious of their precious time dealing with present. time dealing with present. The reverse was true for The reverse was true for the companies overpowering.the companies overpowering.

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

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THE PAST OF COMPETITIONTHE PAST OF COMPETITION

Beyond Restructuring –Beyond Restructuring – When a competitiveness When a competitiveness become inescapable problem become inescapable problem (stagnant growth, (stagnant growth, declining margins, falling market share)declining margins, falling market share), CEO’s , CEO’s brutally pick up the knife and ruthlessly carve away brutally pick up the knife and ruthlessly carve away layers of corporate flab layers of corporate flab (delayering, decluttering, (delayering, decluttering, downsizing).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 stuck to their These denominator based managers stuck to their restructuring strategiesrestructuring strategies (like building pyramids) (like building pyramids) and and didn't know what to do next?didn't know what to do next?

Thus they became history? (like the pharaohs)Thus they became history? (like the pharaohs)

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THE PRESENT OF COMPETITIONTHE PRESENT OF COMPETITION

Beyond Reengineering –Beyond Reengineering – Numerator based managers Numerator based managers (innovation)(innovation) at least offers some hope. However, at least offers some hope. However, incrementalism or incrementalism or nominal innovation nominal innovation has almost has almost reached a plateau; reached a plateau; ensuring only survival of the ensuring only survival of the present; but not of the future. present; but not of the future.

A poll in A poll in circa 2000circa 2000 revealed that revealed that 80%80% of the of the U.S. top U.S. top managersmanagers believed that believed that qualityquality will be a source of will be a source of competitive advantage of the future. On the contrary competitive advantage of the future. On the contrary only only 20%20% of of Japanese managersJapanese managers believed that believed that quality will be a source of competitive advantage of quality will be a source of competitive advantage of the future. the future.

The future is not about catching up with competition; The future is not about catching up with competition; but forging ahead in competition.but forging ahead in competition.

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THE FUTURE OF COMPETITIONTHE FUTURE OF COMPETITION

Regenerating –Regenerating – Leaner, better, fasterLeaner, better, faster; as important as ; as important as these may be, they are not enough to get a company these may be, they are not enough to get a company to the future. Companies need to fundamentally to the future. Companies need to fundamentally reconcieve itself; reinvent its industry;reconcieve itself; reinvent its industry; and and regenerate its strategiesregenerate its strategies (breaking its – managerial (breaking its – managerial frames). frames).

Creating the future requires industry foresight. It is Creating the future requires industry foresight. It is based on deep insights into trends in technology, based on deep insights into trends in technology, demographics and lifestylesdemographics and lifestyles. It involves - . It involves -

Dream about the company’s future; don’t predict.Dream about the company’s future; don’t predict. Create a potential gap; aspirations and resources.Create a potential gap; aspirations and resources. Transform the industry; not just the organization.Transform the industry; not just the organization. Empower from bottom to top; not the other way.Empower from bottom to top; not the other way.

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ABOUT THE DREAM ABOUT THE DREAM

Which customers will you be serving?What will the potential customer look like?

Who will be your future competitors?What will be the basis of your competitive advantage?

Where would your margins come from?What will be your future competencies?

Which end product markets would you cater?

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ABOUT THE TRANSFORMATIONABOUT THE TRANSFORMATION

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

It is about deliberately creating a It is about deliberately creating a strategic misfit.strategic misfit. It drives a hunger and a passion to transform. It drives a hunger and a passion to transform.

Change in at least one fundamental way the rules Change in at least one fundamental way the rules of engagement in an industry.of engagement in an industry.

Redraw the boundaries between industries, by Redraw the boundaries between industries, by converging technologies complex.converging technologies complex.

Create entirely new industries (i.e. blue oceans).Create entirely new industries (i.e. blue oceans).

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ABOUT THE EMPOWERMENTABOUT THE EMPOWERMENT

Bring about a revolution Bring about a revolution (a paradigm shift) (a paradigm shift) in the in the organization. More importantly, the revolution organization. More importantly, the revolution must start at the bottom and spread in all must start at the bottom and spread in all directions of the organization. A revolution that directions of the organization. A revolution that is thrust upon from the top seldom sustains.is 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 Transformational leaders merely lead the way.merely lead the way. Such a process is called Such a process is called institutionalization institutionalization (from (from

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

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THE FUTURE OF STRATEGYTHE FUTURE OF STRATEGY

A company must get to the future not only first but also A company must get to the future not only first but also for less. What does it take to get to the future first?for less. What does it take to get to the future first?

Understanding how Understanding how competitioncompetition for the future is for the future is different.different.

A process for finding and gaining insight into tomorrows A process for finding and gaining insight into tomorrows opportunitiesopportunities (Eg. Toshiba – LCD; South West Airlines – (Eg. Toshiba – LCD; South West Airlines – LCC, Apple – iphone).LCC, Apple – iphone). It requires a lot of It requires a lot of common sensecommon sense and a little bit ofand a little bit of out of the box thinking.out of the box thinking.

An ability toAn ability to energizeenergize the company. the company. Get to theGet to the future firstfuture first, without taking, without taking undue risk.undue risk. Companies need to Companies need to strategize strategize (think ahead of times). (think ahead of times).

Apply the Apply the 40 – 30 – 20 40 – 30 – 20 principle.principle.

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

There is no rule which says that for every leader There is no rule which says that for every leader there will be a follower. As there is no one future; but there will be a follower. As there is no one future; but hundreds.hundreds.

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

Companies of the future will be not based so much Companies of the future will be not based so much on the strength of their resources, as on their on the strength of their resources, as on their aspirations.aspirations.

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

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Reengineering ProcessesOrganizational TransformationCompeting for Market Share

Strategy as LearningStrategy as Positioning

Regenerating StrategyIndustry Transformation

Competing for Opportunity Share

Strategy as UnlearningStrategy as Dream

Not Only But AlsoThe Competitive Challenge

Finding the Future

Strategy as Engineering Strategy as Architecture

THE EMERGING STRATEGY THE EMERGING STRATEGY PARADIGMPARADIGM

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Strategic FitResource Allocation

Product LeadershipSingle Entity

Strategic MisfitResource Stretch & Leverage

Competency LeadershipDominant Coalitions / Co-option

Not Only But AlsoMobilising for the Future

Getting to the Future First

Product Hits & Timing Market Learning & Preemption

Existing Industry Structure Future Industry Structure

THE EMERGING STRATEGY THE EMERGING STRATEGY PARADIGMPARADIGM

276276Time

Degr

ee o

f Lea

rnin

g

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

LEARNING TO FORGETLEARNING TO FORGET

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A core competence relates to a bundle of skills A core competence relates to a bundle of skills (not an (not an asset or a business)asset or a business) that revolves around activities or that revolves around activities or processes and critically underpins a firm’s competitive processes and critically underpins a firm’s competitive advantage.advantage. It represents the collective learning's of an It represents the collective learning's of an organization centering around diverse streams of organization centering around diverse streams of technologies.technologies. It is characterized by the following – It is characterized by the following –

Unique – Unique – It provides unimaginable customer value It provides unimaginable customer value ahead of its times.ahead of its times.

Inimitable & Insubstitutable – Inimitable & Insubstitutable – A high degree causal A high degree causal ambiguity between these skills yield sustainable ambiguity between these skills yield sustainable competitive advantage. It cannot be matched even by competitive advantage. It cannot be matched even by its closest competitors. its closest competitors.

Leverage –Leverage – They are the gateways to future markets.They are the gateways to future markets.

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MORE ABOUT CORE COMPETENCEMORE ABOUT CORE COMPETENCE

Sony – Sony – miniaturization;miniaturization; Honda – Honda – engines;engines; Wal-Mart – Wal-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 manufacturing;lean manufacturing; Toshiba –Toshiba – flat screen displays. flat screen displays.

Core competencies are the roots of the organization. Core competencies are the roots of the organization. Although a core competence may lose value over Although a core competence may lose value over

time; time; it gets more refined and valuable through use. it gets more refined and valuable through use. A core competency cannot be outsourcedA core competency cannot be outsourced; it is ; it is

deeply embedded in the heart of the organization. deeply embedded in the heart of the organization. Most companies around the world do not possess Most companies around the world do not possess

one; one; leaders have one, at the most three to four.leaders have one, at the most three to four.

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ROOTS OF COMPETITIVENESSROOTS OF COMPETITIVENESS

Core Product 1

Competence1

End Products

Core Businesses

Core Products

Core Competencies Competence

2Competence

3Competence

4

Core Product 2

CoreBusiness

1

CoreBusiness

2

CoreBusiness

3

CoreBusiness

4

1 2 3 4 5 6 87 9 10

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RESOURCE STRETCH & LEVERAGERESOURCE STRETCH & LEVERAGE

Initial resource position is a very poor indicator of Initial resource position is a very poor indicator of future performance. It leads to atrophy and future performance. It leads to atrophy and stagnation. Successful companies consciously create stagnation. Successful companies consciously create a potential gap between aspirations and resources. a potential gap between aspirations and resources.

Resource crunch is a common factor among firms Resource crunch is a common factor among firms that faces a wealthy rival, and outperforms them. that faces a wealthy rival, and outperforms them. Leveraging what a company already has, rather than Leveraging what a company already has, rather than allocating it is a more creative response to scarcity. allocating it is a more creative response to scarcity. – By By concentratingconcentrating existing resources. existing resources.– By By accumulating accumulating existing resources.existing resources.– By By complementing complementing existing resources.existing resources.– By By conservingconserving existing resources. existing resources.– By By recoveringrecovering existing resources. 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 in which portfolio of resources on key strategic goals in which individual efforts converge over time. individual efforts converge over time. It is a balance It is a balance between between individual mediocrityindividual mediocrity and and collective collective brilliance.brilliance. It is achieved through – It is achieved through –

Converging –Converging – Redirecting multiple diverging Redirecting multiple diverging (i.e. (i.e. fragmented)fragmented) short term goals into one long term short term goals into one long term goal. It is then resources can be stretched over time.goal. It is then resources can be stretched over time.

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

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

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ACCUMULATING RESOURCESACCUMULATING RESOURCES

Accumulating –Accumulating – Using existing reservoir of resources Using existing reservoir of resources to build new resources. Each and every individual is to build new resources. Each and every individual is a rich & potential source of learning, discover better a rich & potential source of learning, discover better ways of doing things. ways of doing things. It is achieved through -It is achieved 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 substantial acquired, but never learnt. It leads to a substantial jump in the experience curve. jump in the experience curve.

Borrowing –Borrowing – Utilizing resources outside the firm Utilizing resources outside the firm through licensing, alliances, joint ventures. A firms through licensing, alliances, joint ventures. A firms absorptive capacity is as important as its inventive absorptive capacity is as important as its inventive capacity.capacity.

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COMPLEMENTING RESOURCESCOMPLEMENTING RESOURCES

Complementing –Complementing – Using resources of one type with Using resources of one type with another that aligns smoothly to create higher order another that aligns smoothly to create higher order value. In a way it produces an accelerating effect on value. In a way it produces an accelerating effect on each individual resource. each individual resource. It is achieved through – It is achieved through –

Blending –Blending – Interweaving discrete capabilities to Interweaving discrete capabilities to create world class technologies create world class technologies (GM – Honda)(GM – Honda) through integration and imagination. Different through integration and imagination. Different functional skills can also be blended to create a functional skills can also be blended to create a world class end products world class end products (Yamaha – Keyboard). (Yamaha – Keyboard).

Balancing – Balancing – An ability to exploit excellence in one An ability to exploit excellence in one area is never imperiled by mediocrity in another area is never imperiled by mediocrity in another (GE acquiring the CT scanning rights from EMI (GE acquiring the CT scanning rights from EMI because of its inadequate market reach).because of its inadequate market reach).

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CONSERVING RESOURCESCONSERVING RESOURCES

Conserving –Conserving – Sustaining competencies over time Sustaining competencies over time through frequent usage. Resources are never through frequent usage. Resources are never abandoned; they are always preserved for future use.abandoned; they are always preserved for future use.

Recycling –Recycling – Increasing the velocity of use of a Increasing the velocity of use of a competencies over time. As a result core competencies competencies over time. As a result core competencies can be leveraged across an array of products can be leveraged across an array of products (Sony - (Sony - Betamax).Betamax). It includes brand extensions as well. It includes brand extensions as well.

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

Shielding –Shielding – It involves identifying competitors blind It involves identifying competitors blind spots and then attacking without having the fear of spots and then attacking without having the fear of retaliation. retaliation.

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RECOVERING RESOURCESRECOVERING RESOURCES

Recovering - It is the process of reducing the elapsed Recovering - It is the process of reducing the elapsed time between investing in resources and the recovery time between investing in resources and the recovery of those resources in the form of revenues via the of those resources in the form of revenues via the market.market.

Speeding –Speeding – 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 model; average of 8 years to develop an entirely new model; the Japanese reduced it to less than 4.5 years, with the Japanese reduced it to less than 4.5 years, with major new variants in 2 years. This envisaged major new variants in 2 years. This envisaged Japanese players in giving customers more Japanese players in giving customers more opportunities to switch allegiance and loyalty opportunities to switch allegiance and loyalty (Toyota)(Toyota)..

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

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INTERNATIONALINTERNATIONALBUSINESS ENVIRONMENTBUSINESS ENVIRONMENT

287287

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

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

Diversity

Perfo

rman

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)

289289

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

Diversity

Perfo

rman

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)

290290

INTERNATIONAL IDENTITYINTERNATIONAL IDENTITY

MNC’sMNC’s consciously engage in consciously engage in FDIFDI in different parts in different parts of the globe to forge resource diversity as a distinct of the globe to forge resource diversity as a distinct competitive advantage. Characteristics –competitive advantage. Characteristics –

It should have a spread of affiliates or subsidiaries.It should have a spread of affiliates or subsidiaries. It should have a spread of manufacturing facilities.It should have a spread of manufacturing facilities. It should have a spread of assets, revenues and It should have a spread of assets, revenues and

profits.profits. It should have a spread of interest groups / stake It should have a spread of interest groups / stake

holders.holders. It should think globally; act locallyIt should think globally; act locally (Eg. HSBC).(Eg. HSBC).

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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).

292292


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

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

293293


Time Sensitiveness –Time Sensitiveness – Developed country managers Developed country managers regard time as precious, however, in most regard time as precious, however, in most emerging markets meetings are delayed and lasts emerging markets meetings are delayed and lasts unusually long. unusually long. Other factors – local celebrations, Other factors – local celebrations, time-zones.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 tend Developed country managers tend to regard their own culture as superior; and vice-to regard their own culture as superior; and vice-versa. High levels of ethnocentrism usually has a versa. High levels of ethnocentrism usually has a negative effect on business.negative effect on business.

294294

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 and member countries to reduce tariff and non-tariff non-tariff (quota)(quota) barriers. It focused largely on barriers. It focused largely on TRIPS TRIPS (patents, copyrights, trademarks). It also (patents, copyrights, trademarks). It also initiated provisions on 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 in Europe joined member countries in Europe joined hands to move over to a single currency hands 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 as of 2008. The notable exception members as of 2008. The notable exception was Great Britain which still continues with its local was Great Britain which still continues with its local currency currency (i.e. Sterling - Pound). (i.e. Sterling - 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 in However with current recession in the US 2002 onwards, 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 currency.associated with a multiple currency.

Rate Uncertainty –Rate Uncertainty – A single currency eliminates the A single currency eliminates the risk of 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 and A single currency is transparent and competitive, but it may have 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 intangible resources)FII (transfer of intangible 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 may The various attributes of a product may receive different degrees of emphasis depending receive different degrees of emphasis depending on differences in - on differences in - culture culture (food habits), (food habits), economic economic (middle class buying power), (middle class buying power), technologytechnology (micro- (micro-chip).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 quotes are asking for quotes in in (Euro)(Euro) or are shifting bases out of US to avoid risk or are shifting bases out of US to avoid risk of devaluation of Dollar. of devaluation of Dollar.

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

Leverage –Leverage – The leverage may vary across countries The leverage may vary across countries depending upon money and capital market depending upon money and capital market conditions conditions (Eg. debt is cheap in US; equity is cheap in (Eg. debt is cheap in US; equity is cheap in India).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-structure infra-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 In local recruitment, skills are more important that cultural fit and vice-versa.more 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

Location Incentives –Location Incentives – FDI in emerging markets should FDI in emerging markets should explore options for explore options for SEZ’sSEZ’s to explore benefits to explore benefits (tax (tax holidays, reduce power costs)holidays, reduce power costs) vis-à-vis vis-à-vis infrastructural infrastructural bottlenecks.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 of vis-à-vis effective cost of appropriate technology appropriate technology (Euro II).(Euro II).

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

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

CONTEMPORARY CONTEMPORARY TOPICSTOPICS

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INNOVATIONINNOVATION

An invention is the first occurrence of an idea for a An invention is the first occurrence of an idea for a new product or process; innovation is the first attempt new product or process; innovation is the first attempt to carry it out in practice.to carry it out in practice.

Innovations typically paves the way for more secured Innovations typically paves the way for more secured and improved lifestyle for consumers in general.and improved lifestyle for consumers in general.

Innovation is the most preferred strategy today to Innovation is the most preferred strategy today to maintain competitive advantage in the present maintain competitive advantage in the present turbulent business environment. turbulent business environment.

Innovation is all about staying ahead of competition, Innovation is all about staying ahead of competition, but has inherent risks involved as well.but has inherent risks involved as well.

While innovation typically adds value for While innovation typically adds value for organizations; it has destructive effects as well.organizations; it has destructive effects as well.

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TYPES OF INNOVATIONTYPES OF INNOVATION

A key challenge is maintaining a balance between A key challenge is maintaining a balance between process and product innovations.process and product innovations.

While product innovations are typically customer While product innovations are typically customer driven; process innovations are organizational driven.driven; process innovations are organizational driven.

Tangible impact of product innovation on Tangible impact of product innovation on performance is significantly higher than process performance is significantly higher than process innovation. However, process innovation is necessary innovation. However, process innovation is necessary to sustain the competitive advantage of product to sustain the competitive advantage of product innovation. innovation.

Process innovation usually follows product innovation.Process innovation usually follows product innovation. Strategic innovation has the potential to change the Strategic innovation has the potential to change the

rules of the game.rules of the game. 304304

BUSINESS MODELBUSINESS MODEL

It is a simplified description and representation of It is a simplified description and representation of a complex real world; about how an organization a complex real world; about how an organization makes money (i.e. putting an idea into practice).makes money (i.e. putting an idea into practice).

Innovations are the back-bone of successful Innovations are the back-bone of successful business models .business models .

Disruptive business models brings in a new frame Disruptive business models brings in a new frame of reference (i.e. a paradigm shift). It leads to a of reference (i.e. a paradigm shift). It leads to a shift in the price – performance envelope.shift in the price – performance envelope.

Telecom (CDMA Technology), Data Storage (Pen Telecom (CDMA Technology), Data Storage (Pen Drives), Drug Development (Bio Chemicals), Drives), Drug Development (Bio Chemicals), Medical Surgery (Lasik), Processors (Pentium). Medical Surgery (Lasik), Processors (Pentium).

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NINE BUILDING BLOCKSNINE BUILDING BLOCKS

Value proposition offered to the market.Value proposition offered to the market. The segment(s) of clients to be addressed.The segment(s) of clients to be addressed. The channels to reach out to the clients.The channels to reach out to the clients. The proposed relationships established with clients. The proposed relationships established with clients. The key resources and capabilities required.The key resources and capabilities required. The key activities / processes necessary for execution.The key activities / processes necessary for execution. The key partners involved in the activities.The key partners involved in the activities. The cost structure resulting from the business model.The cost structure resulting from the business model. The revenue streams generated by the activities.The revenue streams generated by the activities.

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BUSINESS MODEL FRAMEWORKBUSINESS MODEL FRAMEWORK

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REVENUE MODELREVENUE MODEL

Positioning is just not sufficient; innovative Positioning is just not sufficient; innovative companies to carve out unique business models to companies to carve out unique business models to fend off competition.fend off competition.

With the rapid erosion of certain industries With the rapid erosion of certain industries (IT, (IT, Investment Banking, Real Estate)Investment Banking, Real Estate) companies need to companies need to untangle and understand the intricacies of their untangle and understand the intricacies of their business model. business model.

The revenue model described here are the means to The revenue model described here are the means to generate revenues. It is just one piece of the puzzle. generate revenues. It is just one piece of the puzzle.

It involves – Product Visualization – Product Prototype It involves – Product Visualization – Product Prototype – Product Test – Capacity – Pricing – Distribution. – Product Test – Capacity – Pricing – Distribution.

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HOW TO MAKE INNOVATIVE CO’SHOW TO MAKE INNOVATIVE CO’S

Innovative company’s are a matter of culture and Innovative company’s are a matter of culture and aspirations rather than tangible resources. aspirations rather than tangible resources.

A favourable intellectual property (IP) climate.A favourable intellectual property (IP) climate. Allow the workforce idiosyncrasies for their errors. Allow the workforce idiosyncrasies for their errors. Allow the management sufficient slack to be Allow the management sufficient slack to be

future oriented.future oriented. Have a lean and a flat organization structure.Have a lean and a flat organization structure. Promote the grape-vine.Promote the grape-vine. Provide reasonable incentives (not necessarily Provide reasonable incentives (not necessarily

monetary). monetary). Promote the culture of experimentation.Promote the culture of experimentation.

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HOW TO PROTECT INNOVATION?HOW TO PROTECT INNOVATION?

Without adequate protection (external or otherwise) Without adequate protection (external or otherwise) the effects of innovation does not translate to the effects of innovation does not translate to performance.performance.

In most emerging markets where the IP climate is In most emerging markets where the IP climate is not so favorable, companies are increasingly relying not so favorable, companies are increasingly relying on internal protection to sustain innovation effects.on internal protection to sustain innovation effects.

The most preferred strategy of internal protection The most preferred strategy of internal protection includes imbibing “causal ambiguity” in the includes imbibing “causal ambiguity” in the production process to make reverse engineering production process to make reverse engineering difficult.difficult.

Collusion with the judiciary is also another distinct Collusion with the judiciary is also another distinct possibility in emerging markets, however that possibility in emerging markets, however that possibility is slowly atrophying. possibility is slowly atrophying.

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CORPORATE GOVERNANCECORPORATE GOVERNANCE

The basic theme of corporate governance is to ensure The basic theme of corporate governance is to ensure that professional managers are identified and made that professional managers are identified and made accountable in terms of clear business processes or accountable in terms of clear business processes or activities and held responsible through adequate activities and held responsible through adequate mechanisms & control systems for channelizing their mechanisms & control systems for channelizing their decisions for the benefit of stakeholders at large. decisions for the benefit of stakeholders at large.

Corporate governance aims to reduce the principal-Corporate governance aims to reduce the principal-agent problem present in most professional managed agent problem present in most professional managed organizations through appropriate forms of organizations through appropriate forms of accountability and control mechanisms. accountability and control mechanisms.

In fact the principles of corporate governance implies In fact the principles of corporate governance implies that managers go beyond in satisfying the stated and that managers go beyond in satisfying the stated and unstated needs of the multiple stakeholders. unstated needs of the multiple stakeholders.

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AGENCY THEORYAGENCY THEORY

The root of The root of Corporate Governance Corporate Governance goes back to the goes back to the Agency TheoryAgency Theory; also known as the principal-agent ; also known as the principal-agent problem or agency dilemma. problem or agency dilemma.

According to the agency theory top managers and According to the agency theory top managers and shareholders interests are usually conflicting in shareholders interests are usually conflicting in nature and tend to pull in opposite directions. nature and tend to pull in opposite directions.

From the strategic point of view managers tend to From the strategic point of view managers tend to diversify into unrelated businesses as it provides diversify into unrelated businesses as it provides higher returns hence a more favourable appraisal. higher returns hence a more favourable appraisal. However, shareholders can diversify their portfolio at However, shareholders can diversify their portfolio at a much lesser risk and cost. a much lesser risk and cost.

This exposes the shareholders to additional risks and This exposes the shareholders to additional risks and higher costs, not present in portfolio diversifications.higher costs, not present in portfolio diversifications.

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ORIGIN & CONTEXTORIGIN & CONTEXT

Since the early 20th century since a large part of Since the early 20th century since a large part of public funds were held by publicly traded firms in the public funds were held by publicly traded firms in the US, various laws were enacted to ensure proper US, various laws were enacted to ensure proper usage of these funds. usage of these funds.

After the Enron downfall, the US government passed After the Enron downfall, the US government passed the Sarbanes – Oxley Act, 2002 to restore public the Sarbanes – Oxley Act, 2002 to restore public confidence in corporate governance.confidence in corporate governance.

SEBI Report – 2005, defines corporate governance SEBI Report – 2005, defines corporate governance (headed by Kumar Mangalam Birla) (headed by Kumar Mangalam Birla) as the acceptance as the acceptance by management of the inalienable rights of by management of the inalienable rights of shareholders as the true owners of the corporation shareholders as the true owners of the corporation and of their own role as trustees on behalf of the and of their own role as trustees on behalf of the shareholders.shareholders. 313313

GOVERNANCE PRINCIPLESGOVERNANCE PRINCIPLES

Rights and equitable treatment of shareholders: Rights and equitable treatment of shareholders: Help Help shareholders exercise their rights by effectively shareholders exercise their rights by effectively communicating information in transparent ways that communicating information in transparent ways that is understandable and accessible and encouraging is understandable and accessible and encouraging shareholders to participate in general meetings. shareholders to participate in general meetings.

Interests of other stakeholders: Interests of other stakeholders: Recognize the legal Recognize the legal and other obligations of all legitimate stakeholders, and other obligations of all legitimate stakeholders, including the society at large.including the society at large.

Role and responsibilities of the board: Role and responsibilities of the board: It deals with It deals with issues about an appropriate mix of executive and issues about an appropriate mix of executive and non-executive directors. The key roles of chairperson non-executive directors. The key roles of chairperson and CEO should not be held by the same person and and CEO should not be held by the same person and their offices be clearly separated. their offices be clearly separated.

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GOVERNANCE PRINCIPLESGOVERNANCE PRINCIPLES

Integrity and ethical behaviour: Integrity and ethical behaviour: Organizations should Organizations should develop a code of conduct for their top management develop a code of conduct for their top management that promotes ethical and responsible decision that promotes ethical and responsible decision making. making.

Disclosure and transparency: Disclosure and transparency: Disclosure of Disclosure of information should be timely and balanced to ensure information should be timely and balanced to ensure that investors have clear access to data and facts. that investors have clear access to data and facts. They should also implement systems to They should also implement systems to independently verify and safeguard the integrity of independently verify and safeguard the integrity of the company's financial reporting. the company's financial reporting.

Independence of the entity's auditors: Independence of the entity's auditors: Identification, Identification, assessment and mitigation of risks and retirement assessment and mitigation of risks and retirement by rotation over a fixed period of time.. by rotation over a fixed period of time.. 315315

GOVERNANCE STRATEGIESGOVERNANCE STRATEGIES

Monitoring by the board of directors: Monitoring by the board of directors: The board of The board of directors, with its legal authority to hire, fire and directors, with its legal authority to hire, fire and compensate top management, safeguards invested compensate top management, safeguards invested capital. Regular board meetings allow potential capital. Regular board meetings allow potential problems to be identified, discussed and resolved. problems to be identified, discussed and resolved.

Balance of power: Balance of power: The simplest balance of power is The simplest balance of power is very common; a person benefitting from a decision very common; a person benefitting from a decision should abstain from it. should abstain from it.

Remuneration: Remuneration: Performance-based remuneration is Performance-based remuneration is designed to relate some proportion of salary to designed to relate some proportion of salary to individual performance. However, they should individual performance. However, they should provide no mechanism or scope for opportunistic provide no mechanism or scope for opportunistic behaviour. behaviour. 316316

GOVERNANCE & PERFORMANCEGOVERNANCE & PERFORMANCE

In its “Global Investor Opinion Survey” of over 200 In its “Global Investor Opinion Survey” of over 200 institutional investors in 2002, McKinsey found that institutional investors in 2002, McKinsey found that 80% of the respondents would pay a premium for 80% of the respondents would pay a premium for well-governed companies. They defined a well-well-governed companies. They defined a well-governed company as one that had mostly out-side governed company as one that had mostly out-side directors, who had no management ties, undertook directors, who had no management ties, undertook formal evaluation of its directors, and was formal evaluation of its directors, and was responsive to investors' requests for information on responsive to investors' requests for information on governance issues. The size of the premium varied governance issues. The size of the premium varied by market, from 10% for companies where the by market, from 10% for companies where the regulatory backdrop was least certain (those in regulatory backdrop was least certain (those in Morocco, Egypt and Russia) to around 40% for Morocco, Egypt and Russia) to around 40% for Canadian & European companies.Canadian & European companies. 317317

SHAREHODER – STAKE HOLDER SHAREHODER – STAKE HOLDER THEORYTHEORY

Till the early part of the 20th the basic objective of Till the early part of the 20th the basic objective of modern organizations was to provide goods and modern organizations was to provide goods and services for public consumption for profit services for public consumption for profit maximisation.maximisation.

Over a period of time, the short-term view of profit Over a period of time, the short-term view of profit maximisation gave way to a more broader and maximisation gave way to a more broader and medium-term view wealth maximisation of the medium-term view wealth maximisation of the shareholders.shareholders.

However, today economic institutions are considered However, today economic institutions are considered as a major drivers of improvement in quality of life in as a major drivers of improvement in quality of life in general and therefore needs to include multiple general and therefore needs to include multiple stakeholders. The basic premise is that firms cannot stakeholders. The basic premise is that firms cannot exist in vacuum. Therefore, corporate philanthropy exist in vacuum. Therefore, corporate philanthropy should be a part of every corporate mission. should be a part of every corporate mission. 318318

CORPORATE SOCIAL CORPORATE SOCIAL RESPONSIBILITYRESPONSIBILITY

As Peter Drucker rightly pointed out that, As Peter Drucker rightly pointed out that, “a “a healthy business cannot exist in a sick and healthy business cannot exist in a sick and impoverished society”. impoverished society”. Therefore, giving a very Therefore, giving a very important message that one cannot exist without important message that one cannot exist without the other. the other.

Therefore, economic and social responsibilities Therefore, economic and social responsibilities cannot be mutually exclusive; in fact a large part of cannot be mutually exclusive; in fact a large part of it is significantly overlapping.it is significantly overlapping.

CSR can be defined as, CSR can be defined as, “an enterprises decisions “an enterprises decisions and actions being taken for reasons at least and actions being taken for reasons at least partially beyond its immediate economic interests”.partially beyond its immediate economic interests”.

However, the debate on CRS still continues whether However, the debate on CRS still continues whether firms should detract its focus from its business?firms should detract its focus from its business? 319319

GROWING CONCERN FOR CSRGROWING CONCERN FOR CSR

Awareness due to education: Awareness due to education: With growing literacy, With growing literacy, people are becoming increasingly aware of their right people are becoming increasingly aware of their right to a decent and healthy life.to a decent and healthy life.

The role of media: The role of media: The media and various consumer The media and various consumer organizations have come up in protecting consumer organizations have come up in protecting consumer rights and exposing mal-practices.rights and exposing mal-practices.

Fear of government interference: Fear of government interference: Excessive quench Excessive quench for profits may lead to build up of adverse public for profits may lead to build up of adverse public opinion compelling the government to intervene (Eg. opinion compelling the government to intervene (Eg. MRTP).MRTP).

Public image: Public image: Entrepreneurs are increasingly relying Entrepreneurs are increasingly relying on public image as a source of competitive on public image as a source of competitive advantage and a higher financial discounting.advantage and a higher financial discounting. 320320

CSR STRATEGIESCSR STRATEGIES

Green Supply Chain Management: Green Supply Chain Management: It includes It includes environmentally preferable purchasing, eco environmentally preferable purchasing, eco efficiency, designing eco-friendly products, and efficiency, designing eco-friendly products, and extended producer responsibility extended producer responsibility (Eg. Cement - (Eg. Cement - Paper packaging, Refrigerators – CFC, Exide – Paper packaging, Refrigerators – CFC, Exide – Product take back). Product take back).

Health & Hygiene – Health & Hygiene – Attending the health hazards due Attending the health hazards due to wastes and by-products to employees and society to wastes and by-products to employees and society in proximity in proximity (Eg. Tata Steel – Life Line Express).(Eg. Tata Steel – Life Line Express).

Education, Literacy & Training Programs – (Eg. Education, Literacy & Training Programs – (Eg. Aditya Birla Research Centre – LBS).Aditya Birla Research Centre – LBS).

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BOTTOM OF THE PYRAMIDBOTTOM OF THE PYRAMID

With the market across most developed markets With the market across most developed markets including the US getting saturated, C. K. Prahalad notes including the US getting saturated, C. K. Prahalad notes that future markets exist collectively, across the that future markets exist collectively, across the world's billions of poor people having immense world's billions of poor people having immense untapped buying power. untapped buying power.

They represent an enormous opportunity for companies They represent an enormous opportunity for companies who learn how to serve them. In turn companies by who learn how to serve them. In turn companies by serving these markets, they're helping millions of the serving these markets, they're helping millions of the world's poorest people to escape poverty.world's poorest people to escape poverty.

Strategic innovations leading to disruptive business Strategic innovations leading to disruptive business models can show the way out. models can show the way out.

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BLUE OCEAN BLUE OCEAN STRATEGYSTRATEGY

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MARKETSPACE - TWO WORLDS

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WHAT IS RED OCEAN?WHAT IS RED OCEAN?

Companies have long engaged in Companies have long engaged in head-to-head head-to-head competitioncompetition in search of sustained, profitable in search of sustained, profitable growth. They have fought for profits, battled over growth. They have fought for profits, battled over market-share, and struggled for market-share, and struggled for differentiation differentiation (cost or product)(cost or product). .

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

In today’s red oceans, where most industries are In today’s red oceans, where most industries are saturated, one companies gain is always at the saturated, one companies gain is always at the cost of another companies loss.cost of another companies loss.

This paradigm has its origin in military strategy This paradigm has its origin in military strategy where it follows that you have to beat an enemy where it follows that you have to beat an enemy to win.to win.

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WHAT IS BLUE OCEAN?WHAT IS BLUE OCEAN?

Tomorrow’s leading companies will succeed not Tomorrow’s leading companies will succeed not by battling in by battling in red oceansred oceans, but by creating , but by creating blue blue oceansoceans of uncontested market space ripe for of uncontested market space ripe for growth . growth .

Such strategic moves are possible through the Such strategic moves are possible through the pursuit of product differentiation and low cost pursuit of product differentiation and low cost simultaneouslysimultaneously. It helps in creating powerful . It helps in creating powerful leaps in value for both the firm and its buyers, leaps in value for both the firm and its buyers, rendering rivals obsolete and unleashing new rendering rivals obsolete and unleashing new demand.demand.

Blue Ocean’s have existed in the past; it will exist Blue Ocean’s have existed in the past; it will exist in the future as well. It is only the frames of the in the future as well. It is only the frames of the top managers that prevents it from seeing it.top managers that prevents it from seeing it.

Constant updating of SIC is an indication this Constant updating of SIC is an indication this regard.regard.

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RED OCEAN Vs BLUE OCEANRED OCEAN Vs BLUE OCEAN

Compete in existing markets

Beat the competition

Exploit existing demand

Make the value-cost trade off

Demand is the limiting factor

Compete in uncontested markets

Make the competition irrelevant

Create and capture demand

Break the value-cost trade off

Supply is the limiting factor

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BLUE OCEAN STRATEGY - BLUE OCEAN STRATEGY - IMPERATIVESIMPERATIVES

Prospects in most established market spaces – Prospects in most established market spaces – red oceans – are shrinking steadily. red oceans – are shrinking steadily.

Population shrinkage across a no. of European Population shrinkage across a no. of European nations.nations.

As trade barriers between nations & regions fall, As trade barriers between nations & regions fall, information imperfections atrophy instantly.information imperfections atrophy instantly.

Niche markets & monopoly havens are Niche markets & monopoly havens are continuing to disappear.continuing to disappear.

Demand across developed markets reaching a Demand across developed markets reaching a plateau.plateau.

Technological advances have substantially Technological advances have substantially improved industrial productivity.improved industrial productivity.

Accelerated product life-cycles and Accelerated product life-cycles and obsolescence.obsolescence.

Commoditization of most product – market Commoditization of most product – market segments.segments.

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CONCEPTUAL UNDERPINNINGSCONCEPTUAL UNDERPINNINGS

Blue oceans have existed in the past and will Blue oceans have existed in the past and will exist in the future as well.exist in the future as well.

History indicates that blue oceans exist in three History indicates that blue oceans exist in three basic industries – basic industries – automobilesautomobiles (how people get to (how people get to work) – work) – computers computers (what people use at work) – (what people use at work) – entertainmententertainment (what people do after work). (what people do after work).

They are not necessarily about technology; the They are not necessarily about technology; the underlying technology was often already in underlying technology was often already in existence.existence.

Incumbents often create blue oceans within the Incumbents often create blue oceans within the ambit of their core business.ambit of their core business.

Company & industry are the wrong units of Company & industry are the wrong units of strategic analysis; managerial moves are.strategic analysis; managerial moves are.

It creates entry barriers through first mover It creates entry barriers through first mover advantages.advantages.

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BLUE OCEAN - IMPLEMENTATIONBLUE OCEAN - IMPLEMENTATION

VI

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

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IMPLEMENTATION SEQUENCEIMPLEMENTATION SEQUENCE

Buyer Utility (1)

Is there exceptional buyer utility in your business idea?

Price (2)

Is your price easily accessible to the mass of buyers?

Cost (3)

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

Adoption (4) What are the adoption hurdles in actualizing your business idea?

Are you addressing them up front?

Blue Ocean Strategy

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SOME GLARING EXAMPLESSOME GLARING EXAMPLES

In the last century authors Kim and Mauborgne In the last century authors Kim and Mauborgne have documented the creation of more than 150 have documented the creation of more than 150 blue ocean creations across 30 industries –blue ocean creations across 30 industries –

Virgin Atlantic:Virgin Atlantic: Fractional jet ownership or travel Fractional jet ownership or travel to space.to space.

Sony Play Station:Sony Play Station: Redefining machine-human Redefining machine-human interface in entertainment and targeting an interface in entertainment and targeting an altogether new user base.altogether new user base.

Southwest Airlines:Southwest Airlines: Pioneering the concept of Pioneering the concept of LCC.LCC.

Citibank – Citibank – Automated teller machines & credit Automated teller machines & credit cards.cards.

Tata Nano: Tata Nano: Manufacturing a full fledged Manufacturing a full fledged passenger car at a price of Rs. 1 lac.passenger car at a price of Rs. 1 lac.–

WHAT THEN IS THE HANDICAP?WHAT THEN IS THE HANDICAP?

Most of the traditional views in strategy having its Most of the traditional views in strategy having its origin in (Economic Theory) led to what is called the – origin in (Economic Theory) led to what is called the – structuralist paradigm.structuralist paradigm.

According to this view, companies & managers are According to this view, companies & managers are largely at the mercy of economic forces, greater than largely at the mercy of economic forces, greater than themselves.themselves.

Off late emerging views in strategy having its origin Off late emerging views in strategy having its origin in (Organization Theory) led to a paradigm shift to in (Organization Theory) led to a paradigm shift to what is called the – reconstructionist view.what is called the – reconstructionist view.

According to this view managers need not be According to this view managers need not be constrained to act within the confines of their constrained to act within the confines of their industry. All they need to do is change their industry. All they need to do is change their managerial frames.managerial frames. 333333

Documents

Business Strategy