Strategic HRM: Pulak Das 1

Business Strategy: An
introduction
Lecture slides for Chapter 2
Strategic HRM: Pulak Das 2
Objectives
Objectives of this lecture is to understand
how the profitability difference between
two firms could be explained on the basis
of difference in characteristics of their
product markets and what business
policies a firm could adopt to maintain its
advantageous positions in its product
market.
Strategic HRM: Pulak Das 3
Two approach to business
strategy
Market Driven Strategy:
Resource Driven Strategy:
Fundamental Difference between the
two
What explains the high difference in
profitability between two companies ?
Example: In 2006-7, the profitability of
BHEL was 22% while that of BEML was
just 12%
Strategic HRM: Pulak Das 4
Annual Report of BHEL
2005-6 2006-7 2007-8
Value of (RsCr)13675 17324 20090
Production
Profit before tax 2564 3636 4430
Profit/ VOP 19% 21% 22%
Strategic HRM: Pulak Das 5
Annual report of BEML
2005-6 2006-7 2007-8
Value of (RsCr)2181 2591
Production
Profit before tax 285 316
Profit/ VOP 13% 12%
Strategic HRM: Pulak Das 6
Business Strategy: Two options
Factor
Market
Product
Market
Company
Strategic HRM: Pulak Das 7
Market Driven Strategy
The main reasons for difference in
profitability is due to their doing business
in two different industries.
Product market characteristics are the
principal driver for profit.
The principal contention here is that in the long run
all organizations operating in an industry will have
very similar production and marketing infrastructure
and they are going to earn long run profitability
corresponding to that industry. This long run
profitability of an industry depend on a few
characteristics of the industry.
Strategic HRM: Pulak Das 8
Long run conditions of Factor
and Product Markets
Factor
Market
Product
Market
Company
Homogeneous
Heterogeneous
Strategic HRM: Pulak Das 9
Industry profitability
Because of certain industry specific
characteristics some industries are more
profitable than others;
Porters five forces
Entry barrier;
Power of suppliers;
Power of buyers;
Scope of substitutions;
Rivalry among existing players.
Strategic HRM: Pulak Das 10
Entry barrier
How easy is it for a new player to enter my business
space?
This barrier could be due to
Requirement of large financial capital,
Large land area;
Proprietary right over mineral deposits; technology.
Examples of breached entry barriers;
Electric fan industry was a part of large scale manufacturing in
1960s and 1970s. Now, it is part of small scale business.
Agricultural innovation by a farmer switching from rice cultivation
to say potato and make high return to your investment. But such
return is likely to be short lived. Most potato farmers in Bengal
knows it too well.
Strategic HRM: Pulak Das 11
Power of suppliers
When a manufacturer buys a lot its
manufacturing requirements from a single
supplier it can be vulnerable to suppliers
strategic moves or failures.
Example: In 2006, Steal Authority of India
(SAIL) went for acquiring coal mines
overseas because it wanted to insulate
itself from the irregular coal supply from
Coal India.
Strategic HRM: Pulak Das 12
Power of buyer
When a large part of a companys output is sold to only
one or a few buyers, it can be vulnerable to strategic
intents of the buyers.
Examples:
NTPC sells a lot of its power outputs to State Electricity Boards
(SEB). But most SEBs are poor pay masters. SEBs sickness
was affecting the health of NTPC quite badly.
Burn Standard and Company Ltd, Braithewaite and Co Ltd and
J essop Construction Ltd were faithful suppliers of wagons to
Indian Railway for many years. After economic liberalization,
Indian Railway went for more diversified suppliers that led to
sickness of those loyal wagon suppliers of 1960s and 1970s!
Strategic HRM: Pulak Das 13
Threat of substitute
How easy is it for an existing competitor to come
out with a substitute product that you have just
launched as a new innovation?
Example:
During the later part of last century Indian
pharmaceutical industry had lots of medicinal
formulations with very similar therapeutic values.
This affected serious investment in development
of drugs in India.
Strategic HRM: Pulak Das 14
Rivalry among existing players
How many players are operating in the
industry and how keenly are they watching
each other?
High rivalry among the players will make
them to go for excessive expenditure on
product promotion and customer relations
raising to their annual operating cost which
ultimately is likely to cut into their actual
profits.
Strategic HRM: Pulak Das 15
Strategic Options: Generic
Strategies
Cost Leadership:
When product from all manufacturers appear
same to the customers, then every manufacturer
will try to capture the market by selling at the
lowest cost.
Example: primary education, basic banking or
health care service for common citizens.
In 2006, there was craze among Indian Cement
manufacturers for captive power plant because power
from state grid cost Rs 3.5 to Rs 4.5 per KWH while
that from captive power plant the cost is Rs 2.75 to
Rs3.5 per kwh.
Strategic HRM: Pulak Das 16
Differentiation
When the product has many special
characteristics, a manufacturer may try to do
business with those customers who like those
characteristics more than other characteristics.
Example:
Maruti, Indica and Honda City are all cars but Maruti
is known for its fuel efficiency, Indica is known for its
suspension and Honda City is known for its looks!
And, there are different people who prefer these
characteristics of a car.
Strategic HRM: Pulak Das 17
Focus
Instead of segmenting the total market based on product
characteristics, this strategy is based on segmentation of the
product market based on geography location, customer income,
education, industry etc. A manufacturer will do business in one of
the other market.
Example: Newspapers in Kolkata
There are English papers The Telegraph, The Statesman, the
Times of India and a few others;
Then there are Bengali newspapers e.g. Anandabazar Patrika,
Barthaman, Satyayug then there are Hindi news papers e.g.
Sanmarg.
Do you think all of them give the same headline for their respective
papers? Most likely not. They are different because they are
catering to the news appetite of different markets.
Strategic HRM: Pulak Das 18
Key learning
Product markets are heterogeneous. Different
companies choose to do their businesses in different
product markets.
Different product markets can be broadly classified into
different industries.
Profitability of an industry depend on presence of entry
barrier, power of suppliers, power of buyers, threat of
substitutes and rivalry among the existing players.
A business organizations may choose to adopt any one
of the three generic strategies viz. cost leadership,
differentiation and focus.