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BUSINESS STRATEGY - I

Course Code: 602


Prof. Subir Sen – Faculty Member
ICFAI
E-Mail: subir@ibsindia.org / 9830697368
Ref: 1) Strategic Management – Thompson &
Strickland
2) Strategic Management – Pearce & Robinson
3) Strategic Management – Lomash
4) Strategic Management – Fred. R. David 1

5) Strategic Management – Johnson & Scholes


INTRODUCTION

2
STRATEGY - DEFINITION
 Strategy is all about making trade-offs between what to
do and more importantly what not to do; consciously
choosing to differentiate. It reflects a congruence between
external opportunities and internal capabilities. Types of
strategies -
– Corporate Strategies – It is all about making choices
across various businesses and allocating resources
among them.
– Business Strategies – It is all about developing and
leveraging competitive advantage.
– Functional Strategies – It is all about doing things
differently, rather than doing different things.

3
STRATEGIC MANAGEMENT -
DEFINITION

 Strategic management attempts to align the


traditional management functions with the
environment to make resource allocations in a
way to achieve organisational goals and
objectives.
– This alignment is called strategic fit.
– It serves as a road-map for the organisation in
its growth path. It provides the direction –
extent – pace – timing.
– It depends on the turbulence of the
environment and the aggressiveness of the
organisation.
4
– It distinguishes winners from the losers.
STRATEGIC MANAGEMENT -
FRAMEWORK

Economic
al
Fit Strategic Fit

Technological
Management
Finance
Productio

Fit
Strategic
Political

HR
PoliticalIntent
Strategic
Fit
Political
Marketin
n

g
Fit Manageme Fit
nt
Social & 5
Cultural
STRATEGY - ORIGIN

 The word strategy has its origin from the Greek


word strategia meaning Military Commander. In
the ancient days battles were fought over land.
In contrast, today's battles are fought over
markets.
– In the ancient days battles were won not by
virtue of size, efficiency, adaptive ability; but
by virtue of their strategies.
– Even in today’s markets, battles fought on
the market front are won by companies by
virtue of their strategies, which has its origin
in the battles fought in the ancient days. 6
SOME PARALLELS

 Japan’s attack on Pearl Harbour


– Strategy: Attack where it hurts the most.
– Toyota’s entry in the US challenging GM and
Ford.
 US attack of Morocco to capture Germany
– Strategy: Pin-hole strategy
– Wal-Mart challenging Sears by first entering
small towns.
 Battle of Moses and Ramases II
– Strategy: Survival of the fittest
7
– Jack Welch’s ruthless downsizing of GE.
SOME MORE PARALLELS …………

 Caesar, Genghis Khan, Alexander


– Strategy: Concentration of resources.
– Nokia challenging Motorola.
 Allied Forces Vs Germany (World War II)
– Strategy: Forging alliances.
– Yahoo and Microsoft challenging Google.
 Napoleon’s attack on Russia
– Strategy: Waiting for the right time.
– Reliance’s entry into telecom.
 Cold War: US Vs USSR
– Strategy: Containment.
– Tata’s during the 80’s vis-à-vis Reliance.
8
EVOLUTION OF MANAGEMENT

 As Peter Drucker refers to it, a radical change in the


business environment brings about discontinuity. The
things happening around the firm are totally
disconnected from the past. It leads to a paradigm shift.
 The first major discontinuity in the history of global
business environment – Industrial Revolution.
– Mass Production
– Complicated Processes Organisation Size
– Complex Structures
 Evolving of an emerging paradigm – Survival of the fittest
(Fayol & Taylor, 1907).

9
EVOLUTION OF STRATEGIC
MANAGEMENT

 The second major discontinuity in the history of global


economic environment – World War II.
– Global market place.
– Affluence of the new customer.
– Homogeneous to heterogeneous products.
– Changes in the technology fore-front.
 From uniform performance, performance across firms
became differentiated. The question of outperforming the
benchmark became the new buzzword.
 Survival of the most adaptable becomes a new management
paradigm (Ansoff, 1960).

10
ENVIRONMENTAL CHANGE

Phase IV: Horizon of Phase I: Extrapolation of the past


Scenarios
2
1 1

Prior to
3 1990 1950
onwards
Phase III: Range of Scenarios Phase II: Discrete Scenarios
1 2
1A
1
3 1B

2A

2 2B 1950 to
1970 to 1970
11

1990
STRATEGIC MANAGEMENT -
IMPORTANCE

Performance Decomposition

Industry Effects – 45%


Strategy Effects – 35%
Time Effects – 20% Source: Schmalensee, (1985)
12
STRATEGIC MANAGEMENT - FEATURES

 It forms the core activity of the top management.


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

13
STRATEGIC MANAGEMENT – MYTHS

 It does not involve short-cuts.


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

14
ENVIRONMENTAL DEMANDS

 To be continuously alert.
 To assimilate change faster.
 To be future oriented.
 To tap markets across boundaries.
 To be insulated against environmental threats.
 To leverage size, scale and scope.
 To generate large resource pool.
 To gain expertise in technologies.
 To develop core–competencies.
15
APPROACHES TO STRATEGY

 Analytical Approach – Igor H. Ansoff (1960)


– Strategy can be segregated into certain mutually
exclusive and inter-related components aimed at
managing the growth of an organisation.
– The choice of strategy is primarily concerned with
external ones rather than internal ones.
– The choice of product-market mix is based on
conscious evaluation of risk – return factors.
– Personal biases has a very little role to play in
strategic choices.

16
APPROACHES TO STRATEGY

 Design Approach – Alfred Chandler (1970)


– Structure follows strategy. The organisation
initially decides which industry to enter,
how it will compete, who will be the top
managers, and who will directly decide on
the type of organisation structure (MCS).
– Organisation structure will precede and
cause changes in strategy. Successful
organisations align authority and
responsibility of various departments in
way to reach overall objectives.
17
APPROACHES TO STRATEGY

 Positioning Approach – Michael E. Porter (1980)


– An organisations performance is a direct function of the
environmental forces in which it is exposed; over which
the firm has little or no control.
– The environmental forces comprises of – supplier power,
customer power, new entrant, substitutes, competitors.
– The organisation will outperform the industry where
environmental forces are weak and vice-versa.
– An organisation is seldom in a position to influence the
business environment.

18
APPROACHES TO STRATEGY

 Resource Based Approach – C. K. Prahalad (1990)


– The key to superior performance is not doing the
same as other organisations – locating in most
attractive industries – and pursuing the same strategy
– but exploiting the differences among firms.
– Core competencies comprises of basic resources
linked together through a wide range of bonding
mechanisms to form complex resources.
– It comprises of delivering unimaginable value to
customers much ahead of time.
– Organisations can significantly alter the way an
industry functions.

19
STRATEGIC MANAGEMENT -
PROCESS

 Strategic Intent
 Strategic Planning
– Environmental Scanning
Strategic Gap
– Internal Appraisal of the Firm
 Strategy Formulation
– Corporate Strategy
– Business Strategy Strategic Choices
– Functional Strategy
 Strategy Implementation
 Strategy Performance
 Strategy Evaluation & Control 20
TOP MANAGEMENT PERSPECTIVE

21
STRATEGIC INTENT

 A strategic intent is a dream that energizes a company; it is a


sophisticated and positive version of a simple war-cry. It is the
cornerstone of an organisations strategic architecture.
– It provides a sense of direction and destiny.
– It’s a philosophy that distinguishes it from its competitors.
– It implies a significant stretch. A substantial gap between its
resources and aspirations.
– It consciously creates a strategic gap. A gap that consciously
manages between stagnation and atrophy.

22
STRATEGIC INTENT - HIERARCHY

Visio
Integrativ n Single
e Mission
Dominant
Objective
Do

s
m

g ic
in

Goal Man
an

Specifi

Lo
s y
t

c
Plans
23
DOMINANT LOGIC

 A dominant logic can be defined as the way in which the top


management team conceptualises its various businesses
and make critical resource allocation decisions.
 To put it more simply, it can be perceived as a set of
working rules (similar to thumb rules) that enables the top
management to decide what can be done and more
importantly what cannot be done.
 It is central to the strategic intent of the firm.
 Dominant logic changes, when changes in the internal and
external environment (i.e. strategic variety) is apparent.

24
HOW DOES DOMINANT LOGIC
EVOLVE?

(Schemas)

Characteristics of Identify critical


the success factors
core business

(What worked
(Paradigms)
before?)

(Heuristic Principles)

Strategic success Doing the right things


or failure
25
DOMINANT LOGIC

 Reliance: Perceptions of Lt. Dhirubhai Ambani


– Investments marked by low per-capita consumption.
– Create cost barriers through economies of size.
– Use price-elasticity to blow up the market to
international standards.
– Integrate vertically and horizontally across businesses.
– Acquire a dominating market share.
– Exploit early entry advantages.
– By-pass the regulatory regime.

26
VISION

 It is a dream (not a forecast) about, what the


company wants to become in the foreseeable
future. It is a combination of three basic
elements –
– An organisations fundamental reason for
existence; beyond just making money.
– It stands for the unchanging core values of
the company.
– It represents the company’s aspirations. It
should be audacious, but achievable.

27
VISION - CHARACTERISTICS

 Reliance – Where growth is a way of life.


– Clarity – Vividly descriptive image of what the
company wants to be known for in the future.
– Reachable – It should be within a reasonable
target in the known future.
– Brevity – It should be short, clear, and
preferably memorisable.
– Empathy – It should reflect the company’s
beliefs to which it is sensitive.
– Sharing – The company across all hierarchies
should have faith in it.
28
VISION - ADVANTAGES

 To stay focused on the right track.


 To prevent the fall in a activity trap.
 It gives enlightment.
 It gives the impression of a forward-looking
organisation.
 It provides a holistic picture.
 It gives a shared platform.
 It fosters risk taking and experimentation.
 It lends integrity and genuineness.
29
MISSION

 It is a broad and enduring statement that


distinguishes it from another organisation. It helps
identify the scope of the organisation in terms of
its products and markets. It also serves as a road–
map to reach the vision; its reason for existence.
– What business are we in?
– It reflects the organisations image and identity.
– Its objective should be broad and enduring.
– It should reflect current realities.
– It should be flexible an dynamic.
– It is a philosophy.
30
MISSION – SOME IDEAS

 Reliance – We are in the business of integration.


– We do not offer clothes,
…………………. We offer comfort.
– We do not offer engine oils,
…………………. We offer liquid engineering.
– We do not offer software's,
…………………. We offer solutions.
– We do not offer insurance,
…………………. We offer security.
– We do not offer steel,
…………………. We offer strength.

31
GOALS & OBJECTIVES

 Reliance – We want to become a Rs.1,00,000


crore company by the year 2010. It reflects the
result that an organisation expects to achieve
in the distant future.
 It adds legitimacy to the mission.

 It lends direction – time frame.

 It provides a benchmark for evaluation.

 It involves all the SBU’s.

 It motivates the top management to


identify the – key success factors.
32
PLANS

 Reliance – Desire to invest Rs.25000 crore in telecom business


(circa 1999). It is the process of garnering necessary inputs,
coordinating appropriate technologies, and gaining access to
desired markets in the near future.
 Backward integrate process technologies.

 Compress project times.

 Leverage economies of size and scale.

 Use price-elasticity to break market barriers.

 Acquire a market share of indomitable position.

33
STRATEGIC DRIFT

 Historical studies have shown that most


organisations tend to continue with their existing
strategies. Therefore, past strategies tend to
have a bearing on future strategies. This
tendency to restore continuity is known as inertia
(resistance to change).
 When changes in the environment is incremental,
equilibrium is maintained. However, radical
change may lead to disequilibrium. This state of
affairs is known as strategic drift.
 In such a context strategies lose touch with
emerging environment.
34
STRATEGIC DRIFT FRAMEWORK

Environmental Change
Radical Change
Strategic Change
Degree of change

Incremental Change

State of Flux Stage of Transformation


Continuity
Strategic Drift

Stage of Atrophy

Time 35
ORGANIZATIONAL POLITICS

 Inertia often leads to organizational politics.


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

36
LOGICAL INCREMENTALISM

 According to the incrementalism approach


practitioners simply do not arrive at goals and
announce them in precise integrated packages. They
simply unfold the particulars of the sub-system, but
the master scheme of the rational comprehensive
scheme is not apparent.
 This is not to be treated as muddling; but as a
defensible response to the complexities of a large
organization that mitigate against publicizing goals.
 Strategy formulation and implementation are linked
together in a continuous improvement cycle.

37
IMPLEMENTING INCREMENTALISM

 General Concern – A vaguely felt awareness of an


issue or opportunity.
 Macro Broadcasting – The broad idea is floated
without details to invite pros and cons leading to
refinements.
 Agent of Change – Formal ratification of a change
plan.
 Leveraging Crisis – A sudden crisis or an
opportunity should be used as a trigger to
facilitate acceptance and implementation of
change.
 Adaptation – As implementation progresses. 38
LEARNING ORGANIZATION

 A learning organization is capable of continual


regeneration from knowledge, experience, and skills
that fosters experimentation and questioning and
challenge around a shared purpose. It helps overcome
organisational politics. What fosters a learning
organisation?
– Pluralistic – An environment where different and
even conflicting ideas are welcome.
– Experimentation – Fosters a culture of risk taking.
– Informal Networks – Emerging of new ideas.
– Constructive Bargaining – Agree to disagree.
– Organisational Slack – Enough free space.

39
MANAGING UNCERTAINTY

 Not all organizations face similar


environments and they differ in their form
and complexity. Therefore, they need to have
different approaches to strategy.
 Dominant logic are the foundations when
strategic transformation is apparent.
 Dominant logic is very rigid and sticky.
 Strategic transformation becomes smooth
through a change in top leadership. As it
brings with it a different dominant logic.
40
ENVIRONMENTAL CONDITIONS
Dynamic

Scenario
Planning Learning
Static

Forecasting Decentralisation

Simple Complex 41
INTENDED & REALISED STRATEGIES

 An intended strategy is an expression of


interest of a desired strategic direction. A
realised strategy is what the organisation
actually translates into practice. Usually
there is wide gap between the two. Causes –
– The plans are unworkable.
– The environment context has changed.
– Influential stake-holders back out.
– Strategies are superimposed.
 An emergent strategy is one which slowly
evolves over time. 42
ANALYZING
BUSINESS ENVIRONMENT

43
FORMAL PLANNING Vs STRATEGIC
PLANNING

 Formal planning is a function of extrapolating the


past. It is based on the assumption of incremental
change. It is reactive.
 Emergent strategy is a function of discounting the
future. It is based on the assumption of radical
change. It is pro-active.
 Strategic gap basically points towards a vacuum of
where the organisation wants to be and where it is. It
requires a quantum leap.
 Competitive advantage provides the surest way to
fulfill the strategic gap. It points to a position of
superiority with relation to competition.
44
ENVIRONMENTAL SCANNING

 The environment is defined as the aggregate of


conditions, events, and influences that affect an
organisations way of doing things.
 Factors can be external as well as internal to the
organisation.
 Environmental scanning is very important function
of strategic planning. Since the pace of change in
the environment is increasing rapidly, a strategic
manager has to continuously scan the environment
to ensure fit with its strategic intent.
 It is exploratory in nature (PESTEL).
45
EXTERNAL ENVIRONMENT

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

46
EXTERNAL ENVIRONMENT

 Economic Environment
– GDP, Fiscal deficit
– Savings & Investment
– Inflation & Interest Rates
– Monsoon & Food stock reserves
– Economic Cycles
– Capital Market
– Forex Reserves
– Currency Stability
– Infra-Structural Investments
47
EXTERNAL ENVIRONMENT

 Social & Cultural Environment


– Population
– Religious Composition
– Literacy Levels
– Inter-state immigration & Mobility
– Income Distribution – Middle Class
– Customs, Beliefs, Rituals & Practices
– Language Barriers
– Social Values & Attitude
– Age Distribution
48
EXTERNAL ENVIRONMENT

 Environmental - Technological
– Manufacturing Processes
– Flexible Production Systems
– Obsolescence Rate
– Patent Laws
– Research & Development
– Backward Integration
– Carbon Credits
– Green Supply Chain Management
– Enterprise Resource Planning (ERP)
49
EXTERNAL ENVIRONMENT

 International Environment
– Emerging Markets
– Forex Markets
– War & Terrorism
– FII & FDI Inflows
– Mergers & Acquisition
– Financial Crises – Sub Prime
 Legal Environment
– Corruption – Transparency International – 89th
– Transparency – RTI Act, 2005
– Speedy Trials & Pending Cases

50
ECONOMIC LIBERALISATION

 New Industrial Policy (NIP) –


– Liberalising industrial licensing.
– FERA Liberalisation.
– MRTP Liberalisation.
– Curtailment of PSU’s.
– Encouraging Foreign Direct Investment.
 Economic Reforms –
– Fiscal & Monetary Reforms.
– Banking Sector Reforms.
– Capital Market Reforms.
51
ECONOMIC LIBERALISATION

 New Trade Policy (NTP) –


– Lowering import tariffs
– Abolition of import licenses
– Encouraging exports
– Rupee Convertibility
 Structural Adjustments –
– Phasing out subsidies
– Dismantling price controls
– PSU Disinvestments
– Exit Policy- VRS
52
DISCONTINUITY

 Destabilization due to entrepreneurial freedom


– Cocoon of protection disappears
– Diversification spree
– Existing notions of size shaken
– Industry structures change radically
– Economic Darwinism - Survival of the fittest
 MNC Onslaught
– Enhancing stakes – Power Equation
– Joint Ventures – Technological Alliances
– Take-over threat, Mergers & Acquisitions
53
DISCONTINUITY

 Hyper Competition
– MNC’s - Globalization
– Cheap Imports
– Access to technology
 Buyers exacting demands
– Shortage to surplus – Price competition
– Life-style changes
– Stress on quality, Consumerism
 Challenges on the technology front
– Competencies become technology based
– Investment in R&D become inescapable 54
DISCONTINUITY

 Compulsion to find export markets


– Identifying competitive advantage
– Technological gap
– Global presence
– Depreciating Currency – Exports
 Corporate vulnerability
– It is no longer business as usual
– Capital inadequacy
– Lack of product clout and brand power
– One product syndrome
– Loss of monopoly
55
FIVE FORCES MODEL - PORTER

Threat of New Entrants

Bargainin
Bargainin Competition gBargainin
power
g power from Existing ofg power
of Players of
Suppliers
Suppliers Customer
s

Threat of Substitutes
56
PORTERS FIVE FORCES ANALYSIS

 Competition from existing players –


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

57
PORTERS FIVE FORCES ANALYSIS

 Threat of New Entrants –


– Economies of size and scale.
– Huge investment in CAPEX.
– Strong brand power.
– Product differentiation.
– Resource profile, access to inputs.
– Learning curve advantages.
– Access to distribution channels.
– High switching costs.
– Licensing & Quotas.
58
PORTERS FIVE FORCES ANALYSIS

 Bargaining power of Customers –


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

59
PORTERS FIVE FORCES ANALYSIS

 Bargaining power of Suppliers –


– Importance of volume to supplier.
– Presence of substitute inputs.
– Differentiation of inputs.
– Low scope for vertical integration
 Threat of Substitutes –
– Source of latent competition – timing.
– Substitute offering a price advantage and/or performance
improvement.
– Buyers’ propensity to substitute.

60
FIRM ENVIRONMENT

 Size and Scale of operations.


 Inertia – Commitment to past strategies.
 Cohesiveness – Degree of Bonding.
 Structure – M Form (Profit Centres).
 Business Portfolio – Composition.
 Business Scope – Single, Related, Unrelated.
 Initial Resource Profile.
 Skills & Capabilities
– Business Specific Capability
– Growth Management Capability
– Entrepreneurial Capability
61
COMPONENTS OF FIRM
ENVIRONMENT

 Competencies
– Imitability – Uniqueness
– Substitutability – Difficult to Emulate
– Sustainability – Duration
– Leverage – Scope
 Performance
– Accounting, Market, Risk, Growth
– Strategic

62
VULNERABILITY ANALYSIS - SWOT

 Acronym for Strengths – Weaknesses –


Opportunities – Threats. It helps an
organisation to capitalise on the opportunities
by maximising its strengths and neutralising
the threats minimising the weaknesses. A
SWOT audit should rely on –
– Company Records – Annual Reports,
Websites, Press Clippings & Interviews.
– Case Studies – Structured Questionnaires,
Interviews, Observation.
– Business Intelligence – Bankers, Suppliers, 63
Customers, Analysts, Competitors.
SOURCES OF STRENGTH

 Strong brand identity – Eg. Tata.


 High quality products – Eg. Sony, Toyota.
 Excellent penetration – Eg. HLL, ITC.
 Strong R&D base – Eg. Dr. Reddy’s, Ranbaxy.
 Economies of scale – Eg. Reliance.
 Good credit rating – Eg. Infosys.
 Motivated employees & cordial industrial
relations – Eg. Tisco.
 Large resource pool – Eg. Reliance.
 Strong after sales & service network – Eg. 64
Caterpillar.
SOURCES OF WEAKNESSES

 Outdated technology – Eg. Hindustan Motors.


 Poor working capital management – Eg.
Kirloskars.
 Excess manpower – Eg. SAIL.
 Narrow product base – Eg. Procter & Gamble.
 Inefficient top management – Eg. Ballarpur
Inds.
 Single product base – Eg. Nirma.

65
SOURCES OF OPPORTUNITIES

 Delicensing of Industries – Eg. Telecom.


 Import relaxations – Eg. Hardware & Software.
 Capital market reforms – Eg. Abolishing CCI.
 Abolishing MRTP – Eg. Maruti.
 Consumerism – Eg. Retailing.
 Growing population – Eg. Middle-class buying
power.
 Globalisation – Eg. GDR’s, ECB’s
 Free pricing – Eg. Fertilisers, Insurance, Sugar
 Exit Policy – Eg. VRS
 Collaborations & Joint Ventures – Bharti – WalMart.
66
SOURCES OF THREATS

 Political instability – Eg. (1985–1990).


 Social activism – Eg. Singur SEZ.
 Terrorist attacks – Eg. 9/11.
 Import liberalisation – Eg. Dumping from China.
 Foreign Direct Investment (FDI) – Eg. Onida.
 Economic recession – Eg. (1970’s).
 Natural disaster – Eg. Tsunami, Earth Quake.
 Nationalisation – Eg. TISCO.
 Hostile take-over – Eg. Bajoria – Bombay Dyeing.
 Group disintegration – Eg. Reliance.
67
ETOP

 Acronym for Environment – Threat – Opportunity –


Profile. It represents a summary picture of the
environmental factors and their likely impact on
the organisation. Stages in ETOP analysis –
– List the different aspects of the environment
that has a bearing on the organisation.
– Assess the nature and extent of impact of the
factors.
– Holistic view – Prepare a complete overall
picture.
– Forecasting – Predict the future (i.e. multi-
variate, delphi's technique, judge-mental). 68
PROFIT IMPACT OF MARKET
STRATEGY

 PIMS is a computer based database model


developed by GE and later extended by HBS to
examine the impact of a wide variety of
strategy issues on business performance. It is
also a form of vulnerability analysis.
 An organisation can draw upon the experience
of its peers in similar situations. PIMS Findings
– 75% of the variance in performance is due
to:
– Industry attractiveness.
– Industry segmentation and positioning. 69

– Industry pricing and distribution.


PIMS - LIMITATIONS

 The analysis is based on historical data and it


does not take care of future challenges.
Therefore,
– Contexts drawn across one organisation
may not be applicable to another. As every
organisation is unique in its own way.
– Contexts may vary over time, when radical
changes in the economy takes place.
– Contexts may vary across countries,
therefore validity may be a question.
70
COMPETITIVE ADVANTAGE

 A competitive advantage is a strength relative to


competition.
 It results in a distinct cost advantage or a
differentiation advantage.
 A competitive advantage is a back bone for a
strategy.
 It enlarges the scope of an organisation.
 A collection of competitive advantages comprises
strategic advantage profile (SAP).
 Success of a strategy critically depends on SAP.

71
STRATEGIC ADVANTAGE PROFILE
(SAP)

 Organisations have to systematically and


continuously conduct exercises to identify its SAP.
 In most cases SAP is hidden and dormant.
 Identification of SAP is critical for and stretching
and leveraging of resources.
 In today's world of discontinuity, SAP changes
from time to time.
 Strategic fit is essential for the top management
to shape its SAP.
 Most successful organisations around the world
have a well balanced SAP.
72
COMPOSITION OF SAP

 Marketing
– High market standing and steady market share.
– Continuous product innovation.
– Strong market penetration.
– Market Research – early trend recognition.
– Advertising effectiveness.
– Cost leadership.
 Finance
– Low cost of capital.
– Dynamism in tax planning.
– Innovative financial instruments.

73
COMPOSITION OF SAP

 Human Resources
– Low attrition rate.
– Ability to attract talent.
 Research & Development
– Large no. of patents.
– Huge spending in R&D.
– Velocity of R&D multiplier.
 Production
– Flexible manufacturing systems.
– Outsourcing and controlling SCM.
74
KEY SUCCESS FACTORS (KSF)

 KSF relates to identification and putting


concentrated effort on a particular activity which
forms the very basis of competitive advantage. It
involves a three-stage process-
– Identify KSF – What does it take to be
successful in a business?
– Drawing KSF – What should be the
organisations response to the same?
– Benchmarking KSF – How do we evaluate
organisation success on this factor?
 KSF helps organisations spot early opportunities
and convert them into value adding business 75
propositions.
EXPERIENCE – LEARNING CURVE

 The cost of performing an activity declines on a


per-unit basis as they grow more efficient as
experience teaches better way of doing things.
 With lower costs, it can price its products more
competitively, and with lower prices it can increase
its sales volume, which further reduces costs.
 Matured firms will always be positioned
advantageously on the EL Curve than new
entrants.
 The EL Curve thus enables organisations to build
entry barriers, leverage it as a competitive
advantage.
Also Refer Slide: 26576
EL - CURVE
Point of inflexion
Cost per unit of output

Decreases at an increasing rate

Decreases at a constant rate

Decreases at a decreasing rate

Production / Volume 77
EL - TRADITIONAL VIEW
2
Efficiency = Lower Costs

1 3
Experience = Efficiency Lower Costs = Higher Sales

Entry Barriers = Better Performance 4


6 Higher Sales = Lower Costs

Lower Costs = Entry Barriers


5 78
EL - STRATEGIC VIEW
2
Inertia = Limited Growth

3
Experience = Inertia Limited Growth = Diversification
1

Strategic Failure = Poor Performance 4


Diversification = New Experience
6
New Experience ≠ Previous
Experience 79

5
IDENTIFYING ALTERNATIVE
STRATEGIES

80
CORPORATE STRATEGY

 It provides direction to the groups vision and


mission.
 A corporate strategy identifies and fixes the
strategic gap it proposes to fill.
 It provides a platform for subsequent strategic
decisions.
 It determines the locus a firm encounters with
internal and external environment.
 It indicates the type and quality of growth an
organisation is looking for.
 It serves the process of renewal of the firm. 81
GRAND STRATEGIES

Corporate
Strategy

Stability Growth Divestmen Combinatio


t n

Intensificatio Diversification
n

Market Penetration Market Development Product Development

Concentric / Related Conglomerate / Unrelated

Vertical Horizontal 82
STABILITY

 It involves maintaining status-quo or growing in a


slow and selective manner. The size and scale of
present operations remains almost intact. Stability
however, does not relate to do-nothing. It still has
to adopt a strategy to sustain current performance
levels. (Eg. Hindustan Motors). The reasons for
stability strategy –
– Lack of attractive opportunities.
– The firm may not be willing to take additional
risk associated with new projects.
– To stop for a while and assess past records.
– Why disturb the existing equilibrium set up?
– Limited resource position.
83
GROWTH - ANSOFF’S MODEL
Existing Market New Market
New Product Existing Product

Market Market
Penetration Development
(+) (++)

Product Diversificatio
Development n (+++)
(++)

Note: (+) indicates type of growth and risk 84

involved.
MARKET PENETRATION

 It is a strategy where a firm directs its entire


resources to the growth of a single product, within a
well defined market. Market penetration can be
achieved by – increasing sales to current customers,
convert competitors customers, direct non-users to
users. (Eg. Nirma)
– Suitable for industries where scope for
technological break-through is limited.
– The company carries a risk of product
obsolescence.
– Helps firms which are not comfortable with
unfamiliar terrain.
85
MARKET DEVELOPMENT

 It is a strategy where a firm tries to achieve growth by


finding new uses for existing products or its close
variants and tap a new potential customer base
altogether. (Eg. Du Pont – nylon: parachutes, socks &
stockings, fabrics, tyres, upholstery, carpets,……).
– The firm should be creative and innovative –thinking
out of the box.
– Unconventional and flexible channels of distribution.
– Move across geographical boundaries.
– It is a classical case of re-engineering.

86
PRODUCT DEVELOPMENT

 It is a strategy where a firm tries to achieve growth


through a new product or an improved version of an
existing product or its variant to repeatedly enter the
same market. (Eg. Honda – bikes, cars, generators, lawn
mowers).
– Leverage on customer loyalty.
– Areas of product improvement – quality, features,
styling.
– Ensure high reach through advertising and
promotion.
– Product development with related technologies – core
competencies.

87
DIVERSIFICATION

 It marks the entry of a firm into newer markets with


new products, thereby creating a new business. The
new business is distinct from the existing business in
terms of – inputs – technologies – markets. More
importantly they are strategically dissimilar.
 Why do firms diversify?
– Risk reduction.
– High transaction costs and institutional gaps.
– Economies of size, scale, and scope.
– Conglomerate power.
– Internal capital market.
– Permits - quotas, licenses.

88
HOW DIVERSIFICATION REDUCES
RISK?
Consider a hypothetical planet, in which a given year is
either under hot or cold wave, either of which is equally
likely to prevail. Let us assume that there are two
businesses constituting the entire market – coffee and
ice-cream. If the hot wave dominates the planet, the ice-
cream business would register a return of 30%, while the
coffee business would register a return of 10%. If on the
other hand, cold wave dominates the planet, ice-cream
business would register a return of 10%, while the coffee
business would register a return of 30%. What would be
your diversification strategy?

89
SOLUTION

If we invested in only one of the two companies, our


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

90
WHAT GUIDES DIVERSIFICATION
SUCCESS?
 The newly formed business should be consistent with
the dominant logic of the group. Businesses which are
not consistent are said to be opportunistic. Conclusion:
Higher the strategic fit; better the performance.
 The countermanding logic –
– Appropriate and timely response.
– Better strategic and operational control.
– Unlearning and learning of new skill sets.
– Resource commitment from top management.
– Development of capabilities & competencies.
– Override the industry context.

91
HORIZONTAL DIVERSIFICATION
 It takes place when a company enlarges its scope
of operations by getting into businesses which
provides a feeder services to its existing businesses
(Eg. Reliance). On the other way existing business
may recreate new businesses, which are distinct,
but strategically related (Eg. Bajaj – scooters to
motorcycles).
– It results in increasing market power.
– Distinctive capabilities extended to other areas.
– Resources can be shared for mutual benefit.
– Reduces economic risk, because of differences in
business cycles.
92
HORIZONTAL DIVERSIFICATION -
RELIANCE

Reliance Capital

Reliance Reliance Industries Reliance Ports


Infrastructure

Reliance Power
93
VERTICAL DIVERSIFICATION

 It allows a firm to enlarge its scale of operations either


in a backward business process or in a forward one.
Backward integration occurs when the company starts
manufacturing its inputs. Advantages of backward
integration –
– Cost competitiveness – entry barrier.
– Better operational control – timely supplies, quality
control, coordination – JIT.
Disadvantages of backward integration –
– It may spark of a chain reaction.
– High gestation (i.e. investment in fixed assets)

94
VERTICAL DIVERSIFICATION -
RELIANCE
Oil & Gas exploration

Naptha-cracking
Acetic Acid
Paraxylene (PX)
(PTA) (MEG)
Purified tetra-pthalic Mono-ethylene glycol
acid
Polyester Filament Polyester Staple Fibre
Yarn (PFY) (PSF)
Textiles 95
QUASI & TAPERED INTEGRATION

 Full Integration - Where one firm has full ownership and


control over all the stages in the production of a product
(Eg. Reliance).
 Quasi-integration - A firm gets most of its requirements
from one or more outside suppliers that is under its
partial ownership and control (Eg. Maruti – Sona
Steering).
 Tapered integration - A firm produces part of its own
requirements and buys the rest from outside suppliers
with a variable degree of ownership and control. Usually
the firm concentrates on its core activities, and out-
sources the non-core activities.

96
A CASE OF TAPERED INTEGRATION

Very Critical Critical

Zero Ownership
Component Component
s s

Components
Full Ownership
Partial

Ordinary
Ownershi
p

Transmission

Engine Design Electricals


Steering
Windscreen Seats & Carpets
97
CONGLOMERATE DIVERSIFICATION

 It relates to businesses which are distinct in


terms of businesses as well as strategically
unrelated. Companies usually engage in
conglomerate diversification when industry
characteristics are very attractive. Drawbacks
of unrelated diversification –
– Cost of ignorance.
– Cost of failure (i.e. lack of foresight)
– Cost of neglect (i.e. core business).
– Cost of dysynergy (i.e. synergies pulling in
opposite directions).
98
CONGLOMERATE DIVERSIFICATION -
ITC

Paper & Packaging

Edible Oils Tobacco Hotels

Food & Confectionary


99
DIVESTMENT

 Divestment is a defensive strategy involving the sale


of a business (Eg. Bisleri) in full to an independent
entity. It is usually taken into account when
performance is disappointing and survival is at stake
and nor does the firm have the resources to fend off
competitive forces. It may also involve a product (Eg.
Glaxo’s “Glucon-D” to Heinz) ; or an SBU (Eg. L&T
-Cement Division to Aditya Birla Group) technically
known as divestiture.
 It is may also be a pro-active strategy, where a
company simply exits because the business no
longer contribute to or fit its dominant logic. (Eg.
Tatas sale of Goodlass Nerolac, Tata Pharma, Tata
Press, ACC).
100
DIVESTMENT - ROUTES

– Outright Sale – Popularly known as the asset


route; where 100% of the assets (including
intangibles) are valued and paid for. (Eg. Sale of
Diamond Beverages to Coca-Cola for US $ 40
million).
– Leveraged Buy-Out (LBO) – Here the company’s
shareholders are bought out through a
negotiated deal using borrowed funds. (Eg.
Tatas buy-out of Corus for US $ 11.3 billion,
involving 608 pence per share).
– Spin-Off – A spin off is the creation of a new
entity; where the equity is allotted amongst the
existing shareholders on a pro-rata basis. 101
COMBINATION STRATEGY

 It is a mixture of stability, growth, and divestment


strategies applied simultaneously or sequentially
for a portfolio of businesses (i.e. business group).
 It is usually pursued by a business group with
diverse interests.
 There can be no ideal strategy for every business.
Because every business has its own unique
business and economic cycle.
 The most popular models used to determine
corporate strategies for a business group – BCG
Model, GE Matrix, Arthur’ D. Little, and Shell.

102
STRATEGY CHOICE

103
WHAT IS A BUSINESS GROUP?
Parent Company

Firm 1 Firm 5

Firm 3

Firm 2 Firm 4 104


BUSINESS GROUP - DEFINITION

 A business group is known by various names in


various countries – guanxique in China, keiretsus
in Japan, chaebols in Korea, business houses in
India. They share some similar characteristics –
– Their origins can be traced back to market
imperfections existing in an economy (MRTP
Laws, Licenses & Quotas).
– High degree of centralised control (GEO, BRC).
– Resource sharing.
– Formal and informal ties.

105
BCG GROWTH MODEL

Relative Market Share (%)

High Low

?
Industry Growth
High

Stars Question Mark


(%)
Low

Cash Cow Dogs


106
BUSINESS ANALYSIS – TATA GROUP

 Stars – They have enormous potentials in the long term,


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

107
BUSINESS ANALYSIS – TATA GROUP

 Cash Cow – These are matured businesses, and


the company dominates the industry ahead of
competition (i.e. stability). Given that the growth
potential in the business is low, they are
generators of resources. However, cash cows may
also need to invest provided the industry takes an
upswing (Eg. Tata Motors, Tata Chem, TISCO).
 Dogs – They are a drag on the group, and they
lack on competencies to take on competition and
are basically cash traps (Eg. Nelco, Tata Pharma).
Groups prefer to dispose such businesses (i.e.
divest).
108
GE - MATRIX

Distinctive Capabilities
Strong Medium Weak
High

Diversify (++)Intensify (+) Stability


Attractiveness
Med
Industry

Intensify(+) Stability Harvest(-)


Low

Stability Harvest(-) Divest (- -)

109
ARTHUR’ D. LITTLE
Inception Growth Maturity Decline

Dominant Invest Consolidate Hold

Competitive Position
Strong Improve

Favourable Selective Harvest

Tenable Niche

Weak Abandon Divest

Industry Life-Cycle 110


SHELL – DIRECTIONAL POLICY
MATRIX (DPM)
Business Sector Prospects
Attractive Average Unattractive
Distinctive Capabilities

Market Generate
Strong Growth
Leadership Cash

Try Phased
Custodial
Average Harder Withdrawal

Double
Phased
Or Expand Divest
Withdrawal
Weak Quit
111
STRATEGIC CHOICE – SUBJECTIVE
FACTORS
 Commitment to past strategies - Inertia.
 Attitude towards risk.
– Risk averse managers.
– Risk prone managers.
 Degree of external dependence.
 Internal political considerations.
 Timing – Pressures, Frame, Horizon.
 Corporate culture.
 Competitive reactions.
 Organisation structure.
112
STRATEGIC CHOICE – MACRO TIMING

Recession
(Divestmen
Prosperity t)
(Diversificatio
n)

Depressio
n
Recovery
(Stability)
(Intensification
)

113
STRATEGIC CHOICE – MICRO TIMING
Re-
Engineering

Maturity -
Growth (%)

Diversification
Decline - Divestment

Growth -
Expansion

Inception -
Stability
Duration (Yrs) 114
COMPETITIVE STRATEGY

115
GENERIC STRATEGIES

 A generic strategy deals with how a firm competes in


a particular business. The principal focus is on
meeting competition, protecting market-share, and
earning super-normal profits.
 The strength of a firm in a particular business usually
stems from its competitive advantage. Competitive
advantage refers to a firms resources or activities in
which it is way ahead of competition.
 Such resources or activities should be distinctive and
sustainable over time.
 Firms usually build competitive advantage by
initiating certain unique steps.

116
GENERIC STRATEGY - TYPES

 Cost Leadership – It is a strategy that focuses on


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

117
GENERIC STRATEGY - TYPES

 Product Differentiation – It is a strategy that


attempts to develop products and services that are
differentiated from competitive products in terms of
value proposition. Usually product differentiation is
followed by premium prices. (Eg. Intel, CitiBank,
Sony). Sources of product differentiation -
– High on brand loyalty.
– Unique or package of features, services.
– Investment in R&D, creativity & innovation.
– Patents & Copyrights.
– Market Penetration & Distribution Channels.
– Undeterred attention to quality.
118
GENERIC STRATEGY - TYPES

 Focus / Niche – It is a combination strategy of cost leadership


or product differentiation targeting a specific market or buyer
segment (Eg. Rolex, Mercedes, Mont-Blanc, Cartier, Gucci,
Armani). Sources of focus –
– Brand image.
– Matured customer base.
– The customer takes pride in the product (i.e. sign of
prestige, power, and status).
– Pricing is a limited consideration.
– Limited editions (i.e. planned supply constraint).
– Avoiding brand dilution.

119
PORTERS MODEL OF COMPETITIVE
ADVANTAGE

Competitive Advantage
Cost Leadership Product Differentiation
Competitive Scope
Broad

Cost Leadership Differentiation


(Toyota) (General Motors)
Narrow

Differentiation
Cost Focus
Focus
(Hyundai)
(Mercedes)
120
EMERGING INDUSTRY
 Emerging Industry – An industry characterised by
radical environmental changes, changing customer
needs, technological innovations, ending in a
different cost economics. Eg. Digital photography
and printing. Reasons for emerging –
– High level of technological uncertainty.
– High initial costs, followed by steep cost
reduction.
– First-time buyers. Eg. i-Phones.
– Excessive turbulence in the environment.
– Unknown customer and market profile.
– Low penetration levels.
121
GENERIC STRATEGY
 Rapid industry changes - strategic uncertainty.
(Eg. Pricing in the telecom industry).
 Shaping industry structure.
 Be a market leader, not market follower.
 Strictly differentiation, not standardisation.
 Flexible supplier and distribution channels.
 Shifting mobility barriers.

122
FRAGMENTED INDUSTRY

 Fragmented Industry – An industry where no firm has


a significant market share. Reasons for fragmentation

– Low entry barriers. Eg. Detergents.
– Absence of economies of scale. Eg. Mineral Water.
– High level of creative content. Eg. Advertising &
Interior Designing.
– Local regulations. Eg. MRTP.
– Lack of bargaining power. Eg. Televisions.
– Diverse customer needs. Eg. Blue Star.
– High transportation costs. Eg. Cement, Fertiliser.

123
GENERIC STRATEGY

 Conduct industry wide analysis.


 Identify causes of fragmentation.
 Look for ways to overcome fragmentation.
 Assess consequences of overcoming
fragmentation.
 Locate a defendable position to take
advantage of industry consolidation.
 Primarily concentrate on differentiation, also
focus on cost advantages.

124
MATURE INDUSTRY

 Mature Industry – An industry characterised by imperfect


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

125
GENERIC STRATEGY

 Sophisticated cost analysis and correct pricing.


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

126
DECLINING STRATEGY

 Declining Industry – An industry which has outlived


its utility due to the entry of substitutes which
radically improves the cost-benefit relationship,
with no sign of recovery. Eg. Typewriters. Reasons
for decline –
– Slow to react to environmental changes.
– Adverse to investment in R&D.
– High exit barriers.
– Corporate espionage.
– Costly price wars.
– Not inducive for fresh investment.
127
GENERIC STRATEGY

 Leadership through takeovers and mergers.


 Identifying a niche sub-segment.
 Harvesting –
– Stop to fresh CAPEX.
– Curtailing working capital exposure.
– Minimising adhoc expenditures.
– Maintain a skeleton structure.
– Reducing product diversity.
– Curtailing distribution channels.
 Early divestment – Sell early before it becomes dead-wood.

128
COMPETITIVE ADVANTAGE

129
COMPETITIVE ADVANTAGE

 Strategy drives competitive advantage; competitive


advantage is the back-bone of any strategy.
 For a competitive advantage to sustain over time, it
should be of a higher order in relation to competition
(i.e. inimitable, sustainable).
 A durable and higher order competitive advantage in
turn rests on some fundamental and enduring
strengths, which is unique to the firm.
 Such distinct sources of competitive advantage are
referred to as core competencies. (Eg. miniaturisation
abilities of Sony, engine designing abilities of Honda).

130
HOW TO DEVELOP COMPETITIVE
ADVANTAGE?
 Building competitive advantage is the task of
the top management – Identify KSF’s.
 Internal appraisal and competition analysis
helps identify competitive advantage.
 Benchmarking – Internal, Functional,
Competitive, Generic.
 Value chain will be great of use in identifying
and building competitive advantage.
 Building competitive advantage is a conscious
long term process.

131
UNDERSTANDING VALUE CHAIN
 A value chain segregates a firm into
strategically relevant activities to understand its
cost behaviour.
 Competitive advantage arises by performing
these activities efficiently and differently.
 The sustainability of the value chain depends on
the degree of fit between the activities.
 Value chain significantly influences the
competitive scope. How it can be leveraged?
– Segment Scope
– Industry Scope
– Vertical Scope
– Geographical Scope 132
VALUE-CHAIN ANALYSIS

Infrastructure

Ad
Support

Human Resource Management

va
n
Technology Development

ta
ge
Procurement

e
Out Logistics

Mktg & Sales

Service
Operations

iv
In Logistics
Primary

tit
pe
m
Co
133
STRATEGIC FIT – THE PORTER WAY

 Fit is important because discrete activities result in


negative synergy.
– First order fit refers to simple consistency between
each activity and the overall strategy.
– Second order fit occurs when activities are
reinforcing.
– Third order fit refers to optimisation of effort.
 Competitive advantage arises from a fit across the
entire system of activities.

134
CORE COMPETENCE

 A core competence represents a fundamental,


unique and inimitable strength that –
– Cannot be replicated / substituted even by its
closest competitors.
– Contributes significantly to customer benefits.
– Can be leveraged across a wide range of
businesses.
– Can be sustained even in the long run.
 A core competence generally has its roots in
technology.
 Core competence implies stretching and
leveraging of resources and not outspending in
R&D.
135
Also Refer Slide: 266-268
COMPETITIVE ADVANTAGE - CORE
COMPETENCE

 A competitive advantage does not necessarily


imply a core competence; a core competence
always implies a competitive advantage.
 A competitive advantage may lead to superior
performance, a core competence usually does.
 A competitive advantage manifests from a
function; a core competence has its roots in
products or businesses.
 A competitive advantage is sustainable in the
short-medium term; a core competence is
sustainable even the long-term.
136
GAME THEORY

 The game theory was developed in 1944 by Oscar


Morgenstern. Subsequent work on game theory by John
Nash led to him to a Nobel prize in 1994.
 A game is a contest involving two or more players, each of
whom wants to win. In a game (similar to a business) one
players win is always another's loss. This is known as a
zero sum.
 Here the magnitude of gain offsets the magnitude of loss
equally.
 However, the stringent assumptions of game theory and
difficulty in ascertaining of pay-offs makes game theory
application difficult in business.

137
BIASED AND UNBIASED GAME

 A game is said to be biased when one of the


players have a disproportionate chance of
winning.
Firm Y’s Strategy
Firm X’s Strategy

Use Radio Use Newspaper

Use Radio +2 +7

Use Newspaper +6 -4

Firm X’s Pay-Off Matrix


138
PURE STRATEGY GAME

 In a pure strategy game, the strategy each


player follows will always be the same
regardless of the other players strategy. A
saddle point is a situation where both the
players are facing pureFirm
strategies.
Y’s Strategy
Saddle Point
Firm X’s Strategy

Use Radio Use Newspaper

Use Radio +3 +5

Use Newspaper +1 -2
139
Firm X’s Pay-Off Matrix
BLUE OCEAN STRATEGY

140
TWO WORLDS - MARKETSPACE

141
WHAT IS RED OCEAN?

 Companies have long engaged in head-to-


head competition in search of sustained,
profitable growth. They have fought for
profits, battled over market-share, and
struggled for differentiation.
 Yet in today’s overcrowded industries,
competing head-on results in nothing but a
bloody red ocean of rivals fighting over a
shrinking profit pool.

142
WHAT IS BLUE OCEAN?

 Tomorrow’s leading companies will succeed not


by battling competitors, but by creating blue
oceans of uncontested market space ripe for
growth . Such strategic moves - termed value
innovation - create powerful leaps in value for
both the firm and its buyers, rendering rivals
obsolete and unleashing new demand.
 Blue Ocean Strategy provides a systematic
approach to making the competition irrelevant,
by creating uncontested marketplace…………

143
RED OCEAN Vs BLUE OCEAN

Compete in existing markets


Compete in uncontested markets

Beat the competition Make the competition irrelevant

Exploit existing demand Create and capture demand

Make the value cost tradeoff Break the value cost tradeoff

Supply is the defining variable


Demand is the defining variable

144
RECONSTRUCT MARKET BOUNDARIES
Structures
Industry Within
Beyond
Competitiveness Short - Medium
Long
Buyer Group Serving
Redefining
Issues

Scope Forecast
Dream

Orientation Improving Value


Shifting Value

Time/Trends Reactive Proactive


145
BLUE OCEAN STRATEGY -
IMPERATIVES
 Globalisation.
 Supply exceeding demand.
 Accelerated product life-cycles and obsolescence.
 Commodification of products.
 Learning curves getting saturated.
 Branding becoming more and more difficult.
 Increasing price-wars.
 Shrinking profit margins.
 Efficiency and effectiveness reaching a plateau

146
BLUE OCEAN STRATEGY

 Examining a wide range of strategic moves


across a host of industries, Blue Ocean Strategy
highlights the six principles that every company
can use to successfully formulate and execute
blue ocean strategies.
 The six principles show how to reconstruct
market boundaries - focus on the big picture -
reach beyond existing demand - get the
strategic sequence right - overcome
organizational hurdles - and build execution into
strategy.

147
THE CORE PRINCIPLES

Reconstruct market
boundaries
… overcome beliefs.

Reach beyond
existing demand COST

… go for uncontested space. VI

VALUE
Get the strategic
sequence right
… value (innovation) first. 148
VALUE INNOVATION – GREENER
PASTURES
Reduce
Which factors
to be reduced
below the industry
standard

Eliminate Create
A new
Which of the industry
factors that the industry
value Which factors should be
created that the
takes for granted curve industry has not
should be eliminated offered

Raise
Which of the factors
should be raised above
the industry’s standard 149
REACH BEYOND EXISTING DEMAND

Core Customer Non Costumer

Soon-to-be-NC Refusing Customer

150
RISK IN BLUE OCEAN

Formulation Risks Formulation Principles

Search Risk Reconstruct market boundaries

Planning Risk Focus on the big picture

Scale Risk Reach beyond existing demand

Business Model Risk Get the strategy sequence right

Execution Execution Principles


Risks
Organizational Risk Overcome key hurdles

Management Risk Motivation


151
BLUE OCEAN STRATEGY SEQUENCE

Buyer Utility Price

Is there exceptional buyer Is your price easily accessible


utility in your business idea? to the mass of buyers?

A Commercially Viable Blue Ocean Strategy

Adoption Cost
What are the adoption hurdles in
actualizing your business idea? Can you attain your cost
Are you addressing them up target to profit at your
front? strategic price? 152
STRATEGY
IMPLEMENTATION

153
STRATEGY IMPLEMENTATION
 It relates to transforming strategy formulations into
practices. Performance realisation of a strategy
depends on the effort behind it to move it forward.
Successful implementation depends on the
appropriateness of the strategy. It requires –
– Strategy activation.
– Full commitment of the top management.
– Optimum resource allocation; including its
stretching and leveraging.
– Proactive leadership and motivating employees.
– Compatible organisation structure.
– Strategic evaluation and control.
154
STRATEGY IMPLEMENTATION -
ROUTES

Strategic Fit - High Organic Growth

Strategic Alliance

Joint Venture

Mergers & Acquisition

Strategic Fit - Low Take Overs


155
ORGANIC GROWTH

 Here a corporate builds up its facilities right from


the scratch and continues without any external
participation. The entire infra-structural facilities
are set up afresh having its own gestation, i.e.
green-field projects. (Eg. Reliance Industries).
– It has complete control over inputs, technologies,
and markets.
– Govt. concessions are available for green-field
projects. (Eg. SEZ’s, Tax holidays).
– Long gestation leads to delayed market entry.
– Risk of cost and time overruns.
– Develop competencies.
156
STRATEGIC ALLIANCE

 It involves a pro-active collaboration between two


companies on a particular domain or function. It
touches upon a limited aspects of a particular
business. Alliances are usually in the areas of
technologies or marketing . (Eg. Reliance &
DuPont; Tata Motors & Fiat).
– There is no funding or equity participation.
– Both the companies continue to operate
independently.
– It is short-term; lacks committment.
– It intends to do away with competition by
joining a common platform (i.e. capabilities). 157
JOINT VENTURES

 A joint venture involves a equity participation between two


companies usually of similar intent in a particular business.
It is a win-win situation for both the companies. (Eg. DSP
Financial Vs Merrill Lynch).
– For a joint venture to be successful the dominant logic of
both the companies should match.
– Selecting the right partner is critical for success.
– A comprehensive MOU is essential.
– Degree and extent of management control must be
clearly laid down.
– Significant linkages in value-chain.

158
MERGERS & ACQUISITION

 It refers to the fusion of two or more companies into a


single entity. Size and synergy are the two main
considerations in mergers; it strengthens overall
competitiveness. (Eg. Brooke Bond Vs Lipton - HUL)
– Economies in scale and scope through larger capacities.
– Integrated distribution channel leads to better market
penetration (i.e. synergy).
– Integration of assets and other financial resources.
– Revival of a sick-unit through better management
practices.
– Humane side should be handled properly (i.e. structure).

159
TAKE OVERS
 It refers to the acquisition of significant
management control by buying out a majority stake
in the equity of the company (Eg. TISCO Vs Corus).
– A company seeking to acquire control has to
inform SEBI and make a public offer of not less
than 20% of the balance equity (Also Refer Slide: 231).
– Hostile takeover.
– Instant access to capacities and markets.
– Integration of organisation cultures becomes a
difficult exercise.
– Geographical spread.
– Consolidation in a fragmented industry.
160
RESOURCE ALLOCATION
 Resources include physical resources (Eg. land, labour,
machines), intangible resources (Eg. brands, patents), and
distinctive capabilities and competencies. The various
methods of resource allocation includes –
– Historical Budget – The budgets framed by SBU heads
for a particular business keeping in mind past trends.
– Zero Based Budget – In this case the budget of a SBU
has to worked out from the scratch.
– Performance Budget – Here the act of allocation is a
function of the performance of the SBU.

161
STRATEGY & STRUCTURE
 An appropriate organisation structure is essential to implement strategies and
achieve stated goals. It refers to the ways authority and responsibility is allocated
to individuals and groups. The following considerations are to be kept in mind –
– Size – An organisation grows steeper its size increases.
– Complexity – An organisation grows flatter as its business process complexity
increases.
– People – An organisation grows flatter as people become more matured.
– Technology – An organisation grows flatter as it becomes more technology
inducive.

162
TYPES OF STRUCTURES

 Functional Structure – Activities grouped together


by a common function.
 Divisional Structure – Units grouped together in
terms of products and divisions.
 Strategic Business Units – Businesses segregated
in terms of distinct strategies.
 Project / Matrix Structure – A team formed for the
completion of a particular project; with team
members having dual line of control.
 Team Structure – An informal group formed for a
crisis, based on skills and competencies.
 Virtual Structure – A boundaryless organisation.
163
MOTIVATION & LEADERSHIP
 To bring about change and to implement strategies
successfully, companies depend on
transformational leaders.
– Design a well crafted and designed strategic
intent of the organisation.
– Pragmatism is the ability to make things happen
and achieve positive results.
– He should be an agent of change.
– Install a system of shared beliefs and values.
– Shift from compliance to commitment.
– Bring about transparency.

164
THE STRATEGIC FIT – 7S
 Shared Values – It represents the dominant logic of
the top management.
 Strategy – A trade-off aimed at gaining competitive
advantage.
 Structure – An organisation chart that represents how
tasks are divided and integrated.
 Style – The way in which the top management
influences the functioning of an organisation.
 Systems – It represents the flow of activities.
 Staff – The basic values and beliefs of employees.
 Skills – An organisations capabilities and
competencies.
165
MC KINSEY 7-S FRAMEWORK: TOM
PETERS

Strategy

Structure Systems

Shared Values

Skills Style

1st Order Fit


Staff
2nd Order Fit 166
3rd Order Fit
FUNCTIONAL STRATEGIES
 A functional strategy aims at performing a function
differently from its closest competitors. Linkages
occur in any one or more functional area. However,
sustainability of functional strategies are very low.
It involves -
– The strategic choices are smoothly implemented
across all divisions.
– The various divisions are bound by a set of
integrated policies.
– Better coordination of work flow at various levels
of hierarchy.
– Reduces friction, induces synergy.
167
MARKETING STRATEGIES
 Segmentation – It involves dividing the market into
distinct groups of buyers on the the basis of income,
location, benefits, age, psychographic. It can be
differentiated, undifferentiated or concentrated (Eg.
Ujala, Colorplus, Sumeet).
 Positioning – It is an act of designing the company’s
offerings and image to the target market, to portray the
company’s standing vis-à-vis its competitors, USP.
 Pricing – It involves determining the price to be paid by
the consumer in relation to costs, demand, taxes, and
competition.
 Distribution – It concerns specific objectives in terms of
market coverage.

168
FINANCE STRATEGIES
 Procurement of Funds – It ensures adequate and
regular supply of capital at a competitive cost of
capital. (Eg. The Tatas enjoy one of the lowest
cost of debt by virtue of the immense trust their
name generates). It involves fixed as well as
working capital through a mix of debt and equity.
 Utilisation of Funds – It involves applying various
discounting criteria to appraise, rank and select
projects in order of their merit. It also includes
decisions like make, buy or lease. (Eg. When
Reliance selects a project, they saturate it with
resources as much it can absorb. For them time
lost is more important than costs).
169
HR STRATEGIES
 Recruitment – It is a process of creating an
challenging environment to link the best people
with the jobs to be filled (Eg. Infosys).
 Selection – It is the process of picking the right
people to fill up jobs in an organisation.
Sometimes it is also a process of elimination. (Eg.
Aptitude & Psychometric Tests).
 Placement – The broad objective is to put the
right person in the right job. For mid-level
placements experiences relating to previous
organisation cultures is an important criteria. (Eg.
Learning & unlearning of skills).
170
STRATEGIC CHANGE

Market Imperfection A major shift in the


company’s course of
Prior to 1990 action.

Dominant Logic Strategy

Post 1990

Industry & Group


Characteristics
171
MANAGING STRATEGIC CHANGE -
INERTIA
 When a corporate has been operating in a certain
fashion for a long time, there is a tendency to
continue along the same lines. Inertia is a basic
characteristic of an organisation that endures
status quo. It is retards the process of strategic
change. Changes in top management and
unlearning helps overcome inertia. Sources of
inertia –
– Complacency with past successes.
– Paradigms & conventional beliefs.
– Pattern recognition processes.
– Reliance based on limited heuristics.
172
STRATEGY EVALUATION
 Strategy evaluation centers around assessment of strategic
fit. Since the internal and external environment is in a state
of continuous flux, strategies need to be evaluated on a
continuous basis to prevent deviations of fit.
 Deviation of fit is detrimental to performance.
 To prevent deviation of fit, corporates should move beyond
traditional measures of performance (i.e. Returns, EPS,
Margins) to strategic performance.
 Strategic performance focuses on market share,
implementation delays, response time.

173
STRATEGY CONTROL
 It is concerned with trafficking a strategy as it is being
implemented detecting changes in the external and
internal environment and taking corrective action
wherever necessary. (Eg. Reliance Infocomm’s pricing
strategy). It attempts to answer questions such as –
– Are the organisations capabilities still holding good?
– Is the strategic intent appropriate to the changing
context?
– Has the company acquired any new competency?
– Has the company been able to overcome the
environmental threats.
– Are competitive advantages becoming competitive
disadvantages?

174
IMPLEMENTING STRATEGY CONTROL

 It involves steering towards the company’s original


course of action.
– Premise Control – Checking the validity of the
assumptions on which a strategy is based.
However, checking every premise is costly as well
as difficult.
– Implementation Control – It aims at assessing
whether key activities are proceeding as per
schedule. It involves assessing – strategic thrusts
and milestones.
– Special Alert Control – It intends to uncover
unanticipated information having critical impact on
strategies. It is open-ended as well as unfocussed.

175
MANAGEMENT TOOLS
IN STRATEGY

176
WHY MANAGEMENT TOOLS?

 Change is becoming pertinent in the external


environment. Radical change is superseding
incremental change. The past is ceasing to be
an indication of the future. Change provides
enormous opportunities; it is also a source of
potential threat. Companies therefore need to
adapt to the environment to stay ahead in
competition. Some tools to ensure that –
– Benchmarking – Adopt certain best practices.
– Reengineering – Redesigning work processes.
– TQM – Doing the right thing the first time.
– Balanced Scorecard – Tracking strategy. 177
BENCHMARKING

 A best practice is defined as an activity performed by a


company in a particular domain or function which
distinguishes it from others and making them world-class.
 These exemplary practices involves the stakeholders of the
company and helps achieve its strategic intent.
 Best practices centers around looking at a different way to
satisfy various stakeholders.
 Benchmarking involves the identification, understanding and
adapting of certain best practices and implementing them to
enhance performance.

178
SOME BEST PRACTICES

 Dell: Customised configuration of computers.


 Caterpillar: 48 hours delivery.
 Axis Bank: Priority banking services.
 Maruti: Certified “true value” cars.
 Microsoft: ESOP to employees.
 Infosys: Video conferencing potential employees.
 TCS: Referencing potential employees.
 ITC: Shareholders factory visit.
 AmEx: Outsourcing data mining.
 MARG: Set-top box to understand viewing patterns.
 Honda: CEO’s visit to dealers.

179
WHAT TO BENCHMARK?

 Functional – Used by companies to improve a particular


management activity. Eg. Motorola learnt delivery
scheduling from Domino’s.
 Process – Improving specific key processes and
operations from experiences in similar businesses. Eg.
Ford adopting assembly lay-out plan of Toyota.
 Competitive – It involves assessing the sources of
competitive advantage and imitating them. Eg.
Samsung leveraging miniaturisation skills of Sony.
 Strategic – It involves assessing business models and
replicating them. Eg. Reliance replicating AT&T business
model.

180
HOW TO BENCHMARK? APPROACHES

 Phase 1: Planning
– What to benchmark?
– Whom to benchmark?
– Identify key performance indicators.
– Data source.
 Phase 2: Analysis
– Assessment of performance gaps.
– Predict future performance levels.
 Phase 3: Integration
– Communicate findings and gain acceptance.
– Establish functional goals and implementation plans.

181
HOW TO BENCHMARK?

 Phase 4: Action
– Implement and monitor progress.
– Measure results against stakeholder wants
and needs.
– Recalibrate benchmarks.

182
WHOM TO BENCHMARK?

 Selecting the benchmarking partner is critical to


solving the problem. Firms should generally avoid
selecting the industry leader, because it may not
always adopt the best practices for every process or
activity. Benchmarking partners may also be from
unrelated industries. Types –
– Internal – It involves benchmarking against its
own branches, divisions, SBU’s.
– External – It involves benchmarking against firms
that succeeded on account of their best practices.
– International - It involves benchmarking against
world-class firms.

183
BENCHMARKING - ADVANTAGES

 Finding better ways of meeting stakeholder


needs.
 Establishing goals based on formal assessment
of external conditions.
 Defining effective measure of indicators.
 Ensuring a learning organisation.
 Reducing competitive disadvantage.
 Organisational turnaround.

184
BENCHMARKING - LIMITATIONS

 More and more companies benchmark, the more


similar they end up looking. While strategy is all
about differentiation.
 Benchmarking is useful for bringing about operational
efficiency; but it cannot be used as a strategic
decision making tool. It can at best complement it.
 Strategy is more of creating best practices rather
than copying them.
 Benchmarking merely reorients profits in the hands
of few to profits in the hands in the hands of many
(i.e. clustering). It does not shifts the growth
trajectory of the industry as a whole.

185
RE-ENGINEERING

 Redesigning leads to identification of superfluous


activities and eliminating them (i.e. business
mapping, Eg. single window clearance).
 Re-engineering attempts to radically change an
organisational products or process by challenging the
basic assumptions surrounding it, for achieving
performance improvement (Eg. DOS to Windows)
 Re-engineering involves complete reconstruction and
overhauling of job descriptions from the scratch (i.e.
clean sheet).
 The task demands a total change in organisational
culture and mindset.

186
REENGINEERING – KEY TENETS

Large scale improvement by questioning


Ambition
basic assumptions about how work is done

Micro Vs Macro
Focus
Business Processes Vs Organisational Processes

Starting right from the scratch


Attitude
Not historical

Enabler More IT driven, than people driven

Innovative Vs Traditional
Performance
Customer centric Vs Organisational centric
187
REENGINEERING - LEVELS

 Reengineering can be successfully leveraged at all levels of


an organisation with varying degree of results. It can be of
the following types –
– Functional – It looks into the flow of operations (i.e.
structures, processes, etc) and supports the organisation
for the present.
– Business – It looks into markets, customers and suppliers
and protects the organisation from the future (i.e. BPR).
– Strategic – It looks into the process of strategic planning,
resource allocation and prepares the organisation for the
future (i.e. Proactive Vs Reactive).

188
REVERSE ENGINEERING

 It is a process by which a product is dismantled


and analysed in order to understand how the
product was designed and manufactured, with an
intention to copy it (Eg. Cheaper versions of Intel
chips and mother-boards manufactured in
Taiwan).
 It generally acts as a threat to innovation.
However, protection against RE can be had in the
following ways –
– Early entry advantages.
– High cost and time acts as a deterrent.
– Patenting.
– Causal Ambiguity. 189
STAGES IN REVERSE ENGINEERING

 Awareness – Recognising whether the product is found


to be worth the time, cost and effort necessary for the
purpose of reverse engineering.
 Actualisation – Obtaining and dismantling of the
product to assess how it functions.
 Implementation – Developing of a prototype, designing
facilities, machine tools to convert ideas into a
marketable product (i.e. nano-technology).
 Introduction – Launching the product in the market.
Usually in such cases segmentation and pricing is
different from the original innovator.

190
WHAT IS QUALITY?

 It involves the totality of a product or service to meet


certain stated or implied needs. It has the following
dimensions (Eg. Car) –
– Performance – Mileage of 14 kms to a litre of fuel.
– Features – Anti-lock braking systems, Air bags.
– Reliability – Consistency in mileage.
– Conformance – Preset standards - BIS.
– Durability – 1980 manufactured cars still on road.
– Serviceability – Large no. of service stations.
– Aesthetics – Appeal in design.
– Perception – Customer notions.
191
TOTAL QUALITY MANAGEMENT

 Objective – Management of quality ensures


zero defect products, reduces time and cost of
reworking and ensures good market standing.
 Management of quality was traditionally
inspect it - fix it in nature, touching upon a
limited aspect of a production process. It had
little impact on improving productivity.
 TQM is a way of creating an organisation
culture committed to the continuous
improvement of work processes – Deming.
 It is deeply embedded as an aspect of
organisational life. 192
TQM – KEY TENETS

 Do it right the first time – From reactively


fixing products to proactively preventing it.
 Be customer centered – Generate the concept
of - internal customer.
 Kaizen – Make continuous improvement a way
of life. Looking at quality as an endless
journey; not a final destination.
 Empowerment – It takes place when
employees are properly trained, provided with
all relevant information and best possible
tools, fully involved in decision-making and
fairly rewarded for results. 193
TQM - TECHNIQUES

 Outsourcing – It is the process of self-


contracting services and operations which are
routine and mundane, enabling the firm to
concentrate on core activities.
 Quality Circles – It a small group of shop-floor
employees who meet periodically to take
decisions regarding operational problems and
crises, saving precious top management time.
 SQC – It is a process used to determine how
many units of a product should be inspected to
calculate a probability that the total no. of
units meet preset standards (Eg. 6-Sigma). 194
BALANCED SCORE CARD

 Some interesting comments .........


– Efficiency and effectiveness is passé,
strategy implementation has never been
more important.
– Less than 10% of strategies effectively
formulated are effectively executed.
– In the majority of failures – we estimate
70% – the real problem isn’t (bad
strategy) ..... it’s bad execution.
Source: Fortune Magazine
Why CEO’s fail?

195
BARRIERS TO STRATEGY EXECUTION

 Vision and strategy not actionable – Utopian


ideas, difficult to translate into practice.
 Strategy not linked with goals and objectives –
Lack of coordination leading to negative
synergy.
 Strategy not linked to resource allocation –
Lacking commitment of top management.
 Performance measures are defective – What to
evaluate against? How to measure the
construct?

196
BSC - CONCEPTUALISATION

 A company’s performance depends on how it


measures performance. Most managers tend to rely
on traditional measures of performance having its
origin in finance (Eg. ROI, OPM, EPS) because they
are well tried and tested.
 All the above measures are subject to lead-lag
problems (i.e. poor response time).
 As a result modern managers tend to rely on
strategic measures of performance where lead-lag is
minimum (Eg. cycle time, defect ratio, market-share,
patents).
 BSC combines the traditional with strategic measures
of performance (i.e. cross functional integration).
197
BSC – KAPLAN & NORTON (1992)

 Firms more often have problems, because they have


too many. At the very onset managers must learn to
distinguish between operational and strategic ones.
 A BSC helps a manager to track and communicate
the different elements of company’s strategy. It has
four dimensions –
– How do customers see us?
– What must we excel at?
– Can we continue to improve and create value?
– How do we look to shareholders?
 The authors view that performance is organisational
and not people centric.

198
CUSTOMER PERSPECTIVE

GOALS MEASURES

Relative market share (%)


Products
% of sales from new Vs proprietary products

Timely deliveries and service


Supply
Customer credit analysis (i.e. ageing schedule)

% of key customer transactions


Preference
Ranking of key customer accounts

No. of visits or calls made


Relationship
% of bad debts
199
BUSINESS PERSPECTIVE

GOALS MEASURES

New capabilities and competencies


Skills
Implementation & gestation period

Bank and supplier credit limits


Excellence
Unit Costs / Conversion Ratio / Defect Ratio

Exposure No. of times covered in media

No. of new product launches Vs competition


Introduction
Product pricing Vs competition
200
LEARNING PERSPECTIVE

GOALS MEASURES

No. of new patents registered


Technology
Time to develop next generation products

Manufacturing Average and spread in cycle time

Focus % of products that equal 2/3 sales

Timing No. of product innovations


201
FINANCIAL PERSPECTIVE

GOALS MEASURES

Survival Cash flows

Success Growth in sales and profits

Prosper Return on Investment

Valuation Market capitalisation / PE ratio


202
BSC - IMPLEMENTATION
1
2
Mobilise change through
Translate strategy into effective leadership
operational terms

STRATEGY Make strategy a


continual process

3 4
Align the organisation Make strategy
to the strategy everyone’s job
203
BSC - ADVANTAGES

 Most often top managers face information


overload. As a result, they don’t know - what
they don’t know.
 The BSC brings together the different
elements of a company’s strategy at a glance.
 It helps translating strategy into practice (i.e.
sharing of vision).
 Shift from control to strategy (i.e. doing right
things instead of doing things right).
 Focus on cause not effects.

204
EFFICIENCY Vs EFFECTIVENESS

Ineffective Effective
Inefficient

Goes out of
Business Survives
quickly
Efficient

Dies
Thrives
Slowly

205
CORPORATE
RESTRUCTURING

206
RESTRUCTURING

 The only thing constant in today's business


environment is change. Radical change brings about
strategic variety. Strategic variety may be caused by
changes in the as external well as internal
environment.
 Strategic variety brings paradigm shift, from survival of
the fittest ....... to survival of the most adaptable.
 To adapt to the changing environment, firms use
restructuring strategies.
 Restructuring involves consciously driving significant
changes in the way an organisations thinks and looks
(Eg. Tata Group).

207
RESTRUCTURING – BASIC TENETS

 Customer Focus – Restructuring ideally begins and


ends with the customer. Company’s should go beyond
just asking what he expects. Instead, they should
strive to provide unimaginable value ahead of their
time (Eg. Walkman, Fax, ATM, etc).
 Core Business – Company’s should introspect – What
business are we in? Business evolved out of
opportunism or myopia should be divested, and
dividing the core businesses into SBU’s (i.e. down-
scoping).
 Structural Changes – Conventional hierarchical
structures should be disbanded in favour of more
flexible ones (i.e. downsizing or rightsizing).

208
RESTRUCTURING – BASIC TENETS

 Cultural Changes – A culture represents the


values and beliefs of the employees about the
organisation. Restructuring also requires
cultural orientation. It is created and
institutionalised by the top management (Eg.
During the times of JRD the Tatas were
considered a benevolent and charitable
organisation, ..... Ratan Tata now drives the
point the group means business.)
(Eg. Reliance dismantled their industrial
embassies ..... started focusing on their
capabilities.)
209
RESTRUCTURING - STRATEGIES

 Asset based Restructuring – The asset composition


undergoes a major change –
– Merger, Acquisition, Takeover – It may be vertical,
horizontal, or conglomerate. It may be smooth (Eg.
Mittal – Arcelor) or hostile (Eg. Chabria - Shaw
Wallace; Arun Bajoria – BBay Dyeing).
– Asset Swaps – It entails divesting and acquisition
simultaneously by two companies, where the
difference is settled off through cash (Eg. Glaxo –
Heinz).
– Hive Off – It can have two forms; spin-off and equity
carve. Further spin-off can be classified as split-off and
split-up.

210
HIVE OFF

 Spin-Off – A spin off is the creation of a new


entity; where the equity is allotted amongst the
existing shareholders on a pro-rata basis (Eg.
Reliance Ent).
– Split-Off – In a split-off, the existing
shareholders receive equity in the subsidiary in
exchange for the stocks of the parent
company.
– Split-Up – In a split-up, the entire parent
company loses its identity after being split into
a number of subsidiaries.
 Equity Carve – It involves selling a minority stake
to a third party while retaining control (Eg. Tata
Industries selling 20% stake to Jardine Matheson 211
for Rs. 120 million).
DIVESTITURE

 It involves the sale of a brand or a division of a


company to a third party, with full management
control. It may be sold for a combination of cash or
equity or both. Generic motives include –
– Raise working capital.
– Repay debts.
– Poor performance.
– Strategic misfit.
 In 2001, Tata Chemicals divested its detergents
and cements division but retained its soda ash,
salt, and urea division.
 In 2002, Grasim divested its Gwalior textiles unit.
212
RESTRUCTURING - STRATEGIES

 Capital Restructuring - The capital composition


undergoes a major change –
– LBO – Acquiring control over a substantially
larger company through borrowed funds (Eg.
Tatas take-over of Corus for US $ 11.3 billion,
involving 608 pence per share).
– Share Buyback – It is a process of cancellation of
shares out of free reserves to the extent of 25%
of paid-up capital (Eg. Wipro).
– Conversion – Replacing debt with equity or vice-
versa.

213
BUSINESS RESTRUCTURING – THE
TATAS

Divestments Diversifications
Lakme – Rs. 256 cr Tata Motors – Rs. 1700 cr
ACC – Rs. 950 cr Trent – Rs. 120 cr
Merind - Rs. 42 cr Tata AIG – Rs. 250 cr
Tata Timken – Rs 120 cr Tata Telecom – Rs. 1170 cr
Voltas - Rs. 230 cr Tata Tetley – Rs. 1890 cr
Goodlass Nerolac – Rs. 99 cr Tata Power – Rs. 1860 cr
CMC – Rs. 150 cr
VSNL – Rs. 1439 cr

214
RESTRUCTURING OUTCOMES
Short - Term Long - Term
Alternatives
Reduced labour Loss of
Organisational costs human capital

Reduced debt Lower


costs performance
Business

Emphasis on Higher
strategic control performance
Financial
High debt Higher
costs risk
215
NUMERATOR & DENOMINATOR
MANAGEMENT
 Most of the companies in the developing
economies are operating in saturated markets.
In order to put back the company on the right
track they are resorting to –
– Denominator – It assumes that turnover
cannot be increased hence go in for
downsizing, downscoping or asset sell off.
– Numerator – It assumes that turnover is not a
barrier; focuses on reengineering, reverse
engineering and restructuring.
 While DM yields results instantaneously; NM is
an effective option in the long run.
(Prahalad & Hamel, 1994)
216
RESTRUCTURING & FIRM VALUE

 Restructuring largely alters the value of a firm.


It primarily falls into three categories –
– Asset investments and sell-offs.
– Capital structure changes.
– Dividend policy changes.

217
TURNAROUND
MANAGEMENT

218
WHY TURN AROUND MANAGEMENT?

 Some interesting insights .......


– Only seven of the first fifty business groups
in 1947 were even in business by the turn of
this century, and that the thirty-two of the
country’s largest business groups in 1969
are no longer among the top fifty today.
– Less than 10% of the Fortune 500
companies as first published in 1955, still
exist as on 2005.
Source:
(Business Today, January 1997).
(Govindarajan and Trimble, 2006).
219
TURN AROUND MANAGEMENT

 It is a course of action that enables firms to consciously


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

220
ACTION PLANS – SHORT TERM

 Change in key positions.


 Be more customer centric.
 Recalibrate prices, based on elasticity.
 Product redesigning or reengineering.
 Revamp product portfolio.
 Focus on power brands, consider extension.
 Liquidating dead assets.
 Emphasis on promotion and advertising.
 Better internal coordination.
 Prune work-force (i.e. downsizing).
221
TURNAROUND PROCESS – STAGE
THEORY

Stage 1 Stage 2 Stage 3 Stage 4

Decline Initiation Transition Outcome


Performance

Success
Equilibrium Line

Failure
Nadir

Indeterminate

Time
222

Source: Shamsud D. Chowdhury, 2002


DECLINE (STAGE 1)

 Identify the theoretical perspectives that explains


performance decline –
– K-Extinction – It suggests that macro economic and
industry wide factors are responsible for decline. It
has its origin in I/O Economics and subscribes to
the view that a firm has little control over such
factors.
– R-Extinction – It suggests that organisation factors,
primarily dwindling resources and capabilities are
responsible for decline. It has its origin in SM and
subscribes to the view that a firm has substantial
power to override such factors.

223
INITIATION (STAGE 2)

 Initiation indicates the response of the firm with


regard to performance decline –
– Operational Response – Usually adopted in case of
K-Extinction. It focuses on improving overall firm
efficiency. It is short-term in nature.
– Strategic Response – Usually adopted in case of R-
Extinction. It is medium to long-term in nature. It
focuses on in order of priority –
 Financial Restructuring

 Asset Restructuring

 Business Restructuring

224
TRANSITION (STAGE 3)

 Transition usually reflects first signs of recovery.


However, substantial amount of time usually passes
before results begin to show (i.e. lead-lag).
However, many a times early signs of recovery
fades out. In this stage sustenance is the key
factor. Effective approaches –
– Empowerment, transparency.
– Top management as role model.
– Confidence building measures.
– Prompt decision making.
– Participative style of management.
– Austerity drive.
225
OUTCOME (STAGE 4)

 Outcome is said to be successful when the firm


breaches the equilibrium performance level.
Failure is an indication that initial momentum was
not sustainable characterised by irreversibility.
Effective indicators –
– Share price indications.
– Media coverage.
– Regaining lost market share.
– Commanding a premium in the market.
– Supplier and banker confidence.
– Revival of key customers.
– New launches.
226
JOINT VENTURES
&
STRATEGIC ALLIANCES

227
COOPERATIVE STRATEGIES

 Cooperative strategies are a logical and timely


response to strategic variety with the objective to
restore strategic fit and enhance performance. It
can take the following forms –
 Franchising
Low
 Licensing
 Consortia
Degree of
 Strategic Alliance
involvement
 Joint Venture High
 The form of cooperation depends on duration,
degree of involvement, legal regulations, risk,
size and technology involved in the project.
228
FRANCHISING

 Franchising – It is a contractual agreement between two


legally independent firms whereby the franchiser grants
the right to the franchisee to sell the franchisor’s product
or service or do business under its brand-name in a given
location for a specified period of time for a consideration.
 It is an effective strategy to penetrate markets in a
shortest possible time at a minimum cost.
– Switz Foods, owners of the brand Monginis allows its
franchisees to sell its confectionary products.
– Titan Inds, owners of the brand Tanishq allows its
franchisees to sell its jewellery products.

229
LICENSING

 Licensing – It is a contractual agreement between


two legally independent firms whereby the licensor
grants the right to the licensee to manufacture the
licensor’s product and do business under its brand-
name in a given location for a specified period of
time for a consideration. Different levels –
– Manufacturing without embracing any technology
(CBU).
– Develop a product, refine it and adopt necessary
technologies (SKD).
– Become a systems integrator (CKD).
 HM manufacturing GM range of cars in India with a
buy-back arrangement.

230
CONSORTIA

 Consortia – They are defined as large inter-locking


informal relationships between businesses in a
similar industry. Types –
– Multipartner – Intends to share an underlying
technology, leverage upon size to preempt
competition (Eg. Airbus – Boeing).
– Cross Holdings – A maze of equity holdings
through centralised control to ensure earnings
stability (Eg. Tatas, Mitsubishi, Hyundai).
– Collusion – Few firms in a matured industry collude
(i.e. bonding) to reduce competition (Eg. Coke –
Pepsi).

231
STRATEGIC ALLIANCE
 It is an short term understanding between two or
more firms in a similar business to share
knowledge and skills in a particular domain or
function for mutual benefit (Eg. Tata Motors –
Daimler Benz, Reliance – Du Pont).
 Generic motives involved are –
– Enable learning organisation.
– Design next generation products.
– Effective R&D management.
– Move up on the experience curve.
– Enhance credibility.
– Preempt competition.
232
STRATEGIC ALLIANCE - TYPES
 Collusion – Tacit top management understanding to
neutralise price wars (Eg. Coke – Pepsi).
 Complementary Equals – Two firms mutually
promoting each others complimentary products (Eg.
Whirlpool – Tide).
 Bootstrap – An alliance between a weak and a strong
company with an intention to acquire it.
 Alliances of the Weak – An alliance is entered into to
preempt competition (Eg. Airbus – Boeing).
 Backward – An alliance (quasi or tapered) with a
supplier of critical components seeking commitment
(Eg. Maruti).

233
JOINT VENTURE

 A joint venture is a long term association between two


equal partners to create an independent firm (SPV) by
complementing their resources and capabilities to
explore newer businesses or markets for achieving a
shared vision, whilst the partners continue to operate
independently.
– It aims at creating new value (i.e. synergy) rather
than mere exchange (i.e. combining parts).
– There are substantial linkages in the value-chain.
– It brings in synergy.
– It lasts till the vision is reached.
– Separation is very bitter.

234
JOINT VENTURE - GENERIC MOTIVES

 Entry into newer markets.


– Eg. Yamaha – Escorts, Eli Lily – Ranbaxy.
 Learning new technologies.
– Eg. TVS – Suzuki (4-Stroke Engines)
 Fill gaps in existing product lines.
– Eg. Renault – Nissan (Minivans – Cars).
 Endorsement from government authorities.
– Eg. Maruti – Suzuki.
 Sharing of resources.
– Eg. Essar – Hutch (Vodafone).
 Define future industry standards.
– Eg. Daimler – Chrysler (Premium Cars)

235
RISKS INVOLVED

 Incompatibility – Differences in background.


– Godrej – Procter & Gamble, Century - Enka.
 Risk of brain (i.e. technology) drain.
– Maruti – Suzuki.
 Risk of over dependence.
– Eg. LML - Piaggio
 Differences in size and resource base.
– Eg. Modi - Telstra
 What after exit (parenting disadvantage)?
– Eg. PAL - Fiat
236
PREREQUISITES FOR SUCCESS

 Commitment – Mutual trust, respect, time sharing.


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

237
MERGERS
&
ACQUISITION

238
MERGERS & ACQUISITION

 A merger is a mutually beneficial consent between


two or more firms (usually of similar size) to form
a newly evolved firm by absolving their individual
entities to preempt competition (Eg. Brooke Bond
– Lipton).
 An acquisition is the purchase of a firm by a firm
(of larger size) with a view to acquire
conglomerate power and induce synergy (Eg. HLL
– Tomco).
 An acquisition is said be smooth if it is with the
consent of the management (Eg. Tata – Corus)
and hostile if it is without the consent of the
management (Eg. Chabria – Shaw Wallace, Bajoria
– B’B Dyeing).
 Most countries have laws that prevents hostile 239
takeovers (Eg. SEBI Takeover Code, 2002).
SEBI TAKEOVER CODE, 2002

 Promoter – A person who has a clear control of


atleast 51% of the voting rights of the company.
 Stake – An acquirer who picks up an atleast 5%
stake without mandatory disclosure having an
intention to wrest management control (i.e. creeping
acquisition).
 Hike – An acquirer who has already picked up a 5%
has to make a mandatory disclosure for every
additional 1% stake.
 Preferential – A preferential allottee ending up
acquiring 5% stake also comes under its purview.
 Control – A special resolution of 75% of the
shareholders approving change of guard.

240
SEBI TAKEOVER CODE, 2002

 Pricing – Acquirers will have to offer minority


shareholders the past 26 weeks or past 2
weeks average price, whichever is higher as
an exit route (Eg. Grasim – L&T, Gujarat
Ambuja – ACC).
 Disclosure – All acquirers have to inform the
respective stock exchanges where it is listed
upon acquiring the basic limit and upon every
incremental limit thereon.

241
TYPES OF MERGERS

 A business is an activity that involves procuring of desired


inputs to transform it to an output by using necessary
technologies and creating value in the process.
 The type of merger is dependent on the degree of
relatedness between the variables.
– Horizontal – It involves integration of two highly related
businesses (Eg. Electrolux - Kelvinator).
– Vertical – It involves complimentarity (partially related)
in terms of supply of inputs or marketing activities (Eg.
Godrej, Reliance).
– Conglomerate – It involves integration of two distinctly
unrelated businesses (Eg. ITC).

242
MERGERS & ACQUISITION - MOTIVES

 Increased market power.


 Reduction in risk.
 Economies of size, scale and scope.
 Overcoming entry barriers (Eg. Tisco – Corus).
 Avoiding risk of new product development.
 Access to newer segments (Eg. Ranbaxy –
Crosslands).
 Reduced gestation (i.e. quick access).
 Tax benefits (Eg. ITC Bhadrachalam).
 Sharing of capabilities and competencies (Eg. ICICI
–ITC Classic).
 Global image (Eg. Mittal – Arcelor). 243
MERGERS & ACQUISITIONS -
PITFALLS
 Cultural differences.
 Overvaluation of buying firms.
 Merging of organisational structures.
 Inability to achieve synergy.
 Managing over-diversification.
 Managing size.
 Top management overtly focused on due
diligence exercise and negotiations; neglecting
core business.

244
PLC & MERGER TYPE

 Introduction – A larger firm may acquire a newly


formed firm with an objective to preempt new
competition or acquire its license.
 Growth – This stage may witness parallel merger of
two firms of similar size; or a larger firm may acquire
a growing firm with an objective to reinforce its
growth trajectory.
 Maturity – A larger firm acquires a smaller firm with
an objective to achieve economies of scale and
experience curve effects.
 Decline – Horizontal mergers are undertaken to
ensure survival; vertical to save transactions costs.

245
INTERNATIONAL M&A - FRAMEWORK

 Positive contribution to the acquired company.


 A common shared vision.
 A concern of respect for the business of the
acquired company.
 Left alone; active top management
intervention in phases.
 Blanket promotions across entities.

Source: Peter Drucker


246
INTEGRATION - BLUEPRINT

 Take the media into confidence.


 Shift attention from business portfolio to
people and processes.
 Decide on the new hierarchy; promptly. It will
enable focus on customers and key people.
 Redefine responsibilities and authority.
 Decide upon management control systems.
 Integrating work processes.
 Determine business strategy.

247
M&A - VALUATION

 The process of valuation is central to M&A.


From the financial point of view the following
motives may be considered –
– Undervaluation relative to true value.
– Synergy – Potential value gain from
combining operations.
– Market for corporate control.
– Unstated reasons – Personal self interest
and hubris.

248
VALUING OPERATIONAL SYNERGY

 Synergy – It refers to the potential value gain where


the whole is greater than the sum of the parts. Sources
of operational synergy -
– Horizontal Synergy – Gains come from economies of
scale which reduces costs; or from increased market
power which increases sales and margins.
– Vertical Synergy – Gains come from controlling the
supply-chain and savings in transaction costs.
– Conglomerate Synergy – Gains come when one firm
complements the resources or capabilities of
another (Eg. Innovative product – Good distribution
network).

249
VALUING FINANCIAL SYNERGY

 Diversification – Reduce variability in earnings by


diversifying into unrelated industries. However,
shareholders can accomplish the same at a much
lesser cost, and without paying take-over premiums.
 Cash Slack – It reduces asymmetry between cash
starved firms with deserving projects and cash cows
with no investment opportunities. Synergy comes
from projects which would not have been undertaken
if the two firms stayed apart (Eg. Hotmail).
 Tax Benefits – Tax benefits may accrue from tax
entitlements and depreciation benefits unutilised by a
loss making firm, but availed after being merged with
a profitable firm (Eg. ITC – Bhadrachalam Paper).

250
VALUING FINANCIAL SYNERGY

 Co-Insurance Effect – If the cash flows of the


two firms are less than perfectly correlated, the
cash flow the merged firm will be less variable
than the individual firms. This will induce higher
debt capacity, higher leverage, hence better
performance.
– Default risk comes down and credit rating
improves.
– Coupon rates may also be negotiated at
lower rates.

Source: Lewellen, 1971.


251
VALUING CORPORATE CONTROL

 Premium of M&A are often justified to control the


management of the firm. The value of wrestling control is
inversely proportional to the perceived quality of that
management.
– Value of Control = Value of firm after restructuring
– Value of firm before restructuring.
 The value of control can be substantial for firms that are
operating well below optimal value, since a restructuring
can lead to significant increase in value.
 While value of corporate control is negligible for firms that
are operating close to their optimal value.

252
LEVERAGE BUYOUT (LBO)

 The basic difference between a take-over and


a LBO is the high inherent leverage at the time
of buyout and rapid changes across time.
 Many private firms have been induced to go
public in the lure of –
– Access to financial markets.
– Increased liquidity.
– Continuous valuation.
– Media attention.
– Insignificant costs.
253
VALUING LBO

 However, off-late many publicly traded firms have gone


private keeping in mind the following –
– The fear of LBO.
– The need to satisfy analysts and shareholders.
– Separation of ownership from management.
– Increased information needs.
 A research study showed that 30% of the publicly listed
firms reported above average returns after going private.
The increased benefit showed in the following way –
– Reduced costs.
– Increased revenue.

254
RATIONALE FOR HIGH LEVERAGE

 The high leverage in a LBO can be justified by –


– If the target firm has too little debt (relative
to its optimal).
– Managers cannot be trusted to invest free
cash flows wisely.
– It is a temporary phenomenon; which
disappears once assets are liquidated and
significant portion of debt is paid off.
– Debts repaid off from increased value after
successful restructuring.
– Cost of debt coming down (i.e. co-insurance
effect). 255
EFFECT OF HIGH LEVERAGE

 Increases the riskiness of dividend flows to


shareholders by increasing the interest cost to
debt holders. Therefore, initial rise in leverage is
anticipated.
 As the firm liquidates assets and pays off debt,
leverage is expected to decrease over time.
 Any discounting has to reflect these changing
discounting rates.
 A LBO has to pass two tests to be viable –
– Restructuring to pay-off increased debt.
– Increase equity valuation.
256
REVERSE MERGER

 Reverse Merger – The acquisition of a public company,


which has discontinued its operations (i.e. shell) by a
private company, small in size but having a promising
business, allowing the private company to bypass the
usually lengthy and complex process of going public.
Objectives –
– Traditional route of filing prospectus and undergoing
an IPO is costly, time-barred, or costly.
– Prevents dilution of equity.
– Automatic listing in major exchanges.
– Tax shelter.

257
EFFECT OF TAKE-OVER
ANNOUNCEMENT
 The shareholders of target firms are the clear
winners.
– Takeover announcements reported 30% excess
returns.
– Merger announcements reported 20% excess
returns.
 Excess returns also vary across time periods.
During bearish periods excess returns were 19%;
and 35% during bullish periods.
 However, takeover failures have only initial
negative effects on stock prices. Most target firms
are taken over within (60-90) days.
258
EFFECT OF TAKE-OVER
ANNOUNCEMENT
 The effect of take-over announcement on
bidder firm stock prices are not clear cut.
– Most studies reported insignificant excess
returns around take-over offers or merger
announcements.
– However, in the event of take-over or
merger failures reflected negative returns to
the extent of 5% on bidder firm stock prices.

Source: Jensen and Ruback, 1983.


Bradley, Desai, and Kim, 1983.
Jarrel, Brickley, and Netter, 1988.
259
DEFENSIVE STRATEGIES

 Golden Parachute – An employment contract that


compensates top managers for loss of jobs as a
result of change in management control.
 Poison Put – Premature retirement of bonds at
attractive rates to pour surplus cash and make
target investment unattractive.
 Poison Pill – An offer to existing shareholders to buy
shares at a substantial discount to increase their
voting rights.
 Asset Stripping – The targeted company hives off
its key assets to another subsidiary, so that nothing
is left for the raider.

260
DEFENSIVE STRATEGIES

 White Knight – It is the placing of stocks to a cash rich


investor and bargaining for protection in return. But often
the White Knight turns a betrayer himself (Eg. Raasi
Dement – Indian Cements – Reliance).
 Pac Man – The target company makes a counter bid to take
over the raider company, thus diverting the raider
company’s attention.
 Gray Knight – The target company takes the help of
friendly company to buy the shares of the raiding
company.
 Green Mail – The targeted company buys large blocks from
holders either through premium or through pressure tactics
(Eg. Shapoorji Pallonji).

261
COMPETING FOR
THE
FUTURE

262
GETTING OFF THE TREADMILL

 Canon overpowering Xerox; Honda overpowering


Volkswagen; Nokia overpowering Motorola; Hitachi
overpowering Westinghouse; Wal-Mart overpowering
Sears; Compaq overpowering IBM. Are the
companies too preoccupied with the present than
the future?
 A survey Prahalad & Hamel revealed that 90% of the
companies overpowered, were spending 90% of their
precious time dealing with present.
 What were they doing with the present? What were
they pre-occupied with? What went wrong?
263
THE PAST OF COMPETITION

 Beyond Restructuring – When a competitiveness problem


(stagnant growth, declining margins, falling market
share) become inescapable, they brutally pick up the
knife and ruthlessly carve away layers of corporate fat
(delayering, decluttering, downsizing).
 Not knowing when to stop; most often they ended up
cutting corporate muscle as well and became anorexic.
Thus efficiency was grievously hurt.
 These denominator based managers were stuck to their
restructuring strategies (like pharaohs) and didn't know
what to do next?
 Thus they became history?

264
THE PRESENT OF COMPETITION

 Beyond Reengineering – Numerator based


managers (products, processes, technologies)
atleast offers partial hope. However,
incrementalism of effectiveness has reached a
plateau, ensuring only survival of the present;
but not of the future.
 A poll in circa 2000 revealed that 80% of the US
managers polled that Quality will be a source of
competitive advantage of the future. On the
contrary only 20% of Japanese managers polled
that Quality will be a source of competitive
advantage of the future.
 The future is not about catching up; but getting 265
ahead.
THE FUTURE OF COMPETITION

 Regenerating – Leaner, better, faster; as important as


these may be, are not enough to get a company to the
future. They need to fundamentally reconcieve itself;
reinvent its industry; and regenerate its strategies
(consciously choosing to be different). Successful
companies steer themselves to the future. It involves
the following -
– Dream about the company’s future; don’t predict.
– Transform the industry; not just the organisation.
– Empower from bottom to top; not from top to
bottom.

266
ABOUT THE DREAM

(5-10 years) Future


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?


267
ABOUT THE TRANSFORMATION

 The future does not belong to those who take the


industry for granted. Successful companies have
a complete grip over the industry, do not fall sick
in the first place.
 It is about deliberately creating a strategic misfit.
It creates a hunger and a passion to transform.
– Change in some fundamental way the rules of
engagement in an industry.
– Redraw the boundaries between industries.
– Create entirely new industries.

268
ABOUT THE EMPOWERMENT

 Bring about a revolution (a paradigm shift) in the


organisation. More importantly, the revolution must start
at the bottom and spread in all directions of the
organisation. A revolution that is thrust upon from the
top seldom sustains.
 Most successful revolutions (Gandhi to Mandela) rose
from the dispossessed.
 The middle management plays a strong moderating role.
 Transformational leaders merely show the way.
 Such a process is called institutionalisation (from people
centric to organisational centric).

269
THE FUTURE OF STRATEGY

 What does it take to get to the future first?


– Understanding how competition for the
future is different.
– A process for finding and gaining insight into
tomorrows opportunities (Eg. Toshiba - FSD).
It requires a lot of common sense and a little
bit of out of the box thinking.
– An ability to energise the company.
– Get to the future first, without taking undue
risk. Thus efficiency and effectiveness may
be passé; but still it has an important role to270
play.
HOW DOES THE FUTURE LOOK LIKE?

 There is no rule which says that for every


leader there will be a follower. Similarly, there
is not one future; but hundreds.
 We are in the midst of a 3600 vacuum; each
point in space represents an unique business
opportunity. The further a company can see in
this endless space, the farther it will be away
from competition.
 What distinguishes a leader from a laggard;
greatness from mediocrity, is the ability to
imagine in a different way what the future 271
could be.
THE NEW STRATEGY PARADIGM - I
Not Only But Also
The Competitive Challenge
Reengineering Processes Regenerating Strategy

Organisational Transformation Industry Transformation

Competing for Market Share


Competing for Opportunity Share

Finding the Future


Strategy as Learning Strategy as Unlearning

Strategy as Positioning Strategy as Dream

Strategy as Engineering Strategy as Architecture


272
THE NEW STRATEGY PARADIGM - II
Not Only But Also
Mobilising for the Future
Strategic Fit Strategic Misfit

Resource Allocation Resource Stretch & Leverage

Getting to the Future First


Existing Industry Structure Future Industry Structure

Product Leadership Competency Leadership

Single Entity Dominant Coalitions


Product Hits & Timing Market Learning & Preemption
273
LEARNING TO FORGET
P1: The degree of learning in current period is
directly proportional to the degree of unlearning in
the previous period.
Degree of Learning

Unlearning
Curve

P2: Unlearning in previous period does not


necessarily ensure learning in the current period.

Learning
Curve

t1 t2 t3 t4 t5
274
Time
CORE COMPETENCE

 A core competence relates to a bundle of skills


(not an asset or a business). A high degree
causal ambiguity between these skills yield
sustainable competitive advantage. A core
competency is characterised by the following –
– Unique – It provides unimaginable customer
value ahead of its times.
– Inimitable & Insubstitutable – It cannot be
matched even by its closest competitors.
– Leverage – They are the gateways to
tomorrows markets. 275
MORE ABOUT CORE COMPETENCE

 Sony – miniaturisation; Honda – engines; Wal-Mart


– logistics; SKF – antifriction and precision, Coca
Cola – brand, Nike – designing; Canon – imaging;
Intel – nano-electronics; Toyota – lean
manufacturing; Toshiba – flat panel displays.
– Although a core competence may lose value
over time; it gets more refined and valuable
through use.
– A core competency cannot be outsourced; it is
deeply embedded in the heart of the
organisation.
– Most companies around the world do not
possess one; successful companies have one,276 at
the most three to four.
CONCEPTUALISING A DIVERSIFIED
FIRM

Core Group

Core
Businesses

Core
Products

Core
Competencies
277
RESOURCE LEVERAGE

 Initial resource position is a very poor indicator


of future performance. It leads to atrophy and
stagnation. Resource crunch was a common
factor amongst all those firms that faced a
wealthy rival, outperformed them. Strategies to
manage a resource gap -
– By concentrating existing resources.
– By accumulating existing resources.
– By complementing existing resources.
– By conserving existing resources.
– By recovering existing resources.
278
CONCENTRATING RESOURCES

 Concentrating – It involves effectively directing


portfolio of resources on key strategic goals. It is a
balance between individual mediocrity and collective
brilliance. It is achieved through -
– Converging – Redirecting multiple competing (i.e.
fragmented) short term goals into one long term
goal. It is then resources can stretched over time.
– Focusing – Making trade-offs and preventing dilution
of resources at a particular point of time.
– Targeting – Focusing on the right innovations that
are likely to have the biggest impact on perceived
customer value.
279
ACCUMULATING RESOURCES

 Accumulating – Using existing reservoir of resources to


build new resources. It is achieved through -
– Mining – Extracting learning experiences from existing
body of each additional experience (i.e. success or
failure). It is an attitude that can be acquired, but
never learnt. It leads to a substantial jump in the
experience curve.
– Borrowing – Utilising resources outside the firm
through licensing, alliances, joint ventures. A firms
absorptive capacity is as important as its inventive
capacity (Eg. Bell Labs invented the transistor, but it
was Sony who popularised it).

280
COMPLEMENTING RESOURCES

 Complementing – Using resources of one type with another


to create higher order value. It is achieved through –
– Blending – Interweaving discrete capabilities to create
world class technologies (GM – Honda) through
integration and imagination. Different functional skills
can also be blended to create a world class product
(Yamaha – Keyboard).
– Balancing – Taking ownership of resources that
accelerate the value of a firms own competencies (Eg.
GE acquiring the technological rights of EMI’s CT Scan).

281
CONSERVING RESOURCES

 Conserving – Sustaining competencies over time.


– Recycling – Increasing the velocity of use of a
competencies over time. As a result core
competencies can be leveraged across an array
of products (Eg. Sony). It includes brand
extensions as well.
– Co-Opting – Enticing resources of potential
competitors to exercise influence in an industry
(Fujitsu – IBM).
– Protecting – It uses competitors strength to
one’s own advantage, by deflecting it, rather
than absorbing it. 282
RECOVERING RESOURCES

 Recovering - It is the process of reducing the


elapsed time between investing in resources and
the recovery of those resources in the form of
revenues via the market-place.
– Prior to the 1980’s Detroit’s majors took an
average of 8 years to develop an entirely new
model; the Japanese reduced it to less than 4.5
years, with major new variants in 2 years.
– This forced the Japanese players to recover their
resources in about half the time; giving
customers more opportunities to switch
allegiance.
283
INTERNATIONAL
BUSINESS & ENVIRONMENT

284
EMERGING MARKETS

 Emerging markets (India, China, Korea, Chile) provide a


different context (i.e. high levels of market imperfection).
Therefore, strategies suited for the developed markets
may not be appropriate for emerging markets.
 Emerging markets are characterised by infrastructural
bottlenecks, institutional gaps, and high transaction costs.
Therefore focused strategies based on core competence
may not be suitable for emerging markets (Khanna &
Palepu, 1997).
 Diversified groups in operating in emerging markets
therefore benefit from unrelated diversification.

285
DIVERSITY - PERFORMANCE (I)

Diversity attempts to measure the degree and


extent of diversification (Herfindahl, Concentric,
Entropy).
Optimum level of diversification
Performance

Diversity is initially positively related


with performance, subsequently
negatively related across developed
markets.
Synergy, Size & Scale, Experience

Strategic Fit

Diversity Palich, et al. (2000)


286
DIVERSITY - PERFORMANCE (II)
Diversity is initially negatively related
with performance, subsequently
positively related across emerging
markets.
Performance

Huge initial investment, brand building

Risk diversification,
conglomerate power

Threshold level of diversification

Diversity (Khanna & Palepu, 2001) 287


INTERNATIONAL IDENTITY

 MNC’s consciously engage in FDI in different parts


of the globe to forge cultural diversity as a distinct
advantage. Characteristics –
– It should have a spread of affiliates or
subsidiaries.
– It should have a spread of manufacturing
operations.
– It should have a spread of assets, revenues and
profits.
– It should have a spread of interest groups.
– It should think globally; act locally (Eg.
McDonalds). 288
GLOBAL BUSINESS ENVIRONMENT

 Power Distance – It reflects the disparities in income and


intellectual development (Eg. low power distance in
developed markets and vice versa for emerging markets).
 Feminity Index - It reflects the disparities in women in
workforce (Eg. high feminity index in developed markets
and vice versa for emerging markets).
 Risk Profile – It reflects the risk attitude of the top
management (Eg. low risk profile in developed markets and
vice versa for emerging markets).
 Group Scale - It reflects the relative role of team building
(Eg. low group scale in developed markets and vice versa
for emerging markets).

289
INTERNATIONAL BUSINESS
ENVIRONMENT
 Cultural Adaptability – It reflects the adaptive ability to a
changing environment - culture, way of life, attitude, code
of conduct, dress sense, customs, time value, flexibility (Eg.
high cultural adaptability in developed markets and vice
versa for emerging markets).
 Country Risk – It reflects the political and economic risk (Eg.
political stability, credit rating, currency, FOREX reserves,
inflation, interest rates, terrorism (9/11), corruption,
judiciary) of doing business in a particular country (Eg. low
country risk in developed markets and vice versa for
emerging markets).

290
INTERNATIONAL BUSINESS
ENVIRONMENT
 Time Sensitiveness – Developed country managers
regard time as precious, however, in most emerging
markets meetings are delayed and lasts unusually
long. Other factors – local celebrations, time-zones.
 Language Barriers – Developed country managers
expect foreign partners to communicate in their
languages; in most emerging markets use of an
interpreter may be a standard protocol.
 Ethnocentrism – Developed country managers tend to
regard their own culture as superior; and vice-versa.
High levels of ethnocentrism usually has a negative
effect on business.

291
GATT

 GATT was a bi-lateral treaty initiated between US


and some member countries in 1947 to promote free
trade. In 1995 (Uruguay Round) GATT was renamed
to WTO. It a multi-lateral treaty with 143 (as on
2002) member countries to reduce tariff and non-
tariff (quota) barriers. It focused largely on TRIPS
(patents, copyrights, trademarks). It also initiated
provisions on anti-dumping.
 The 1999 (Seattle Round) saw a lot of protest amidst
bringing agriculture under the purview of TRIPS. It
also highlighted the nexus between US & WTO.
 The 2001 (Doha Round) focused on power blocks
(NAFTA, ASEAN, BRIC).
292
EURO – SINGLE CURRENCY

 In 1999 twelve member countries joined hands to


move over to a single currency (i.e. Euro); three
countries joined in 2002 increasing it to fifteen
members. The notable exception was Great
Britain which still continues with its local currency
(i.e. Pound).
 The Euro was significantly devalued against the
Dollar till 2002. However with current recession in
the US 2002 onwards, the Euro slowly started
outperforming the Dollar.
 However, the Dollar still remains the most
preferred currency globally; primarily the OPEC
countries. 293
SINGLE Vs MULTIPLE CURRENCY

 Transaction Costs – Though the initial cost of introduction


of a single currency is very complicated and costly; it
helps avoiding transaction costs associated with a
multiple currency.
 Rate Uncertainty – A single currency eliminates the risk of
competitive devaluations. However, a multiple currency is
preferable where the business cycles of member nations
are different.
 Transparency – A single currency is transparent and
competitive, but it may have spill-over effects.
 Trade Block – It will strengthen the EU identity which
would not have been possible otherwise.

294
FII Vs FDI INVESTMENT
 Classical economists believed that foreign investment
(in any form) is basically a zero sum game (i.e. the
gain of one country is loss of another). Neo classical
economists believe that foreign investment may in
fact be a win-win game.
– FDI (transfer of tangible resources) is slow but
steady for the purpose of economic growth. It is
long term with high levels of commitment.
– FII (transfer of tangible resources) is fast but may
have strong repercussions (i.e. hot money). It is
short-medium term with comparatively low levels
of commitment.
295
INTERNATION MARKETING

 Product – The various attributes of a product may


receive different degrees of emphasis depending
on differences in - culture (food habits),
economic (middle class buying power),
technology (micro-chip).
 Pricing – It depends on the competitive structure
(PLC – Kellogg's), customer awareness (micro-
waves), usage (talk time), promotion (surrogate
advertising).
 Distribution – It depends on the market
characteristics (fragmented – concentrated),
buying patterns (spread), lifestyle (petroleum
outlets – departmental stores). 296
INTERNATION FINANCE

 Currency Risk – Many Indian IT companies (Rs)


having business in US (Dollar) are asking for
quotes in (Euro) or are shifting bases in US to
avoid risk of devaluation of Dollar.
 Accounting Norms – The accounting norms of one
country (AS - India) may be different from that
another trading country (US – GAAP).
 Leverage – The leverage may vary across
countries depending upon money and capital
market conditions (Eg. debt is cheap in US; equity
is cheap in India).
 Cost Structure – Companies in India need to
investment in fixed costs due to poor infra-
structure compared to developed markets. 297
INTERNATIONAL HR

 An uniform HR policy is idealistic to enable parity in


performance appraisal; however, in most cases it is
not desirable nor practiced.
 Recruitment – In local recruitment, skills are more
important that cultural fit and vice-versa.
 Compensation – Differential pay packages exists
because of differences in purchasing power, social
security, double taxation, labour laws.
 Training – It is a pre-requisite for international
business to reduce language, technology
(convergence, shortened life cycles), and cultural
barriers (language) vis-à-vis emerging markets.

298
INTERNATIONAL OPERATIONS

 Locational Incentives – FDI in emerging markets


should explore options for SEZ’s to explore
benefits (tax holidays, reduce power costs) vis-à-
vis infrastructural bottlenecks.
 Technology – The cost to be evaluated in terms of
latest technology (Euro VI) vis-à-vis effective cost
of appropriate technology (Euro II).
 Outsourcing – A company having a core
competence may be the source of global
outsourcing (Eg. Bosch spark plugs are used by car
manufacturers worldwide).
 SCM – Use of ERP to network the extended
enterprise across the globe. 299