BUSINESS STRATEGY

Course Code: 611 & 612 Dr. Subir Sen Faculty Member, IBS
E-Mail: subir@ibsindia.org, 9830697368 1) Crafting & Executing Strategy Thompson & Strickland. 2) Strategic Management Pearce & Robinson. 3) Strategic Management Fred. R. David. 4) Exploring Corporate Strategy Johnson & Scholes. 5) Competitive Advantage Michael E. Porter. 6) HBR Articles. 1 7) HBR & ICMR - Case Studies.

INTRODUCTION

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 finding newer ways to perform existing processes, or better still 3 adopting new processes altogether.

STRATEGIC MANAGEMENT - DEFINITION

Strategic management attempts to integrate the traditional management functions and align the organization as a whole with the broader environment to make resource allocations in a way to achieve the strategic intent of the organization. This alignment is called strategic fit. It serves as a road-map for the organization in its growth trajectory. It provides the direction extent pace timing. It depends on the turbulence of the environment and the aggressiveness of the organization. 4 It distinguishes the winners from the losers.

PILLARS OF STRATEGIC MANAGEMENT

Differentiation Differentiation of key inputs and technologies helps a firm to consciously move away from homogeneous to heterogeneous markets enabling them to earn super-normal profits from normal profits. Integration Whenever dealing with a complex task of managing a business (i.e. involving a no. of variables with cross linkages) it is in the interest of simplicity that the task be broken up in smaller components. However, for effective control, integration is essential. Alignment Since differentiation is prone to replication, it is in the interest of the firm to differentiate continuously by aligning the resources with 5 environmental opportunities.

STRATEGIC MANAGEMENT - FRAMEWORK

Economical Fit Operation Strategic Finance Fit Political Strategic Intent Fit Political Marketing Management Social & Cultural Fit Management Technological
6

Strategic

Political

Fit

HR Fit

STRATEGIC MANAGEMENT - FEATURES

It forms the core activity of the top management. It requires full commitment of the top management. It is long-term in nature. It is all about creativity and innovation. It is about adaptation and response to the same. It involves substantial resource outlay. It is irreversible. It is a holistic and integrated approach. It provides broad guidelines. It is a top to bottom process. 7 It can make or destroy a company.

STRATEGIC MANAGEMENT MYTHS

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

STRATEGIC MANAGEMENT - IMPERATIVES

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 innovate, again and again . To be proactive, rather than reactive. To develop corecompetencies.

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 of the army or armory; but by virtue of their courage, obsession, and more importantly - strategies. Even in todays markets, battles fought on the market front are won by companies by virtue of their obsession & strategies, whose origin can be traced to some of the greatest battles fought in the ancient days. It is an old wine in a new bottle; but with a lot a rigour 10 and robustness.

SOME PARALLELS

Japans attack on Pearl Harbour Strategy: Attack where it hurts the most. Toyotas entry in the US, challenging GM and Ford. US attack of Morocco to capture Germany Strategy: Pin-hole strategy Wal-Mart challenging Sears by entering small towns. Allied Forces Vs Germany (WW-II) Strategy: Forging alliances. Yahoo and Microsoft challenging Google. Napoleons attack on Russia Strategy: Waiting for the right time. 11 Reliances entry into telecom.

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 when totally disconnected from the past leads to a paradigm shift. A paradigm is a dominant belief about how the business and its environment operates. The first major discontinuity in the history of global business environment was the - Industrial Revolution. Mass Production Complicated Processes Organization Size Complex Structures Evolving of an emerging paradigm survival of the 12 fittest (Fayol & Taylor, 1910).

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 (i.e. push to pull). Changes in the technology fore-front. Homogeneous to heterogeneous products. 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). Efficiency and 13 effectiveness are no longer sufficient.

ENVIRONMENTAL CHANGE
Phase IV: Horizon of Scenarios
2 1 1

Phase I: Extrapolation of the past

1990 onwards

Prior to 1950

Phase III: Range of Scenarios

1 2

Phase II: Discrete Scenarios

1 1A 1B 2A

1970 to 1990

2B

1950 to 1970
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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 organization. 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. Biases and prejudices has a very little role to play in strategic choices pursued by managers. Learning always begin on a clean sheet of paper. 15 It is primarily the top managements prerogative.

APPROACHES TO STRATEGY

Design Approach Alfred Chandler (1970) Structure follows strategy. The organization initially decides which industry to enter, how it will compete, who will be the top managers. The top managers then decide on the type of organization structure & systems to be in place. Organization structure will precede and cause changes in strategy. Successful organizations align authority and responsibility of various departments in way to reach overall objectives. Management control systems has a dominating role in influencing firm performance. Once the control16 systems are in place, everything else follows.

APPROACHES TO STRATEGY

Positioning Approach Michael E. Porter (1980) Choose a consumer segment and position your product accordingly. A firms performance is inversely related with the bargaining power of environmental forces to which it is exposed. The environmental forces comprises of supplier, customer, new entrant, substitutes, competitors. The organization will outperform the industry where environmental forces are weak and vice-versa. An organization is seldom in a position to influence 17 the larger business environment.

APPROACHES TO STRATEGY

Core Competence C. K. Prahalad (1990) The key to superior performance is not doing the same as other organizations, locating in most attractive industries and pursuing the same strategy; but exploiting the resource differences among them. Core competencies are a set of skills that are unique and can be leveraged. They are complex resources and undermines a firms competitive advantage. It enables a firm to deliver unimaginable value ahead of time. Organizations can significantly alter the way an 18 industry functions.

STRATEGIC MANAGEMENT - PROCESS

Strategic Intent Strategic Planning Strategic Gap Environmental Scanning Internal Appraisal of the Firm Strategy Formulation Corporate Strategy Strategic Choices Business Strategy Functional Strategy Strategy Implementation Strategy Performance Strategy Evaluation & Control

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TOP MANAGEMENT PERSPECTIVE

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STRATEGIC INTENT

If you cannot see the future, you cannot reach there. A strategic intent is a statement of purpose of existence. It involves an obsession to be the best or outperform the best. It is the cornerstone of an organizations strategic architecture reflecting its desired future state or its aspirations. It provides a sense of direction and destiny. Its a philosophy that distinguishes it from its competitors. It implies a significant stretch. A substantial gap between its resources and aspirations. A gap that 21 consciously manages between stagnation and atrophy.

STRATEGIC INTENT - HIERARCHY

Vision Integrative Mission Dominant Objectives

Lo g
na mi Do

Single

Specific

Goals Plans

ic

Many

nt

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DOMINANT LOGIC

A dominant logic can be defined as the way in which the top management team conceptualizes 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 core to the strategic intent of the firm. Dominant logic changes, when radical changes in the internal and external environment (i.e. strategic 23 variety) is apparent.

VISION
It is a dream (not a forecast) about what the company wants to become in the foreseeable future. It provides an unity of purpose amidst diversity of personal goals. It ensures that the company does not wander off into unrelated zones or fall into an activity trap. It enables the top management to remain focused. It is a combination of three basic elements An organizations fundamental reason for existence; beyond just making money. It stands for the unchanging core values of the company. It represents the companys audacious, but achievable 24 aspirations.

VISION - CHARACTERISTICS

Reliance Where growth is a way of life. In Reliance when a new project becomes operational top managers hand over charge to the SBU heads and move on to a new project. 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; not an utopian dream. Brevity It should be short, clear, and memorizable. Empathy It should reflect the companys beliefs to which it is sensitive. Sharing The company across all hierarchies should25 have faith in it.

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. It makes strategic alignment easier. It facilitates development of skills & capabilities.

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MISSION
Mission defines the space that a business wants to create for itself in a competitive terrain. It enables the firm to define its business landscape and identify its competitive forces. It is intuitive for managers to conceive their business in terms of the customer needs they are serving What business are we in? Which customer needs are we serving? It should be broad based and relevant to all stakeholders. Although the purpose may change over time. A broad mission statement helps in fending competitors. It serves as a road map to reach the vision; its reason 27 for existence.

MISSION SOME IDEAS

Reliance We are in the business of integration. All the businesses of the company are strongly integrated with their main business, though some may seem unrelated in nature. Some other examples We do not offer shoes, . We offer comfort. We do not offer steel, . We offer strength. We do not offer software's, . We offer solutions. We do not offer insurance, 28 . We offer security.

GOALS & OBJECTIVES

Reliance We want to become a Rs.100K crore company by the year 2005. It is an end result (quantifiable) something a firm aims and tries to reach in a time bound frame. It provides a quantitative feel to an abstract proposition. It lends direction time frame in the medium term. It provides a benchmark for evaluation. It helps identifying key success factors. It is based on Management by Objectives (MBO). It adds legitimacy and motivation. It keeps the mid management pre-occupied. 29 It prevents deviation.

PLANS
Reliance Desire to invest 25K crore in telecom business by circa 2010. It is the process of garnering necessary inputs, coordinating appropriate technologies, and gaining access to desired markets to achieve the desired goals and objectives. It is specific to a particular business. The details of the plan Reliance Telecom adopted were Backward integrate process technologies. Compress project times. Leverage economies of size and scale. Use price-elasticity to break market barriers. 30 Acquire a market share of indomitable position.

STRATEGIC DRIFT

Due to top management commitment, past strategies tend to have a bearing on future strategies. Historical studies have shown that most organizations tend to continue with their existing 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. It often leads to an organizational crisis. In such a context, strategies lose touch with the 31 emerging realities.

STRATEGIC DRIFT FRAMEWORK

Environmental Change Strategic Change

Radical Change

Degree of change

Incremental Change State of Flux Continuity Stage of Transformation Strategic Drift Stage of Atrophy

Time

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ORGANIZATIONAL POLITICS

Strategic drift often leads to organizational politics. Organizational politics involves intentional acts of influence to enhance or protect the self-interest of individuals or groups over organizational goals. Some instances of organizational politics Formation of powerful groups or coteries. Creating obligations of reciprocity. Hiding vulnerability. Using covert tactics to pursue self interests. Creating a favourable image. Developing a platform of support. 33 Distorting information to gain mileage.

INTENDED & REALISED STRATEGIES

An intended strategy is an expression of interest of a desired strategic direction. A realized strategy is what the top management actually translates into practice. Usually there is wide gap between the two when organizational politics is evident. Other causes The plans are unworkable and utopian. The environment context has changed. Influential stake-holders back out. Persons responsible for strategy conceptualization and implementation are divergent. An emergent strategy evolves over time and takes shape with the changing environment. A lot of inter34 active learning takes place when strategies emerge.

LOGICAL INCREMENTALISM

According to the incrementalism approach (contrary to integrated approach) practitioners simply do not arrive at goals and announce them in crafted and well defined packages. They simply unfold the particulars of the sub-system in stages, but the master scheme of the rational comprehensive scheme is not apparent. However, 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. Learning 35 is an integral part of logical incrementalism.

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 finer refinements. Agent of Change Formal ratification of a change plan through MBO. Leveraging Crisis A sudden crisis or an opportunity should be used as a trigger to facilitate acceptance and implementation of change. The broader objective should serve the overall interest of the organization. 36 Adaptation As implementation progresses.

STRATEGIC TRANSFORMATION

Strategic transformation (a complete overhauling of the strategic architecture) becomes inevitable whenever a strategic drift takes place. Tampering with surface level factors often leads to atrophy. Dominant logics are the cornerstones of change when strategic transformation is apparent. Dominant logics are very rigid and sticky and prone to inertia. It creates blinders. Strategic transformation becomes smooth through a change in top leadership. As it brings with it a different dominant logic. A new mindset provides additional lenses for the top 37 managers look at existing problems.

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 prevent a strategic drift from occurring at the first place. A learning organization must continuously focus on unlearning as well. Factors that fosters a learning organization 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. 38 Organisational Slack Enough free space.

ENVIRONMENTAL CONDITIONS

Dynamic

Scenario Planning

Learning Organization

Static

Forecasting

Decentralization

Simple

Complex

39

ANALYZING BUSINESS ENVIRONMENT

40

PLANNING & STRATEGIC PLANNING

Formal planning is a function of extrapolating the past. It is based on the assumption of incremental change. It is reactive in nature. Strategic planning is a function of discounting the future. It is based on the assumption of radical change. It is pro-active in nature. Strategic gap basically points towards a vacuum of where the organisation wants to be and where it is. It requires a quantum leap (i.e. gap analysis). Competitive advantage provides the surest way to fulfill the strategic gap. It points to a position of 41 superiority with relation to competition.

ENVIRONMENTAL SCANNING

The environment is defined as the aggregate of conditions, events, and influences that affect an organizations way of doing things. Environmental scanning is very important component of strategic planning. A manager has to continuously scan the environment to ensure alignment of the strategies with the radically changing environment. Environmental factors can be external as well as internal to the organization. It is exploratory in nature; not guided by any boundaries. The world is flat, resources and ideas move unhindered. The segments of the environment a top manager 42 scans selectively depends upon his dominant logics.

PESTEL

PESTEL attempts to provide a broad framework on how the broader environmental forces affects an organization and influences the way it practices strategy. It is not intended to be used as an exhaustive list. It is particularly important that PESTEL be used to look at the future impact of environmental factors, which may be different from the past impact. It is important not only to identify the structural drivers of change, but also to analyze the complex linkages across them. Understanding the composite effect is critical, for which 43 a holistic picture is required.

PESTEL FRAMEWORK

Political Government Stability, Government Attitude, Economic Model, Central State Co-alignment, Subsidies & Protection, Licensing & Quotas. Economic GDP, Fiscal Deficit, Savings & Investment, Inflation & Interest Rates, Monsoon & Food Grains Reserves, Economic Cycles, Capital Market & Forex Reserves, Currency Stability, Infra-Structural Investments, FDI Inflows. Social Population Diversity, Religious Sentiments, Literacy Levels, Income & Age Distribution, Language 44 Barriers, Social Values.

PESTEL FRAMEWORK

Technological Innovation, Obsolescence Rate, Patents, Research & Development, ERP, Technological Convergence. Environmental Global Warming & CSR, Product Design, Environmentally Preferable Purchasing, Extended Producer Responsibility, Waste Disposal & Emissions, Non-Fossil & Alternative Fuels, Carbon Credits, Pollution Control Laws. Legal Monopolies Legislation, Employment Laws, Product Safety & Health Hazards, Direct & Indirect Taxes, Patent Laws, Consumer Protection Laws.

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ECONOMIC LIBERALISATION

New Industrial Policy (NIP) Liberalizing industrial licensing, FERA Liberalization, MRTP Liberalization, Curtailment of PSUs, Encouraging FDI. Economic Reforms Fiscal & Monetary Reforms, Banking Sector Reforms, Capital Market Reforms. 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 46 Policy- VRS.

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

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DISCONTINUITY

Hyper Competition MNCs - Globalization Cheap Imports & Dumping Push to Pull Marketing 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

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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

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FIVE FORCES MODEL - PORTER

Threat of New Entrants

Bargaining power of Suppliers

Competition from Existing Players

Bargaining Bargaining power of power of Suppliers Customers

Threat of Substitutes
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FIVE FORCES MODEL - ASSUMPTIONS

The model is to be used at the SBU level and not at the industry level. It is even wiser to apply the same at the product market level. It depicts the attractiveness of an industry (i.e. profit potential) per se. The model should not be used as a snapshot in time; the forces are subject to changes, incremental or otherwise. It should not only be used to understand the forces, but also used to understand how they can be countered and overcome. 51 The five forces have strong cross-linkages.

PORTERS FIVE FORCES ANALYSIS

Threat to Entry Economies of size and scale, Product differentiation through proprietary technology or brand power, Capital requirements, Learning curve advantages, Access to distribution channels, Government policy, Resource profile & fear of retaliation, High switching costs, Industry stagnation. Threat of Customers Buyer concentration and volumes, Undifferentiated product, Low relative importance of the segment, Low margins & stagnancy, Unimportance of product quality, Scope for backward integration, Presence of substitutes or unorganized 52 sector, Low customer switching costs.

PORTERS FIVE FORCES ANALYSIS

Threat of Suppliers Supplier monopoly, Differentiated inputs, Lack of substitute inputs, High customer switching costs, Scope for forward integration, Low relative importance of the segment. Threat of Substitutes Improvement in price -performance trade-off, Produced by industries earning high profits, Buyers propensity to substitute. Jockeying for position Fragmented market, Industry stagnancy, Intermittent overcapacity, Low level of differentiation, High exit barriers, Unorganised sector, Piracy and counterfeits, Product perishability, Diversity 53 of players.

FIRM ENVIRONMENT

Size and Scale of Operations It is a very important component of competitiveness in today's global context (Bharti MTN, Reliance). Business Scope The intention whether the firm wants to be in a single business, or related diversified or unrelated diversified (Tata, Aditya Birla). Inertia Excessive commitment to past strategies prevents firms from tapping emerging opportunities. Cohesiveness Degree of bonding existing across affiliated firms. Resource Profile It highlights the capabilities (business 54 specific or generic) or competencies of the firm.

EXPERIENCE CURVE

The cost of performing an activity declines on per-unit basis as a firm becomes more efficient; experience teaches better and more effective 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 E-Curve than new entrants. The E-Curve thus enables organisations to build entry barriers, leverage it as a competitive advantage. Experience curve has strong linkages with performance. However, an E-Curve can prove to be futile during 55 discontinuity.

EXPERIENCE CURVE
Decreases at an increasing rate Point of inflexion Decreases at a constant rate Decreases at a decreasing rate

Cost per unit of output

Production / Volume

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EXPERIENCE CURVE - TRADITIONAL VIEW

Efficiency = Lower Costs

2 3

1
Experience = Efficiency

Lower Costs = Higher Sales

Entry Barrier = Better Performance

4
Higher Sales = Lower Costs

6 5

Lower Costs = Entry Barrier

57

EXPERIENCE CURVE - STRATEGIC VIEW

Inertia = Limited Growth Experience = Inertia

2 3

Limited Growth = Diversification

Strategic Failure = Poor Performance

5 New Experience Old Experience

Diversification = New Experience

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VULNERABILITY ANALYSIS - SWOT

The framework was originally conceptualized by Kenneth Andrews in 1970. Acronym for Strengths Weaknesses Opportunities Threats. It helps an organisation to capitalize on the opportunities by maximizing its strengths and neutralizing the threats minimizing the weaknesses. It is one of the earliest models in environmental scanning. A SWOT audit involves Company Records Annual Reports, Websites, Press Clippings & Interviews. Case Studies Structured Questionnaires, Interviews, Observation. Business Intelligence Bankers, Suppliers, Customers, 59 Analysts, Competitors.

SWOT ANALYSIS - FRAMEWORK

Opportunities

Nullify weaknesses which prevents you from exploiting opportunities

Leverage strengths to make use of opportunities

Weaknesses Minimize weaknesses which prevents you from countering threats Threats

Strengths Utilise strengths to counter threats (?)

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SOURCES OF STRENGTH

Strong brand identity Eg. Tata. High quality products Eg. Sony, Toyota, Honda. Excellent penetration Eg. HUL, ITC. Strong R&D base Eg. Dr. Reddys, Ranbaxy, Biocon. Economies of scale Eg. Reliance. Good credit rating Eg. Infosys, SBI. Motivated employees & cordial industrial relations Eg. Tata Steel, Infosys. Large resource pool Eg. Aditya Birla, Reliance. Strong after sales & service network Eg. Caterpillar. 61 Engineering Skills Eg. Volkswagen, Siemens.

SOURCES OF WEAKNESSES

Outdated technology Eg. Hindustan Motors. Strategic myopia Eg. CESC. Excess manpower Eg. SAIL. Single product syndrome Eg. Procter & Gamble. Inefficient top management Eg. Ballarpur Inds. Narrow business scope Eg. Nirma. Excessive diversification Eg. Tatas. Inertia Eg. J. K. Group - Raymond. Lacking experimentation culture Eg. B. K. Modi Group. Lack of product / brand clout Eg. Bijoligrill. 62 Organizational Politics Eg. CMC (Tata Group)

SOURCES OF OPPORTUNITIES

Delicensing of Industries Eg. Telecom, Banking. Capital market reforms Eg. Abolishing CCI. Abolishing MRTP Eg. Maruti. Life style changes Eg. Retailing. Growing population Eg. Middle-class buying power. Globalization Eg. GDRs, ECBs. Free pricing Eg. Fertilizers, Insurance, Sugar. Exit Policy Eg. VRS. Collaborations & Joint Ventures Bharti & WalMart. Market driven Interest rates Eg.Tata Motors. 63 Market driven Pricing Eg. Fertilizer, Sugar.

SOURCES OF THREATS

Political instability Eg. (19851990). Land acquisition - Social activism Eg. Singur SEZ. Terrorist attacks Eg. 11/9, 26/11. Import relaxation Eg. Dumping from China. Foreign Direct Investment (FDI) Eg. Onida. Economic recession Eg. (2008). Natural disaster Eg. Tsunami, Earth Quake. Nationalisation Eg. Tata Steel. Hostile take-over Eg. Bajoria Bombay Dyeing. Group disintegration Eg. Reliance. 64 Lack of Corporate Governance Eg. Satyam.

ETOP

Acronym for Environment Threat Opportunity Profile. It represents a summary picture of the external environmental factors and their likely impact on the organization. Stages in ETOP analysis List the aspects of the environment that has a bearing on the organization. Assess the extent of impact of the factors. Holistic view Prepare a complete overall picture. Forecasting Predict the future (i.e. time series, Delphi's technique, scenario analysis). Strategic responses (including adaptation) to opportunities and threats is critical for survival and 65 success.

PROFIT IMPACT OF MARKET STRATEGY

PIMS is a database model developed by GE and later extended by HBS to examine the impact of a wide range of strategy variables on business performance. It is also a form of assessing vulnerability through longitudinal analysis. An organization can draw upon the experience of its peers in similar situations. Some key findings on major performance drivers that explains 75% deviations in performance Product quality and relative market share. High investment intensity acts as a drag. Relative attractiveness of the market. 66 Vertical integration is a powerful strategy; selectively.

PIMS - LIMITATIONS

The analysis is based on historical data and it does not take care of future challenges. Managers should be particularly cautious while referring to such data during times of discontinuity as it makes past patterns futile. Authenticity of data is of prime importance Contexts drawn across one organization may not be applicable to another. As every organization 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 67 validity may be a question.

KEY SUCCESS FACTORS (KSF)

KSF relates to identification and putting concentrated effort on a particular activity or process which forms the very basis of competitive advantage. It enables the top management to draw focus. KSF helps organizations spot early opportunities and convert them into value adding business propositions. It involves a three-stage process Identify KSF What does it take to be successful in a business? Drawing KSF What should be the organizations response to the same? Benchmarking KSF How do we evaluate organization 68 success on this factor?

IDENTIFYING ALTERNATIVE STRATEGIES

69

CORPORATE - GRAND STRATEGY

It is concerned with the overall business (single, related, unrelated) and geographical (local, national, global) scope of a firm and deals with choices of allocating resources across them. It provides broad direction to the groups vision and mission. A corporate strategy identifies and fixes the strategic gap it proposes to fill. It determines the locus a firm encounters with internal and external environment. It indicates the quality of growth an organization is looking for. 70 It reflects the customer needs it intends to satisfy.

CORPORATE STRATEGY MATRIX

Corporate Strategy Stability Stability Growth Growth Combination Diversification Market Development Product Development Unrelated Horizontal Divestment

Intensification Market Penetration Related Vertical

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STABILITY

It involves maintaining status-quo or growing in a slow and selective manner. The scale and scope of present operations remains almost intact. Stability however, does not relate to do-nothing (Eg. Hindustan Motors). Even during adverse times firms need to adopt a strategy to sustain current performance levels. (Eg. Citibank). 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? 72 Limited resource position; erosion of capabilities.

GROWTH - ANSOFFS MODEL

Existing Product Existing Market Market Penetration (+) New Market Market Development (++)

New Product

Product Development (+ +)

Diversification (+++)

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

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MARKET PENETRATION

It is a strategy where a firm directs its entire resources to the growth of a single product or a closely knit product set, within a well defined market segment. Market penetration can be achieved by increasing sales to current customers, convert competitors customers, direct non-users to users. (Eg. Nirma, Ujjala, Britannia). Suitable for industries where scope for technological break-through is limited. Elongated product life-cycle. Helps firms which are not comfortable with unfamiliar terrain. 74 The company carries a risk of product obsolescence.

MARKET DEVELOPMENT

It is a strategy where a firm tries to achieve growth by finding new uses of 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, or Teflon: aircraft technologies to cutlery to paints or Raytheon Corp Microwaves: radars to kitchen appliances). Creativity and innovation thinking out of the box. Stretches product life cycles. Unconventional and flexible distribution channels. 75 Moves across geographical boundaries.

PRODUCT DEVELOPMENT

It is a strategy where a firm tries to achieve growth through a radical new product (Eg. Microsoft: DOS to Windows) or a substantial improved version (incremental) of an existing product to repeatedly enter the same market (Eg. Close Up: Fluoride Gel toothpaste or VIP - Strolleys). Areas of product improvement performance, features, reliability, conformance, durability, serviceability, aesthetics, perception. Deliverable through redesigning or reengineering. Leverage on customer and brand loyalty. Leveraging through innovation. 76 Substitutes that serve the same needs (Eg. Refills)

DIVERSIFICATION

It marks the entry of a firm into newer markets with new products, thereby creating a new business. From the traditional point of view, the new business is distinct from the existing business in terms of inputs technologies markets. From the modern point of view they are strategically dissimilar. Why do firms diversify in the Indian context? Shift the growth trajectory or opportunistic. Risk reduction. High transaction costs and institutional gaps. Internal capital market. Permits: quotas, licenses (i.e. industrial embassies). Conglomerate or market power (i.e. dominance). 77

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 ideal diversification strategy through optimization? 78

DIVERSIFICATION STRATEGY
If we diversified in either of the two businesses, our expected return will be 20%, with a possible risk of 10%. If, we split our investment between the two businesses 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 (i.e. risk). Diversification results in 20% expected return with zero risk, whereas investing in individual businesses was yielding an expected return of 20% with a risk factor of 10%. The pivotal point is that the two businesses are negatively correlated. 79

HORIZONTAL INTEGRATION

It takes place when a company increases the breadth of a firms business or geographical scope by getting into product market segments which compliments its existing businesses (Eg. Reliance). Alternatively, existing business may recreate new businesses, which are distinct, but supplements its existing business (Eg. Bajaj scooters to motorcycles, Dove soaps to shampoo). It results in increased market power. Leveraging existing capabilities. Resources can be shared for mutual benefit. Reduces economic risk (i.e. business cycles). 80 Enables brand or product line extension.

HORIZONTAL INTEGRATION

Reliance Capital

Reliance Infrastructure

Reliance Industries

Reliance Ports

Reliance Power
81

VERTICAL INTEGRATION

It increases the depth of its business scope either in a backward business process or in a forward one. Backward integration occurs when the company starts manufacturing its inputs or catalysts. In forward integration a firm moves into marketing of its products and services. Advantages of backward integration Cost competitiveness entry barrier. Better operational control timely supplies, quality control, coordination JIT, savings in indirect taxes. Disadvantages of backward integration It may spark of a chain reaction - contagion effect. 82 Long gestation & break even - investment in CAPEX.

VERTICAL INTEGRATION
Oil & Gas exploration Naptha-cracking Acetic Acid Paraxylene (PX) Purified tetra-pthalic acid Polyester Filament Yarn
(PFY) (PTA) (MEG)

Mono-ethylene glycol Polyester Staple Fibre

(PSF)
83

Textiles

DIVERSIFICATION SUCCESS ?

While diversifying into new businesses, the scope of relatedness or unrelatedness should not be judged from the traditional static view, but from the modern dynamic view which incorporates strategic factors like capabilities and dominant logic. Countermanding reasons Potential to reap economies of scope across SBUs that can share the same strategic asset. Potential to use an existing capability to help improve the quality of a strategic asset in another business. Potential to use an existing capability to create a new strategic asset in another business. Potential to expand the existing pool of capabilities. 84 Dominant logic ensures timely & appropriate response.

QUASI & TAPERED INTEGRATION

Full Integration - Where one firm has full ownership and control over all the stages of a value-chain in the manufacturing 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. Ranbaxy, Dr. Reddys). 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 (Eg. 85 Maruti Sona Steering).

A CASE OF TAPERED INTEGRATION

Full Ownership

Partial Ownership

Transmission Engine Design Electricals Steering Windscreen

86 Seats & Carpets

Zero Ownership

Very Critical Components

Critical Components

Ordinary Components

CONGLOMERATE DIVERSIFICATION

It relates to entry of firms into businesses which are distinct in terms of inputs technologies markets. and are also strategically dissaimilar. Firms usually engage in conglomerate diversification when emerging opportunities are very attractive and offers potential growth opportunities. Drawbacks of unrelated diversification Cost of failure (i.e. lack of strategic intent, myopia). Cost of ignorance (i.e. lack of knowledge of competitive forces). Cost of neglect (i.e. core business). Cost of dysynergy (i.e. synergies pulling in opposite 87 directions).

CONGLOMERATE DIVERSIFICATION

Paper & Packaging

Edible Oils

Tobacco

Hotels

Food & Confectionary

88

DIVESTMENT

Divestment is a defensive strategy involving the sale of entire stake (Eg. ACC) 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 SBU (Eg. L&T-Cement Division to Aditya Birla Group) technically known as divestiture. or a product (Eg. Glaxos Glucon-D to Heinz). In strategy there is no scope for sentimentality with divestment. 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 89 Nerolac, Tata Pharma, Tata Press).

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 companys 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). Hive-Off A hive off is the creation of a new entity followed by transfer of assets; where the equity is allotted amongst the existing shareholders on a pro-rata basis. However, the Companies Act, 1956 does not 90 permit this mode.

COMBINATION STRATEGY

It is a mixture of stability, growth, and divestment strategies applied simultaneously or sequentially for a portfolio of businesses. It is usually pursued by a business group with diverse interests across multiple industries. There can be no ideal strategy for every business, because every business has its own unique external and internal environment. A combination strategy can be implemented through green-field projects (i.e. developing facilities right from the scratch) or through brown-field projects (i.e. 91 mergers and acquisition, joint ventures).

STRATEGY CHOICE & PORTFOLIO ANALYSIS

92

STRATEGIC CHOICE

A strategic choice seeks to determine the alternative courses of action available before top managers to achieve its strategic intent. It attempts to answer the following questions How effective has the existing strategy been? How effective will that strategy be in the future? What will be the effectiveness of alternative strategies? It is impossible for a manager to assess all the alternatives. Dominant logic enables top managers to selectively scan the environment and make trade-offs. In most cases the trade-off is between resources and 93 opportunities. What then is the magical number?

SELECTIVITY IS THE KEY

The role of a top manager is not to solve a problem, nor is to a define a problem for others to solve. The key task before a top manager is to identify the right problems. To identify the right problems, managers need to ask the right questions. They must choose problems which will lead to the right kind of opportunities; if addressed, will help the firm achieve its intent. For an optimal choice the following four issues need to be resolved Is the strategy clearly identifiable? Is it consistent with the resources of the firm? Will it be able to exploit the opportunities in full? 94 Is it in tune with the values and beliefs of the firm?

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. Their roots can be traced to a single family or clan and share broad similarities. Their origins can be traced back to market imperfections existing in an economy (MRTP Laws, Licenses & Quotas, Managing Agency). Proximity to the corridors of power (i.e. embassies). High degree of centralized control (GEO, BRC). Resource sharing, formal and informal ties. Succession planning is critical to continuity. 95 Does group affiliation enhance performance?

RESOURCE SHARING ACROSS FIRMS

Parent Company

Firm 1

Firm 5 Firm 3

Firm 2

Firm 4

96

STRATEGIC CHOICE MACRO TIMING

Recession (Stability) Prosperity (Diversification) Depression (Divestment) Recovery (Intensification)

97

STRATEGIC CHOICE MICRO TIMING

Re-Engineering Maturity - Stability
Growth (%)

Decline - Divestment Growth - Diversification

Duration (Yrs) Inception - Intensification

98

PORTFOLIO ANALYSIS

Resource allocation across a portfolio of businesses is an important strategic choice, next only to choice of business. Why? Businesses are not about liquid assets; therefore, there are high costs associated with entry and exit. Relatedness across resources are difficult to realize; sometimes impossible. Investing in emerging businesses may not actually be so simple as it appears to be. Rules of the game are different. Redeployment of resources upsets the established power bases of a group. Power and resources often99 goes hand in hand.

BCG GROWTH MODEL

Relative Market Share (%)
Industry Growth (%)

High
High

Low

Stars

Question Mark

Low

Cash Cow

Dogs100

BUSINESS ANALYSIS TATA GROUP

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 net users of resources, and their risk profile is high (Eg. Trent, Tata Telecom, TataAIG). Stars They achievers in the near term, provided the industry growth rate continues and the company is able to maintain its growth (i.e. diversification). These businesses are also net users of resources (Eg. TCS, 101 Tata Steel), but to larger extent than a question mark.

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, Indian Hotels, Tata Tea, Tata Chemicals). 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, Tata Press). Groups prefer to dispose off such businesses (i.e. harvest, divest) as achieving a dominant position in102 these businesses is a difficult task.

BCG - LIMITATIONS

It does not address the concerns of a business which is in the average category (usually the majority); neither in high or low. Certain businesses in the low market share category may be the result of a conscious strategy (i.e. niche Rolex, Cartier, Mercedes Benz, Armani). Cash cows may actually need substantial investments to retain their market position (Eg. HUL). The model does not provide specific solutions within a particular category. The terminologies used are somewhat prohibitive. 103 Data may be prohibitive; factors are limited.

GE - MATRIX
Distinctive Capabilities
Industry Attractiveness
Strong
High

Medium Intensify (+)

Weak Stability

Diversify (++)

Low

Med

Intensify(+)

Stability

Harvest (-)

Stability

Harvest (-)

Divest (- -)
104

ARTHUR D. LITTLE
Inception Dominant Strong Favourable Tenable Weak Growth Maturity Decline

Invest Improve Selective

Consolidate

Hold
Competitive Position
105

Harvest Niche

Abandon Industry Life-Cycle

Divest

SHELL DIRECTIONAL POLICY MATRIX

Business Sector Prospects
Attractive Average Unattractive Generate Cash Phased Withdrawal

Distinctive Capabilities

Strong

Market Leadership Try Harder Double Or Quit

Growth

Average

Custodial

Weak

Phased Expand Withdrawal

Divest
106

TERMINOLOGIES

Harvest It entails minimizing investments while trying to maximize short-run profits and cash flow with the intention to exit the business in the near future. Divest Selling a part or the entire business at one go. Disinvestment involves selling in phases. SBU A business unit which is strategically different from another and also shares a different SIC code. Portfolio An organization is perceived as a portfolio of businesses. BCG Boston Consulting Group. 107 Gap Analysis It emphasizes what a firm wants to

BUSINESS STRATEGY & COMPETITION

108

COMPETITIVE STRATEGY

A competitive strategy deals with how a firm competes in a particular business or product-market segment. The principal focus is on meeting competition, building market-share, and earning super-normal profits (i.e. rent). 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. 109 Competitive advantage is the back-bone of strategy.

BUSINESS STRATEGY - FRAMEWORKS

How to be distinctive and yet sustainable Differentiation Understanding of the dynamics of competition, identifying critical success factors, developing competitive advantage (Porter). Resource Based View Obsession with competence building, involving harmonizing and integrating multiple streams of technologies (Wernerfelt, Prahalad). Delta Lock In Two dominant players co-opt to selfreinforce and create or escalate an entry barrier, preventing new entry and/or competition (Hax & Wilde). Blue Ocean Consciously moving away from overcrowded industries to uncharted territories and 110 making competition irrelevant (Kim & Mauborgne).

PORTERS COST LEADERSHIP

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 are varied and depends on the structure of the industry Economies of size, backward integration, proprietary technology, preferential access to raw materials. Compress project duration through crashing. Locational or early entry advantage. 111 Steep experience curve effects.

PORTERS PRODUCT DIFFERENTIATION

Product Differentiation It is a strategy that attempts to provide products or services that are differentiated from competitive products in terms of its value proposition and uniqueness. It selects one or more attributes that buyers perceive as important. Means of product differentiation are peculiar to each industry. Successful product differentiation is often followed by premium pricing. (Eg. Intel, Sony, Rayban). Creativity, innovation and out of the box thinking. Culture of experimentation, and sufficient slack. Focus on brand loyalty, avoiding brand dilution, undeterred attention to quality. 112 Feeling the pulse of the customer.

PORTERS NICHE OR FOCUS

Focus / Niche It is a variant strategy of cost leadership or product differentiation targeting a specific market or buyer sub-segment with the exclusion of others (Eg. Rolex, Maybach, Mont-Blanc, Cartier, Armani). A focuser seeks to achieve a competitive advantage in its target segment, though it may not possess an overall competitive advantage. The target segment must have unusual needs or the delivery system catering to this segment must be unique. They are poorly served by mainstream players. Sub optimization alone may not be a source of superior 113 performance; coupled with fear of structural erosion.

COMPETITIVE POSITIONS
Competitive Advantage
Cost Differentiation Product Differentiation

Competitive Scope

Cost Leadership (Toyota)

Product Differentiation (General Motors)

Broad

Cost Focus (Hyundai)

Differentiation Focus (Mercedes)

114

Narrow

HYBRID STRATEGY

A hybrid strategy is the simultaneous pursuit of cost leadership and differentiation, and usually outperforms a stand alone generic strategy. Though cost leadership and differentiation are inconsistent, in a hyper competitive context the two strategies need not be mutually exclusive. Reducing cost does not always involve a sacrifice in differentiation; similarly differentiation may not always lead to rising costs. Firms focusing on a hybrid strategy typically aim at shifting the productivity frontier and recreating a new 115 product-market segment altogether (Eg. Tata Nano).

STUCK IN THE MIDDLE

A firm that engages in a hybrid strategy and fails to achieve a competitive advantage because it was ill conceived will be - stuck in the middle. It will have a competitive disadvantage vis--vis a clearly positioned generic player. Industry maturity will usually widen the gap, unless such a player is capable of discovering a profitable segment. It is usually the result of a firm not willing to make trade offs, leading to what is called straddling. It tries to compete through every means, but achieves 116 none. The positioning therefore gets blurred.

EMERGING INDUSTRY

Emerging Industry An evolving industry characterized by - radical environmental changes, changing customer needs, technological innovations, ending in a differential cost economics. Eg. Digital imaging, Data Storage, Artificial intelligence). It is characterized by High level of technological uncertainty, leading to a blurred productivity frontier and steep learning curve. First-time buyers. Consumer behaviour pattern unstable and evolving. Eg. Speech recognition software's. Excessive turbulence in the dynamics of the environment, coupled with low penetration levels. Market segmentation not well defined. There is a lot117 of scope to define the rules of competition.

GROWTH / FRAGMENTED INDUSTRY

Growth Industry An industry characterized by high growth potential in the long run and where no firm has a significant market share (an edge over another) leading to clear fragmentation. It is characterized by Low entry barriers, because of lack of economies of size and scale. Eg. Consumer durables. High exit barriers because of huge investment in CAPEX. Eg. Retail and telecom. Government regulations in the form Eg. MRTP may also cause fragmentation. Diverse customer needs. Eg. Air Conditioning, Paints. Scope for players to change the rules of the game. 118

MATURED INDUSTRY

Matured Industry An industry characterized by saturation in growth rates, technological maturity, established industry dynamics, well defined consumer behavioral patterns and imperfect competition leading to near monopoly. Cartel among existing players through collusion, collaboration and cooption. Strong entry barriers, because of economies of size and learning curve effects, distribution networks, early entry and location advantages. Limited scope for innovation - technological maturity. Firms are rule takers in the segment as productivity 119 frontier is well defined.

DECLINING INDUSTRY

Declining Industry An industry which has outlived its utility due to the entry of close substitutes and or radical product innovations which results in a shift of the productivity frontier, with little or no signs of recovery. Eg. Typewriters, scooters, dot-matrix printers. Firms facing a declining phase are characterized by inertia and slow to react to environmental changes. Learning abilities have been stunted and firms adverse to investment in R&D and make fresh investments. Exit barriers are extremely high because of limited prospective buyers, backed by corporate espionage, and costly price wars. 120 Nature of competition extremely high.

COMPETITIVE STRATEGIES

Emerging Industry Set benchmarks, strictly product differentiation and not standardization, premium pricing, aggressive building of distribution networks, branding and promotion. Fragmented Industry Identify, assess and overcome fragmentation. Locate a defendable position, focus more on product differentiation or even a hybrid one. Matured Industry Sophisticated cost analysis, process innovation, increasing scope, mergers and acquisition, strictly cost differentiation. Declining Industry Redesign, reengineer, regenerate, move beyond boundaries, recreate new 121 markets, strike alliances, or else exit the segment.

RESOURCE BASED VIEW

Differentiation based on cost or products saturates and ceases to exist in the medium term. However, positions based on resources which are unique and inimitable are far more sustainable even in the long term. A firms resources can be classified into Tangible These refer to real assets. They are a standard in nature, hence very rarely confer competitive advantage as can be easily acquired or replicated. Intangible These refer to goodwill, patents, brands, and complex learning experiences in integrating and harmonizing technologies (distinctive capabilities) that play an important role in delivering competitive 122 advantage through causal ambiguity.

CAPABILITIES & COPMPETENCIES

These include a complex combinations of tangible and intangible resources that organizations use to convert inputs to outputs. Typically, they are woven around technologies; but not necessarily. There is a high degree of internal and external causal ambiguity involved in it. Hence, differentiation based on capabilities can be sustained even in the long run. They play a very critical role in shaping competitive advantage. Therefore firms should concentrate on developing complex resources that forms the very basis of differentiation. Capabilities can be generic (i.e. can be leveraged across businesses) or specific to a particular 123 business.

COMPETITIVE ADVANTAGE

124

COMPETITIVE ADVANTAGE

A competitive advantage is a position of superiority relative (i.e. not absolute) to competition. It results in a distinct differentiation advantage or a cost advantage or hybrid as well. Strategy drives competitive advantage; competitive advantage subsequently becomes the back bone for a competitive strategy. It enlarges the scope of an organization, and results in well springs of new business development. A portfolio of competitive advantage comprises strategic advantage profile (SAP). 125 Success of a strategy critically depends on SAP.

STRATEGIC ADVANTAGE PROFILE (SAP)

Organizations 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. Internal strategic fit between its strategy and dominant logics is essential for the top management to stretch and leverage SAP. Most successful organizations around the world have a 126 well balanced SAP.

VALUE CHAIN ANALYSIS

A value-chain segregates a firm into strategically relevant activities to understand its individual behaviour. Inventory Mgt to Logistics Mgt to Supply Chain Mgt. Today SCM is integrated with greening the environment as CSR practices. A VC is often compared with a relay team; each of the players need to be efficient backed by sufficient coordination at the contact points (i.e. kaizen or internal customer). Competitive advantage arises not from an individual activity but a stream of inter-related activities. VC pay-offs: better product availability, faster product launches, and enhanced customer tracking higher 127 market share. Substantial cost reductions also follow.

THE VALUE CHAIN

Infrastructure

Support

rg Ma

Human Resource Management Technology Development Procurement

in
Service

Mktg & Sales

Out Logistics

In Logistics

Operations

Primary

Ma rg in
128

STRATEGIC FIT THE PORTER WAY

The sustainability of the value chain depends on the degree of fit between the activities. Fit is important because discrete activities result in negative synergy and can also be easily copied by competitors. Operational effectiveness is not strategy. First order fit refers to simple consistency between each activity and the overall strategy. Second order fit occurs when activities are reinforcing amongst them. Third order fit refers to optimization of effort. A learning organization helps create strategic fit. A high fit involving a complex chain of activities drives both 129 competitive advantage and its sustainability.

CORE COMPETENCE

A core competence represents the collective learning's of an organization around diverse streams of technologies. It forms the very basis of competitive advantage. These skills results in distinctive activities and processes. It should satisfy the following conditions Contributes significantly to customer benefits. Cannot be easily imitated or substituted. Can be leveraged across businesses. Can be sustained even in the long run. A core competence usually has its roots in technology, but not necessarily. Core competence has a high degree of external and 130 internal causal ambiguity embedded in it.

CORE COMPETENCE
A competitive advantage does not necessarily imply a core competence; a core competence always implies a competitive advantage. A competitive advantage may or may not lead to superior performance, a core competence usually does. A competitive advantage manifests from a function; a core competence has its roots in a set of skills. A competitive advantage is sustainable in the shortmedium term; a core competence is sustainable even in the long-term. Majority of the firms have competitive advantage, only 131 leaders possess a core competence.

GAME THEORY

The game theory was developed in 1944 by Oscar Morgenstern. Subsequent work on game theory by John Nash led him to win the 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 game. 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. In fact there are no. 132 illustrations depicting a win-win situation.

BIASED AND UNBIASED GAME

A game is said to be biased when one of the players have a disproportionate chance of winning. An unbiased game is one where both the players have equal chances of winning. Firm Ys Strategy Use Radio Use Radio Use Newspaper +2 +6 Use Newspaper +7 -4
133

Firm Xs Strategy

Firm Xs Pay-Off Matrix

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 pure strategies. Firm Ys Strategy Use Radio +3 +1 Use Newspaper +7 -2
134

Firm Xs Strategy

Saddle Point

Use Radio Use Newspaper

Firm Xs Pay-Off Matrix

TYPES OF GAMES

Simultaneous Games This is a situation where the players have an option to choose to cooperate or not through collusion, collaboration or cooption. It represents the classical prisoners dilemma. However, there is likely to be temptation by any of the players to try to steal the advantage over the other by breaking the rules of the game (E.g. Coke Vs Pepsi). Repeated Games In this situation the players interact repeatedly with each other sub-optimizing the outcome possibilities. This is usually through learning by experience (i.e. iteration) rather than through 135 collusion (E.g. Yahoo Vs Microsoft).

CHANGING THE RULES OF THE GAME

In a situation where a player is unable to compete with the existing rules of the game may attempt to change the rules of the game altogether. It results in a shift in the productivity frontier. In a market dominated by price-based differentiation one may attempt to change the rules of the game by/when Bases of differentiation dependent on clear identification of what customer wants or value. Building incentives for customer loyalty. Making pricing more transparent. Game theory relies on the principle of rationality; but 136 players do not always behave rationally.

DELTA MODEL & LOCK-IN

Its a systematic approach where-in two or more industry majors, who by default has achieved a proprietary position (Microsoft Software / IBM Computers) which are not necessarily best-products in the industry, co-opt to create a lock-in. A lock-in implies that other players has to conform or relate to that standard in order to prosper. Becoming the industry standard requires strong brand, causal ambiguity, and close relationship with other companies offering complimentary services. Lock-in is self reinforcing and escalating (i.e. 137 accelerating effect).

THE THREE STRATEGIC POSITIONS

System Economics Market Dominance Complementary Share

System Lock-In

Enabled through effective use of technology

Total Customer Solutions

Customer Economics Cooperation Customer Share

Proprietary Product

Product Economics Rivalry Product Share 138

138

LOCK-IN PAYOFFS

Bill Gates is the richest man in the world not necessarily because he has developed the worlds best software's or excels at customer satisfaction; but he has got an army of people working for him who are not on his payroll all the application software providers who are writing programs based on Windows compatible operating platform. Once you create the lock-in it is sustainable because of the network effects; which creates the proverbial virtuous cycle customers want to buy the computer with largest set of applications and software developers want to write programs for the computers with the largest installed base.

LOCK-IN SUSTAINABILITY

The proponents (Hax & Wilde) believe that every organization has the ability to create and sustain a lockin positioning (though in varying degree). This system lock-in is referred to as delta delta being the Greek letter that stands for transformation and change amongst the players. The lock-in once created becomes very difficult for a firm to penetrate, and becomes a distinct entry barrier. The model is based on the belief that it compliments Porters differentiation model and RBV framework instead of contradicting them. In a lock-in strategy the performance outcomes are dependent on the success of another.

STRATEGY IMPLEMENTATION

141

STRATEGY IMPLEMENTATION

It relates to translating strategy formulations into practice. Performance realization of a strategy depends on the implementation effort. Successful implementation also depends on the appropriateness of the strategy. Since strategy implementation is a time bound process, alignment (i.e. strategic fit) is a key variable during times of radical change. Some of the other levers of successful strategy implementation are Transformational leadership and motivating power. Resource allocation; its stretching and leveraging. Compatible organization structure & control systems. 142 Inertia & resistance to change.

IMPORTANCE OF STRATEGIC FIT

Strategic fit has a central role to play in strategic management. While external strategic fit (strategy environment) is relevant for strategy formulation; internal strategic fit (dominant logic strategy) is critical to strategy implementation. A high strategic fit (co alignment) is useful because it enables Appropriate and timely response. Unlearning & learning of new skill sets. Better strategic and operational control. Resource commitment from top management. Development of capabilities & competencies. 143 Changing the rules of the game.

FORMULATION Vs IMPLEMENTATION

Traditionally, strategy formulation and implementation has been perceived to be distinct & independent. In such a situation, while control is very effective; learning levels are very low. According to Mintzberg, effective strategies are better crafted when there is a subtle overlapping between the two. In such a situation, learning levels are very high; at the cost of sacrificing a lesser degree of control. In fact, formulation & implementation can occur simultaneously. Some of the key strategic learning's exists at the 144 contact point between the organization and its

ROLE OF TOP MANAGEMENT

To bring about change and to implement strategies successfully, companies depend more on transformational leaders than transactional leaders. A transactional leader is usually confined to allocating tasks & responsibilities and extracting performance. In contrast, transformational leaders go one step beyond Design a well crafted and designed strategic intent of the organization. Install a system of shared beliefs and values. Pragmatism is the ability to make things happen. He should be an agent of change; shift from compliance 145 to commitment; bring about transparency.

RESOURCE ALLOCATION

Resources allocation includes tangible resources (Eg. land, labour, machines) referred to as threshold resources (i.e. minimum requirement). Intangible resources (Eg. brands, patents), also includes distinctive resources - capabilities and competencies. The various methods of resource allocation includes Historical Budget The budgets framed by HQ for a particular SBU keeping in mind past trends. Zero Based Budget In this case the budget of a SBU has to be worked out right from the scratch. Performance Budget SBU managers need to justify the distinctive resources in terms of the opportunity it is 146 pursuing yields the highest possible pay-offs.

CAPABILITIES & COMPETENCIES

Technology and business are slowly becoming in separable. Moreover, convergence of multiple streams of technologies at the product market level is becoming increasingly evident (Eg. Flat Screen Displays). Distinctive capabilities are complex set of skills woven around technologies; though not necessarily in the case of emerging markets. Distinctive capabilities helps in stretching and leveraging resources thereby overcoming two major constraints involved in strategy implementation times & costs. Due to causal ambiguity (complexity), these capabilities 147 are sustainable even in the medium to long term.

STRATEGY & STRUCTURE

It is a framework within which individual efforts are coordinated to bring synergy. An appropriate organization structure & adequate control systems are essential to implement strategies and achieve stated goals. The level of centralization and decentralization is decisive. Once the structure is in place, processes become people independent. A single product or a dominant business firm usually employs a functional structure. A firm in several related businesses usually employs a divisional structure. A firm in several unrelated businesses usually employs a 148 SBU structure.

TYPES OF STRUCTURES

Functional Structure Activities grouped together by a common function (Eg. Marketing, Finance). Divisional Structure Units grouped together in terms of products, processes, or geographical locations. SBU Structure Businesses segregated in terms of strategic dissimilarities (Eg. Inputs ,Technology, Output). Project / Matrix Structure A group formed for the completion of a particular project/crisis; with team members having dual line of control; disbanded subsequently. Team Structure An informal group formed for a crisis, based on skills and competencies. 149 Virtual Structure A boundary less or hollow

FACTORS INFLUENCING STRUCTURE

Size As an organizations size increases there is more specialization and differentiation leading to the top management moving away from operational issues and control, leading to a tall structure. Technology With more and more convergence of technologies in business, structures are becoming flatter and more simpler, as span is broader. Environment & People Economic and political conditions have a major bearing on structure coupled with the attitude and aspirations of the people in the organization. It includes the desire for independence, assuming responsibility, facing challenges & crises. 150

INERTIA

When a firm has been operating in a certain fashion for a long time, there is a tendency to continue along the same lines. Inertia is a characteristic of a firm that endures status quo. Most firms undergo periods of strategic continuity rather than strategic change. Inertia acts as an impediment in strategy implementation. Changes in top management and unlearning helps overcome inertia. Top managers resist change, irrespective whether it is from worse to good or good to worse. Common sources of inertia Complacency with past successes. Commitment to past strategies; size and age. 151 Beliefs & biases (i.e. dominant logic).

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 an ongoing basis to prevent deviations of fit. Deviation of fit is detrimental to performance and may lead to strategic failure. However, certain authors propose misfit as a source of superior performance. Firms should know how to learn, unlearn and relearn. To prevent deviation of fit, firms should move beyond financial performance to strategic performance as organization systems are becoming complex. 152 Continuous learning prevents trap of inertia.

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. It attempts to answer the following questions Is the strategic intent appropriate to the changing context? Are the organizations capabilities still holding good, competitive advantages becoming disadvantages? Has the company acquired any new competency? Has the company been able to overcome the environmental threats. 153 Are the strategic assumptions still valid?

STRATEGY CONTROL - IMPLEMENTATION

It involves steering the company towards its original growth trajectory & stated goals. Premise Control Checking the validity of the assumptions on which a strategy was 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. If not tackled appropriately they may throw the entire 154 strategy into hay-wire.

BARRIERS TO STRATEGY EXECUTION

Vision and strategy not actionable Utopian ideas, difficult to translate into practice. Strategy intent not linked with goals and objectives Lack of coordination at lower levels leading to negative synergy. Strategy not linked to resource allocation & capabilities Lacking commitment of top management, low strategic fit. Performance measures are defective What to evaluate against? How to measure the construct? As a saying goes, If you cannot measure it, you cannot 155 improve it.

7S FRAMEWORK OF Mc KINSEY

The 7-S Framework of McKinsey is a management model that describes 7 factors to organize a company in an holistic and effective way. Together these factors determine the way in which a corporation operates. Managers should take into account all seven of these factors, to be sure of successful implementation of a strategy. Large or small, important or not they're all interdependent, so if one fails to pay proper attention to one of them, this may effect all others as well. On top of that, the relative importance of each factor may vary over time and context. Today it is considered one of the most powerful tools for strategy implementation 156 determining success or failure.

BACKGROUND & ORIGIN

The 7-S Framework was first mentioned in "The Art Of Japanese Management" by Richard Pascale and Anthony Athos in 1981. They had been investigating how Japanese industry had been so successful. At around the same time in the US Tom Peters and Robert Waterman were exploring what made a company excellent. The 7-S model was born at a meeting of these four authors in 1978. It appeared also in "In Search of Excellence" by Peters and Waterman, and was taken up as a basic tool by the global management consultancy company McKinsey. Since then it is known as their 7-S model and is extensively used by 157 corporations worldwide to implement their strategies.

THE 7S

Shared Values It represents what the organization stands for and what it believes in. Strategy Trade-offs for the allocation of a firms scarce resources, over time, to reach identified & stated goals. Structure The way in which the organization's units relate to each other in terms of their commonalities. Style The way in which the top management influences the functioning of an organization. Systems The procedures, processes and routines that characterize how work should be done. 158 Staff Human inter-relationships, formal & informal .

STRATEGIC FIT
Strategy Structure Shared Values Systems

Skills Staff

Style

1st Order Fit 2nd Order Fit 3rd Order Fit

159

A CRITIC OF THE 7S MODEL

While the hard Ss (strategy, structure, systems) are comparatively easy to identify and influence. In contrast, the soft Ss (skill, staff, style, shared values) are very malleable and comparatively more difficult to identify & influence, because most often they are culturally embedded and often neglected during M&A. While the American cos focuses on the hard Ss; their Japanese counterparts focus more on the soft Ss for their early success and sustainability. A choice of an alphabet often limits the scope and skews the interpretation of a model. Consider the 4Ps of marketing or 3Rs of SCM. 160 Ineffective in case of a virtual company.

STRATEGY IMPLEMENTATION - ROUTES

Strategic Fit - High Organic Growth Strategic Alliance Joint Venture Mergers & Acquisition Strategic Fit - Low Take Overs
161

ORGANIC GROWTH

Here a firm builds up its facilities right from the scratch and continues to do so without any external participation. The entire infra-structural facilities are set up afresh having its own gestation and break-even, i.e. green-field projects. (Eg. Reliance Industries). It has complete control over inputs, technologies, and markets, i.e. the entire value chain. Govt. concessions are available for green-field projects. (Eg. SEZs, tax holidays, soft loans, subsidized power). Long gestation leads to delayed market entry. Risk of cost and time overruns. Develop capabilities & competencies. 162 Manage time as a source of competitive advantage.

STRATEGIC ALLIANCE

It involves a pro-active collaboration between two or more firms on a particular domain or function for mutual gain. It touches upon a limited aspects of a firms value chain. Alliances are usually in the areas of technologies or markets (Eg. Tata Motors & Fiat). Alliances are usually short-lived and disbanded once the purpose is achieved. There is no funding or equity participation from the alliance partner & both the firms continue to operate independently. It has limited intervention power and usually lacks holistic commitment from the alliance partner. It is a form of competitive collaboration. 163 It paves the way for future associations.

JOINT VENTURES

A joint venture involves an equivalent equity participation between two firms usually of similar strategic intent and comparable size to enter a particular market through a newly formed entity. It is a win-win situation for both the companies. (Eg. Tata AIG, Hero - Honda). Dominant logic of both the companies should be complimentary, leaving minimum scope of overlapping. Selecting the right partner is critical for success. A comprehensive MOU is essential. Degree and extent of management control must be clearly laid down. Both the partners should have significant linkages in value-chain to combine expertise. 164 Usually has a longer tenure than an alliance.

MERGERS & ACQUISITION

It refers to the fusion of two or more firms into a single entity; with the individual firms ceasing to exist any more (Eg. Brooke Bond & Lipton). Acquisition is an outright purchase of a firm assets by another independent entity (Eg. ITC - Tribeni Tissues, Coca Cola Thums Up). Economies in scale leading to lowering of costs. Integrated distribution channel leads to better market penetration and overall synergy. Integration of assets and other financial resources. Revival of a sick-unit through better management practices is a major motive behind an acquisition strategy. Structural side should be handled properly; otherwise it 165 can lead to failure (i.e. left alone syndrome).

TAKE OVERS

It refers to the acquisition of significant management control by buying out majority stake in a firm through due diligence or hostility (Eg. Tata Steel - Corus). Integration of organization structure & cultures is difficult, often the new firm is left alone. Instant access to capacities and markets. Larger geographical diversity. Consolidation in a fragmented industry. Most countries have stringent laws that prevents hostile take over. Inform SEBI / Stock Exchange after 5% stake is acquired. Make a public offer of not less than 20% of 166 the balance equity after take-over.

MANAGEMENT TOOLS IN STRATEGY

167

WHY MANAGEMENT TOOLS?

Change is becoming pertinent in the business 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 ensure competitive advantages doesnt become competitive disadvantages. Some tools to ensure that Benchmarking Adopt certain best practices, or better still create next practices Reengineering Redesigning work processes right from the scratch. TQM Doing the right thing the first time, every time. 168 0 Balanced Scorecard Tracking strategy 360 .

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 worldclass. 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. Firms are moving towards next practices as best 169 practices make firms look more and more homogeneous.

SOME BEST PRACTICES

Dell: Customized configuration of computers. Caterpillar: 48 hours delivery anywhere in the world. Citi Bank : Priority banking services. Maruti: Certified true value pre-owned cars. Microsoft: ESOP to employees. Infosys: Customized work-stations. TCS: Referencing potential new recruits. ITC: Shareholders factory visit. AmEx: Outsourcing data warehousing mining. MARG: Set-top box to study viewing patterns. 170 Honda: CEOs visit to dealers.

TYPES OF BENCHMARKING
Functional Used by companies to improve a particular management activity. Eg. Motorola learnt delivery scheduling from Dominos. 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 miniaturization skills of Sony. Strategic It involves assessing business models and replicating them in a different market. Eg. Reliance 171 replicating AT&T business model.

HOW TO BENCHMARK?

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 its implementation. Phase 4: Action Implement and monitor progress. Measure results against stakeholder wants and needs. 172 Recalibrate or outperform benchmarks.

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 different industries. Types Internal It involves benchmarking against its own branches, divisions, SBUs. Proximity to data and cooperation is taken care of automatically. External It involves benchmarking against firms that succeeded on account of their best practices. It may also involve benchmarking against world-class firms. Friction may arise due to presence in competing 173 industries.

BENCHMARKING - ADVANTAGES

Finding better ways of meeting stakeholder needs. Organizational learning comes from internal as well as external sources. Establishing goals based on formal assessment of external conditions. Defining effective measure of indicators, facilitate comparison, adopt from other organizations. Ensuring a continuous learning organization. Reducing competitive disadvantage. Organizational turnaround, especially effective in case of a wide strategic drift when differentiation strategies 174 fail to work.

BENCHMARKING - LIMITATIONS

More and more companies benchmark, the more similar they end up looking. While strategy is all about differentiation and not looking alike. 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 175 the industry as a whole.

RE-ENGINEERING

Redesigning leads to identification of superfluous activities or product features (i.e. process mapping) and eliminating or improving them (E.g. Windows 95 to 97). Re-engineering attempts to radically change an organizational products or process by challenging the basic assumptions surrounding it, for achieving performance improvement (E.g. 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 176 culture and mindset.

REENGINEERING KEY TENETS

Ambition Focus Attitude Enabler Performance

Large scale improvement by questioning basic assumptions about how work is done Micro Vs Macro Business Processes Vs Organisational Processes Starting right from the scratch Not historical More IT driven, than people driven Innovative Vs Traditional Customer centric Vs Organisational centric
177

REENGINEERING - LEVELS

Reengineering can be successfully leveraged at all levels of an organization with varying degree of results. It can be of the following types Functional It looks into the flow of operations (i.e. products, structures, processes, etc) and supports the organization for the present. Business It looks into markets, customers and suppliers and protects the organization from the future (i.e. BPR). Strategic It looks into the process of strategic planning, resource allocation and prepares the organization for the future through a reorientation of 178 the entire strategic architecture. .

REVERSE ENGINEERING

It is a process by which a product is dismantled and analyzed 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, Indonesia). While traditional manufacturing is a bottom-up approach; reverse engineering is a top-bottom approach. It generally acts as a threat to innovation. However, protection can be had in the following ways Patenting. Early entry advantages, learning curve advantage. 179 High cost and time acts as a deterrent.

STAGES IN REVERSE ENGINEERING

Awareness Recognizing whether the product is found to be worth the time, cost and effort necessary for the purpose of reverse engineering. Inaccurate assessment at this stage may lead to a failure of the entire project. Actualization 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 180 different from the original innovator.

WHAT IS QUALITY?

It involves the totality of a product or service in meeting certain stated or implied needs. More and more companies are moving towards meeting implied rather than stated needs. It has eight 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 Emission standards - Euro IV. Durability 1980 manufactured cars still on road. Serviceability Large no. of service stations. Aesthetics Appeal in design. 181 Perception Customer notions.

TOTAL QUALITY MANAGEMENT

Objective Management of quality ensures conformance to certain pre-set standards, zero defects, which ensures good market standing. Management of quality was traditionally inspect it - fix it in nature, touching upon a limited aspect of a value chain. It had little impact on improving overall productivity. TQM is a way of creating an organization culture committed to the continuous improvement of work processes Deming. It is deeply embedded as an aspect of organisational life 182 & culture.

TQM KEY TENETS

Do it right, the first time From reactively fixing error in products to proactively preventing errors from occurring at the first place (Juran). Be customer centric Generate the concept of internal customer (Ishikawa). 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 decision183 making and fairly rewarded for results.

TQM - STRATEGIES

Outsourcing It is the process of self-contracting services and operations which are routine and mundane, enabling the firm to concentrate on core activities essential to customer satisfaction. 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). 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. It is based on the 184 principles of MBO (i.e. equal participation).

BALANCED SCORE CARD

Some interesting comments ......... Efficiency and effectiveness is pass, 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 isnt (bad strategy) ..... its bad execution.
Source: Fortune Magazine Why CEOs fail?
185

BSC - CONCEPTUALISATION

A companys performance depends on how it measures performance. Most managers tend to rely on traditional measures of performance having its origin in finance as they are well tried and tested. These measures worked well when organizational systems were simple and unidirectional and more importantly the environment was static. In todays context when organizational systems have become complex and multi-directional we need to have a holistic view of performance to cut the lag effects. Organizations need to move from financial to strategic 186 performance. Focus more on causes, rather than effects.

BSC KAPLAN & NORTON (1992)

A BSC helps a manager to track and communicate the different elements of companys 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? Firms more often have problems, because they have too many. The most critical element of a BSC is to measure these four dimensions, and distinguish strategic 187 problems from operational ones.

CUSTOMER PERSPECTIVE

GOALS Products Supply Preference Relationship

MEASURES Relative market share (%) % of sales from new Vs proprietary products Timely deliveries and service Customer credit analysis (i.e. ageing schedule) % of key customer transactions Ranking of key customer accounts No. of visits or calls made % of NPAs
188

BUSINESS PERSPECTIVE

GOALS Skills Excellence Exposure Introduction

MEASURES New capabilities and competencies Implementation & gestation period Bank and supplier credit limits & PLR Unit Costs / Conversion Ratio / Defect Ratio No. of times covered in media No. of new product launches Vs competition Product pricing Vs competition
189

LEARNING PERSPECTIVE

GOALS Technology Manufacturing Focus Timing

MEASURES No. of new patents registered Time to develop next generation products Average and spread in operating cycle % of products that equal 2/3 sales No. of product innovations
190

FINANCIAL PERSPECTIVE

GOALS Survival Success Prosper Divestment

MEASURES Cash flows Growth in Sales and Profits EPS, Return on Investment Market Capitalization / PE ratio
191

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

5
STRATEGY

Make strategy a continual process

3 Align the organization to the strategy

4 Make strategy everyones job

192

BSC - ADVANTAGES

Most often top managers face information overload. As a result, they dont know - what they dont know. Modern managers should be poised to ask the right questions. The BSC brings together the different elements of a companys 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. Seek excellence, 193 performance will automatically follow.

EFFICIENCY Vs EFFECTIVENESS

Ineffective Inefficient Goes out of Business quickly

Effective

Survives

Efficient

Dies Slowly

Thrives
194

EFFECTIVENESS + STRATEGY

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

195

CORPORATE RESTRUCTURING

196

CORPORATE 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 organizations thinks and looks (Eg. Tata Group). As Peter Drucker pointed out, every organization must 197 be prepared to abandon everything it does.

RESTRUCTURING BASIC TENETS

Customer Focus Restructuring ideally begins and ends with the customer. Companys should go beyond just asking what he expects. Instead, they should strive to provide unimaginable value ahead of its time (Eg. Walkman, Fax, ATM, etc). Internal customers should also not be neglected. Core Business Companys should introspect What business are we in? Business evolved out of opportunism or myopia should be divested, and dividing the core businesses into SBUs (i.e. down-scoping). Structural Changes Conventional hierarchical structures should be disbanded in favour of more flexible 198 ones (i.e. downsizing or rightsizing).

RESTRUCTURING BASIC TENETS

Cultural Changes A culture represents the values and beliefs of the people about the organization. Restructuring also requires cultural reorientation. It is created and institutionalized by the top management. During the times of JRD, the Tatas were considered a benevolent and charitable organization, ..... Ratan Tata now drives the point the group means business.) Reliance dismantled their industrial embassies ..... started focusing on their capabilities.) The Aditya Birla group typically relied on the marwari community for key management positions ..... Kumar 199 Birla today is more dependent on professionals.

MOVING CLOSER TO THE CUSTOMER

As companies evolve, they tend to move away from the customer. Restructuring provides a platform to close this gap. Communicating to the media about organization efforts to deliver quality products. Getting feedback & addressing customer complaints. Organizing customer and supplier meets. Publicizing welfare projects to demonstrate CSR. Carry out PR campaigns. Use the reach of networking technologies. Hondas ad says, one reason our customers are 200 satisfied is that we arent.

ASSET RESTRUCTURING

Asset Restructuring The asset composition of a firm undergoes a major change, including its intangibles Mergers It may be vertical, horizontal, or conglomerate. Further, it may be smooth (Eg. Tata Corus) or hostile (Eg. Mittal Arcelor) and can take various forms. Asset Swaps It entails divesting and acquisition simultaneously by two companies, where the difference in valuation is settled off through cash or equity (Eg. Glaxo Heinz). Hive Off It involves siphoning of assets under control. It may include brands as well. It can have two forms; spin-off and equity carve. Further spin-off can be 201 classified as split-off and split-up.

HIVE OFF

Spin-Off A spin off is the creation of a new entity; in which 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. Most of these practices are not in consonance with Indian laws. Equity Carve It involves selling a minority stake to a third party while retaining control (Eg. Tata Industries 202 selling 20% stake to Jardine Matheson).

DIVESTITURE

It involves the sale of a brand or a division of a company to a third party, for a specified market or in general with full management control. Generic motives include Raise working capital; repay long-term debts. Poor performance; strategic misfit. In 1995, Parle sold its Thums Up brand to Coke for $40 million apprehending fierce competition. In 2005, L&T sold its cements division to Aditya Birla group, but retained its engineering division. A complete sell-out is known as divestment (TOMCO). 203 Selling out in phases is called disinvestment (IPCL).

CAPITAL RESTRUCTURING

Capital Restructuring - The internal & external liability 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). It provides greater leverage as well as management control. Conversion Replacing debt with equity or vice-versa or 204 costlier with cheaper debt or cross currency debt.

BUSINESS RESTRUCTURING TATAS

Divestments Lakme Rs. 256 cr ACC Rs. 950 cr Merind - Rs. 42 cr Tata Timken Rs 120 cr Voltas - Rs. 230 cr Goodlass Nerolac Rs. 99 cr Diversifications Tata Motors Rs. 1700 cr Trent Rs. 120 cr Tata AIG Rs. 250 cr Tata Telecom Rs. 1170 cr Tata Tetley Rs. 1890 cr Tata Power Rs. 1860 cr CMC Rs. 150 cr VSNL Rs. 1439 cr
205

ORGANIZATIONAL RESTRUCTURING

Organizational structure and systems calls for a change when strategic variety is apparent. It can be carried out in the following ways Downsizing It is a systematic one-time reduction in the no. of a firms employees and sometimes in the no. of operating units, usually as a result external turbulence, keeping the composition of business intact (Jet Airways). Survival is the primary motive. Rightsizing It is phasing of excess and redundant employees resulted out of faulty internal planning (SAIL). Turnaround is the primary motive. Downscoping It involves reducing the business and/or geographical scope of a firm (Aditya Birla group). 206

STRATEGIC CHANGE

One of the most difficult components of organization restructuring is the mindset of the top management represented through its dominant logic and its shared values reflected in cultural orientation. The dominant logic represents the perceptions and biases (i.e. thumb rules) of the top management. Dominant logic becomes deep-rooted in organizational contexts depending on the period it is in place (tenure of the CEO). The longer the period, the more difficult it becomes to uproot the paradigm (i.e. inertia). Strategy change is unviable without a preceding change in its dominant logics, as strategies are based on such 207 beliefs and biases.

FORCES AGAINST STRATEGIC CHANGE

The problem with strategic change is that the whole burden typically rests on few people (i.e. 20% of the people carry out 80% of the changes). Companies achieve real agility only when people at every level rise above the ordinary to face the challenges revitalization or transformation. In most organizations, the factor that stifled change & performance was culture. Successful transformation requires incorporating employees fully into the process leading from a different place so as to maintain employee involvement instill mental disciplines that will enable employees to 208 behave differently.

SUCCESSFUL TRANSFORMATION

Build an intricate understanding of the business model at all levels of the organization. Encourage uncompromising straight talk. Manage from the future. The best way is to alter the institutional point of view. Harness setbacks, it is not about winning but about learning. Promote inventive accountability; process ownership. Understand and deliver the quid pro quo. Create relentless discomfort with the status quo. Questioning every basic action of the organization, 209 never take no for an answer.

FORCE-FIELD ANALYSIS

A force-field analysis provides an initial overview of change problems that needs to tackled, by identifying forces for and against change. Culture and style of management are two main impediments in force-field analysis, also known as cultural-web. It involves identifying Aspects of current culture which needs to be reinforced. Aspects of current culture which needs to be overcome. Identify and implement facilitators of cultural change. It involves diagnosing a change situation systems & structures, that can be both enablers and blockages to 210 change and restructuring.

RESTRUCTURING - OUTCOMES
Alternatives Organizational Short - Term Reduced labour costs Reduced debt costs Emphasis on strategic control Business High debt costs Higher risk
211

Long - Term Loss of human capital Lower performance Higher performance

Capital

NUMERATOR & DENOMINATOR MGT

Most firms across emerging markets undergo strategic discontinuity and as a result are forced to restructure their businesses. In order to put back the company on the right track they are resort to Denominator It assumes that turnover cannot be increased, hence go in for downsizing, down-scoping or asset stripping. Numerator It assumes that turnover is not a barrier or constraint; focuses on reengineering, reverse engineering and regenerating. While the first strategy produces results instantaneously; the second one is a more viable strategy and sustainable 212 option in the long run.

TURNAROUND MANAGEMENT

213

WHY TURN AROUND MANAGEMENT?

Some interesting insights ....... Only seven of the first fifty Indian business groups in 1947 were even in business by the turn of this century, and that the thirty-two of the countrys 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. Why do firms atrophy? Source: (Business Today, January 1997). 214 (Govindarajan and Trimble, 2006).

TURN AROUND MANAGEMENT

A turnaround is said to occur when a firm perseveres through an existence threatening performance decline; ends the threat with a combination of strategies, skills, systems, and capabilities; and achieves sustainable performance recovery. Both content (what) and process (how) are equally important for a successful turnaround. While content focuses on endogenous and exogenous variables; process focuses on A logic to explain a causal relationship between intervening variables. A category of underlying principles and concepts. 215 As a sequence of events describing how things change

TURNAROUND INDICATORS

Most firms atrophy simply because they fail to diagnose the indicators that acts as threat to organizational existence. Some indicators Continuous cash flow crises as a result of dwindling market-share and profits. Substantial shifts in consumer preferences. Low employee morale leading to high employee attrition at all levels, especially in key positions. Uncompetitive products or services, leading to lack of acceptability from distributors and customers. Rising input costs, unavailability or radical lowering of substitute costs or technological obsolescence. Low stakeholder confidence; suppliers and bankers.216

TURNAROUND ILLUSION

The first step to a successful turnaround is the basic acceptance of the fact that .. all is not well, which most top managers fail to appreciate. Hence, they adopt surface level measures (disprin popping) which most often fail. Common approaches adopted 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 advertising and market penetration. 217 Extending work hours, prune work-force.

TURNAROUND STAGE THEORY

Stage 1 Decline Stage 2 Response Stage 3 Transition Stage 4 Outcome

Performance

Equilibrium Line

Success Failure Indeterminate

Nadir

Time
218

DECLINE

Decline is the first stage in the turnaround process. It involves the identification of 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 environment led fit that subscribes to the view that a firm has little control over external factors. R-Extinction It suggests that organization factors, primarily dwindling resources and capabilities are responsible for decline. It has its origin in resource led stretch and subscribes to the view that a firm has substantial power to override the context. Identification 219 of the stimulus leads to the arrest of the downfall.

RESPONSE INITIATION

Turnaround responses are typically categorized as operating or strategic. Operating responses typically focuses on the way the firm conducts business and involves tactics geared towards cost cutting and process redesigning (BPR). Strategic responses focus on changing or adjusting the business the firm is engaged in through long term moves such as integration, diversification, new market initiatives, asset reduction. The response must match the cause of the decline. If the decline stems from structural shifts, the response should be strategic. If the underlying cause is internal 220 efficiency, the response should be operational.

RESPONSE DICHOTOMY

The response initiation is somewhat dichotomous and cannot be universally applicable. Untangling this question brings into focus three events Domain Many of the strategic cures have limited applicability for an affiliated firm. Similarly new market initiatives is feasible only for multi-product firms. Scope A diversified conglomerate may acquire a distressed business to turn it around and gain valuable synergies; which may be unavailable to a focused firm. Contour It is easier to reverse decline in the earlier stages through operational measures; when decline 221 deepens shifts in strategic position becomes essential.

TRANSITION

Transition usually reflects the first signs of recovery. However, substantial amount of time usually passes before results begin to show (i.e. lead lag). Empirical studies show that average time is 7.7 years with a range of (4-16) years. However, many a times early signs of recovery fades out. Sustenance is the key factor in this stage. Effective levers of transition. The top management has a key role to play through empowerment, transparency, role model, confidence building measures, participative management (i.e. consensus). Support from all the stake holders through resource 222 commitment.

OUTCOME

Outcome is said to be successful when a firm breaches the equilibrium performance level. Failure is an indication that initial momentum was not sustainable characterized by irreversibility. Instead of focusing on financial parameters alone, it should adopt a holistic approach. Cut off points must be unequivocal. Share price indications and media coverage. Regaining lost market share and distributor confidence. Revival of key customers and new product launches. Commanding a premium in the market. 223 Supplier and banker confidence.

COOPERATIVE STRATEGIES & ALLIANCES

224

COOPERATIVE STRATEGIES

Cooperative strategies are a logical and timely response to changes in business dynamics, technology, and globalization . It can assume any of the following forms franchising, licensing, consortia, supply-chain partnership, strategic alliance, or joint venture. Any cooperative strategy maybe between firms within the same country or cross border as well. In the cooperative strategy continuum as firms move up the value order, the commitment and the involvement between the firms increases manifold. More and more companies worldwide are moving away from competition to co-option to leverage their 225 resources and enhance bargaining power.

FRANCHISING

Franchising It is a contractual agreement between two legally independent firms whereby the franchiser grants the right to the franchisee to sell the franchisors 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. Branding is critical to franchising. Switz Foods, owners of the brand Monginis allows its franchisees to sell its confectionary products. Titan Inds, owners of the brand Tanishq allows its 226 franchisees to sell its jewellery products.

LICENSING

Licensing It is a contractual agreement between two legally independent firms whereby the licensor grants the right to the licensee to manufacture the licensors product and do business under its brand-name in a given location for a specified period of time for a consideration. Different levels of licensing Manufacturing without embracing any technology (CBU). Develop a product through its crude stage, refine processes and adopt necessary technologies (SKD). Become a systems integrator (CKD), as in Tata Indica. HM manufacturing GM range of cars in India with a 227 buy-back arrangement is a perfect example of CBU.

CONSORTIA

Consortia They are defined as large inter-locking relationships & cross holdings between businesses in a similar industry. It can be of the following types Multipartner Intends to share an underlying technology or asset, leverage upon size to preempt competition by escalating entry barriers (Eg. Airbus Boeing). Cross Holdings A maze of equity holdings through centralised control to ensure earnings stability & threshold resources for critical mass (Eg. Tata, Hyundai). Collusion Few firms in a matured industry collude to reduce industry output below the equilibrium level, enabling them to increase prices (Eg. Coke Pepsi).228

SUPPLY CHAIN PARTNERSHIP

It is a pro-active & collaborative arrangement between supplier and customer aimed at achieving better control over the value chain (Eg. Tata Motors IDEA). Companies in different industries with different but complimentary skills, link their capabilities to create value for end users. It usually provides a platform to sort out differences between conceptualization and implementation to suit local market needs. Continuous sharing of knowledge is critical to the success of a supply chain partnership, otherwise it 229 becomes routine outsourcing.

STRATEGIC ALLIANCE

It is an short to medium term understanding between two or more firms to share knowledge and risk, to gain knowledge and to obtain access to new markets (Eg. Tata Motors Fiat, Reliance Du Pont). Despite their popularity (50-60)% of the alliances fail to accomplish their stated objectives. Partner selection is one of the critical success factors. Firms should undertake a long courtship with potential partners, instead of hurrying into a relationship. Generic motives involved are - learning organization, design next generation products, effective R&D management, enhance credibility, preempt competition, 230 enter newer markets.

STRATEGIC ALLIANCE - TYPES

Collusion Tacit top management understanding to neutralize price wars (Eg. Coke Pepsi). Complementary Equals Two firms mutually promoting each others complimentary products (Eg. Whirlpool Tide, Bajaj Castrol). 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 231 (Eg. Maruti).

PARTNER SELECTION CRITERIA

It is likely that partners will not have complete consent on alliance objectives because the institutional context in which the alliance embedded varies from country to country. Cultural orientation has been found to have a profound effect on top managements strategic orientation (Eg. Japan Vs US). Differences in level of economic development can produce differences in alliances motives. Firms from developed markets seek access to markets and firms from emerging markets seeking access to technology. 232 Too much stress on financials & structure be avoided.

PARTNER CHARACTERISTICS

Complimentarity of Capabilities The degree to which partners resources can be used in conjunction. Dominant Logics Similarity in beliefs & biases. Unique Resources Abilities or skills which cannot be easily duplicated. Intangible Assets Move beyond the financials of the firm. Willingness to share knowledge and skills. Partners ability to acquire fresh skills. Experience related to previous alliances. Managerial capabilities, including ability to provide 233 quality products and services.

MANAGING ALLIANCES

Alliances are more than just a deal; instead of focusing controlling the relationship, partners should nurture it. Selection & Courtship It involves self analyzing, understanding the chemistry, degree of compatibility. Getting Engaged It should incorporate a specific joint activity; vows to include commitment to expand the relationship; incorporating clear signs of continuing independence for all partners. Setting up the housekeeping, the value chain. Learning to collaborate strategic, operational & cultural integration. 234 Changing within; differences not anticipated earlier.

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. Conceptually, a joint venture is a selection among modes by which two or more firms can transact. 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. 235 It lasts till the vision is reached; separation is very bitter.

JOINT VENTURE GENERIC MOTIVES

Transaction Cost The situational characteristics best suited for a JV are high performance uncertainty; in addition to a high degree of asset specificity. The market fails as sellers are unwilling to reveal their technology and buyers are unwilling to purchase in the absence of inspection. Strategic Behaviour Firms may override transaction costs, though more profitable alternative to other choices. It may also be linked to deterring entry or eroding competitors position. Organizational Learning It is a means through which a 236 firm learns or seeks to retain their capabilities.

OTHER 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)

237

RISKS INVOLVED

Incompatibility Differences in cultural 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 If the cost of continuing exceeds the exit costs? 238 Eg. Tata Aditya Birla in Idea Cellular

PRE-REQUISITES FOR SUCCESS

Commitment Mutual trust, respect, time sharing. Objectives Shared vision. Partner Avoid duplication of skills and capabilities. Agreement Clarity on operational control. 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. 239 Costs Other modes of transaction becomes cheaper.

MERGERS & ACQUISITION

240

MERGERS & ACQUISITION

A merger is a mutually beneficial consent between two or more firms (usually of similar size) to form a newly evolved entity by absolving their individual entities to preempt competition (Eg. Brooke Bond Lipton). The larger objective is to leverage on size. An acquisition is the purchase of a firm by a firm (of larger size, however, reverses are also taking place through LBO) 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. Ranbaxy - Daichi) and hostile if it is without the consent of the management (Eg. Mittal Arcelor). Most countries have stringent laws that prevents hostile 241 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 and confidence of all the major stakeholders. Acquirer Someone (individual or firm) 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 that it acquires. Preferential A preferential allottee ending up acquiring 5% stake also comes under its purview. Control A special resolution of 75% of the share 242 holders approving the change of guard.

SEBI TAKEOVER CODE, 2002

Pricing Acquirers will have to offer minority shareholders (at least 20%) the past 26 weeks or past 2 weeks average price, whichever is higher as an exit route (Eg. Grasim L&T Cement, Gujarat Ambuja ACC). Disclosure All acquirers have to inform the respective stock exchanges where it is listed and SEBI upon acquiring the basic limit and upon every incremental limit thereon. SEBI In case of a hostile take over, the SEBI can intervene and block share transfers if: the acquirer has ulterior motives (i.e. asset stripping), credentials or track record is at stake, and/or does not enjoy the confidence 243 of the different stake holders.

TYPES OF MERGERS

A business is an activity that involves procuring of desired inputs to transform it to an output by using appropriate technologies and thereby creating value for its stake holders in the process. The type of merger is depends on the degree of relatedness (strategic) between the two businesses. Horizontal It involves integration of two highly related businesses (Eg. Electrolux - Kelvinator). Vertical It involves complimentarily (partially related) in terms of supply of inputs or marketing activities (Eg. Godrej, Reliance). Conglomerate It involves integration of two distinctly 244 unrelated businesses, usually opportunistic (Eg. ITC).

MERGERS & ACQUISITION - MOTIVES

Increased market / conglomerate power. Reduction in risk. Economies of size, scale and scope. Overcoming entry barriers (Eg. Tata Steel 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). Acquiring assets or capabilities (Eg. ICICI ITC Classic). Global image (Eg. Mittal Arcelor). Ulterior motives (Eg. Asset Stripping Shaw Wallace). 245 Coinsurance effect Higher debt raising capability.

MERGERS & ACQUISITIONS - PITFALLS

Cultural differences (Eg. Tata Corus). Overvaluation of buying firms (Eg. When Tata Steel started negotiations with Corus, their initial offer was around 420 pence/share; while the ultimate acquisition was made at 607 pence/share). Overvaluation is often as a result of an ego drive and substantially affects future returns. Merging of organisational structures. Inability to achieve synergy. Managing over-diversification. Managing size. Top management overtly focused on due diligence 246 exercise and negotiations; neglecting core business.

MERGER TYPE & PLC

Introduction A larger firm may acquire a newly formed entity with an objective to preempt new competition or acquire its license (Eg. Kingfisher Air Deccan). Growth This stage may witness parallel merger of two firms of similar size; with an objective to reinforce its growth trajectory or to take on the might of a comparatively larger player (Eg. Brooke Bond Lipton). Maturity A larger firm acquires a smaller firm with an objective to achieve economies of scale and experience curve effects (Eg. Tata Steel Corus). Decline Horizontal mergers are undertaken to ensure 247 survival; vertical to save transactions costs.

INTERNATIONAL M&A - FRAMEWORK

Positive contribution to the acquired company. An acquisition just for the sake of it or reputation yields very little value in the long term. A common shared vision. Strong differences may stifle plans and its execution. A concern of respect and trust for the business of the acquired company. Left alone syndrome; active top management intervention in phases. Immediate attempts to super impose structure and culture may cause bottle necks. Blanket promotions across entities and confidence 248 building exercises needs to be practiced.

INTEGRATION - BLUEPRINT

Take the media into confidence. They can carry the message to the various stake holders. 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. 249 Do not ignore the people factor.

M&A - VALUATION

The process of valuation is central to M&A. While under valuation may be a significant opportunity; over valuation can become a curse. Valuation decisions are arrived through a due diligence process when the prospective acquirer gets access to the books of accounts of acquiring company. The process takes (6-12) months. Financial motives Undervaluation relative to true value. Market for corporate control. Unstated reasons Personal self interest and hubris. Synergy Potential value gain from combining 250 operations (i.e. operational & financial).

VALUING OPERATIONAL SYNERGY

Synergy It refers to the potential value gain where the whole is greater than the sum of the parts. Synergy can be negative as well; when the fit between the two entities is very poor. 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 251 (Eg. Innovative product Good distribution network).

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 unutilized by a loss making firm, but availed after being merged with a 252 profitable firm (Eg. ITC Bhadrachalam Paper).

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. The likelihood of default decreases when two firms' assets and liabilities are combined through a M&A compared to the likelihood of default in the individual companies. It relates to the concept of diversification, as risky debt is spread across the new firm's operations. Default risk comes down and credit rating improves. 253 Coupon rates may also be negotiated at lower rates.

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. 254 Assessment of perceived quality is critical.

LEVERAGE BUYOUT (LBO)

The basic difference between a take-over and a LBO is the high inherent leverage (i.e. debt component) at the time of buyout and rapid changes in capital structure over time. LBO facilitates a relatively smaller firm to bid for a comparatively larger firm in the bid for management control. Confidence of investment bankers and the international financial community is essential. It is a very costly and risky proposition. The assets of the acquired company are used as collateral for the borrowed capital, sometimes in 255 combination with the assets of the acquiring company.

TO GO PUBLIC OR NOT?

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 and increased revenue. However, the advantages of going public includes access to financial markets, liquidity, on-going 256

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 capital structure). 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 and wresting management control. Cost of debt coming down (i.e. co-insurance effect). 257 Cash trapped company unable to utilize opportunities.

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 / pledges assets and pays off debt, leverage is expected to decrease over time. Any discounting has to reflect these changing cost of capital. Lack of sufficient cash flows to repay costly debts resulting in a possible debt trap. A LBO has to pass two tests to be viable Restructuring to pay-off increased debt. 258 Increase equity valuation.

REVERSE MERGER

Reverse Merger The acquisition of a public company, which has discontinued its operations (i.e. shell company) 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. 259 Facilitates better valuation and forthcoming offerings.

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. Initial anomaly in stock prices usually normalizes over a 260 period of time (6-12) months.

EFFECT OF TAKE-OVER ANNOUNCEMENT

The effect of take-over announcement on bidder firms 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 failure negative returns to the extent of 5% on bidder firm stock prices is reflected. However, as stock markets become more and more perfect such anomalies would reduce over time.
Source: Jensen and Ruback, 1983. Bradley, Desai, and Kim, 1983. 261 Jarrel, Brickley, and Netter, 1988.

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 262 the raider to strip off..

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 companys 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 263 pressure tactics (Eg. Shapoorji Pallonji).

COMPETING FOR THE FUTURE

264

GETTING OFF THE TREADMILL

Canon overpowering Xerox; Honda overpowering Volkswagen; Honda overpowering GM; Nokia overpowering Motorola; Hitachi overpowering Westinghouse; Wal-Mart overpowering Sears; Compaq overpowering IBM; British Air overpowering Pan Am. Most companies were too preoccupied with the present than the future? 99% of the companies overpowered, were spending 99% of their precious time dealing with present. The reverse was true for the companies overpowering. What went wrong???? What were they doing with the 265 present? What were they pre-occupied with?

THE PAST OF COMPETITION

Beyond Restructuring When a competitiveness become inescapable problem (stagnant growth, declining margins, falling market share), CEOs brutally pick up the knife and ruthlessly carve away layers of corporate flab (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 stuck to their restructuring strategies (like building pyramids) and didn't know what to do next? 266 Thus they became history? (like the pharaohs)

THE PRESENT OF COMPETITION

Beyond Reengineering Numerator based managers (innovation) at least offers some hope. However, incrementalism or nominal innovation has almost reached a plateau; ensuring only survival of the present; but not of the future. A poll in circa 2000 revealed that 80% of the U.S. top managers believed that quality will be a source of competitive advantage of the future. On the contrary only 20% of Japanese managers believed that quality will be a source of competitive advantage of the future. 267 The future is not about catching up with competition;

THE FUTURE OF COMPETITION

Regenerating Leaner, better, faster; as important as these may be, they are not enough to get a company to the future. Companies need to fundamentally reconcieve itself; reinvent its industry; and regenerate its strategies (breaking its managerial frames). Creating the future requires industry foresight. It is based on deep insights into trends in technology, demographics and lifestyles. It involves Dream about the companys future; dont predict. Create a potential gap; aspirations and resources. Transform the industry; not just the organization. 268 Empower from bottom to top; not the other way.

ABOUT THE DREAM

Which customers will you be serving? What will the potential customer look like? Who will be your future competitors? What will be the basis of your competitive advantage? Where would your margins come from? What will be your future competencies? Which end product markets would you cater?
269

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, hence do not fall sick in the first place. Therefore, they do not need to restructure. It is about deliberately creating a strategic misfit. It drives a hunger and a passion to transform. Change in at least one fundamental way the rules of engagement in an industry. Redraw the boundaries between industries, by converging technologies complex. Create entirely new industries (i.e. blue oceans). 270

ABOUT THE EMPOWERMENT

Bring about a revolution (a paradigm shift) in the organization. More importantly, the revolution must start at the bottom and spread in all directions of the organization. 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 lead the way. Such a process is called institutionalization (from 271 people centric to organisational centric).

THE FUTURE OF STRATEGY

A company must get to the future not only first but also for less. 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 LCD; South West Airlines LCC, Apple iphone). It requires a lot of common sense and a little bit of out of the box thinking. An ability to energize the company. Get to the future first, without taking undue risk. 272 Companies need to strategize (think ahead of times).

HOW DOES THE FUTURE LOOK LIKE?

There is no rule which says that for every leader there will be a follower. As there is no one future; but hundreds. We are in the midst of a 3600 vacuum; each point in space represents a unique business opportunity. The farther one can see in this endless space, the farther it will be away from competition. Companies of the future will be not based so much on the strength of their resources, as on their aspirations. What distinguishes a leader from a laggard; greatness from mediocrity, is the ability to imagine in a different 273 way what the future could be.

THE EMERGING STRATEGY PARADIGM

Not Only
Reengineering Processes Organizational Transformation Competing for Market Share

But Also
Regenerating Strategy Industry Transformation Competing for Opportunity Share

The Competitive Challenge

Finding the Future

Strategy as Learning Strategy as Positioning Strategy as Engineering Strategy as Unlearning Strategy as Dream Strategy as Architecture
274

THE EMERGING STRATEGY PARADIGM

Not Only But Also

Mobilising for the Future

Strategic Fit Resource Allocation Strategic Misfit Resource Stretch & Leverage

Getting to the Future First

Existing Industry Structure Product Leadership Single Entity Product Hits & Timing Future Industry Structure Competency Leadership Dominant Coalitions / Co-option Market Learning & Preemption 275

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 Time t4 t5
276

CORE COMPETENCE

A core competence relates to a bundle of skills (not an asset or a business) that revolves around activities or processes and critically underpins a firms competitive advantage. It represents the collective learning's of an organization centering around diverse streams of technologies. It is characterized by the following Unique It provides unimaginable customer value ahead of its times. Inimitable & Insubstitutable A high degree causal ambiguity between these skills yield sustainable competitive advantage. It cannot be matched even by its closest competitors. 277 Leverage They are the gateways to future markets.

MORE ABOUT CORE COMPETENCE

Sony miniaturization; Honda engines; Wal-Mart logistics; SKF antifriction and precision, Coca Cola brand, Nike designing; Canon imaging; Intel nano-electronics; Toyota lean manufacturing; Toshiba flat screen displays. Core competencies are the roots of the organization. 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 organization. Most companies around the world do not possess one; 278 leaders have one, at the most three to four.

ROOTS OF COMPETITIVENESS

End Products

10

Core Businesses

Core Business 1

Core Business 2

Core Business 3

Core Business 4

Core Products Core Competencies

Core Product 2 Core Product 1

Competence 1 Competence 2 Competence 3 Competence 4 279

RESOURCE STRETCH & LEVERAGE

Initial resource position is a very poor indicator of future performance. It leads to atrophy and stagnation. Successful companies consciously create a potential gap between aspirations and resources. Resource crunch is a common factor among firms that faces a wealthy rival, and outperforms them. Leveraging what a company already has, rather than allocating it is a more creative response to scarcity. By concentrating existing resources. By accumulating existing resources. By complementing existing resources. By conserving existing resources. 280 By recovering existing resources.

CONCENTRATING RESOURCES

Concentrating It involves effectively directing portfolio of resources on key strategic goals in which individual efforts converge over time. It is a balance between individual mediocrity and collective brilliance. It is achieved through Converging Redirecting multiple diverging (i.e. fragmented) short term goals into one long term goal. It is then resources can be 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 281 likely to have the biggest impact on customer value.

ACCUMULATING RESOURCES

Accumulating Using existing reservoir of resources to build new resources. Each and every individual is a rich & potential source of learning, discover better ways of doing things. 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 Utilizing resources outside the firm through licensing, alliances, joint ventures. A firms absorptive capacity is as important as its inventive capacity. 282

COMPLEMENTING RESOURCES

Complementing Using resources of one type with another that aligns smoothly to create higher order value. In a way it produces an accelerating effect on each individual resource. 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 end products (Yamaha Keyboard). Balancing An ability to exploit excellence in one area is never imperiled by mediocrity in another (GE acquiring the CT scanning rights from EMI because of its 283 inadequate market reach).

CONSERVING RESOURCES

Conserving Sustaining competencies over time through frequent usage. Resources are never abandoned; they are always preserved for future use. Recycling Increasing the velocity of use of a competencies over time. As a result core competencies can be leveraged across an array of products (Sony Betamax). It includes brand extensions as well. Co-Opting Enticing resources of potential competitors to exercise influence in an industry (Fujitsu IBM). Shielding It involves identifying competitors blind spots and then attacking without having the fear of 284 retaliation.

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. Speeding Prior to the 1980s Detroits 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 envisaged Japanese players in giving customers more opportunities to switch allegiance and loyalty (Toyota). Protecting It uses competitors strength to ones own advantage, by deflecting it, rather than absorbing it as 285 practiced in Judo.

INTERNATIONAL BUSINESS ENVIRONMENT

286

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. 287

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)

288

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)

289

INTERNATIONAL IDENTITY

MNCs consciously engage in FDI in different parts of the globe to forge resource diversity as a distinct competitive advantage. Characteristics It should have a spread of affiliates or subsidiaries. It should have a spread of manufacturing facilities. It should have a spread of assets, revenues and profits. It should have a spread of interest groups / stake holders. It should think globally; act locally (Eg. HSBC).
290

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 291 and vice versa for emerging markets).

GLOBAL 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).
292

GLOBAL 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 293 effect on business.

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 294 (NAFTA, ASEAN, BRIC).

EURO SINGLE CURRENCY

In 1999 twelve member countries in Europe joined hands to move over to a single currency (i.e. Euro); three countries joined in 2002 increasing it to fifteen members as of 2008. The notable exception was Great Britain which still continues with its local currency (i.e. Sterling - 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 295 currency globally; primarily the OPEC countries.

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 296 would not have been possible otherwise.

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 intangible resources) is fast but may have strong repercussions (i.e. hot money). It is short-medium term with comparatively low levels of 297 commitment.

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).
298

INTERNATION FINANCE

Currency Risk Many Indian IT companies (Rs) having business in US (Dollar) are asking for quotes in (Euro) or are shifting bases out of 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 or IRS). 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 299 developed markets.

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 300 barriers (language) vis--vis emerging markets.

INTERNATIONAL OPERATIONS

Location Incentives FDI in emerging markets should explore options for SEZs to explore benefits (tax holidays, reduce power costs) vis--vis infrastructural bottlenecks. Technology The cost to be evaluated in terms of latest technology (Euro VI) vis--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 301 across the globe.

CONTEMPORARY TOPICS

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INNOVATION

An invention is the first occurrence of an idea for a new product or process; innovation is the first attempt to carry it out in practice. Innovations typically paves the way for more secured and improved lifestyle for consumers in general. Innovation is the most preferred strategy today to maintain competitive advantage in the present turbulent business environment. Innovation is all about staying ahead of competition, but has inherent risks involved as well. While innovation typically adds value for organizations; it has destructive effects as well. 303

TYPES OF INNOVATION
A key challenge is maintaining a balance between process and product innovations. While product innovations are typically customer driven; process innovations are organizational driven. Tangible impact of product innovation on performance is significantly higher than process innovation. However, process innovation is necessary to sustain the competitive advantage of product innovation. Process innovation usually follows product innovation. Strategic innovation has the potential to change the 304 rules of the game.

BUSINESS MODEL

It is a simplified description and representation of a complex real world; about how an organization makes money (i.e. putting an idea into practice). Innovations are the back-bone of successful business models . Disruptive business models brings in a new frame of reference (i.e. a paradigm shift). It leads to a shift in the price performance envelope. Telecom (CDMA Technology), Data Storage (Pen Drives), Drug Development (Bio Chemicals), Medical Surgery (Lasik), Processors (Pentium). 305

NINE BUILDING BLOCKS

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

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REVENUE MODEL

Positioning is just not sufficient; innovative companies to carve out unique business models to fend off competition. With the rapid erosion of certain industries (IT, Investment Banking, Real Estate) companies need to untangle and understand the intricacies of their business model. The revenue model described here are the means to generate revenues. It is just one piece of the puzzle. It involves Product Visualization Product Prototype Product Test Capacity Pricing Distribution. 308

HOW TO MAKE INNOVATIVE COS

Innovative companys are a matter of culture and aspirations rather than tangible resources. A favourable intellectual property (IP) climate. Allow the workforce idiosyncrasies for their errors. Allow the management sufficient slack to be future oriented. Have a lean and a flat organization structure. Promote the grape-vine. Provide reasonable incentives (not necessarily monetary). 309 Promote the culture of experimentation.

HOW TO PROTECT INNOVATION?

Without adequate protection (external or otherwise) the effects of innovation does not translate to performance. In most emerging markets where the IP climate is not so favorable, companies are increasingly relying on internal protection to sustain innovation effects. The most preferred strategy of internal protection includes imbibing causal ambiguity in the production process to make reverse engineering difficult. Collusion with the judiciary is also another distinct possibility in emerging markets, however that 310 310 possibility is slowly atrophying.

CORPORATE GOVERNANCE

The basic theme of corporate governance is to ensure that professional managers are identified and made accountable in terms of clear business processes or activities and held responsible through adequate mechanisms & control systems for channelizing their decisions for the benefit of stakeholders at large. Corporate governance aims to reduce the principalagent problem present in most professional managed organizations through appropriate forms of accountability and control mechanisms. In fact the principles of corporate governance implies that managers go beyond in satisfying the stated and 311 311 unstated needs of the multiple stakeholders.

AGENCY THEORY

The root of Corporate Governance goes back to the Agency Theory; also known as the principal-agent problem or agency dilemma. According to the agency theory top managers and shareholders interests are usually conflicting in nature and tend to pull in opposite directions. From the strategic point of view managers tend to diversify into unrelated businesses as it provides higher returns hence a more favourable appraisal. However, shareholders can diversify their portfolio at a much lesser risk and cost. This exposes the shareholders to additional risks and 312 higher costs, not present in portfolio diversifications.

ORIGIN & CONTEXT

Since the early 20th century since a large part of public funds were held by publicly traded firms in the US, various laws were enacted to ensure proper usage of these funds. After the Enron downfall, the US government passed the Sarbanes Oxley Act, 2002 to restore public confidence in corporate governance. SEBI Report 2005, defines corporate governance (headed by Kumar Mangalam Birla) as the acceptance by management of the inalienable rights of shareholders as the true owners of the corporation and of their own 313 role as trustees on behalf of the shareholders.

GOVERNANCE PRINCIPLES

Rights and equitable treatment of shareholders: Help shareholders exercise their rights by effectively communicating information in transparent ways that is understandable and accessible and encouraging shareholders to participate in general meetings. Interests of other stakeholders: Recognize the legal and other obligations of all legitimate stakeholders, including the society at large. Role and responsibilities of the board: It deals with issues about an appropriate mix of executive and nonexecutive directors. The key roles of chairperson and CEO should not be held by the same person and their 314 offices be clearly separated.

GOVERNANCE PRINCIPLES

Integrity and ethical behaviour: Organizations should develop a code of conduct for their top management that promotes ethical and responsible decision making. Disclosure and transparency: Disclosure of information should be timely and balanced to ensure that investors have clear access to data and facts. They should also implement systems to independently verify and safeguard the integrity of the company's financial reporting. Independence of the entity's auditors: Identification, assessment and mitigation of risks and retirement by 315 315 rotation over a fixed period of time..

GOVERNANCE STRATEGIES

Monitoring by the board of directors: The board of directors, with its legal authority to hire, fire and compensate top management, safeguards invested capital. Regular board meetings allow potential problems to be identified, discussed and resolved. Balance of power: The simplest balance of power is very common; a person benefitting from a decision should abstain from it. Remuneration: Performance-based remuneration is designed to relate some proportion of salary to individual performance. However, they should provide no mechanism or scope for opportunistic behaviour. 316

GOVERNANCE & PERFORMANCE

In its Global Investor Opinion Survey of over 200 institutional investors in 2002, McKinsey found that 80% of the respondents would pay a premium for well-governed companies. They defined a wellgoverned company as one that had mostly out-side directors, who had no management ties, undertook formal evaluation of its directors, and was responsive to investors' requests for information on governance issues. The size of the premium varied by market, from 10% for companies where the regulatory backdrop was least certain (those in Morocco, Egypt and Russia) 317 to around 40% for Canadian & European companies.

SHAREHODER STAKE HOLDER THEORY

Till the early part of the 20th the basic objective of modern organizations was to provide goods and services for public consumption for profit maximisation. Over a period of time, the short-term view of profit maximisation gave way to a more broader and medium-term view wealth maximisation of the shareholders. However, today economic institutions are considered as a major drivers of improvement in quality of life in general and therefore needs to include multiple stakeholders. The basic premise is that firms cannot exist in vacuum. Therefore, corporate philanthropy 318 should be a part of every corporate mission.

CORPORATE SOCIAL RESPONSIBILITY

As Peter Drucker rightly pointed out that, a healthy business cannot exist in a sick and impoverished society. Therefore, giving a very important message that one cannot exist without the other. Therefore, economic and social responsibilities cannot be mutually exclusive; in fact a large part of it is significantly overlapping. CSR can be defined as, an enterprises decisions and actions being taken for reasons at least partially beyond its immediate economic interests. However, the debate on CRS still continues whether firms should detract its focus from its business? 319

GROWING CONCERN FOR CSR

Awareness due to education: With growing literacy, people are becoming increasingly aware of their right to a decent and healthy life. The role of media: The media and various consumer organizations have come up in protecting consumer rights and exposing mal-practices. Fear of government interference: Excessive quench for profits may lead to build up of adverse public opinion compelling the government to intervene (Eg. MRTP). Public image: Entrepreneurs are increasingly relying on public image as a source of competitive advantage 320 and a higher financial discounting.

CSR STRATEGIES

Green Supply Chain Management: It includes environmentally preferable purchasing, eco efficiency, designing eco-friendly products, and extended producer responsibility (Eg. Cement - Paper packaging, Refrigerators CFC, Exide Product take back). Health & Hygiene Attending the health hazards due to wastes and by-products to employees and society in proximity (Eg. Tata Steel Life Line Express). Education, Literacy & Training Programs (Eg. Aditya 321 Birla Research Centre LBS).

BOTTOM OF THE PYRAMID

With the market across most developed markets including the US getting saturated, C. K. Prahalad notes that future markets exist collectively, across the world's billions of poor people having immense untapped buying power. They represent an enormous opportunity for companies who learn how to serve them. In turn companies by serving these markets, they're helping millions of the world's poorest people to escape poverty. Strategic innovations leading to disruptive business 322 models can show the way out.

BLUE OCEAN STRATEGY

323

MARKETSPACE - TWO WORLDS

324

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 (cost or product). Yet in todays overcrowded industries, competing head on results in nothing but a bloody red ocean of rivals fighting over a shrinking profit pool. In todays red oceans, where most industries are saturated, one companies gain is always at the cost of another companies loss. This paradigm has its origin in military strategy where it 325 follows that you have to beat an enemy to win.

WHAT IS BLUE OCEAN?

Tomorrows leading companies will succeed not by battling in red oceans, but by creating blue oceans of uncontested market space ripe for growth . Such strategic moves are possible through the pursuit of product differentiation and low cost simultaneously. It helps in creating powerful leaps in value for both the firm and its buyers, rendering rivals obsolete and unleashing new demand. Blue Oceans have existed in the past; it will exist in the future as well. It is only the frames of the top managers that prevents it from seeing it. 326 Constant updating of SIC is an indication this regard.

RED OCEAN Vs BLUE OCEAN

Compete in existing markets Beat the competition Exploit existing demand Make the value-cost trade off Demand is the limiting factor

Compete in uncontested markets Make the competition irrelevant Create and capture demand Break the value-cost trade off Supply is the limiting factor
327

BLUE OCEAN STRATEGY - IMPERATIVES

Prospects in most established market spaces red oceans are shrinking steadily. Population shrinkage across a no. of European nations. As trade barriers between nations & regions fall, information imperfections atrophy instantly. Niche markets & monopoly havens are continuing to disappear. Demand across developed markets reaching a plateau. Technological advances have substantially improved industrial productivity. Accelerated product life-cycles and obsolescence. 328 Commoditization of most product market segments.

CONCEPTUAL UNDERPINNINGS

Blue oceans have existed in the past and will exist in the future as well. History indicates that blue oceans exist in three basic industries automobiles (how people get to work) computers (what people use at work) entertainment (what people do after work). They are not necessarily about technology; the underlying technology was often already in existence. Incumbents often create blue oceans within the ambit of their core business. Company & industry are the wrong units of strategic analysis; managerial moves are. 329 It creates entry barriers through first mover advantages.

BLUE OCEAN - IMPLEMENTATION

Reduce
Which factors to be reduced below the industry standard

Eliminate
Which of the industry factors that the industry takes for granted should be eliminated

Create

VI

Which factors should be created that the industry has not offered

Raise
Which of the factors should be raised above the industrys standard

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IMPLEMENTATION SEQUENCE
Buyer Utility (1)
Is there exceptional buyer utility in your business idea?

Price (2)
Is your price easily accessible to the mass of buyers?

Blue Ocean Strategy

Adoption (4)
What are the adoption hurdles in actualizing your business idea? Are you addressing them up front?

Cost (3)
Can you attain your cost target to profit at your strategic price?
331

SOME GLARING EXAMPLES

In the last century authors Kim and Mauborgne have documented the creation of more than 150 blue ocean creations across 30 industries Virgin Atlantic: Fractional jet ownership or travel to space. Sony Play Station: Redefining machine-human interface in entertainment and targeting an altogether new user base. Southwest Airlines: Pioneering the concept of LCC. Citibank Automated teller machines & credit cards. Tata Nano: Manufacturing a full fledged passenger car 332 at a price of Rs. 1 lac.

WHAT THEN IS THE HANDICAP?

Most of the traditional views in strategy having its origin in (Economic Theory) led to what is called the structuralist paradigm. According to this view, companies & managers are largely at the mercy of economic forces, greater than themselves. Off late emerging views in strategy having its origin in (Organization Theory) led to a paradigm shift to what is called the reconstructionist view. According to this view managers need not be constrained to act within the confines of their 333 industry. All they need to do is change their