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  • 1. A – Z Strategy A Ackoff, Russell L: One of the early strategy gurus, Ackoff introduced rigor into strategic planning. In his book, “A concept of corporate planning,” Ackoff mentions that there are some aspects of the future about which we can be virtually certain. Here, companies can pursue commitment planning. There are some aspects of the future about which we cannot be certain, but we can be reasonably sure of what the possibilities are. Here, contingency planning is useful. A good example is planning for a military invasion. Every possibility is identified and analyzed and a suitable action plan prepared, because time is of the essence, once a possibility has become a reality. Finally, there are some aspects of the future, which cannot be anticipated. Here, responsiveness planning can be used, i.e. building flexibility into the organization. (See Adaptive Planning) Activity-Based Costing: Activity Based Costing (ABC) increases the accuracy of cost information by linking overhead and other indirect costs to product or customer segments more precisely. Traditional accounting systems distribute indirect costs on the basis of direct labor hours, machine hours, or material costs. This leads to a distorted picture. Decisions about which product line to invest in and which not to invest in, become difficult. ABC undertakes detailed economic analyses of important business activities to improve strategic and operational decisions. To build a system that will support ABC, companies should: • Determine the key activities performed; • Determine the cost drivers by activity; • Determine overhead and other indirect costs by activity, using clearly identified cost drivers. ABC can be used to: Re-price products - Managers can analyze product profitability more accurately by combining activity-based cost data with pricing information. This can result in the re-pricing or elimination of unprofitable products. Managers can also estimate new product costs accurately. Reduce cost - ABC identifies the components of overhead costs and other cost drivers. Managers can reduce costs by decreasing the cost of an activity or the number of activities per unit. Influence strategic and operational planning – ABC can facilitate target costing, performance measurement for continuous improvement, and resource allocation based on projected demand and infrastructure requirements. ABC can also assist a company in identifying/evaluating new business opportunities. (See Full Costing, Strategic Cost Management) Adaptive Planning: This school of strategic planning, developed by Russell Ackoff, believes that the principal value of planning lies not in the plans themselves but in the process of producing them. Companies should try to put in place a system that will minimize the future need for retrospective planning, i.e. planning aimed at removing deficiencies produced by past decisions. This school classifies the future into three types: certainty, uncertainty and ignorance. When the future is reasonably certain, commitment planning can be used. When the future is uncertain but we can be reasonably sure of what the possibilities are, contingency planning can be used. Finally, there are some aspects of the future that just cannot be anticipated. The only way to deal with such
  • 2. 2 uncertainties is by building responsiveness and flexibility into the organization. This is called responsiveness planning. (See Russell Ackoff) Adjacencies: A term coined by Chris Zook and James Allen1. These are the markets close to the company’s core business. By identifying and exploiting these markets, companies can create a new growth trajectory. Adjacencies essentially imply related diversification, i.e. moving into a new area which has some resemblance to the core business and taking advantage of the existing competencies. Adjacencies represent new growth opportunities which have a strong fit with the existing business. (See Core Competence, Diversification) Adjusted Present Value: The Net Present Value (NPV) is a popular method of evaluating an investment decision. NPV involves estimating the cash flows expected from the project and discounting them to the present value. NPV is, however, not suitable in some more complex situations where risk is different for different cash flows. Adjusted Present value (APV) is a modified version of NPV. APV uses different discount rates for different cash flows depending on the associated risk. Higher the risk, higher the discount factor used. (See Net Present Value) Agency Theory: Probes the relationship between principals and agents. Principals appoint agents to get the work done. The goals of principals usually differ from those of agents. This gives rise to the agency problem. For example, advertisers (principals) tend to emphasize sales goals and the cost-effectiveness of marketing communications, whereas advertising agencies may be more inclined to think of creative goals and attention-getting commercials. Professors of top Business Schools would like to spend most of their time doing research and consultancy. But the owners expect these professors to spend more time with students both in the classroom and outside. Agency theory is a key concept in corporate governance. Professional managers often pursue strategies that increase their personal payoffs at the expense of shareholders. For example, they may grant themselves lavish perquisites including elegant corner offices, corporate jets, large staffs, and extravagant retirement programs. Managers also often tend to pursue growth at the cost of profitability. Shareholders generally want to maximize earnings, as it results in stock appreciation. Since managers are typically compensated more for sales than earnings growth, they tend to be enthusiastic about strategies like mergers and acquisitions even when this enthusiasm is not really justified. Managers may also pursue diversification opportunities that are not necessarily in line with the company’s best interests. In other cases, managers may become complacent and allow things to drift. They may avoid risk since they feel they are more likely to be fired for failure, than for mediocre performance. Executives may be far less entrepreneurial than they should be. They may not make the bold moves that the situation demands. 1 “Beyond the Core: Expand Your Market Without Abandoning Your Roots,” by Chris Zook, HBS Press, 2004; “Profit From the Core: Growth Strategy in an Era of Turbulence” by Chris Zook and James Allen, Harvard Business School Press, 2001; “Growth Outside the Core” by Chris Zook and James Allen, Harvard Business Review, December 2003, pp 66-73.
  • 3. 3 One way to tackle the agency problem is to align the interests of managers with those of owners by using appropriate incentives such as stock option and executive bonus plans. But ironically enough, these schemes may also tempt managers to act against the best interests of the firm. For example, they may manipulate the financial statements to increase earnings artificially. (See Corporate Governance) Alignment: A key factor in effective implementation of strategy. Most large organizations are divided into business units which are out of synch and work at cross purposes. The challenge is to coordinate the activities of these units and leverage their skills for the benefit of the organization as a whole. Kaplan & Norton2 call this alignment. By aligning the activities of its various business and support units, an organization can create additional sources of value in various ways. Financial synergies can be generated through centralized resource allocation and financial management. Value can also be created if corporate headquarters can operate internal capital markets better than external market mechanisms and share knowledge across business units, in a manner that would be difficult if the different units were independent entities. Customer synergy means enhancing customer relationships by offering a range of complementary products and services from different business units. Corporations can leverage their multiple products and services to create unique integrated solutions, resulting in customer satisfaction and loyalty that less diversified and more focused organizations cannot match. Companies can also generate value by delivering a value proposition consistently throughout their decentralized units. Cross selling to specific customers can also generate value. Internal process synergies can be created by generating economies of scale in activities such as procurement, logistics, information technology and infrastructure. Sharing processes across units generates economies of scale in such activities and helps cut costs. Centralized resources having specialized expertise and knowledge in how to operate a key process or service can be leveraged. The sharing of common philosophies, programs and competencies across business units can also generate significant benefits. Expertise sharing can reduce the time to respond to customer needs and make the company better equipped to exploit the emerging opportunities in the business environment. Learning and growth synergies can be generated by developing and sharing critical intangible assets including people, technology, culture and leadership. Corporate Headquarters can put in place effective processes for developing intangible assets and promote the sharing of knowledge and best practices throughout all its business and support units. New ideas can rapidly spread across the enterprise and be assimilated by the business units in a manner that would be difficult, were they independent entities. Growing leaders faster than competition can generate competitive advantage. There are different ways of achieving alignment. One way is to start at the top and then cascade down. Another way is to start in the middle, at the business unit level, before building a corporate scorecard and map. Some companies launch an enterprise wide initiative right at the start. Others conduct a pilot test at one or two business units before extending the scope to other enterprise units. Alignment has four components: strategic fit, organization alignment, human capital alignment and alignment of planning and control systems. Strategic fit exists when the internal performance drivers 2 “Alignment - Using the Balanced Score-card to create Corporate Synergies” by Robert S Kaplan and David P Norton, Harvard Business School Press, 2006.
  • 4. 4 are consistent and aligned with the desired customer and financial outcomes. Organization alignment explores how the various parts of an organization synchronize their activities to generate synergy. Human capital alignment is achieved when employees’ goals, training and incentives become aligned with business strategy. Planning and control systems alignment exists when management systems for planning, operations and control are linked to strategy. As Kaplan and Norton put it, “Strategy execution is not a matter of luck. It is the result of conscious attention, combining both leadership and management processes to describe and measure the strategy, to align internal and external organizational units with the strategy, to align employees with the strategy through intrinsic and extrinsic motivation and targeted competency development programs and finally, to align existing management processes, reports and review meetings, with the execution, monitoring and adapting of the strategy.” (See Balanced Scorecard) Ansoff, Igor H: A famous strategy guru, Igor Ansoff developed the notion of corporate strategic planning. He argued that any business needs to look at its resources, and align them with the business environment. Ansoff's analytical tools such as competence grids, flow matrices, charts and diagrams are popular in contemporary management literature. He used the term competitive advantage years before Michael Porter. Ansoff's “Corporate Strategy: An analytical approach to business policy for growth and expansion” (1987), mentions three classes of decisions: (a) strategic (the selection of the product/market mix); (b) administrative (structure), and (c) operating (process). According to Ansoff, strategy should focus on three fundamental issues: • Definition of the firm’s core objectives • Whether the firm should diversify and, if so, into what areas • How the business should exploit and develop its new or existing market The closer a business stays to its existing products and markets, the lower the risk. Introducing new products into diversified markets carries the highest risk. Hence, the recommendation to stick to the knitting. Ansoff showed this in a matrix form, with four possible strategies, depending on the situation faced. Old Products New Products Old Markets Market Penetration Product development New Markets Market Development Diversification • Market penetration means increasing market share by encouraging current customers to buy more, attracting customers of competitors or convincing non-users to use the product. • Market development implies launching the current product in a new market by expanding distribution channels, selling in new locations or identifying the potential users.
  • 5. 5 • Product development involves launching a new product in the current market by developing new features, improving quality levels, etc. • Diversification means moving beyond the current business. Concentric (related) diversification involves developing new products for the same segment. Conglomerate (unrelated) diversification involves developing new products for new markets. Ansoff is also famous for: • establishing corporate planning as a formal management process. • popularizing SWOT analysis • developing the idea of environmental scanning. • repositioning ‘strategic planning’ as part of a continuing process rather than a once-a-year (or less frequent) planning process. • Articulating the various advantages and disadvantages of deliberate strategy versus emergent strategy. • ‘Gap’ analysis – which looks at the gap between our aspirations and the likely outcome of current strategies. Ansoff’s seminal book ‘Corporate Planning’ has emphasized the need to break down the strategy process into various steps: • external analysis – understanding market opportunities and threats • internal analysis – understanding strengths and weaknesses. • choice (and our alternatives). • implementation. (See Strategic Options, SWOT Analysis) Anti Takeover Strategy: A takeover means change of ownership and usually change of management. The current management can resist the takeover bid in various ways: • The Golden Parachute is a provision in a CEO's contract to ensure that he will get a large bonus in cash or stock if the company is acquired. • The supermajority is a defense that requires an overwhelming majority of shareholders to approve of any acquisition. This makes a takeover much more unlikely. • A staggered board of directors prolongs the takeover process by preventing the entire board from being replaced at the same time. The terms are staggered so that some members are elected say every two years, while others are elected every four years. The acquirer may not want to wait four years for completely reconstituting the board. • Dual-class stock allows company owners to hold on to voting stock, while the company issues stock with little or no voting rights to the public. That way the new investors cannot take control of the company. • A poison pill refers to anything the target company does to make itself less valuable or less desirable as an acquisition after the raid has begun. For example, high-level managers and other employees may threaten to leave the company if it is acquired. A specific asset of a company like the R&D center or a particular division may be sold off to another company, or spun off into a separate corporation. A flip-in provision may allow current shareholders to buy more stocks at a steep discount in the event of a takeover attempt. The flow of additional cheap shares into the total pool of shares dilutes their value and voting power. A more drastic poison pill involves deliberately taking on large amounts of debt.
  • 6. 6 Argyris, Chris: A social psychologist by training, Chris Argyris has done pioneering work on how individuals respond to changing organizational situations and the impediments to organizational learning. Argyris has done extensive research on learning in teams and drawn attention to the problems created by defensive behavior. The cleverer the team is, the more difficult it becomes to maintain openness to learning, and to avoid becoming defensive. Argyris describes the process involved here as ‘double-loop learning’. While ‘single-loop learning’ involves doing existing things better, ‘double-loop’ learning entails doing existing things in new ways or inventing new things. Effectively, double-loop learning involves reframing problems and stepping outside existing mind- sets. Argyris’ language is sometimes hard to understand. So he is often perceived as an esoteric rather than a popular guru. But his ideas and thoughts are profound and continue to guide the functioning of today’s organizations. (See Organizational Learning) B Backward Integration: Moving along the value chain towards the inputs side. By producing internally some or all of the inputs, the firm can benefit in various ways. The firm can avoid sharing proprietary data with its suppliers. This can be an important factor if the exact specifications of the component parts may reveal the key characteristics of the final product's design to the supplier. Backward integration may result in inputs with closely controlled specifications, enabling the firm to improve quality and differentiate its product. If the inputs are critical, backward integration helps the firm to gain greater control of the value chain and to mitigate the high bargaining power of suppliers. Some good examples of backward integration are India’s largest aluminium manufacturer Hindalco setting up a power plant, Reliance moving into petroleum refining and Tata Steel setting up its own township in Jamshedpur and mines and collieries in various parts of Orissa and Bihar. (See Vertical Integration) Balanced Scorecard: Designed by Robert Kaplan and David Norton, the Balanced Scorecard provides a comprehensive set of objectives and performance measures to monitor a company’s progress. These include: • Financial performance (revenues, earnings, return on capital, cash flow); • Customer value performance (market share, customer satisfaction, customer loyalty); • Internal business process performance (productivity, quality, delivery, etc) • Learning and Growth (Percent of revenue from new products, employee suggestions, rate of improvement, employee morale, knowledge, turnover, use of best demonstrated practices). The challenge in implementing the balanced scorecard lies in identifying the key metrics and measuring them on an ongoing basis so that the firm can systematically achieve its objectives. Too many metrics can make things complicated. So a few key metrics must be carefully chosen. (See Alignment) Bargaining Power of Buyers3: One of the forces in Porter’s Five Forces Model. The higher the bargaining power of buyers, less attractive the industry. The bargaining power of buyers is high under the following circumstances: • Few buyers who purchase in large quantities. 3 Abstracted from the book “The essence of Competitive Strategy” written by David Faulkner and Cliff Bowman, published by Prentice Hall of India in 2002.
  • 7. 7 • Low switching costs, resulting in low loyalty. • Many relatively small sellers • The item being purchased is not an important one for buyers, and they can take it or leave it. • Buyers have a lot of information about competitive offers, which they can use for bargaining. • There is a good possibility that buyers may decide to integrate backwards, i.e make the product rather than buy it. (See Five Forces Model) Bargaining Power of Suppliers4: One of the forces in Porter’s Five Forces Model. Higher the bargaining power of suppliers, the less attractive the industry. Bargaining power of suppliers tends to be high under the following circumstances: • The purchase is important to the buyer. • Buyers face high switching costs. • There are few alternative sources of supply • Any particular buyer is not an important customer of the supplier • There is a strong possibility that the supplier may integrate forward. (See Five Forces Model) Barnard, Chester: One of the first management thinkers to think differently from the then gurus, Frederick Taylor and Max Weber. Barnard spent the whole of his career as a business executive with the Bell Telephone Company. He wrote two influential books, The Functions of the Executive (1938) and Organization and Management (1948). Barnard emphasized the importance of communication and shared values in organizations. Barnard excelled at organization-building skills. His tenure as CEO was marked by a sense of public service and personal integrity that are almost unimaginable to many today. He showed exemplary commitment to corporate welfare policies. For example, in 1933, at the height of the Depression, Barnard announced a no-layoff policy choosing to reduce employees’ working hours instead. Management authority, he realized, rested in its ability to persuade, rather than to command. The challenge was to balance the inherent tension between the needs of individual employees and the goals of an organization. He also recognized that much of the creative potential of an organization lay in informal networks, not in the formal hierarchy. He understood the role of constructive conflict. Barnard viewed the organization as a complex social system. The main challenge for management was achieving cooperation among the groups and individuals to facilitate the achievement of organizational goals, i.e. resolving the tension between achieving organizational goals and the need for individuals to achieve personal goals. Organizational goals could not be accomplished unless the leadership of the organization acknowledged individual aspirations and devised a means of helping employees achieve them. For Barnard, conventional incentive schemes were essentially, a self-fulfilling prophecy. Much before Maslow, Barnard argued that beyond a certain level of equitable compensation, employees would not necessarily be motivated by financial incentives. Bonuses and incentives only created a culture of greed. 4 Abstracted from the book “The essence of Competitive Strategy” written by David Faulkner and Cliff Bowman, published by Prentice Hall of India in 2002.
  • 8. 8 Barnard argued that management had to focus on the “strategic” few that would offer “the greatest leverage over the outcomes of a particular decision”. He suggested that deciding what decisions not to make was as important as which decisions to make. “The fine art of executive decision consists in not deciding questions that are not now pertinent, in not deciding prematurely, in not making decisions that cannot be made effective, and in not making decisions that others should make.” Here, Barnard seemed to be in agreement with Peter Drucker. Barriers to Entry: One of the five forces in Porter’s Famous Five Forces model. Barriers to entry are the obstacles that a firm must overcome to enter an industry. When high entry barriers exist in an industry, competition is usually less intense and profitability tends to be high. On the other hand, when entry barriers are low, new firms can enter the industry. While demand may not go up immediately, they bring additional capacity along and reduce the overall level of profitability in the industry. The barriers to entry can be tangible or intangible. Tangible barriers include capital, and various kinds of physical assets like plant and machinery and infrastructure. Tangible barriers are easier to replicate than intangible barriers, like brands, corporate reputation, customer loyalty and relationships with vendors/distribution channels. 5 Barriers to entry may be high under the following circumstances: Economies of Scale: If there are major cost advantages to be gained from operating on a large scale or scope then new entrants will not find it easy. Learning Curve: If low unit costs can be achieved by accumulated learning, inexperienced new entrants will be at a unit cost disadvantage. Knowledge & Skills: Access to process knowledge and particular skills can make entry difficult. Customer Brand Loyalty: Customers may have preferred brands, or they may have strong relationships with their existing suppliers. New entrants have to persuade customers that it is worth incurring switching costs and move to the product of a new entrant. Capital costs: High capital costs involved in setting up production facilities, R&D centers, dealer networks and brand building will limit the number of potential entrants. Distribution Channels: It is often difficult for a new player to break into an existing distribution network. If all major distribution outlets are already closed to the new entrants, they may have to make heavy investments in setting up their own direct distribution network. High Switching Costs: High switching costs for customers constitute a barrier to entry. Government Policy: Government may restrict licenses, issue exclusive franchises or establish regulations that are troublesome and costly to implement. Access to low-cost inputs: This may act as a barrier to entry if potential entrants do not have such access to inputs which competitors enjoy. (See Barriers to Imitation, Five Forces Model) 5 Abstracted from the book “The essence of Competitive Strategy” written by David Faulkner and Cliff Bowman, published by Prentice Hall of India in 2002.
  • 9. 9 Barriers to Imitation: With innovations rapidly diffusing, the key to success in today’s business environment is creating barriers to imitation. In general, tangible assets are easier to replicate, compared to intangible resources. Thus brands create formidable barriers to imitation but large factories can be easily replicated. Similarly, when a way of working is built into the company’s culture, imitation becomes difficult. For example, just-in-time, in which Toyota is a master is less about techniques and more about corporate philosophy and culture. That is why companies have found it difficult to implement Just-in-Time even though so much has been written about it and Toyota allows managers from all over the world to visit its factories. (See Barriers to Entry, Five Forces Model) Bartlett, Christopher A: Famous for his work on globalization and strategic management. Bartlett is the author/coauthor of several books, including Managing Across Borders and Individualized Corporation both coauthored with Sumantra Ghoshal. Managing Across Borders is considered one of the best ever books written on business management and possibly the most authoritative book on globalization. The book has been translated into several languages. (See Sumantra Ghoshal, Globalization) BCG Growth-Share Matrix: The Boston Consulting Group (BCG) has developed a matrix to help companies analyze their product lines and businesses. The 2x2 matrix considers two factors, market growth rate and the company's market share, as indicated below. High Low Market High Stars Question Marks Share Low Cash Cows Dogs Market Growth Accordingly, the BCG matrix divides products/businesses into four categories: • Stars: These high growth products in a fast growing market, need more resource commitments. For a company like Satyam Computer Services, the ERP implementation business is a star. • Cash Cows: These are low growth, high market share products, where minimal investments are envisaged. Indeed, cash cows provide the cash flows that support other businesses. The soaps and detergents business is a cash cow for Hindustan Lever Ltd. • Question Marks: These are low market share business units in high growth markets. Investment is needed to build them into stars. The foods division of HLL falls in this category as also the games business of Microsoft, and the retailing venture of Reliance. The long term profitability of these businesses is by no means certain. • Dogs: These are low growth and low market share businesses which generate just enough cash to maintain themselves. They are businesses from which the company is likely to withdraw in the near future. IBM thought the PC business was a dog and sold it to the Chinese computer manufacturer, Lenovo. Businesses evolve over time. According to the conventional product life cycle, question marks may turn into stars, and become cash cows if the market growth falls, finally becoming dogs towards the end of the cycle. It is, however, not necessary that businesses must evolve in this fashion. A star may
  • 10. 10 turn into a dog overnight if a disruptive technology emerges in an industry. That is what happened to mini computers when PCs arrived. On the other hand, a cash cow can be converted into a star by brand repositioning or by targeting a new customer segment. In India, Cadbury’s has attempted to reposition its chocolates as products that can also be consumed by adults. (See GE 9 Cell Planning Grid) Beachhead Market: A market similar to a targeted strategic market but which provides a low risk learning opportunity. For example, Austria/ Switzerland can be considered beachhead markets for companies planning to enter Germany. Singapore is a beach head market for the Asian region. (See Globalization) Benchmarking: A process by which a company compares itself with another company, in the same or different industry on how well it is faring on various parameters. Benchmarking helps companies in setting stretch targets, improving the way of functioning and avoiding complacency. (See Best Practices) Best Practices: The most effective way to carry out a business activity or process. The term 'best' is highly subjective, is context dependent and also seems to imply that no further improvements are possible. Many people now prefer the term good practice. Best practices are often contextual. So transferring them across organizations may not be as easy as it often looks. Sometimes even within an organization, transfer of a best practice across departments/ functions can be a challenge. When best practices are embedded in an organization’s culture, replication in another organization becomes very difficult. (See Benchmarking, Barriers to Imitation) Big Hairy Audacious Goals (BHAGS): A term coined by James C Collins and Jerry I Porras in their well known book “Built To Last”. Visionary Companies set Big Hairy Audacious Goals (BHAGS) that raise the bar and inspire people across all levels. Examples of BHAGS include: • Boeing’s decision to commit to a Boeing 707 or 747 • Walt Disney’s decision to create Disneyland • Henry Ford’s declaration, “We will democratize the automobile” • Dhirubhai Ambani’s ambition of constructing the world’s largest petroleum refinery. A BHAG should be consistent with the company’s core ideology. It should be so clear and compelling that it must require little or no explanation. It must get people excited and pumped up. A BHAG should fall well outside the comfort zone. While it is important for people in the organization to believe they can pull it off, it should require tremendous effort. A BHAG should be so bold and compelling in its own right that even if the organization’s leaders disappeared, it would continue to inspire progress. (See Core Ideology, Corporate Purpose) Blue Ocean Strategy: Most companies focus on beating the competition. But according to W Chan Kim and Renee Mauborgne, two of the most respected scholars today in the area of strategy, the best way to beat the competition is to stop trying to beat the competition.
  • 11. 11 Markets can be divided into red oceans and blue oceans. Red oceans represent the known or existing market space. Blue oceans denote the non existent or unknown market space. In red oceans, industry boundaries are defined and accepted, and the basis for competing is known. Here, companies try to grab market share from each other. As competition intensifies, both profitability and growth decline and products become commodities. Blue oceans, in contrast, represent untapped markets, in which the rules of the game are still not defined. There are highly profitable growth opportunities. Although some blue oceans are created well beyond existing industry boundaries, most are created from within red oceans by expanding existing industry boundaries. Identification of blue oceans cannot be done by looking at the past. About 100 years back, many of today's industries, automobiles, music recording, aviation, petrochemicals, health care, and management consulting were unheard of or had just begun to emerge. Only 30 years back, industries like mutual funds, cell phones, gas-fired electricity plants, biotechnology, discount retail, express package delivery, minivans, snowboards, coffee bars, and home videos, did not exist in a meaningful way. Blue ocean strategy is the result of a new mindset that moves the attention of companies away from competitors to alternatives and from customers to non-customers. It involves changing the rules of the game through the careful examination of factors that: • can be eliminated. • should be reduced well below the industry's standard. • should be raised well above the industry's standard. • should be created. In most industries, a common definition tends to emerge of who the target buyers are and what value they are looking for. Some industries compete principally on functionality. Other industries compete largely on emotional appeal. But what is often overlooked is that the appeal of most products or services is rarely intrinsic. Through the way they have competed in the past, companies unconsciously shape buyers' ex- pectations. Over time, functionally oriented industries may become more functionally oriented while emotionally oriented industries may become even more emotionally oriented. In the process, aspirations of customers may be ignored. When companies are willing to challenge the conventional wisdom, they often find new market space. In emotionally oriented industries, removing frills may create a fundamentally simpler, lower- priced, lower-cost business model that customers would welcome. Conversely, functionally oriented industries can often infuse commodity products with new life by adding a dose of emotion. Swatch transformed the functionally driven budget watch industry into an emotionally driven fashion statement. The Body Shop did the reverse, transforming the emotionally driven cosmetics business into a functional, no-nonsense one. (See Chan Kim, Renee Mauborgne, Value Innovation) Bottom-of-the-pyramid: A term coined by the well known guru, C K Prahalad6. Till recently, marketers ignored the people in the lower income groups, because of their low per capita purchasing power. The current thinking is that people at the Bottom-of-the-pyramid comprise a huge market with distinctive characteristics. By understanding these characteristics and tailoring the marketing mix 6 Prahalad C K. “Fortune at the Bottom of the Pyramid: Eradicating Poverty Through Profits” Wharton School Publishing, 2006.
  • 12. 12 suitably, companies have major opportunities to exploit this market. The Bottom-of-the-pyramid is driven by factors like affordability, access and availability. Affordability. The key to success at the bottom of the pyramid is affordability without sacrificing acceptable levels of quality. Access. Distribution patterns for products and services must take into account where the poor live as well as their work patterns. Distribution networks must penetrate deeply into small towns and villages. Most BOP consumers work the full day before they have enough cash to purchase the necessities for that day. Stores that close at 5:00 PM have no relevance to them, as their shopping begins after 7:00 PM. Further, BOP consumers cannot travel great distances. Stores must be easy to reach, often within a short walk. This calls for effective penetration of the distribution network. Availability. Often, BOP consumers make their purchase decision, based on the cash they have on hand at a given point in time. They tend to buy for immediate consumption. Availability is a critical factor in serving BOP consumers. Brainstorming: A useful technique for generating new ideas when confronting an unfamiliar situation or a problem. A group activity in which members are encouraged to speak freely, say the first answer that strikes them about how to solve a problem, no matter how weird or absurd. Having obtained as many ideas as possible, the group then examines each one in more detail to determine the feasibility of implementation. Brand Management: For companies across industries today, brands are becoming increasingly important in the quest to gain competitive advantage. Brands symbolize trust, reputation and quality. Brands are intangible assets that are not easy to imitate. The high valuation of many of the successful companies today is on account of the brands they own. Brand management must be considered an integral part of corporate strategy and not just the marketing function. No wonder, most CEOs get personally involved in branding related matters. Breakeven Analysis: Companies incur two kinds of costs, fixed costs which are incurred, independent of the level of production and variable costs which vary with the level of output. The breakeven point is the level of output at which the firm makes just enough profit to cover its overheads. The difference between price and variable cost is called contribution. In the short run, a firm may operate below the breakeven point just to recover part of the overheads. But in the long run, the firm must operate above the breakeven point and fully recover its overheads, to justify its existence. Bureaucracy: Bureaucracy refers to the administrative execution and enforcement of rules. A bureaucratic organization is characterized by standardized procedure, formal division of responsibility, hierarchy, and impersonal relationships. Examples of everyday bureaucracies include governments, armed forces and courts. Bureaucracies enforce order and discipline, especially while handling routine matters. But beyond a point they can also frustrate employees. A key task of managers in knowledge-based-organizations is to eliminate bureaucracy. Business Ethics: Business ethics is a form of applied ethics that is concerned with the various moral or ethical problems that can arise in a business setting; and any special duties or obligations that apply to persons who are engaged in business. Ethics is a normative discipline, which involves making specific judgments about what is right or wrong, about what ought to be done or what ought
  • 13. 13 not to be done. In some situations, if not all, what is right depends on the context. Many companies have a code of ethics that helps employees understand what actions are acceptable and what are not. (See Code of Ethics) Business Forecasting: Business forecasting is an integral part of strategic planning. Various types of forecasts are used by companies depending on the situation: Economic Forecasts are published by governmental agencies and private economic forecasting firms. A business can use these forecasts as a starting point. Financial Forecasts include forecasts of financial variables such as the amount of external financing needed, earnings and cash flows. Sales Forecasts project future sales for the company's goods or services for a certain period. Technological Forecasts estimate the rate of technological progress. Qualitative forecasting approaches are based on judgment and opinion. These include Expert opinions, Delphi and Consumer surveys. Quantitative approaches either crunch historical data (time series analyses) or associative data (causal forecasts). Time series methods include Moving averages, Exponential smoothing and Trend analysis. Causal forecasts include Simple regression, Multiple regression and Econometric modeling. Quantitative models work well in a relatively stable environment. In a highly volatile business environment, the qualitative approach based on human intuition and judgment is more useful than number crunching. The choice of a specific forecasting technique will depend on various factors like: • the cost of developing the forecasting model, • the relationships being forecasted, • time horizon, • degree of accuracy desired • data availability Business Model: The way a company runs its business. A company’s business model must address three issues. Who are the customers? What are they looking for? How do we deliver the products or services needed by customers better than how competitors can? These questions may look simple. But it is the ability to address these questions well that determines the effectiveness of a business model. Business model design implies making major trade offs, deciding which customer segments not to serve, which activities not to do in-house, what kind of risks to avoid and so on. Business model innovation, which goes far beyond process or product innovation, is essentially about changing the rules of the game. (See Process Innovation, Product Innovation, Value Chain) Business Process Reengineering (BPR): BPR involves the radical redesign of core business processes to achieve dramatic improvements in productivity, cycle times, and quality. In BPR, companies start from scratch and redesign existing processes, to increase efficiency and to deliver more value to the customer, often by reducing organizational layers and eliminating unproductive activities. Functional organizations are transformed into cross-functional teams with a strong process orientation. Information technology (IT) is used to improve data dissemination and
  • 14. 14 decision-making. BPR must be completed before a major IT intervention. Otherwise, the existing inefficiencies will get amplified. (See Process Innovation) Business Risk: Refers to the degree of uncertainty associated with a firm’s sales volume and price realization. This risk is core to the business. Market characteristics and the firm’s business model together determine business risk. Business risk is not easy to quantify. Yet, companies should try to go beyond qualitative statements and arrive at some numbers wherever possible. (See Enterprise Risk Management) Buy Back: When a firm has more capital than it needs, it may buy back shares from the market. Buy backs are often viewed positively by the market because they signal that the company is prepared to return cash to shareholders instead of frittering it away on unproductive investments or meaningless diversification. Companies may also resort to buy backs when the management feels the market is undervaluing the shares in relation to the intrinsic value. C Cadbury Committee Report: A standard reference point for any discussion on corporate governance. Prominent institutions in London concerned about audit and regulatory issues following a number of company collapses in the 1980s, set up a committee chaired by Sir Adrian Cadbury. To keep under control, over-powerful chief executives or overenthusiastic executive management, the committee's 1992 report advocated various checks and balances at the board level. These included: • Wider use of independent non-executive directors; • Establishment of an Audit Committee; • Separation of the posts of Chairman and CEO; • Use of a remuneration committee; • Adherence to a detailed code of best practice (See Corporate Governance) Capacity Expansion: Growing an existing business often involves expansion of capacity, in terms of plant, human resources, technological infrastructure, R&D facilities, etc. Any major capacity expansion is a strategic decision that involves significant resource commitments and is often difficult to reverse. So such a decision has to be made carefully. Capacity expansion is often narrowly applied to manufacturing. But in many businesses, there is no or little manufacturing. So, capacity needs to be understood in terms of the investments made in the most critical area of the value chain. Thus, in the pharmaceutical industry, capacity has to be defined in terms of scientific manpower and sales force. In a software development company, capacity has to be understood in terms of the number of programmers employed. In a Business School, capacity may be defined as the number of professors available to teach students. According to Michael Porter, the decision to expand capacity has to take into account various factors: Some of them are: • Future demand. • Future input prices.
  • 15. 15 • Likelihood of technological obsolescence. • Probable capacity expansion by competitors. • Future industry capacity and individual market shares. The main risk in capacity expansion is the creation of excess capacity. When there is excess capacity, competition intensifies as players try to increase capacity utilization and profits come down. Excess capacity may result because of various reasons: • Capacity often has to be added in lumps, not in incremental fashion. • Economies of scale or significant learning curve can prompt indiscriminate capacity expansion. • Long lead times in adding capacity may motivate firms to add capacity even when future demand is uncertain. • Changes in production technology may attract new firms even as older plants continue to operate due to exit barriers. • Equipment suppliers, through price cutting and attractive credit schemes, can lure manufacturers into buying their products. • Large buyers, by promising more business in future can tempt the suppliers to add capacity. • In some industries, such as airlines, the firm which has the largest capacity may be able to grab a disproportionately large chunk of the market. • When there are several players in the market, they may all try to increase market share, by increasing capacity. • Firms often build more capacity than is needed in the initial stages when future prospects look favorable. • Excess capacity often results when firms overestimate the potential of their competitors and want to preempt them by adding more capacity. • Many manufacturing firms do not like to be left behind by competition and embark on a regular process of capacity expansion. • Tax incentives sometimes motivate manufacturers to invest in plant and equipment. Capacity expansion can be used as a pre emptive strategy to lock up a major share of the market and to discourage competitors from expanding and potential rivals from entering the industry. According to Porter, a preemptive strategy is risky. It tends to succeed only under the following conditions: • The expansion of capacity is large relative to market size. • There are substantial economies of scale and learning curve advantages. • The firm’s strategy looks credible in terms of availability of resources, technological capabilities, past track record, etc. • The firm announces its plans before competitors develop even a reasonable degree of commitment to the process. A preemptive strategy is unlikely to succeed when competitors pursue non economic goals, consider the business to have strategic importance and are prepared to give up profits in the short run or have equal or better staying power. Capital Structure: The relative proportion of debt and equity used by the company to run the business. Debt is borrowed capital and has to be returned to the investors in the short or medium term.
  • 16. 16 Debt costs less. But as interest and principal payments are mandatory, there might be a lot of strain on cash flows especially in the early days of a company. Equity is more expensive. But it has to be returned to investors only under exceptional circumstances. Companies must arrive at the appropriate capital structure after making the necessary trade offs. For example, in technology businesses where the markets tend to be volatile and the business risk tends to be high, it may be necessary to reduce financial risk by having a large proportion of equity. (See Financial Risk) Cartel: Cartel is an illegal arrangement in which different market players come together and collude to fix the price or share the market suitably by limiting competition. One of the most famous cartels in business history has been the Organization of Petroleum Exporting Countries (OPEC) (See Oligopoly) Cash Cow: A business that generates more cash than what is required to maintain its earning power. Such a business is expected to continue to generate cash without providing significant opportunities for growth through reinvestment of profits. Cash flows from such a business can be pumped into more promising ventures. (See BCG Matrix) Chandler, Alfred DuPont: One of the most well known business historians of our times, Chandler explored the relationship between strategy and structure. He realized that the overload in decision making at the top was indeed the reason for creating a new structure. This overload resulted not from the larger size of the enterprise per se, but from the increasing diversity and complexity of decisions that senior managers had to make. Chandler argued that growth without structural adjustment could lead only to economic inefficiency. As he wrote, “Unless new structures are developed to meet new administrative needs which result from an expansion of a firm’s activities into new areas, functions, or product lines, the technological, financial, and personnel economies of growth and size cannot be realized.” Chandler’s book, “Scale and Scope,” which was published in 1990, provides several insights on the evolution of the modern industrial enterprise. Chandler pointed out that major industrial corporations clustered in industries in which high-technology production processes made it possible to exploit the cost advantages of economies of scale and scope. These tended to be capital-intensive rather than labor-intensive. In these industries, large-scale, low-cost producers operated at a much greater cost advantage than smaller, labor-intensive producers. As these capital-intensive producers grew in scale (volume), scope (diversification), and consequently, complexity, they also began to invest in their own distribution networks. Over time, scale and scope demanded suitable changes in structure for effective management. (See Economies of Scale, Economies of Scope, Organizational Design, Organizational Structure) Change Management: In a rapidly changing business environment, organizations must learn to adapt themselves quickly. Change is necessary to ensure survival, growth and profitability of' the business enterprise. But change is difficult for many reasons. Change requires effort and a new mindset. People find it difficult to adjust to changing status and power relationships. There is also a tendency to avoid change as it might be interpreted as a tacit admission of the failure of past policies. As Michael Porter mentions7, change is extraordinarily painful and difficult for any successful 7 In his book “The Competitive Advantage of Nations,” The Free Press, 1990.
  • 17. 17 organization. The past strategy becomes ingrained in organizational routines. Information that would modify or challenge it is not sought or filtered out. As the past strategy becomes rooted in company culture, suggesting change is equated with disloyalty. Successful companies often seek predictability and stability. They become preoccupied with defending what they have. Supplanting or superseding old advantages to create new ones is not considered until the old advantages are long gone. Change often involves a sacrifice in financial performance and unsettling, organizational adjustments. A clear corporate vision is the starting point in any major change management initiative. It helps employees to understand why change is needed. That way, change can be introduced proactively instead of being introduced as a fire fighting measure. Symbolic gestures tend to reinforce change by telling employees that the management means business. To bring about change, it is also essential that responsibilities are clearly allotted. Accountability puts pressure on individuals to move fast. Metrics are also needed to track performance. Change initiatives must focus on a few critical areas to prevent resources from being spread too thin. Culture plays an important role in change management. Culture refers to the beliefs and values of employees. People have set notions about what is to be done and how it should be done on the basis of these beliefs and values. Culture is built up over a period of time and it cannot be changed overnight. But strong leadership which sends out the right signals can hasten the process. Christensen, Clayton M: Best known for his book, “The Innovator’ Dilemma”, Christensen’s writings reflect highly insightful thinking on innovation and is a marked departure from conventional wisdom. Christensen’s main argument is that successful companies lose their competitive edge over time because they try to pamper existing customers by adding more features, instead of looking at new customer segments which are looking for something simpler or cheaper, that has to be necessarily delivered by a new business model. But, it is not easy for successful companies to take actions which threaten their existing business model. This is what gives rise to the Innovator’s Dilemma. Based on his research in a variety of industries, including computers, retailing, pharmaceuticals, automobiles, and steel, Christensen shows how truly important, break-through innovations – or disruptive technologies – are initially rejected by mainstream customers because they cannot currently use them. This makes it difficult for firms with a strong focus on existing customers to find new markets for the products of the future. Even as they let go these opportunities, more nimble, entrepreneurial companies emerge to catch the next great wave of industry growth. The Innovator’s Dilemma presents useful insights for dealing with disruptive innovation. These insights can help managers determine when it is right not to listen to customers, when to invest in developing lower-performance products that promise lower margins, and when to pursue small markets at the expense of seemingly larger and more lucrative ones. “The Innovator’s Dilemma” together with “The Innovator’s Solution” and “Seeing What is Next”, form a trilogy that is compulsory reading for companies serious about innovating and creating value for their shareholders. (See Innovation, Innovator’s Dilemma, S Curve in Technology Evolution, Technology Risk)) Clusters: In a globalized economy, companies can access capital, goods, information and technology from all parts of the world. Thanks to faster methods of transportation and communication, physical location has become less important. Yet, there are geographic concentrations of industrial activities. For example, Silicon Valley in California is reputed for its cluster of computer hardware and software companies. Even though it is a very expensive location, many tech companies continue to perform their key value adding activities in this region.
  • 18. 18 Michael Porter8 uses the term “clusters” to describe geographical concentrations of interconnected companies and institutions in a particular business. Clusters include suppliers of components, machinery, services and institutions which provide specialized infrastructure. Sophisticated, demanding customers who keep companies on their toes can also be considered a part of the cluster. So can the local government, universities, research centres and think-tanks who play a vital role in encouraging innovation and creating suitable conditions for more efficient value addition. Clusters help in improving productivity, due to the superior quality of the local infrastructure. Other aspects which give a location a head start over other centers include a high quality transportation network, which facilitates fast and efficient movement of goods, availability of skilled, educated and trained manpower, a sound legal system and favorable tax rates. Many leather goods, footwear, apparel and accessories companies operate out of Italy because of the country’s reputation for fashion and design. France is an important country for cosmetics, since it has highly sophisticated customers. In a location with well-established marketing networks, companies can also take advantage of referrals. Clusters help companies to improve as competition with rivals keeps them on their toes. The presence of companies engaged in related value chain activities, downstream and upstream, facilitates effective coordination even without vertical integration. Proximity also builds a greater degree of trust among the various players. The presence of demanding customers in a cluster motivates companies to innovate, while the presence of competent suppliers and partners helps in bringing innovations to the market faster. A company within a cluster can source what it needs much faster, closely involve suppliers and partners in the product development process and obtain relevant technical and service support. (See Comparative Advantage, Global Value Chain Configuration, Strategic Advantage) Coase, Ronald: A British economist and the Clifton R. Musser Professor Emeritus of Economics at the University of Chicago Law School, Coase graduated from the London School of Economics in 1931. He received the Nobel Prize in Economics in 1991. Coase is best known for two articles "The Nature of the Firm" (1937), which introduces the concept of transaction costs to explain the size of firms, and "The Problem of Social Cost" (1960), which suggests that well defined property rights can overcome the problems of externalities. Code of Ethics: Well managed companies take various steps to enforce high ethical standards among employees. The Corporate Code of Ethics defines the company's core values and guiding principles and often describes how employees are expected to behave in different circumstances. Through a Corporate Code of Ethics, the firm can publicly display its commitment to high standards of moral excellence. (See Business Ethics) Commoditization: As industries mature, the scope to differentiate reduces. The offerings of different players begin to look increasingly alike. Price based competition intensifies. This phenomenon is called commoditization. Companies can deal with commoditization in various ways. One way is to wrap value added services around the core product. Differentiation of the core product may be difficult but there may be scope to innovate in packaging, delivery, customer experience or 8 Porter, Michael E. “Clusters and the New Economics of Competition” Harvard Business Review, November- December 1998, pp 77-90.
  • 19. 19 supply chain management. In the highly commoditized PC industry, Dell has succeeded largely because of its excellence in supply chain management. Online auctions may look like a commodity business but ebay has done well by building a community and providing a great customer experience. A second way of preventing or reversing commoditization is to reposition the product. Repositioning helps change the perceptions of customers and also in differentiating the product. (See Blue Ocean Strategy, Differentiation) Company Profile: A company must have a good understanding of its capabilities and expertise. Effective strategies can be formulated only by developing the company profile accurately and aligning it with corporate mission and environmental factors. One way to develop the company profile is to examine each function and key components under each function critically. See table below. Marketing Product range, Sales organization, Distribution network, pricing strategy, after sales services etc. Fund raising capabilities, Cost of capital, Tax planning, cost Finance & Accounting control, Costing system etc. Raw material availability and costs, supplier relationships, Operations Inventory control systems, Sub contracting, etc. Personnel Employees' skills, morale, Industrial relations, manpower turnover, specialized skills, etc. General management Structure, communication systems, control systems, culture, decision making, strategic planning systems, etc. (See Environment Analysis, SWOT Analysis) Comparative Advantage: The ability to cut costs by the suitable location of value chain activities. Global companies can realize comparative advantages by locating value chain activities in cheaper locations. Some automobile companies have preferred to locate their assembly plants at cheaper locations in Asia and Latin America, rather than North America or Europe. Many companies trying to enter the European Union (EU), including Dell and Intel, have preferred to locate their plants in Ireland, a cheaper location, compared to more developed countries such as France and Germany. Texas Instruments has set up a software design subsidiary at Bangalore in India to access the relatively low cost, highly skilled technical workers available locally. Many global companies such as General Electric (GE) and Citigroup are locating their back office operations in India. (See Strategic Advantage) Competitive Advantage: The key message in Michael Porter’s theory of competitive strategy is that firms must be able to create a defendable position in an industry, in order to cope successfully with competitive forces and generate a superior return on investment. Superior performance within an industry can be achieved through Cost leadership, Differentiation or Focus. Cost leadership involves becoming the lowest cost producer in the industry by pursuing strategies such as economies of scale, process automation, supply chain efficiency, etc. Differentiation means being unique in the industry along some dimensions that are widely valued by buyers. Differentiation can be on the basis of product, distribution, sales, marketing, service, image, etc. Focus means being the best in a carefully chosen segment or group of segments.
  • 20. 20 Firms should pursue one of these strategies and take care not to get stuck in the middle. But care must also be taken to maintain a proper balance between cost leadership and differentiation. Thus a cost leader should not be seen to be offering distinctly inferior products, compared to rivals who are competing on the basis of differentiation. A differentiator cannot afford to have a very high cost structure. The costs should not exceed the price premium it receives from the buyers. 9 The sustainability of competitive advantage depends on three conditions. The first is the particular source of the advantage. There is a hierarchy of sources of competitive advantage in terms of sustainability. Lower-order advantages, such as low labor costs or cheap raw materials are relatively easy to imitate. Higher-order advantages, such as proprietary process technology, product differentiation, brand reputation and customer relationships are more durable. Higher-order advantages involve more advanced skills and capabilities such as specialized and highly trained personnel, internal technical capability and often close relationships with leading customers. Such advantages also demand sustained and cumulative investment in physical facilities and specialized intangible assets. The second determinant of sustainability is the number of distinct sources of advantage a firm possesses. If there is only one advantage, competitors can more easily nullify this advantage. Firms which sustain leadership over time, tend to proliferate advantages throughout the value chain. The third, and most important basis for sustainability is constant improvement and upgrading. A firm must keep creating new advantages at least as fast as competitors can replicate old ones. The firm must improve relentlessly its performance against its existing advantages. This makes it more difficult for competitors to nullify them. In the long run, competitive advantage can be sustained only by expanding and upgrading sources and by moving up the hierarchy to more sustainable types. To sustain competitive advantage, a firm may have to destroy old advantages to create new, higher-order ones. A company must learn to exploit industry trends and close off the avenues along which competitors may attack by making pre emptive investments. (See Cost Leadership, Competitive Strategy, Differentiation, Focus) Competitor Analysis10: Analyzing competitors is an integral part of strategic planning. Porter’s book, “Competitive Strategy,” gives various insights in this regard. In identifying current and potential competitors, firms must consider several important variables: • How do other firms define the scope of their market? • How similar are the benefits offered by the products and services to those of other firms? • How committed are other firms in the industry? • What are the long-term intentions and goals of competitors? Certain pitfalls must be avoided while doing competitor analysis. These include: • Focusing on current and known competitors while ignoring potential entrants. 9 From, Porter, Michael E. “From competitive advantage to corporate strategy” Harvard Business Review, May- June 1987, pp 43-59. 10 Drawn heavily from “Competitive Strategy: Techniques for Analyzing Industries and Competitors” by Michael E Porter published by Free Press in 1980.
  • 21. 21 • Concentrating on large competitors while ignoring smaller players. • Assuming that competitor behavior will not change with time. • Misreading signals that may indicate a shift in the focus of competitors or a refinement of their present strategies or tactics. • Excessive focus on the tangible assets of competitors, while ignoring their intangible assets. • Assuming that all the firms in the industry have the same constraints and opportunities. • Getting too obsessed with outsmarting the competition, instead of focusing on customer needs and expectations. The first step in analyzing competition is to understand the goals of competitors, whether they are satisfied with their current position, whether they are likely to change strategy and also how they will react to competitor’s moves. Porter draws a distinction between threatening and non threatening moves. Moves are non-threatening if competitors do not notice or are not concerned. In contrast, threatening moves are taken seriously by rivals. Before making such moves, it is important to estimate the likelihood, timing, effectiveness and extent of retaliation and assess whether the retaliation can be countered effectively. The response of a firm which gives importance to profitability is likely to be different from another, which emphasizes market share. Some strategic moves can threaten certain competitors more than the others, given their goals. In that case, there is greater likelihood of retaliation. The stated and unstated financial goals, capabilities and psyche of competitors of the industry must be studied carefully. Analysis of competitors' goals helps a firm to avoid retaliatory moves that can trigger off intense rivalry. For instance, a move to gain market share from a firm divesting its business, would not provoke any retaliation. On the other hand, rivalry may intensify if an attempt is made to grab market share from a firm which is trying to build the business. A low cost producer is likely to respond very aggressively to the price cutting moves of a competitor. On the other hand, a firm which focuses on differentiation and customer loyalty is less likely to retaliate. It is important to understand the capabilities and psyche of competitors thoroughly. These include the competitor's beliefs about its relative position, historical and emotional identification with particular products/policies, cultural factors, organizational values, the extent to which a competitor believes in conventional wisdom, etc. Historical information on the competitors' past financial performance, track record in the market place, areas of success, past reactions to strategic moves etc. can also be very useful. It is also important to gain greater understanding about the top management, the types of strategies that have worked for the management in the past, other businesses with which the top management had been earlier associated, the events which have influenced top management in the past, the technical background of the management, etc. A firm, serious about a competitive move must communicate clearly that it is committed to the move and has the necessary resources. Then rivals are more likely to resign themselves to the new position. Similarly, if a firm says it loud and clear that it will react strongly to moves by competitors, it may be able to deter them from making competitive moves. The greater the certainty with which the competitor sees the commitment being honored, the greater the deterrent value of the commitment. Competitors should understand that the firm has both the resources and resolve to carry out the commitment quickly. Based on all these considerations, a firm has to select its strategy. An ideal strategy would prevent competitors from reacting. Such a situation arises when the legacy of the past makes some moves very costly for competitors to counter. Small and new firms often have little stake in the strategies practiced by industry leaders. These challengers can benefit substantially by pursuing strategies that
  • 22. 22 penalize competitors for their stake in these existing strategies. (See Competitive Strategy) Competitive Strategy: Thanks to Michael Porter, companies today have a considerable amount of knowledge on how to take offensive or defensive actions to compete effectively in an industry. For Porter, the essence of competitive strategy formulation is understanding the industry structure and relating the company to its environment. Industries differ widely in the nature of competition and opportunities for sustained profitability. The structural attractiveness of an industry depends on five factors, which form Porter’s famous Five Forces model: • The entry of competitors. How easy or difficult is it for new entrants to enter the business? • The threat of substitutes. How easily can the company’s product or service be substituted? • The bargaining power of buyers. How strong is the position of buyers? • The bargaining power of suppliers. How strong is the position of sellers? • The rivalry among the existing players. Is there intense competition among the existing players? 11 The second central concern in strategy is position within an industry. Some positions are more profitable than others, regardless of what the average profitability of the industry may be. At the heart of positioning is competitive advantage. In the long run, firms succeed relative to their competitors if they possess sustainable competitive advantage. There are two basic types of competitive advantage: lower cost and differentiation. Lower cost is the ability of a firm to design, produce and market a comparable product more efficiently than its competitors. Differentiation is the ability to provide unique and superior value to customers in terms of product quality, special features, after-sale service, etc. Differentiation allows a firm to command a premium price which leads to superior profitability, provided costs are comparable to those of competitors. It is difficult, though not impossible, to achieve lower cost and differentiation simultaneously relative to competitors. So a trade off is involved. However, any successful strategy must pay close attention to both types of advantage while excelling in one. A low-cost producer must offer acceptable quality and service to avoid having to give discounts, while a differentiator’s cost position must not be so far above that of competitors as to offset its price premium. A key variable in positioning is competitive scope. A firm must choose the range of product varieties it will produce, the distribution channels it will employ, the types of buyers it will serve, the geographic areas in which it will sell, and the array of related industries in which it will also compete. Most industries are segmented, with distinct product varieties, multiple distribution channels and several different types of customers. These segments have frequently differing needs. Serving different segments requires different strategies and calls for different capabilities. Competitive scope is also important because firms can sometimes gain competitive advantage by exploiting interrelationships by competing in related industries through sharing of important activities or skills. Both industry structure and competitive position are dynamic. Industries can become more or less attractive over time, as barriers to entry or other elements of industry structure change. Industry attractiveness and competitive position can also be shaped by a firm. Successful firms not only respond to their environment but also attempt to influence it in their favor. 11 See Michael Porter’s, “The Competitive Advantage of Nations,” The Free Press, 1990.
  • 23. 23 Achieving competitive advantage requires a firm to make choices. If a firm is to gain advantage, it must choose the type of competitive advantage it seeks to attain and the scope within which it can be attained. (See Competitive Advantage, Generic Strategies) Concentration Ratio: A measure of the degree of competition in an industry. Thus the four firm concentration ratio is the percentage of the market accounted for, by the top four players. (See Herfindal Index, Oligopoly) Concentric Diversification: Diversification into related areas. A less risky strategy compared to conglomerate diversification. The new business may be related to the existing business in terms of product, technology or both. (See Diversification) Conglomerate Diversification: Diversification into unrelated areas. Firms sometimes enter a new business simply because it represents the most promising investment opportunity available. The main concern here is the profit generating capacity of the new venture and financial synergies. For instance, businesses with sales patterns moving in opposite trends may balance each other. It is widely accepted that related diversification is more likely to succeed than conglomerate diversification. The key, of course lies in understanding what is related and what is not. (See Diversification) Contestability: The degree to which firms can enter or leave an industry. Contestability provides a measure of the effect of potential competition in an industry. Perfect contestability implies there are no barriers to entry. In the early 1980s, the economist W J Baumol pointed out that perfect contestability could yield the results of perfect competition in a market, even without having a large number of small firms. The airline industry is generally held up as an example of a reasonably contestable industry. (See Barriers to Entry) Contingency Planning: The development of a management plan that uses alternative strategies to ensure the success of a project even in the event of things going wrong. Essentially, it means preparing for highly uncertain situations. (See Adaptive Planning, Russell Ackoff) Contract Manufacturing: Production on behalf of a client who owns the design and brand name. Contract manufacturing helps a company gain access to capacity in a cost effective way. On the other hand, the contract manufacturer does not have the burden of marketing the product and handling end customers. (See Licensing) Co-opetition: 'Co-opetition', a word coined by Ray Noorda (the founder of Novell), is defined by Brandenburger and Nalebuff as a new mindset that combines cooperation and competition. Cooperation generally leads to an expansion of the cake and competition to a slicing up of the cake. Both cooperation and competition are necessary. An exclusive focus on competition ignores the potential for expanding the market or creating new profitable forms of enterprise. A 'co-opetition' mindset actively looks for ways to change and expand the business, as well as newer and better ways to compete.
  • 24. 24 (See Dynamic Capabilities, Process Networks, Strategic Alliances) Core Competence: A term coined by C K Prahalad and Gary Hamel 12. A core competence is a bundle of skills and technologies that enable a company to provide superior value to customers. A core competence is effectively a company's specialized capability to create unique customer value. This capability is largely embodied in the collective knowledge of its people and the organizational procedures that shape the way employees interact. Over time, investments made in facilities, people and knowledge that strengthen core competencies, create sustainable sources of competitive advantage. A core competence should not be equated with a single skill or discrete technology. If a company identifies too many competencies, it is probably referring to discrete skills. At the same time, if it identifies only one or two competencies, the level of aggregation is too broad. Typically, a firm may have between five and 15 core competencies. Skills which are a pre-requisite for becoming an industry player, should not be confused with core competencies. A core competence is also not a physical asset. For instance, a factory, a distribution channel, brand or patent cannot be referred to, as a core competence. The ability to manage these assets may, however, be a core competence. A core competence should: • Provide significant and appreciable value to customers, relative to competitor offerings; • Be difficult for competitors to imitate or procure in the market; • Enable a company to move into new markets or to develop new technologies. Core competencies are not product specific. They can and should be leveragable to create new products/ services. Indeed, a core competence is truly core when it forms the basis for entry into new product lines/ businesses. Sony's core competence in miniaturization has enabled it to develop a range of popular consumer products. Reliance Industries' core competence in project management has enabled it to complete many complicated projects that span across industries ahead of schedule. The Aditya Vikram Birla group has a similar competence. By understanding core competencies, a firm can identify which businesses to strengthen and which to divest. Identification of core competencies can also lead to greater clarity on potential entrants into the industry who may be using similar core competencies to make other products. To sustain competitive advantage, competencies need to score well on four dimensions: Appropriability: The degree to which the profits earned by a competence can be appropriated by someone other than the firm in which the profits were earned. The lower the appropriability of the asset, the more sustainable the profits. Durability: How durable is the competence as a source of profit? Shortening product and technology life cycles make most competencies less durable than they were, a decade earlier. Transferability: The easier it is to transfer the core competencies and resources, the lower the sustainability of its competitive advantage. 12 In their book, “Competing for the Future,” Harvard Business School Press, 1994.
  • 25. 25 Replicability: If it is possible, by appropriate investment or by purchasing a similar asset for a competitor, to construct a nearly identical set of capabilities, the competitive advantage is not sustainable. Examples of core competence Company Core Competency Products Sharp/Toshiba Flat screen display Lap Top Computers, Television; Videophone Sony Miniaturisation Personal Audio Federal Express Logistics Management Courier Services Walmart Logistics Management Discount Retailing Motorola Wireless communication Cellular Phones Ranbaxy Labs Reverse Engineering Generic drugs Honda Combustion Engineering Motor Cycles, Cars, Generators Gujarat Ambuja Energy Management Cement Cements Some management scholars feel that core competence has several limitations. It is more useful in explaining why something has gone right or wrong and less useful in predicting what will be right or wrong. For instance, Clayton Christensen, the innovation guru, feels that core competence is too internally focused. Instead of asking what they are good at, companies must ask what customers value. Accordingly, they must develop new competencies when circumstances demand, instead of continuing to exploit existing ones. Prahalad, himself, has warned of core competencies becoming core rigidities. A dramatic structural change in an industry can substantially reduce the value of a core competence. That is why, it is important to assess the value of a core competence by the benefits it generates for customers rather than the technicalities underlying the core competence. (See Diversification) Core Ideology: A term coined by Collins and Porras in their book “Built to Last”. Core Ideology describes an organization’s identity that transcends all changes related to its relevant environment. Core ideology consists of two notions: Core Purpose – the organization’s reason for being – and Core Values – essential and enduring principles that guide an organization, its behaviors and actions. (See Corporate Purpose, Corporate Values) Core Values: Core values are the basic or central values of an organization. They serve to guide the company and have a profound influence on how people in that organization think and act. As long as actions are aligned with core values, no external justification is required. These core values define the organization in terms of what it is and what it does and give the organization an unique identity. In other words, core values provide the glue that holds an organization together. Core values are an organization's essential and enduring tenets that should not be compromised for financial gain or short-term expediency. Even during hard times, the values should not be diluted. These values should undergo modification only in the most exceptional situations. (See Core Ideology, Corporate Purpose, Culture)
  • 26. 26 Corporate Governance: Corporate governance has been a hot issue in recent years. The series of corporate scandals involving Enron & WorldCom in the US, Parmalat in Italy, etc., has alarmed stakeholders. In India too, corporate governance is attracting a lot of attention. Corporate governance is the subject that deals with the responsibilities of senior managers, directors and shareholders. Directors are expected to safeguard the interests of shareholders by monitoring the actions of managers. But time and again, directors have not been able to impose necessary checks and balances. That explains why boards have come for sharp criticism and independent directors have become so important. In the United Kingdom, the importance of good corporate governance came into the public domain after a series of corporate collapses and scandals in the 1980s and 1990s. The functioning of boards was criticized and the importance of independent, impartial non-executive directors was highlighted. Following the publication of the Cadbury committee report in 1992, a code of best practices was established. Although it is voluntary, all listed companies are expected to comply with it. Since the Cadbury report, a number of other committees have established best practices in specific areas like director's pay. In the US, the Sarbanes Oxley Act 2002 (SOX) has been framed to enhance and enforce corporate accountability, transparency and disclosures in all the activities and transactions the company undertakes. SOX requires the CEO and the CFO of a publicly listed company to certify in the Annual Report that all the disclosures made are accurate and true. In India too, various codes of corporate governance have been formulated through committees like the Kumara Mangalam Birla committee on corporate governance (2000). This report has made various recommendations, both mandatory and non-mandatory for publicly listed companies with respect to the structure and composition of the board, the audit committee, the remuneration committee, accounting and financial reporting standards, functions of the management and shareholders' rights. For instance, the company's half-yearly declaration of financial performance including a summary of the significant events in last six months must be sent to each shareholder. (See Agency Theory) Corporate Image: Corporate image refers to the way the business of an organization is perceived by the investors and customers. A positive corporate image represents a major intangible asset. For example, the Tatas have successfully leveraged their positive image to enter various businesses. Corporate image is shaped by an organization’s history, its beliefs and philosophy, its ownership, its people, the personality of its leaders, its values and its strategies. Public relations play an important role in building a company’s image by explaining what the organization stands for, to the stakeholders. A company’s advertisements, statements made by the leaders, relations with stakeholders and the website all contribute to image building. The financial community, business community, consumers, other ‘thought’ leaders, top managers, employees, shareholders and the government must all be kept in mind, while shaping the corporate image. Corporate Philanthropy: Corporate philanthropy refers to the involvement of business firms in charitable activities through contributions in the form of time, money, goods, or services. Corporate philanthropy is not merely about spending money. It is also about getting the best returns and the best results for the money spent and involving the larger community, especially NGOs. One of the best examples of corporate philanthropy is the Bill Gates and Melinda Gates foundation which has taken up various laudable initiatives across the world, especially to improve healthcare in poor countries.
  • 27. 27 (See Corporate Social Responsibility) Corporate Purpose: As defined by Collins and Porras in their book, “Built to Last”, corporate purpose is the organization's fundamental reason for existence. The primary aim of corporate purpose is to guide and inspire the company. The corporate purpose should not be confused with specific goals or business strategies. Two companies could have a very similar purpose but operate in different ways in different businesses. A visionary company continues to pursue, but never really reaches its purpose. As Walt Disney once remarked, "Disneyland will never be completed, as long as there is imagination left in the world." Unilever's corporate purpose states13: • Unilever's mission is to add vitality to life. We meet everyday needs for nutrition, hygiene and personal care with brands that help people feel good, look good and get more out of life. • Our deep roots in local cultures and markets around the world give us our strong relationship with consumers and are the foundation for our future growth. We will bring our wealth of knowledge and international expertise to the service of local consumers – a truly multi-local multinational. • Our long-term success requires a total commitment to exceptional standards of performance and productivity, to working together effectively, and to a willingness to embrace new ideas and learn continuously. • To succeed also requires, we believe, the highest standards of corporate behaviour towards everyone we work with, the communities we touch, and the environment on which we have an impact. (See Core Ideology, Mission, Vision) Corporate Renewal: Because of organizational inertia and inflexibility, many companies continue to bet on the strategies that have worked in the past, taking customers and competitors for granted. Corporate renewal implies proactive change management that involves both tightening belts from time to time and inspiring employees with a powerful vision. Leaders must set stretch targets for their employees and constantly encourage them to question the basic assumptions of the business. At the same time, they must move people in a clear direction through an inspiring vision. Organizations need to renew themselves continuously as the external environment changes. But they often do not do so, persisting zealously with what has succeeded in the past. Managers have a tendency to support structures, systems and decisions that have ensured the company's success in the past. This tendency is reinforced by a belief that customers are captive and competitors are weak. Great organizations facilitate renewal, by setting stretch targets and articulating a powerful vision that encourages people not to see themselves in terms of the past, but in terms of the future potential. They go beyond the task of ensuring alignment of existing resources to providing new challenges. They create organizational disequilibrium. And most importantly, within the turmoil, they are willing to make choices and commitments to new options and opportunities. (See Corporate Restructuring) Corporate Restructuring: Over time, as the industry structure changes and markets evolve, the internal profile of an organization may need a major revamp. Corporate restructuring refers to the 13 Adapted from Unilever Website.
  • 28. 28 various actions involved in realigning the organization in the light of emerging market trends. This may include a new organizational structure, divestment of unviable businesses, alteration of capital structure, reduction of headcount and outsourcing of non core activities. Change management is often a key ingredient of corporate restructuring. (See Change Management, Corporate Renewal) Corporate Social Responsibility (CSR): For any medium sized or large company, society is an important stakeholder. Though companies are primarily guided by the profit motive, they cannot act without considering the larger interests of society. Several years ago, the famous economist, Milton Friedman argued that the social responsibility of a business is to make profits. Friedman was clear that corporate actions motivated by anything other than shareholder wealth maximization threatened the well being of shareholders. Today, that view is considered somewhat extremist. Most businesses accept that they have a responsibility towards society. A responsive corporate social policy may not only enhance a firm's long-term viability but also preempt restrictive government regulations. Ardent supporters of CSR argue that, when a company behaves responsibly, there is a direct impact on the bottom line. Some CSR activities do have tangible economic benefits. Expenses incurred on CSR are often tax deductible. Some socially responsible practices such as recycling of water may even generate cost savings and, as a result, increase profits. For example, recycling may reduce input costs and pollution simultaneously. Corporate philanthropy can also lead to intangible benefits such as goodwill. However, there is no guarantee that CSR will automatically lead to an improvement in profitability, especially in the short run. At the same time, there is a wide acceptance that CSR will generate a positive impact in the long run. (See Corporate Philanthropy) Corporate Venturing: This occurs when a large firm decides to invest in a smaller, but promising venture. Corporate venturing provides an alternative way of generating growth and tapping expertise that would otherwise take time to develop. Corporate venturing enables a company to develop products to expand the core business, to enter new industries or markets, or to develop breakthrough technologies that could substantially change the industry. Corporate venturing can be done by taking a passive, minority position in an outside business, by taking an active interest in an outside company, by building a new business as a stand-alone unit or by building a new business inside the existing firm, with independent management. Cost Leadership: A strategy that focuses on making the operations more efficient and cutting costs wherever possible. It may result from scale/scope efficiencies, tight overhead control, careful selection of customers, standardization and automation. Cost leadership aims at having the lowest costs in a market. This makes the company best placed to survive a price war and generates the highest margins if a price war does not occur. Gujarat Ambuja has pursued this strategy in the Indian cement industry. The largest retail chain in the world, Wal-Mart also believes in cost leadership. TISCO has been a cost leader in the Indian steel industry. (See Generic Strategy) 14 Controlling costs systematically can lead to competitive advantage in industries where price is an important factor. If a company offers a standard product or service at a lower cost when compared to 14 This term is taken heavily from “The Essence of Strategic Management” written by Clief Bowman, published by Prentice Hall of India, 1990.
  • 29. 29 the industry average, the company will earn higher profits. Low cost can enable the company to compete on price if that is required. It can also generate profits that can be reinvested to improve the product quality while charging the same price as the average in the industry. Low cost producers are more likely to survive a price war. If suppliers hike prices, the low cost leader will not be squeezed as much as the other players. The firm’s low cost position may also act as an entry barrier, particularly if the potential entrant hopes to compete on price. A cost leader can also use price as a weapon to ward off threats from substitute products. There are some risks associated with the cost leadership strategy: • If the buyer perceives the product to be cheap or of low quality, then the company would have to reduce the price to sell it. In that case, cost leadership will not lead to superior profitability. • Too much focus on costs can lead to the firm losing touch with the changing requirements of the customer. • Many routes to a low cost position can be easily copied. Competitors can purchase the most efficient scale of plant. As industries mature, the experience curve effect confers fewer benefits. But perhaps the greatest threat comes from competitors who are able to price at marginal cost in the industry because they have other, higher profit-earning product lines to recover the fixed costs. (See Generic strategy,Offshoring, Outsourcing) Cost of capital: For a business to be set up and run, capital is needed. This capital must yield returns that exceed the costs incurred to create value for shareholders. So it is important to measure the cost of capital and keep tracking it on an ongoing basis. Debt is a cheaper source of capital compared to equity. Within debt, there are various instruments available. Corporate treasurers must choose the appropriate mix of debt instruments and equity to get to the targeted cost of capital. (See Capital Structure) Counterparry: A term coined by globalization guru, George Yip. Counterparry involves responding to a competitive attack in one country by retaliating in another country. The retaliation is done in a country where the competitor will be hurt most. To make a counterparry effective, a strong presence in important markets, especially the home countries of major competitors is desirable. Kodak used this strategy against Fuji. (See Cross Country Subsidization, Global Leverage) Country of Origin Effect: The special preference given by customers to goods produced in certain countries. Japan, for example symbolizes quality and reliability in the consumer electronics business. Similarly, Switzerland represents excellence in watch making and Germany in precision engineering. Country Risk: The risk associated with a particular country, either because of an investment made, a loan given or some other commitment. Understanding and estimating country risk involves the examination of economic, political and geographical factors. Country risk is an important factor to be considered in international business. (See Political Risk) Critical Success Factor (CSF): Refers to those critical areas, where things must go right for the business to flourish. For example, the ability to attract and retain talented people is a critical
  • 30. 30 success factor for Indian IT services companies like Infosys, TCS and Satyam. Similarly, the ability to control freight costs is a critical success factor for steel manufacturers like Tata Steel. The ability to manage R&D effectively is a critical success factor for global pharma companies like Merck. Supply chain management is a critical success factor for large retail chains like Food World. Cross Country Subsidization: Using profits from one country to subsidize losses in other countries. This strategy is closely related to counterparry. Global companies, thanks to their presence across countries, have this capability. (See Counterparry) Cross Holding: The holding of equity shares by companies in each other. In countries like India, this is a common practice that enables promoters to retain management control of a company with minimal investment. It also provides opportunities for tunneling, i.e. movement of funds across subsidiaries. Cross holding is considered bad for corporate governance because there is an imbalance between control and cash flow rights. Cross holding also leads to unrelated diversification resulting in unwieldy conglomerates, which often generate less than satisfactory returns to shareholders. Customer Relationship Management (CRM): An age old concept, which has become hot in recent times because of the rise of information technology. CRM refers to efforts by companies to understand their customers and manage them in the most profitable way. CRM aims at improving customer retention, offering differentiated products based on customer needs, clever customer acquisition and reward programs, and better customer service programs. CRM usually uses information technology to manage large amounts of customer data and automate various steps, to prevent human error. Data collected through CRM enables firms to serve target segments more effectively by tailoring products to closely match customer needs. CRM also provides data to educate employees, align their incentives, and make a company better placed to profit from evolving market needs. Customer Switching Costs: The costs that tend to tie buyers to the current supplier. These costs tend to be high when the product needs specialized inputs, when the customer has invested a lot of time and energy in learning how to use the product, or when the customer has made special- purpose investments that cannot be used elsewhere. Enterprise Resource Planning (ERP) software falls in this category. (See Barriers to Entry) Cusumano, Michael: Well known for his work on business strategy, especially in the computer software industry, Cusumano has extensively studied tech companies across the world, including Microsoft, Netscape, and Intel. Based on his research, he has contributed valuable insights on the strategic management of tech companies. Cusumano argues that strategic planning is important even in a fast changing world like Information Technology. The only difference is the planning cycles have to be shorter. Among the ideas for which Cusumano is famous are Platform leadership and knowledge transfer across projects. (See Platform Leadership) D Decision Making: Decision making is a key element in strategic management. Good decision making is as much about collecting hard data and doing painstaking analysis as much about
  • 31. 31 behavioral issues. According to Herbert Simon, the Nobel prize winner, decision making takes place in four stages. “Intelligence” involves discovering, identifying and understanding the problem. “Design” includes identifying and exploring solutions to the problem. “Choice” means choosing one of the alternatives. “Implementation” means making the chosen alternative work. These stages explain how decision making should take place logically. In practice, the influence of various behavioral issues cannot be overlooked. Moreover, the four steps, instead of occurring sequentially, may overlap. And in many cases, decision making takes place in iterative fashion, accepting things that work and rejecting those that do not. Three key factors that are an impediment to good decisions are information quality, human filters and resistance to change. Information may not be accurate, complete, consistent or available on a timely basis. Managers have selective attention, various biases and focus on some dimensions of the problem while ignoring others. Last, but not the least, people are resistant to change. So, decisions often tend to be a balancing of the firm’s various interest groups rather than the most optimal solution. 15 The way people think, both as individuals and in groups, affects the decisions that they make. Bad decisions take place when the alternatives are not clearly defined; the right information is not collected and the costs and benefits are not accurately weighed. Sometimes the fault lies not in the decision-making process, but in the mind of the decision-maker. Managers often do not realize the various traps that exist while taking decisions. Some common traps include: The anchoring trap. Managers tend to give disproportionate weight to the first piece of information they receive. The status quo trap. People like to maintain the status quo, even when better alternatives exist. The sunk-cost trap. Companies often perpetuate the mistakes of the past because they have invested so much in an approach or decision that they find it difficult to alter course. The confirming-evidence trap. Managers tend to seek information to support an existing tendency and discount opposing information. The overconfidence trap. Most people have an exaggerated belief in their ability to understand situations and predict the future. The framing trap. People's roles in an organization influence the way problems are framed. So often a problem or situation is incorrectly stated. Deming, William Edwards16: (1900-1995): An American engineer who is regarded as the founder of total quality management. It was under Deming’s stewardship that Japan became renowned for producing innovative high quality products. No wonder the Japanese have named their premier quality award after him. 15 John S., III Hammond, Ralph L. Keeney, Howard Raiffa. “The Hidden Traps in Decision Making” Harvard Business Review, 24th June 2006. 16 Adapted from www.wikipedia.org.
  • 32. 32 Deming understood that technology was not enough to tackle the quality problems. The people best equipped to resolve such problems, were those who worked with the system on a daily basis and who knew it best. Insights into the system and useful ideas for changing it had to percolate up from the bottom of the organization. So management had to shake up the hierarchy, drive fear out of the workplace and foster the intrinsic motivation of its employees. Deming emphasized the systems approach (i.e., the interdependence of all the organizational units that work to accomplish the goals of an organization). Strongly opposed to traditional performance appraisal and merit pay, Deming argued that merit rating encouraged short-term performance undermined long-term planning, built fear, destroyed teamwork and fueled rivalry and politics. Deming argued that pay for performance was intrinsically unfair because it ascribed to the people in a group differences that might be caused totally by the system they were working in. If management did its job well in terms of hiring, developing employees, and keeping the system stable, most employees would perform as well as the system permitted. Deming believed that the desire for achievement was fundamental to human nature. Employees wanted to be given the chance to demonstrate their abilities and exploit their potential. The greatest competitive advantage would accrue to companies that helped employees achieve their full potential. Deming contended that within a stable system, most fluctuations in individual performance over time would be attributable to natural variations in the system. Moreover, it was almost impossible to measure the contribution of a single individual within a system that was subject to the vagaries of numerous other variables. Deming emphasized that by embracing appropriate principles of management, organizations could increase quality and simultaneously reduce costs (by reducing waste, rework, staff attrition and litigation while increasing customer loyalty). The key lay in practicing continual improvement and viewing manufacturing as a system, not as bits and pieces. Deming articulated various principles for successful business transformation. Some of them are: • Reduce dependence on mass inspection to achieve quality. Instead, improve the process and build quality into the product in the first place. • Build leadership capabilities for the management of people, recognizing their unique abilities, capabilities, and aspirations. Leaders should help people, machines, and gadgets do a better job. • Drive out fear and build trust so that everyone can work more effectively. • Break down barriers between departments. Abolish competition and build a win-win system of cooperation within the organization. • Eliminate slogans, exhortations, and targets asking for zero defects or new levels of productivity. Such exhortations only create adversarial relationships, as the bulk of the causes of low quality and low productivity lie in the system and thus lie beyond the power of the work force. • Remove barriers that rob people of joy in their work. Abolish the annual rating or merit system that ranks people and creates competition and conflict. • Involve people at all levels. (See Total Quality Management)
  • 33. 33 Demographic Environment: The demographic environment takes into account factors such as age, population, immigration, marital status, sex, education, religious affiliations and geographic dispersion. Based on these characteristics, demand forecasts can be made and the market appropriately segmented. Unlike many other trends, demographic trends are generally stable and easy to predict. They are unlikely to change suddenly. So market forecasts can be made with a fair degree of accuracy. One of the important demographic trends of recent times, the ageing of Japan and Europe, for example, has major implications for marketers and pension fund managers. (See Environmental Scanning) Devil's Advocacy: A way of improving the decision making process. When a proposal is being discussed, someone can act as a devil's advocate and argue why the proposal should be accepted. By examining the downside, the risks associated with the proposal can be better understood and managed. The creativity guru, Edward De Bono calls it, black hat thinking. However, if taken too far, Devil’s advocacy may be equated with cynicism or obstructionism. Diamond: A term coined by Michael Porter. According to Porter, the competitive advantage of an industry derives from the national `diamond', i.e. four different determinants, which are created within the nation state: factor conditions, demand conditions, related and supporting industries, and firm strategy, structure and rivalry. Factor conditions: Factors can be grouped into a number of broad categories: • Human resources: the quality, skills and cost of personnel. • Physical resources: land, water, mineral or timber deposit, hydro electric power sources, fishing grounds and other physical traits. • Knowledge resources: scientific, technical and market knowledge • Capital Resources: the amount and cost of capital available. • Infrastructure: the transportation system, the communications system, mail and parcel delivery, payments or funds transfer, health care and so on. A nation’s firms gain competitive advantage if they possess factors that are significant to competition in a particular industry. Basic factors are either unimportant to national competitive advantage or the advantage they provide for a nation’s firms is unsustainable. Advanced factors are more significant for competitive advantage. They are scarcer because their development demands large and often sustained investments in both human and physical capital. Generalized factors, like the highway system, a supply of debt capital, or a pool of well motivated employees with college education support only rudimentary types of competitive advantage. They are usually available in many nations, and tend to be more easily nullified, circumvented, or sourced through global corporate networks. Specialized factors involve narrowly skilled personnel, infrastructure with specific properties, knowledge in particular fields, and other factors with relevance to a limited range or even to just a single industry. Specialized factors which provide more decisive and sustainable bases for competitive advantage require more focused, and often riskier, private and social investment.
  • 34. 34 The most significant and sustainable competitive advantage results when a nation possesses advanced and specialized factors needed for competing in a particular industry. Nations must also be good at upgrading the needed factors. Demand Conditions: The composition of home demand, the size and pattern of growth of home demand, and the mechanisms, by which a nation’s domestic preferences are transmitted to foreign markets, shape the rate and character of improvement and innovation by a nation’s firms. A nation’s firms are likely to gain competitive advantage in global segments that represent a large or highly visible share of home demand but account for a less significant share in other nations. Small nations can be competitive in segments which represent an important share of local demand but a small share of demand elsewhere, even if the absolute size of the segment is greater in other nations. A nation’s firms are likely to be globally competitive if domestic buyers are among the world’s most sophisticated and demanding buyers for the product or service. Such buyers put pressure on local firms to meet high standards in terms of product quality, features and service. A nation’s firms gain a competitive advantage if the needs of home buyers anticipate those of other nations and become an early indicator of global buyer needs. Related and Supporting Industries: National advantage is also determined by the presence in the nation of supplier industries or related industries that are internationally competitive. For example, Japanese machine tool producers have drawn on the expertise of world-class suppliers of numerical control units, motors and other components. Sweden’s fabricated steel products (like ball bearings and cutting tools) industry has leveraged the country’s strength in specialty steels. Japan’s global competitiveness in facsimile machines owes much to the country’s strength in copiers. The presence of globally competitive suppliers creates advantages in downstream industries in several ways - efficient, early, rapid and sometimes preferential access to the most cost-effective inputs, superior coordination and faster innovation and upgrading. Competitive advantage emerges from close working relationships between world-class suppliers and the industry. Firm strategy, structure and rivalry: The way in which firms are created, organized and managed as well as the nature of domestic rivalry determine global competitiveness. Nations will tend to succeed globally in industries where the management practices and modes of organization prevalent in the country are well suited for generating competitive advantage. Italian firms, for example, are world leaders in a range of fragmented industries (lighting, furniture, foot ware, woolen fabrics and packaging machines) in which economies of scale are either modest or can be overcome through networks of loosely affiliated companies. Italian companies tend to pursue focus strategies, avoiding standardized products and operate in small niches with their own particular style or customized product variety. These firms do not have depth of management talent. Indeed, they are often, dominated by a single individual. Yet these firms can take quick decisions, rapidly develop new products and adapt to market changes with great flexibility. Competition is possibly the biggest driver of improvisation and innovation. Rivalry increases the pressure to lower costs, improve quality and service and create new products and processes. Active pressure from rivals stimulates innovation as much from fear of falling behind as the inducement of getting ahead. Intense rivalry also puts pressure on domestic firms to sell abroad in order to grow. Particularly when there are economies of scale, rivalry increases the pressure to globalize. Toughened by intense rivalry, the stronger domestic firms are also equipped to succeed abroad. (See Clusters)
  • 35. 35 Differentiation: A strategy that lays emphasis on offering a superior product, on some dimension(s), compared to what competitors are providing. Differentiation is possible along one or more of various dimensions – product features, quality, customer service, guarantee, distribution, delivery, product customization, etc. 17 A successful differentiation strategy emphasizes uniqueness in ways that are valued by buyers. If buyers are willing to pay for these unique features and the firm’s costs are under control, then the price premium will lead to higher profitability. The key success factor in differentiation is sound understanding of the buyer needs. A differentiator needs to know what buyers value, deliver that particular bundle of attributes and charge accordingly. By effectively serving a sub-group of buyers who will not consider other firms’ offerings as substitutes for this offering, the company can effectively lock up the segment. A successful differentiation strategy reduces the head-to-head rivalry witnessed in price based competition. If suppliers raise prices, loyal customers who are not price conscious are more likely to accept the higher price that the differentiator passes on. Customer loyalty also acts as a barrier to new entrants and as a hurdle that potential substitute products have to overcome. However, the differentiation strategy is not without its risks: • If the basis for differentiation is easily imitated, it will not lead to a sustainable advantage. Then rivalry within the industry is likely to switch to price-based competition. • Broad-based differentiators may be outmaneuvered by specialist companies who target one particular segment. • If the strategy is based on continual product innovation, the company runs the risk of exploiting risky territory merely for followers to exploit the benefits. • If the firm ignores the costs of differentiating, the premium prices charged may not lead to superior profits. (See Generic Strategy) Discovery Driven Planning: A term coined by Rita Gunther McGrath and Ian C. MacMillan. It refers to planning in the case of highly uncertain ventures, where new data and assumptions are incorporated on an ongoing basis and plans revised on the basis of new information flowing in from the market. This technique can be really useful for a multinational corporation, which is entering an emerging market. It is also useful in case of a new technology when it is difficult to make market forecasts based on the past. If past assumptions change, sales and cost projections and investment plans need to be altered. (See Strategic Planning) Diseconomies of Scale: Factors which increase unit costs with increasing scale of operations. Costs of coordinating activities tend to be high when the scale of operations is unwieldy. Large firms have many layers of hierarchy. Communication can get distorted as it is typically done through memos, reports or written requests. Worse still, written messages are often impersonal and less motivating than conversation. In small firms, decisions are usually made by the proprietor, or a small group of people at the top. One person taking the decisions ensures coordination of the firm’s strategy and actions. Large firms are typically organized as Business Units. Different units may head in 17 Abstracted from “The Essence of Strategic Management” written by Clief Bowman, published by Prentice Hall of India, 1990.
  • 36. 36 different directions. So regular meetings involving senior managers are required to ensure coordination. This drives up costs significantly. While all these coordination and administration costs go up, the scale economies that come as a result of using large plant and equipment, may disappear beyond a certain size. As a result of all these reasons, costs may go up as the scale of operations increases, beyond a point. (See Economies of Scale) Disruptive Technology: A term coined by Clayton Christensen of Harvard Business School to describe a technology that is quite different from the existing one and offers a totally new price-value proposition. A disruptive technology may have less features but it may be cheaper and more user friendly. Such a technology tends to attract new customers for whom existing products are too expensive or too sophisticated. It is often newcomers and not established players who succeed in developing disruptive technologies. The PC has been a disruptive technology in relation to mainframe and mini computers. Despite being inferior to a mainframe in terms of performance capabilities, the PC is cheaper and easier to use for most people. (See Innovator’s Dilemma, Innovation, Technology Risk) Diversification: A strategy that involves going beyond the current line of business into a new one for various reasons: • In the existing business, opportunities to grow may be limited. • What starts out as a technology for one product may soon become a whole family of technologies generating a range of products targeted at different markets. • Tired of doing the same type of work, managers may think actively in terms of entering a new business. • Diversification may be prompted by the need for vertical integration to get greater control over the value chain. • Most tax legislation incorporate incentives for reinvestment of profits. Firms may find it tempting to invest the surplus capital in a new business. The strategic challenge in diversification is to determine whether there is a fit between the old and the new business. In general, the least risky form of diversification is offering a new product to existing customers. Then comes offering the existing product to a new market. The highest degree of risk is involved while introducing a new product in a new market. Companies which embark on diversification, in response to the poor performance of their existing business, usually fail. There are instances of successful and unsuccessful diversification. Among the successful diversified conglomerates are General Electric, Siemens, Hoechst and ICI. On the other hand, there have been some classic failures like the Ruias of the Essar group in India and Metal Box (India) Ltd. which went into a terminal decline, following its ill-advised diversification into bearings. In general, the less complex a business is, the easier it is to manage it and lower the probability of things going wrong. Highly diversified businesses tend to have more layers of management and more complicated structures and control systems. The top management has to depend on reports, figures and other quantitative data rather than a fundamental understanding of the customers and technology. So before diversifying, the firm must critically examine whether the move can create value for shareholders that they cannot create themselves by diversifying their investment portfolio. A small checklist is given below: A. Core Competencies: These are the value creating skills which can be extended to new products or markets. A company can create value for its shareholders by leveraging its core competencies.
  • 37. 37 B. Market Power: By becoming larger through diversification, the business might be able to gather extra market power vis-a-vis competition, buyers, suppliers and substitutes. C. Sharing Infrastructure: Infrastructure represents tangible resources such as production facilities. There may be scope to leverage this infrastructure and enter a new business. D. Financial stability: A diversified business portfolio can balance cash flows across businesses effectively. For instance, businesses in growing markets may need more cash than they have while those in mature markets may have more cash than they need. E. Growth: Diversification can provide opportunities for fast growth. F. Risk: When different businesses respond differently to economic cycles, diversification can reduce business risk. Peter Drucker’s insights on diversification though mentioned several years ago, are still useful. The diversified company must have a common core of unity to its businesses. The different businesses, technologies, products and activities must be united within a common market, Alternatively, the markets, products and activities must be linked together by a common technology. In general, market diversification based on common technology is more difficult than technological diversification based on a common market. Expertise in technology can be readily identified and acquired whereas that in markets is tacit knowledge based on experience and rather more difficult to assimilate. Under what circumstances does diversification work? Milton Lauenstein18 argues that in well- managed conglomerates, the mediocre performance of unit managers is not tolerated. On the other hand, in focused firms, the CEO is rarely sacked unless the performance is disastrous. Moreover, well managed conglomerates tend to have a corporate staff who go through the annual budgets and long range plans of the operating units with a microscope. In contrast, directors of a focused company often do not spend enough time, going into details. If a conglomerate selects able unit managers, energizes them with a strong corporate purpose, monitors their progress and provides guidance and support when needed, it can outperform the boards of many independent companies. This is exactly what GE, the most successful large diversified company in corporate history, seems to have done under the leadership of Jack Welch. However, diversified corporations must avoid heavy bureaucracy. They must focus on basic governance using a small corporate staff. As Lauenstein puts it: “If it begins trying to coordinate the activities of various units, it will be drawn into operating management functions. The corporate office will expand and begin making decisions which would be better made by executives in operating units. It then becomes an easy mark for a well managed independent competitor.” Lauenstein also points out that in focused firms, the top management’s role is to understand the industry, make the key operating decisions and run the business. In a conglomerate, the top management must govern, not run operations. Its focus must be on selecting, motivating and mentoring the general managers of individual units. At GE, Jack Welch killed bureaucracy, encouraged innovation and selected extraordinarily talented managers to manage each of the company’s diverse businesses. Welch was also ruthless with non- performers. In India, JRD Tata successfully built a portfolio of diverse businesses. Even though his management style was quite different, Tata like Welch had the extraordinary knack of selecting some truly outstanding managers to run the different companies. He kept Russi Mody at Tata Steel, Sumant Mulgaonkar at Telco, Darbari Seth at Tata Chemicals and Ajit Kerkar at India Hotels. (See Concentric Diversification, Conglomerate Diversification) 18 Lauenstein, Milton C, “Diversification – The hidden explanation of success,” Sloan Management Review, Fall 1985, pp. 49-55. .
  • 38. 38 Divestiture: A divestiture strategy involves the sale of a business or part of a business for various reasons. One could be a lack of fit with the core business. A second reason could be that the business has entered the decline phase of its life cycle. The third might be an urgent need for cash. A fourth could be government antitrust action when a corporation is perceived to monopolize or unfairly dominate a particular market. Divisional Structure: A type of structure in which the grouping is done either on the basis of product or geographic segments. The famous Japanese company, Matsushita has been one of the pioneers in the use of the divisional structure, as also General Motors under Alfred Sloan. The idea is to empower managers who have an intimate understanding of the individual businesses. At the same time, some functions like finance are centralized and tightly controlled. The divisional structure creates a sharper focus on different market segments. But duplication of functions makes it less efficient, when compared to the functional structure. Moreover, when capabilities, especially knowledge, are spread across the divisions, pooling them together for the benefit of the organization as a whole can be a major challenge. (See Organizational Design, Organizational Structure) Downsizing: In the face of slowing or declining sales, companies often cut manpower strength. Downsizing can cut costs but it may also result in lower employee morale and a sense of uncertainty across the organization. Creative ways to avoid downsizing include hiring freezes, salary cuts, shortened work weeks, restricted overtime hours, unpaid vacations, and temporary plant closures. When downsizing becomes unavoidable, the aim should be to eliminate non-essential company resources while minimizing the negative impact on the remaining organization. This calls for a frank and free explanation of the circumstances and transparent communication with employees. Drucker, Peter F: Widely considered the father of modern management, Drucker, who passed away in 2005, was a well known writer, management consultant and professor. Drucker published his first book, The End of Economic Man, in 1939. He then joined New York University's Graduate Business School as Professor of Management in 1950. In 1971, he became Clarke Professor of Social Science and Management at the Claremont Graduate University in Claremont, California. The university named its management school after him in 1987. Drucker wrote several books on management, including the landmark books The Practice of Management and The Effective Executive. His other books include “Management Challenges for the 21st Century” “Managing for Results” “Management: Tasks, Responsibilities, Practices” “Innovation and Entrepreneurship” “The Age of Discontinuity” and “The New Realities”. Drucker also served as a regular columnist for The Wall Street Journal from 1975 to 1995 and contributed essays and articles to numerous publications, including the Harvard Business Review, The Atlantic Monthly, and The Economist. He served as a consultant to various organizations. Arguably the most popular management philosopher of the country, Drucker’s writings cover a wide range of areas. Drucker’s great strength is his ability to absorb vast amounts of information, to see patterns in what would appear as a jumble of chaotic events, trends, and economic indicators, and to anticipate trends. Though some academics consider Drucker no more than a “journalist”, his admirers consider him to be one of the most perceptive observers of all time. Earlier and more clearly than anyone else, he highlighted the importance of the corporation as the defining social institution of our time.
  • 39. 39 Drucker’s interest in nonprofit organisations was a logical evolution of both his commitment to the importance of organizations and his recognition that many corporations had failed to live up to expectations in discharging social responsibility. Drucker’s most compelling argument may be that for capitalism and democracy to survive, society must find a way to mitigate the social costs of a free market economy. Due Diligence: The examination of the books of a company which has been identified as a takeover target by the acquiring company. Due diligence is important because the financial statements may not tell the complete story. Many skeletons may be hidden in the cupboard by the company being acquired. If these are not taken into consideration, the bidder may end up paying an excessively high price. Due diligence can play an important role in identifying specific problem areas such as over valued assets, window dressed financial statements or wrong market projections. Dynamic Capability Building: In a dynamic environment, companies must be able to strengthen existing capabilities and build new ones smartly. John Hagel III and John Seely Brown, in their book, “The Only Sustainable Edge” define capability as the recurring mobilization of tangible and intangible resources for the delivery of distinctive value in excess of cost. They emphasize that companies must take a more dynamic view of capabilities to stay ahead of competitors. Sustainable competitive advantage will ultimately come from a firm’s institutional capacity to rapidly strengthen its distinctive capabilities and to accelerate learning across enterprise boundaries. As Hagel and Brown mention, “….the primary role of the firm should be to accelerate the knowledge and capability building of its members so that all can create even more value. This perspective broadens managerial attention from the tasks of allocating existing resources to the tasks of deepening knowledge and capability in an increasingly uncertain environment.” Hagel and Brown suggest three mechanisms to accelerate capability building. Processes can be outsourced or offshored to gain access to specialized capabilities. Distributed networks of specialized companies can also help in mobilizing resources. People with diverse backgrounds and skills can be brought together to solve business problems. (See Process Networks, Strategic Alliances) Dynamic Specialization: A term introduced by John Hagel III and John Seely Brown in their book, “The Only Sustainable Edge”. It implies eliminating resources and activities that no longer act as differentiators and focusing on capabilities that can truly distinguish the firm in the market place. Such firms are more focused, have a greater sense of urgency and are more responsive to the potential threats and opportunities unfolding in the environment. Within the area they choose, firms with dynamic specialization can serve a broader range of customers. Senior executives in such companies have a deeper understanding of the operational details of their business and can therefore encourage and facilitate innovations more effectively. (See Core Competence) E Earnings Before Interest and Taxes: The profits earned by a company before deducting interest and taxes. It is a measure of how profitable the company is, without taking into account the impact of capital structure and tax planning. Economic Value Added (EVA): Economic Value Added (EVA) is the present value of future cash flows, in excess of that required to service the cost of capital. EVA has become an increasingly popular way to financially evaluate both new and existing business strategies. It can also be used to identify businesses for disposal and closure and any new acquisition or alliance.
  • 40. 40 EVA is based on cash flows rather than conventional accounting profit measurement. Cash flows are a better indicator of the economic worth of a business than accounting profits which are often distorted by many non-cash adjustments. EVA also takes into account longer-term cash flows whereas accounting profit is by and large shorter term oriented. Also, using EVA, it is possible to trade off long and short term cash flows thereby avoiding short-termism in economic valuation of strategic decisions. EVA Analysis helps firms to understand how best to increase shareholder value: reinvesting in existing businesses, investing in new businesses, or returning cash to stockholders. By making the cost of capital visible to executives, EVA encourages investment in projects that increase shareholder value. EVA Analysis consists of three steps. The income generated by a business is first determined. Then the return required by investors, i.e. the cost of capital is estimated. For some businesses, one cost of capital is sufficient. However, if business units have vastly different situations or levels of risk, separate costs of capital may need to be calculated. The EVA of each business is determined by subtracting expected return to shareholders from the value created by the firm or business unit. Firms with positive EVA generate profits above that expected by shareholders. Economies of Scale: Refers to the cost savings that a company can achieve due to a larger scale of operations. When the volume of production increases, the average unit cost tends to decline. In other words, doubling the output results in a less than double the increase in costs, as factor inputs can be used more efficiently. The fixed costs can be spread over many units of output. A large scale of operations can also lead to job specialization and consequently higher labor productivity. Bulk buying may reduce input costs. Larger firms also enjoy a lower cost of capital. Banks may charge lower rates of interest and equity investors may be more willing to accept low dividend yields from bigger firms, if they feel a large firm is less risky. (See Diseconomies of Scale) Economies of Scope: Economies of scope arise when, by widening the product range, a company can reduce the average unit cost for each product. It occurs when highly specialized inputs or expensive infrastructure such as a logistics/distribution network can be shared by different goods. Firms can hire specialist computer programmers, designers and marketing experts, leverage their skills across the product range, thereby spreading their costs and lowering the average total cost of production of each of the products. FMCG companies like Hindustan Lever and ITC can generate economies of scope by pushing a wide range of products through the existing distribution network. Emotional Intelligence: There is growing evidence that emotional balance plays a far more critical role than IQ in the success of professionals in their careers. There are five components of emotional intelligence - Self-awareness, Self-regulation, Personal Motivation, Empathy and Social Skills. Self-awareness means having a deep understanding of one's emotions, strengths, weaknesses, needs, and drives. Self-regulation means the ability to control one’s feelings. A high level of personal motivation is another trait of emotionally intelligent leaders. Empathy means thoughtfully considering the feelings of employees along with other factors in the process of making intelligent decisions. Social skills imply the ability to develop relationships with people and get the work done. Stephen Covey19 has explained the relationship between Emotional Intelligence and the Seven Habits of highly effective people. 19 Covey, Stephen R. “The 8th Habit: From Effectiveness to Greatness” Free Press, 2005.
  • 41. 41 Self-awareness: An awareness of self, of the freedom and power to choose, is the core of Be Proactive. Human beings are aware of the environmental forces around them and can make wise choices. Self-regulation: This is another way of expressing Put First Things First and Sharpen the saw. People must decide what their priorities are and live by them. They must master what they intend to do, live by their values and constantly renew themselves. Personal Motivation: Personal motivation is the basis for choices. People must decide what their highest priorities, goals and values are. That’s essentially what Begin with the end in mind is all about. Empathy: Empathy is the first half of Seek First to Understand, Then to Be Understood. It’s learning to understand the viewpoints and emotions of other people and becoming socially very sensitive and aware of the situation before attempting to influence others. Social Skills: Think win-win, Seek First to Understand, then to be Understood help build social skills. (See Leadership, Personal Effectiveness) End-game Strategies: They are plans for dealing with the decline phase of the product or industry life cycle. It is wrongly believed that the only way to respond to declining sales is to cut prices or prune marketing spending. But other options may be available to reverse the decline phase and create a new growth trajectory. For example, products can be repositioned or new market segments identified. (See Product Life Cycle) Enterprise Resource Planning: Enterprise resource planning (ERP) systems are information systems that integrate and automate many of the business processes across the various functions of an organization like manufacturing, logistics, distribution, inventory, shipping, invoicing, and accounting. ERP facilitates better control of many business activities, like sales, delivery, billing, production, inventory management, quality management, and human resources management by providing real time information. ERP systems are often called back office systems indicating that customers and the general public are not directly involved, unlike front office systems eg., customer relationship management (CRM) systems that deal directly with the customers. (See Customer Relationship Management) Enterprise Risk Management: In a fast changing environment, risks are many and diverse. So risk management is becoming an increasingly important discipline. Enterprise Risk Management (ERM) involves the identification, measurement and control of various risks an organization faces, in a systematic and integrated way. By considering the interrelationships that exist among different risks and all the risk mitigation mechanisms available, risk can be managed more effectively. The essence of ERM is changing the way decisions are made, by systematically collecting and processing information. ERM should not be viewed as a defensive tool. Rather, it is about creating conditions which encourage managers to achieve the right balance between minimizing risks and exploiting new opportunities. Indeed, the ultimate aim of ERM is to make available a steady stream of cash flows that can be utilized to maximize shareholders’ wealth. (See Risk)
  • 42. 42 Entrepreneurship: In simple terms, entrepreneurship is the practice of starting a new business. Since many new businesses fail, it is widely believed that entrepreneurship is risky. However, if the risks involved are carefully understood and managed well, there is no reason, an entrepreneurial venture cannot succeed. Another point to be noted is that entrepreneurship can also be displayed by professional managers in the way they identify and pursue opportunities. Our understanding of entrepreneurship owes a lot to the work of the famous economist, Joseph Schumpeter. Schumpeter (1950) viewed an entrepreneur as a person, willing and able to convert a new idea or invention into a successful innovation. According to Schumpeter, entrepreneurship forces "creative destruction" across markets and industries, creating new products and business models while eliminating others. Creative destruction is largely responsible for the dynamism of industries and long-run economic growth. There are different views of entrepreneurship. Entrepreneurs are persons who are willing to put their career and financial security on the line for an idea, spending their time and capital, working on it in an uncertain venture. An entrepreneur can also be described as a person who excels in discovering, evaluating and exploiting opportunities. Another way of viewing an entrepreneur is as "someone who acts without regard to the resources currently under his control in relentless pursuit of opportunity". (Jeffry A Timmons). Environmental Scanning: Understanding the environment is the starting point of strategic planning. Various environmental factors have an impact on the business. These include: Political Political parties in power, Anti-trust legislation, Regulatory framework, etc. Economic Availability of credit, interest rates, inflation, GNP growth rate, etc. Social Beliefs, attitudes, values, opinions, lifestyles of customers, etc. Technological Degree of obsolescence, speed of innovation, etc. Competitive position Market share, Breadth of product line, Distribution network, Raw material costs, Operational efficiency, R & D capabilities, etc. Customer profile Geographic, demographic, psychographic segmentation, consumer behavior, etc. Environmental scanning involves systematically collecting information about all these factors to identify threats and opportunities and formulate appropriate responses. There are three ways of scanning the business environment. Ad-hoc Scanning involves short term, infrequent examinations, often in response to a crisis. Regular scanning involves studies done according to a regular schedule. Continuous scanning involves structured data collection on an ongoing basis and processing with respect to a wide range of environmental factors. In today's turbulent business environment, continuous scanning is necessary to enable firms to act quickly, take advantage of opportunities before competitors do, and respond to threats effectively. (See SWOT Analysis) Experience Curve: As companies accumulate experience, people learn to do their jobs more efficiently and effectively because of accumulated learning. So costs come down significantly over
  • 43. 43 time. That puts the firm in a position to cut the price and expand the market further. One strategy which firms can pursue is to start with a relatively high price and bring down the price progressively over time. (See Barriers to Entry) F Fayol, Henri (1841-1925): A French management pioneer who focused on the problems of organizational structure within large firms at the turn of the last century. Whereas his contemporary, F W Taylor, concentrated on the efficiency of shop-floor labor, Fayol looked at senior management. Fayol played a key role in developing the concepts of chain of command, the organizational chart, and span of control. First Mover Advantage: It is the competitive advantage realized by a company by entering a market first. First movers are usually better placed to reap economies of scale, to reduce costs through cumulative learning, to establish brand names and customer relationships, to control distribution channels and to obtain the best locations for facilities or the best sources of inputs. The danger with the first mover strategy is that the company may end up creating a market, which will be better exploited by a later entrant offering a superior product. First mover strategies seem to work best when both technology and market conditions remain reasonably steady, economies of scale are significant and customers are conservative about switching suppliers. When both technology and market are changing rapidly, later entrants have ample opportunities to uproot the first mover. As Michael Porter has mentioned20, to succeed, first movers must correctly anticipate industry changes. American companies were early entrants into electronic watches. However, they bet heavily on light emitting diode (LED) displays. This technology proved inferior to liquid crystal displays (LCD) for less expensive watches and traditional (analog) displays combined with quartz movements for watches in higher price ranges. The introduction of LCD and quartz enabled Japanese firms to become industry leaders in watches targeted at the mass market. Often the wise strategy is to be an early mover, not necessarily the first mover. Just like in a marathon race, a company can be in the front but not necessarily at the top of the pack. That way, it can learn from the first mover and yet move fast when necessary and reach the winning line. In many of its markets, the global software giant, Microsoft has succeeded by pursuing this kind of a strategy. (See Free Rider) Five Forces Model: Porter's Five Forces Model is probably the most widely used tool in business strategy. The Five Forces model which helps analyze the attractiveness of an industry can be seen as one of two dimensions in maximizing corporate value creation. The other value creation dimension is how well a company performs relatively towards its competitors. Here the Value Chain framework and Competitive Advantage, both developed by Porter come in handy. The five forces are: 1. Barriers to Entry: The barriers to entry are high or low, depending upon factors like economies of scale, brand image, capital requirements, access to distribution channels, government policies, etc. Higher the barriers to entry, the more attractive the industry. 2. Bargaining power of buyers: This is influenced by buyer volume, buyer information, buyer profits, substitute products available, etc. The lower the bargaining power of buyers, the more attractive the industry. 20 In his book, “The Competitive Advantage of Nations,” The Free Press, 1990.
  • 44. 44 3. Bargaining power of suppliers: This is affected by various factors like switching costs, differentiation of inputs, supplier concentration, presence of substitute inputs, threat of forward/backward integration, etc. The lower the bargaining power of suppliers, the more attractive the industry. 4. Threat of substitutes: The threat of substitutes is high if there are alternative products with lower prices or better performance parameters for the same purpose. The lower the threat of substitutes, the more attractive the industry. 5. Rivalry: This refers to the intensity of competition among existing players in an industry. Competition among existing players is likely to be high when there exists a large number of companies, slow market growth, high fixed costs, and high exit barriers. The lower the degree of rivalry, the more attractive the industry. Some scholars argue that the model emphasizes an outside-in approach and underemphasizes the importance of the (existing) strengths of the organization (inside-out). That is the main argument behind a competing school of strategy, Resource Based Theory. Notwithstanding this criticism, the five forces model remains a conceptually elegant way of analyzing the structural attractiveness of an industry. (See Barriers to entry, Bargaining Power of Buyers, Bargaining Power of Suppliers, Industry, Threat of Substitutes, Rivalry) Flat Organization: An organization with few layers of management between the highest and the lowest levels. It presents a stark contrast to the classic hierarchical organization which has several layers of managers, each of whom supervises a lower layer. The basic premise behind the flat organization is that trained, empowered workers with assigned goals, who are encouraged to work innovatively, will be more productive than workers who are closely supervised by managers. A flat organization is more transparent, less bureaucratic and improves communication. One problem with a flat organization is that opportunities for career advancement may be limited. (See Organization Design, Span of Control) Focus: A strategy which believes in concentrating on a small segment defined in terms of customer segment or geographical territory. A focus strategy means carefully choosing the arena to compete in and narrowing the competitive scope. By selecting carefully 21a segment and meeting the needs of that segment better than competitors who target more broadly defined segments, companies can gain competitive advantage. A focus strategy takes advantage of the differences between the target segments and other segments in the industry. It is these differences that result in a segment being poorly served by the broad-scope competitor. The firm that focuses on cost may be able to outperform the broad-based firm through its ability to strip out frills not valued by the segment. Alternatively, the product or service can be differentiated, taking into account the unique needs of the segment. The obvious danger with the focus strategy is that the target segment may shrink or disappear over time for some reason. A new player may ‘outfocus’ the firm. Alternatively, shifting from broad to narrow targeting usually means a dramatic reduction in volumes. This can raise unit costs if the overheads have not been trimmed to match the smaller outputs demanded by the narrower customer base. (See Generic Strategy) 21 This term is taken heavily from “The Essence of Strategic Management” written by Cliff Bowman, published by Prentice Hall of India, 1990.
  • 45. 45 Follett, Mary Parker: One of the earliest and strongest advocates of collaborative, participative approaches to management and cross-functional problem solving. Follett argued that true authority and leadership were a function of the knowledge and experience of people, not their rank in a corporate hierarchy. If Taylor was the father of scientific management, Follett pioneered a behavioral, post-scientific approach to managing human organizations. She pioneered ideas such as constructive conflict resolution, participative management, and flatter organizations. According to Follett, the proper response to conflict was “integration” of different points of view to reflect multiple viewpoints. Collaboration and cooperation with labor, she argued, were the only rational ways to run a business. Follett seems to have been an early advocate of organizational learning through she never used those words explicitly. Force Field Analysis: Developed by Kurt Lewin (Lewin), Force field analysis is a useful technique for diagnosing situations, especially when planning and implementing a change management program. In any situation, both driving and restraining forces operate. Take the example of productivity. Driving forces include pressure from a supervisor, incentive earnings, and competition. Restraining forces may include apathy, hostility, and poor maintenance of equipment. Equilibrium is reached when the sum of the driving forces equals the sum of the restraining forces. The level of productivity can be increased or decreased by changing the balance between the driving and the restraining forces. Suppose a new manager takes over a work group in which productivity is high but the maintenance of the equipment has been ignored. The earlier manager had increased the driving forces to increase output in the short run. By doing this, however, new restraining forces developed, such as machine breakdown. When the new manager takes charge, the restraining forces may have begun to increase, resulting in repeated breakdowns and frequent maintenance. Now a new equilibrium at a significantly lower productivity is faced by the new manager. The new manager may decide not to increase the driving forces but to reduce the restraining forces by spending more time on maintenance and modernization. In the short run, output will tend to come down still further. However, in the long run, the new driving forces will move the plant towards a higher level of output. Managers often have to strike the right balance between short-term and long-term goals, to ensure sustained performance in the long run. The force field analysis is a useful framework in this regard. Forward Integration: Forward integration means moving into downstream activities, i.e. getting closer to customers. Such a strategy can help a firm to differentiate its product more effectively by controlling more elements of the value chain. For example, forward integration into retailing, can allow the firm to control areas such as customer interactions, store ambience, etc. Forward integration can also solve the problem of access to distribution channels. Forward integration can help a company understand the market better. Since the forward stage determines the size and composition of demand for the upstream stages of production, the firm can determine the demand for its products sooner. The firm might also gain first hand information about market trends and competitive developments. This can be very useful in an environment of cyclical, erratic and changing demand. Forward integration may also allow prices to be better matched to market conditions. By setting different prices for different customers, forward integration may facilitate higher overall price realization.
  • 46. 46 (See Vertical Integration) Franchise: A business in which one entity (the franchisee) operates a business in conformance to the name, logos and trading method of an existing, successful business (the franchiser). Various restrictions may be placed on the franchisee in terms of the design of the facility, inputs used, processes and the training of manpower. A franchising arrangement enables the franchiser to avoid heavy investments and penetrate a new geographic region quickly. For the franchisee, the risks are limited. The trading strategy and methods have been tried and tested elsewhere. The name and logos may have wide customer recognition and loyalty, ensuring adequate demand for the product/service from day one. (See Licensing) Free Rider: Sometimes, it does not make sense to be the first mover. A player who moves in later, can learn from the experiences of the first mover and avoid similar mistakes. In the browser market for instance, Netscape moved first but it was Microsoft which ultimately turned out to be the winner. (See First Mover Advantage). Full Costing: It is an attempt to allocate all costs incurred in an organization to cost centers. Both direct and indirect costs are considered and the possibility of losses by under pricing is avoided. Direct labor and material costs can be easily allocated to an activity or a product. Some direct overheads may be easy to allocate. But indirect overheads cannot be allocated easily. An example of full costing would be allocating 35 per cent of the overhead cost of rent to the machine shop if it occupies 35 per cent of the factory space. Activity based costing (ABC) is a better technique for allocating overheads. ABC would look at the actual pattern of usage of the machine shop, instead of just going by the space occupied. (See Activity Based Costing) Functional Strategy: The strategies pursued by different functions such as marketing, finance, operations and human resources must be aligned with the long-term corporate strategy. Functional strategies facilitate the implementation of corporate strategy in the sub-units of the company. Thus, functional strategies in marketing may deal with product, price, place and promotion. Those in finance may deal with capital mobilization, capital allocation, cash flow management, working capital management, etc. Those in operations may be concerned with facilities, purchasing, operations planning and control. Human resources strategies span employee recruitment, selection & orientation, career development and counseling, performance evaluation, compensation, labor relations, etc. (See Operating Strategy) Functional Structure: In a functionally organized company, the managers of each major function (such as marketing, production, research and development, and finance) report to the chief executive, who provides overall direction and coordination. The same logic can be extended to sub functions. In a functionally organized marketing department, the managers of the different marketing functions (such as sales, advertising, marketing research, and product planning) report to the marketing manager. A functional structure emphasizes specialization and increases efficiency. But such a structure lacks the overall perspectives and the sharper market focus, which the divisional structure can bring. Functions often work in silos and do not leverage the knowledge and expertise available in the organization creating serious problems in activities like new product development, which need excellent coordination across functions. Such problems have led to the concept of cross- functional teams.
  • 47. 47 (See Organizational Structure) G Game Theory: Game theory is a branch of applied mathematics that is useful in analyzing situations where players choose different actions in an attempt to maximize their returns. First developed as a tool for understanding economic behavior, game theory is now used in many diverse fields, ranging from biology and psychology to sociology and philosophy. Game theory is relevant in strategy formulation in that it studies decisions under circumstances where various players interact. In other words, game theory studies choice of optimal behavior when costs and benefits of each option are not fixed, but depend upon the choices exercised exercised by other individuals. Porter’s Competitive Strategy seems to draw heavily from game theory. (See Competitive Strategy, Oligopoly) Garbage In, Garbage Out: The quality of inputs into any process determines the quality of output. If incorrect data is entered for processing, the output will be garbled. Similarly, if incompetent people are recruited, the organization will under-perform. Generic Strategy: A term associated with Michael Porter. A company must be committed to one of three generic strategies in order to compete effectively in the market place: • Cost Leadership: Here the firm lays great emphasis on improving cost competitiveness. Cost leadership is facilitated by efficient-scale facilities, tight overhead control, careful selection of customers and standardization of activities. Gujarat Ambuja has pursued this strategy in the Indian cement industry. Maruti has done this in the Indian car industry. The largest retail chain in the world, Wal-Mart is also a cost leader. So is Dell in the PC industry. • Differentiation: A business strategy, which attaches more importance to providing value to customers in a unique way, which competitors cannot easily imitate. Different methods can be employed to achieve differentiation: design or brand image, technology, features, and customer service. In the process of differentiation, the firm cannot afford to ignore costs. But cost cutting is not the primary focus here. The emphasis is on creating unique value and charging a premium for it. A good example is Mercedes Benz. • Focus: A means of gaining competitive advantage by concentrating on one particular aspect of a product / service / market / geographic region that is important to a particular type of customer. In this way, a firm can be more effective than the other players in that chosen segment. (See Cost Leadership, Differentiation, Focus, Competitive Strategy) Ghoshal, Sumantra: One of the most well known management gurus of our times, Ghoshal (1948 - March 2004) graduated from Delhi University and worked for Indian Oil Corporation, rising through the management ranks before moving to the United States on a Fulbright Fellowship in 1981. There, he produced simultaneously two Ph.D. dissertations at the MIT Sloan School of Management and then at Harvard Business School. He joined INSEAD Business School at France and later London Business School. His book Managing Across Borders: The Transnational Solution, coauthored with Christopher Bartlett has been listed as one of the most influential management books ever written and has been translated into nine languages. Ghoshal’s extensive research for the book led to the conclusion that global companies need to combine three capabilities – global standardization to cut costs, local customization where necessary to suit the needs of national markets and knowledge sharing across business units. Ghoshal is also well known for his Purpose-Process- People doctrine. Instead of concentrating on Strategy, Structure and Systems, top management must
  • 48. 48 articulate a purpose, redefine management processes and show a high degree of commitment to the development of people. (See Purpose-Process-Principle Doctrine) Global Corporations: An organization with a global network of subsidiaries across the world. When used in the strict sense of the term, a global company is one which emphasizes uniform products and policies across the world. It does not take into account the need to customize its products and services to suit the needs of specific markets. In contrast, a multinational corporation (MNC) lays great emphasis on being sensitive and responsive to differences in national environments around the world. An MNC is organized as a portfolio of several national entities. Operations in different countries are managed on a stand-alone basis, without any serious attempts to integrate them. The Dutch multinational, Philips till recently, followed this model. Unilever is another good example. The problem in MNCs is that due to weak global integration, the firm may lose valuable opportunities for cutting costs, improving efficiency and leveraging organizational knowledge. According to Ghoshal & Bartlett, today’s business environment demands both global standardization and local customization, giving rise to a new breed of MNCs, called the Transnational corporation. Such a company strikes the right balance by standardizing those activities where scale and efficiency are important and customizing where responsiveness to customer needs is the priority. (See Globalization) Global Industry: It is an industry in which strategic moves in one country have to be made after taking into account the global implications. Typically, these are industries where there are significant economies of scale and the need for local customization is minimal. In a global industry, the strategic positions of competitors in major markets are fundamentally affected by their overall global positions. In such an industry, firms have to coordinate their activities worldwide to emerge as global leaders. (See Global Value Chain Configuration, Multi Domestic Industry) Global Leverage: It is the advantage, a global corporation is able to realize due to scale efficiencies, co-ordination and integration of worldwide operations and the ability to transfer good ideas and best practices across the world. For example, a global corporation can defend itself against an attack by a competitor in its home country with a counter attack in the competitor's home country. A global company can also leverage its world wide pool of talent and capabilities. Global leverage results when cost and strategic advantages are combined. (See Comparative Advantage, Strategic Advantage) Global Value Chain Configuration: Firms can be in business only if the activities they perform, add value for their customers. If they can add value efficiently and effectively and charge a price which is more than the total cost of the activities, they can make a profit. The value chain, a concept developed by Michael Porter, is a useful tool for analyzing the value adding activities of a company. While the value chain is important for all companies, in the case of global companies, a highly sophisticated and well-coordinated approach to value chain management becomes critical. This is because global companies must carefully locate different activities in different countries to optimize the effectiveness of the value chain as a whole. Global value chain configuration increases competitive leverage by helping a company access global resources and capabilities. In a multi domestic company, each subsidiary’s competitive position is determined locally. On the other hand, global companies, by taking an integrated view of their worldwide activities, are better equipped not only to cut costs but also to generate value. At the same time, managing a network of activities spread across the world, poses major challenges.
  • 49. 49 (See Comparative Advantage, Global Leverage, Process Networks, Strategic Advantage, Value Chain) Globalization: A very commonly used term, globalization can mean different things to different people. At a broad level, globalization refers to the growing economic interdependence among countries, reflected in the increasing cross border flow of goods, services, capital and technical know how. The booming Business Process Outsourcing (BPO) business in India is a reflection of this trend. At the level of a specific company, it refers to the degree to which competitive position is determined by the ability to leverage physical and intangible resources and market opportunities across countries. There are a number of factors driving globalization. More and more countries across the world are embracing free market philosophy and dismantling trade barriers. Better and cost effective ways of communication are making the world a smaller place. Due to the heavy R&D costs involved in developing new products, the pressure is increasing on companies to look for global markets to quickly recoup their investments. Satellite television is playing an important role in creating global markets by promoting uniform tastes among customers across the world. Globalisation has created major opportunities for poor countries. In the past, poor countries remained poor and rich countries remained rich for generations. Now societies can develop skills and wealth in a much shorter time. In less than 40 years, Singapore has gone from developing country to developed country status. Taiwan and South Korea are also good examples. Globalization has leveled the playing ground for smaller companies. What matters in the global economy is not simply size; it is other intangible factors such as nimbleness, reputation and the ability to innovate. At the same time, the more global we become, the more tribal is our behavior. John Naisbitt, author of Global Paradox, has argued that the more we become economically interdependent, the more we become possessive about our core basic identity. Fearing globalization and, by implication, the imposition of a western (predominantly American) culture, many countries have become paranoid about preserving their distinctiveness and identity. This book is more concerned with how companies globalize. Typically, the process of globalization of companies evolves through distinct stages. In the first stage, companies normally tend to focus on their domestic markets. They develop and strengthen their capabilities in some core areas. In the second stage, companies begin to look at overseas markets more seriously but the orientation remains predominantly domestic. The various options a company has in this stage are exports, setting up warehouses abroad and establishing assembly lines in major markets. The company gets a better understanding of overseas markets at low risk, but without committing large amounts of resources. In the third stage, the commitment to overseas markets increases. The company begins to take into account the differences across various markets to customize its products suitably. Different strategies are formed for different markets to maximize customer responsiveness. The company may set up overseas R&D centers and full-fledged country or region specific manufacturing facilities. This phase can be referred to as the multinational or multi-domestic phase. The different subsidiaries largely remain independent of each other and there is little coordination among the different units in the system.
  • 50. 50 In the final stage, the transnational corporation emerges. Here, the company takes into account both similarities and differences across different markets. Some activities are standardized across the globe while others are customized to suit the needs of individual markets. The firm attempts to combine global efficiencies, local responsiveness and sharing of knowledge across different subsidiaries. A seamless network of subsidiaries across the world emerges. It is very difficult to make out where the home country or headquarters is. (See Comparative Advantage, Global Leverage, Strategic Advantage) Goals: Goals represent desired future states of organizations. Goals should not be confused with objectives. Since goals represent the end state, they are more long term oriented. Objectives represent the building blocks of the goal and are more short term oriented. (See Long Term Objectives) Golden Handcuffs: Retaining good employees has become one of the major concerns of any organization. Golden handcuffs refer to deferred compensation, incentives and attractive retirement plans to boost employee loyalty and motivation levels especially in senior level positions. A good example is employee stock options. (See Golden Hello, Golden Key) Golden Handshake: It refers to a large cash sum, part of which may be tax free, paid to employees who are forced to leave before the end of a service contract. It is a method to reduce the number of employees in the organization and consequently cut salary expenses. Golden Hello: A payment made to a senior executive as an incentive to join a company. This payment is meant to compensate for the benefits forgone by leaving the previous employer and for the additional risks, the executive is taking. Golden Key: The key, which unlocks golden handcuffs, in order to pay off people not thought to be worth keeping. (See Golden Handcuffs) Golden Parachute: A provision that enables senior managers to exit from the company with handsome separation packages in case of events such as a hostile takeover. Govindarajan, Vijay: Well known for his pioneering book, “Strategic Cost Management” coauthored with John K Shank. Govindarajan has also done pioneering work in the areas of learning, innovation and globalization. His most recent book, “Ten Rules for Strategic Innovators — from Idea to Execution” co-authored with Chris Trimble in 2005, provides a blue print for business innovation. (See Strategic Cost Management, Strategic Innovation) H Handy, Charles: The author of many business books, notably Understanding organizations and Inside organizations. One of the most respected gurus in business history, Handy was one of the first persons to forecast the rise of outsourcing and the decline in the numbers of people employed as permanent workers.
  • 51. 51 Hedgehog Principle: A term coined by Jim Collins in his book, “Good to Great”. The fox knows many things, but the hedgehog knows only one big thing, i.e. survival. A company should be like a hedgehog, not like a fox. In this context, a company must answer three questions: "What can we be the best in the world at?" "What can we be passionate about?" "What is our one economic driver?" Thinking like a hedgehog can help to bring a lot of focus into the company’s plans and thinking. Herfindahl Index: A measure of how concentrated an industry is or how intense the rivalry is. The Herfindahl index is calculated as where s is the market share of firm i in the market, and n is the number of firms. The Herfindahl Index (H) has a value that is always smaller than one. A small index indicates intense competition with no dominant players. If all firms have an equal share, the reciprocal of the index shows the number of firms in the industry. When firms have unequal shares, the reciprocal of the index indicates the "equivalent" number of firms in the industry. The major benefit of the Herfindahl index, compared to the concentration ratio is that it gives more weight to larger firms because of the squaring. Take, for instance, two cases in which the six largest firms produce 90 % of the output: We will assume that the remaining 10% of output is divided among 10 equally sized producers. • Case 1: All six firms produce 15%. • Case 2: One firm produces 80 % while the five others produce 2 % each. The six-firm concentration ratio would equal 90 % in both cases, but in the first case, competition would be fierce while in the second case we have a monopoly for all practical purposes. The Herfindahl index captures this important information. In case 1, H=.1350 and in case 2, H=.6420. (See Concentration Ratios, Oligopoly) Herzberg, Frederick (1923-2000): Well-known for his two-factor theory of job satisfaction. According to Herzberg, every organization has a set of hygiene factors like working conditions, salary, etc. The absence of hygiene factors creates employee dissatisfaction but their presence does not improve satisfaction. Herzberg found five factors in particular that were strong determinants of job satisfaction: achievement, recognition, the work itself, responsibility and advancement. Motivators (satisfiers) are associated with a long-term positive impact on job performance. In contrast, hygiene factors produce only short-term changes in job attitudes and performance, which quickly fall back to their previous level. Although Herzberg has been criticized for drawing conclusions about workers as a whole based on a study of accountants and engineers, his theory has proved very robust. Many firms have successfully put his methods into practice. Part of the reason for the popularity of his theory is that Herzberg has offered a practical approach to improving motivation through job enrichment, by redesigning workplaces and work systems. (See Motivation)
  • 52. 52 Hierarchical Organization: A traditional organization in which, authority flows from the person in charge through various levels of supervision, while information and requests for approval, travel upward through the same channels. As the size of operations increases, the top managers become the bottlenecks. Today, many business organizations are trying to become flat by delegating much decision making to lower levels of management. This delegation is facilitated by information technology and better methods of communication that make it possible to operate with much wider spans of control, than was possible earlier. (See Bureaucracy, Flat Organization) Hostile Bid: A bid for taking over a company despite the resistance being shown by the takeover target. Hostile bids can lead to acrimony, war of words and unpleasant situations where sentiments run high and unreasonably high bids may be made. Another problem with hostile bids is that key employees may feel unhappy. Hostile bids are particularly avoidable in high tech industries, where acquisitions are often made to get across to a ready pool of talent. (See Anti takeover Strategy) Human Capital – is the degree of skill and training embodied in labor as a factor of production. The value of human capital can be increased by careful recruitment and investment, typically in education and training. Human capital is a major asset in knowledge based industries like computer software and pharmaceuticals. Hygiene Factors: Elements of the work environment that have the potential to cause dissatisfaction, if not adequately provided. These include salary and working conditions. These aspects are taken for granted. By providing them, motivation levels will not increase. But if they are not provided, employees will be unhappy. (See Frederick Herzberg, Motivation) I Independent Director: An outside director or non-executive director, who does not have interests that affect the exercise of independent judgment, while taking decisions on behalf of the company. A sufficiently large number of independent directors on the board is considered desirable from the point of view of corporate governance. In the US, institutions like New York Stock Exchange and the Securities & Exchange Commission have prescribed various tests of independence. But independence alone does not guarantee good corporate governance. Many of the American companies, which collapsed a few years back, including Enron had a large proportion of independent directors. The real issue is the willingness and ability of the independent directors to impose checks and balances on the top managers. That calls for both competence and the right mental predisposition. (See Corporate Governance) Industry: An industry can be viewed as a collection of firms that offer similar products or services, i.e. products that customers perceive to be direct alternatives for one another. 22A strategically distinct industry encompasses products where the sources of competitive advantage are similar. Many discussions of competition are based on very broad industry definitions. These are not meaningful definitions because the nature of competition and the sources of competitive advantage vary a great deal within them. Consider a firm in the PC industry. Does the industry include printers? 22 Porter, Michael E. “The Competitive Advantage of Nations” The Free Press, 1990.
  • 53. 53 Color monitors? Modems? These are the kinds of questions that executives face in defining industry boundaries. Defining industry boundaries enables executives to determine the arena in which their firm is competing, the key success factors and address some important questions: • Which part of the industry corresponds to the firm's goals? • What are the key success factors in that part of the industry? • Does the firm have the skills needed to compete effectively? If not, can it build those skills? • Does the company have the skills to exploit emerging opportunities and counter future threats? The industry structure may change over time because of the following reasons: • Demand patterns may change due to demographic factors, changes in lifestyle, tastes, social conditions, substitutes, complementary products, market penetration, product innovation, etc. New buyer segments may emerge while existing segments may disappear. • As buyers become more knowledgeable, the scope for differentiation reduces and products tend to become commodities. • The uncertainties with regard to technology, buyer segments, industry growth and industry size may reduce over time. Simultaneously, there is a great degree of imitation as successful strategies are imitated and failed ones abandoned. • Because of diffusion of knowledge, proprietary advantages tend to erode over time. The rate of diffusion of proprietary technology, however, depends on the particular industry. • Accumulation of experience can often result in declining unit costs. An early mover may be able to reap significant benefits. • Changes in cost or quality of inputs can affect the industry structure. • Product innovations can expand the market, promote industry growth and create opportunities for product differentiation. They can also create mobility barriers. • Marketing innovations can influence the industry structure. New advertising media and distribution channels can facilitate the targeting of new customers and increase the scope for differentiation. Sometimes, marketing innovations may also cut costs drastically. • Process innovations may influence the economies of scale, proportion of fixed costs and the degree of vertical integration. This can make the industry more or less capital intensive. • Changes in suppliers' and customers' industries can result in changes in industry structure. (See Blue Ocean Strategy, Five Forces Model, Industry Shakeout, Substitutes, Value Innovation) Industry Shakeout: Marks a discontinuity or turning point, as the industry goes through a major upheaval. Some of the greatest risks which companies face are during times when the industry is witnessing a shake-out. George S Day23 has provided some useful insights on industry shake-outs. Day refers to two kinds of shake-out: the boom-and-bust syndrome and the seismic-shift syndrome. The boom-and-bust syndrome typically applies to emerging markets and cyclical businesses. The dot com industry in the late 1990s is a good example. During the boom, many companies entered the 23 Day, George S. “Strategies for surviving a shakeout,” Harvard Business Review, March-April 1997, pp. 92-102.
  • 54. 54 industry leading to excess capacity. As competition intensified and prices fell, many players found the going tough. The successful companies focused on operational excellence and cut costs ruthlessly. The seismic-shift syndrome is more applicable to mature industries. Such industries enjoy prosperity for years together in a protected environment, with minimal competition and decent margins. A seismic shift takes place when these factors disappear. Deregulation, globalization and technological discontinuities are some of the factors that can cause a seismic shift. A good example is the pharmaceutical industry before the emergence of managed health care. In a physician driven environment, price was not an important factor. Physicians did not hesitate to prescribe expensive medicines which drug companies gleefully marketed. The emergence of HMOs has reduced the importance of physicians. HMOs recommend the use of generics wherever possible and control costs wherever they can. Drug companies are struggling to adjust to this new environment. Managers need to develop antennae that can sense a shakeout before their competitors do so. Scenario planning can focus attention on change drivers and force the management team to imagine operating in markets which may bear little resemblance to the present ones. Studying other markets which have already seen a shakeout, which are similar in terms of structure and are susceptible to the same triggers can also be of great help. Examining how the same industry is evolving in other countries and regions can also provide useful insights. Day refers to survivors from a boom and bust shakeout as adaptive survivors and those from a seismic shift syndrome as aggressive amalgamators. Adaptive survivors impose discipline in operations and respond efficiently to customer needs and competitor threats. Dell is a good example of an adaptive survivor. During the initial shakeout in the PC industry in the 1980s, Dell survived due to its lean build-to-order direct selling model. In the early 1990s, Dell stumbled when it entered the retail segment and its notebook computers failed to get customer acceptance. Founder, Michael Dell did not hesitate to make sweeping changes in the organization. He put in place a team of senior industry executives to complement his intuitive and entrepreneurial style of management. Dell became the largest manufacturer of PCs in the world, emerging as an adaptive survivor in an industry, which saw the exit of several players. Aggressive amalgamators show an uncanny ability to develop the right business model for an evolving industry. They usually make one or more of the following moves: rapidly acquire and absorb smaller rivals, cut operating costs and invest in technologies that increase the minimum scale required for efficient operations. Mittal Steel is a good example. The company’s appetite for acquisitions and global consolidation is legendary. For companies which find it difficult to become adaptive survivors or aggressive amalgamators, there are alternative strategies to survive a shakeout. These include becoming niche players, joining hands with other small players through strategic alliances and finally selling out and getting the best price possible. (See Scenario Planning, Strategic Inflection Point) Innovation: The most effective way to compete in a changing environment is to churn out new products and services rapidly according to the needs of the market. Innovation helps a company to stay ahead of the pack and move into less crowded areas. No wonder all companies are talking about innovation these days. Very often, innovation is misunderstood as invention. Invention is creating new things. But innovation is all about taking new ideas to the market place. History is full of examples of many companies that developed a new technology or product but failed to take it to the
  • 55. 55 market. For example, Xerox developed many of the concepts associated with the modern day PC but failed to make a commercial proposition out of them. Peter Drucker refers to innovation as the effort to create purposeful focused change in an enterprise's economic or social potential. Innovation must begin with an analysis of opportunities, in a systematic and organized way. The starting point in innovation is identifying the scope for improvement with respect to customers, suppliers and internal processes. Innovations must be market focused. Opportunities to innovate are provided by new customer segments which are just emerging; customer segments that existing competitors are neglecting or not serving well, new customer needs which are emerging and new ways of producing and delivering products to customers. In his book “Innovation and Entrepreneurship,” Drucker has listed seven sources of opportunity for innovative organizations. Four are internal to the enterprise and three external. In order of increasing difficulty and uncertainty, they are as follows: Unexpected success or failure Understanding the reasons for the unexpected success or failure of a product generates opportunities to innovate. Take the case of IBM, which wanted to sell accounting machines to banks, but discovered that it was libraries that wanted to buy these machines. IBM’s Univac, designed for advanced scientific work, became popular in business applications such as payroll. Unexpected product failures can also give companies new ideas that may help them to come up with something that the market likes. The incongruity between what actually happens and what was supposed to happen If things are not happening as they should, there is scope to innovate. For example, in industries which are growing, but where the margins are falling, there is tremendous potential for innovation. Similarly, when companies continue to work at improving something to reduce costs but fail to do so, an innovator can look at other options to cut costs. This is exactly how container ships emerged by focusing on the ship’s turnaround time rather than fuel efficiency. The deficiencies in a process, that are taken for granted If a process is inefficient or suffers from a big gap, there is scope to innovate. Sometimes, a process that is widely used may have certain deficiencies. An innovator, by thinking out of the box, may come up with a new idea that removes this deficiency. Pilkington’s float glass manufacturing process, for example, paved the way for the development of glass with a smooth finish. The changes in industry or market structure that catch everyone by surprise The emergence of new, fast-growing segments provides scope for innovation. Innovators can serve the needs of these segments. The success of the small floppy disk drive manufacturers had much to do with the emergence of new customer segments who wanted smaller and lighter disk drives. According to Drucker24, “New opportunities rarely fit the way the industry has always approached the market, defined it, or organized to serve it. Innovators therefore have a good chance of being left alone for a long time.” Demographic changes Demographic changes result in new wants and new lifestyles that call for new products. The Japanese pioneered robotics because they anticipated the rising levels of education and the consequent shortage of blue-collared workers. In recent years, the ageing of Japan and Europe has put pressure on governments to control healthcare expenses. This has fuelled the rise of generic drugs. Demographic changes provide innovation opportunities that are the most rewarding and the least risky, as the trends are easier to predict. Changes in perception 24 Drucker, Peter F. “The Discipline of Innovation” Harvard Business Review, November-December 1998, pp 149-157.
  • 56. 56 By changing the common perception of people, new needs can be created. For example, capitalizing on people’s concern for health and fitness, a booming industry has emerged for exercise and jogging equipment. The changes brought about by new knowledge New knowledge can be used to develop innovative products. Innovations of this sort usually combine many sorts of knowledge. The development of the computer, for example, was facilitated by a combination of binary arithmetic, calculating machine, punch card, audion tube, symbolic logic and programming. Such innovations are also risky, because there is usually a gap between the emergence of new knowledge and its conversion into usable technology and another gap before the product is launched in the market. Drucker has mentioned25, “Contrary to almost universal belief, new knowledge is not the most reliable or most predictable source of successful innovations. For all the visibility, glamour and importance of science-based innovation, it is actually the least reliable and least predictable one.” (See Innovator’s Dilemma) Innovator's Dilemma: A term coined by the innovation guru, Clayton Christensen of Harvard Business School. Many successful companies fail not because they neglect customers but because they take them too seriously and continue to pamper them by adding more features. An excessive focus on satisfying existing customers prevents the current market leaders from creating new markets and from finding new customers for the products of the future. In the process of adding new features to please their existing customers, the product or service becomes overpriced, going beyond the reach of customers, who might be looking for a simpler, cheaper product. According to Christensen, many successful companies face the innovator's dilemma. Keeping close to existing customers may make sense in the short run. But long-term growth and profitability need a totally different approach. When the successful players are not prepared to embrace a new business model, they lose market share to more nimble or entrepreneurial companies, which are not encumbered by any baggage. For example, PCs, when they entered the market, were not superior to minicomputers. But mini computer manufacturers like Digital Equipment lost their market share rapidly, when standalone workstations and networked desktop computers emerged and successfully targeted a totally new customer segment. (See Clayton Christensen, Innovation) Institutional Investor: A financial institution with shareholdings in listed companies. Institutional investors include pension funds, investment trusts, mutual funds (or unit trusts), insurance companies and banks managing investment portfolios for clients. Institutional investors across the world are playing an increasingly important role in equity markets. Through the buying and selling decisions they make, institutional investors not only move markets but also have an impact on corporate governance. (See Corporate Governance) Intrapreneurship: Intrapreneurship is the practice of developing entrepreneurial skills and approaches by or within a company. In companies which encourage intrapreneurship, employees are encouraged to behave as entrepreneurs by being given enough freedom and resources to experiment with new ideas. (See Entrepreneurship) 25 Drucker, Peter F. “Innovation and Entrepreneurship,” Harper Business Publications, 1986.
  • 57. 57 J Japanese Style of Management: The Japanese style of management has various distinctive elements: • a long term perspective, in which establishing a strong market position is more important than short-term profit. • a highly educated, highly trained workforce that is encouraged and empowered to improve production methods and quality; • lean production, eliminating wastage of materials and time; • continuous improvement • decision making by consensus. (See Kaizen, Kanban, Lean Thinking, Mckinsey 7S framework) Joint Venture: A joint venture involves two or more parties coming together to undertake an economic activity. The parties typically agree to create a new entity together by jointly contributing equity capital and share the revenues and expenses. The venture can be for one specific project only, or for a continuing business relationship. Multinationals often enter emerging markets by forming joint ventures. Such an arrangement not only helps them to benefit from the expertise of the local partner in managing the local environment but also minimizes risk, especially political risk. (See Political Risk, Strategic Alliance) Judo Strategy: A term coined by David Yoffie of Harvard Business School. Judo strategy effectively means avoiding direct confrontation and leveraging the strength of the opponent to create space. Judo strategy can help small companies to enter new markets and defeat stronger rivals. Through speed, flexibility, and leverage, new players can occupy uncontested ground and turn the strengths of dominant players against them. Consider Netscape, which after being set up in 1994, became the hottest company in the tech world. Netscape’s flagship product, the Navigator Web browser, dominated its market from day one. And in August 1995, just sixteen months after its founding, Netscape made a highly successful IPO. But Netscape’s fall was equally spectacular when it decided in favor of a head-to-head confrontation with Microsoft. In late 1995, Microsoft launched aggressive moves against Netscape. Under relentless attack, Navigator’s market share soon began an irreversible decline. By the end of the decade, Microsoft had started to dominate the browser business, and Netscape survived only as a division of AOL. In contrast, Palm Computing which shipped the Pilot, a handheld electronic organizer, in April 1996, succeeded for much longer by avoiding head-to-head battles with entrenched leaders. In many competitive battles, the answer is not to oppose strength with strength, as Netscape ultimately chose to do. Instead, the challenger should study the competition carefully, avoid head-to- head battles and use the opponents' strength to its advantage. This is the essence of judo strategy. Challengers can be at a severe disadvantage when entering a market where a powerful incumbent holds sway. Judo strategy can come in handy in such circumstances. Just–in-Time : See Lean Manufacturing
  • 58. 58 K Kaizen: A Japanese term meaning 'continuous improvement'. In the 1960s, Japanese car makers were far behind their western counterparts in quality. Through slow but ongoing improvements in their manufacturing techniques, the Japanese improved their quality and operational efficiency and became the global leaders in various industries. The basic thinking behind Kaizen is that small ongoing improvements, over a period of time, can lead to a significant competitive advantage. (See Japanese Style of Management, Lean Manufacturing) Kanban: A technique for controlling the flow of inventory through a manufacturing system. It is closely linked to the just-in-time system. The term is Japanese for 'card' or 'signal'. In its simplest form, the technique may be viewed as a card used by operators to instruct their suppliers to provide more material. Kanbans “pull” inventory through the manufacturing process and form the core of a just-in-time production system. (See Japanese Style of Management) Kaplan and Norton: Kaplan and Norton are famous for developing the ‘Balanced Score- Card’. They emphasize the importance of not over-focusing on financial measures of performance. The Balanced Score Card has four perspectives: • Customer perspective • Process perspective • Innovation and Learning perspective • Financial perspective The main idea of the balanced score-card is that one needs to measure and manage all of these indicators in a balanced way instead of focusing solely on financial performance. Kaplan and Norton have also developed the concept of Activity Based Costing. (See Activity Based Costing, Balanced Score Card) Keiretsu: A form of organization in Japan in which a group of companies work closely together, effectively becoming a vertically integrated enterprise. The companies may be held together by cross- ownership, long-term business dealings, directorship on each other’s board and social ties. These vertical ties improve trust and facilitate the smooth flow of goods and services across the different entities. In recent times, as companies have restructured themselves and tried to become leaner and more focused, Kirietsu ties in Japan have weakened, while arms length market based relationships have become stronger. (See Vertical Integration) Kepner – Tregoe analysis: A structured methodology for identifying and ranking all factors critical to a decision. The aim is to minimize the influence of conscious and unconscious biases. This methodology can be applied to nearly all decisions ranging from product marketing to selection of the site for a new plant. The analysis helps in evaluating alternative courses of action and optimizing the ultimate results based on explicit objectives. Khanna, Tarun: A professor at the Harvard Business School, Khanna has done extensive research in corporate strategy, particularly business houses and conglomerates in emerging markets. As part of the Emerging Giants project, he seeks to understand how to build world-class companies
  • 59. 59 from emerging markets worldwide. Much of his work is focused on China and India, and involves identifying best practices for local entrepreneurs and multinationals operating in each of these two countries. Khanna’s work has been published extensively in academic journals, including the Journal of Finance, the European Economic Review, the Strategic Management Journal, the Academy of Management Journal, Organization Science and Management Science. Khanna’s work has also been profiled in news-magazines around the world, including The Wall Street Journal, The Economist, the Far Eastern Economic Review, and numerous newspapers in China, India, and elsewhere in Asia and Latin America. He has been a frequent commentator on China and India and has featured on several TV programs recently (CNN, CNBC, and local channels). Khanna’s two articles written jointly with another Harvard Business School professor, Krishna Palepu, “The right way to restructure conglomerates in emerging markets,” and “Why focused strategies may be wrong for emerging markets” are widely cited in the literature. (See Palepu, Krishna G) Knowing-Doing Gap: According to Jeffrey Pfeffer and Robert Sutton, who teach at Stanford, knowing amounts to little without doing. The gap between knowing and doing is more important than the gap between ignorance and knowing. Today, there are entities like consulting firms who specialize in collecting and disseminating knowledge about management practices. Knowledge workers are also mobile and move from one organization to another. So better ways of doing things cannot remain secret for long. In most cases, however, the knowledge that is successfully transferred in various ways is not used to take action. According to Pfeffer and Sutton, the ability to minimize the knowing-doing gap, is the defining characteristic of well managed companies. (See Willpower) Knowledge Management: A discipline which is becoming increasingly important in today’s knowledge economy. It refers to the retention, exploitation and sharing of knowledge in an organization to generate sustainable competitive advantage. The crux of knowledge management (KM) is leveraging the knowledge which resides in individuals for the benefit of the organization as a whole. The biggest challenges arise in the case of tacit knowledge which is often difficult to extract from individuals. KM has to strike the right balance between information technology and human intervention. The key to effective KM is to get into an action mode by actually using knowledge to create value. This calls for embedding knowledge into business processes wherever possible. KM really takes off when knowledge flows in as and when knowledge workers need it. While many sophisticated KM tools are available today, the key to successful KM is an enabling culture that encourages learning and knowledge sharing. (See Knowing-Doing Gap) L Lateral Thinking: Lateral thinking, a term coined by Edward de Bono, a Maltese psychologist, effectively means problem solving by approaching problems indirectly from diverse angles instead of concentrating on one approach at length. Lateral thinking involves reasoning that is not immediately
  • 60. 60 obvious and ideas that may not be obtainable by using only traditional step-by-step logic. Lateral thinking implies shifting of thinking patterns away from entrenched or predictable thinking to new or unexpected ideas. (See Innovation) Law of Conservation of Profits: A principle coined by Clayton Christensen of Harvard Business School. The total profit along an industry value chain does not change. What happens is that profit moves along the value chain. Some parts of the value chain become more attractive and others less attractive over time as both technology and markets undergo a change. The smart companies understand the industry dynamics and occupy the sweet spot on the value chain. This is the place where there is still scope to improve the performance of the product or service, differentiate it from competitors and charge a premium. In the PC industry for example, Microsoft and Intel have occupied sweet spots on the value chain. They have kept coming up with improved versions of their products and the market buys them as they deliver enhanced features and better performance. (See Value Migration) Law of Unintended Consequences: Things do not often happen the way we expect them to. Leaders frame policies with good intentions. But at the end of the day, the consequences of these policies are very often unintended. Leaders should appreciate this when they take a decision or frame a policy. A few examples will illustrate the point. One of the most important decisions in Corporate Finance is Capital Structure. Managers often prefer equity to debt as equity is perceived to be less risky. Debt involves mandatory principal and interest payments. In case of equity, there is no compulsion to pay dividends. And rarely if ever, is equity capital (except for small portions which are bought back) returned to investors. But as equity is less risky, managers tend to take things easy and do not use the capital efficiently, often landing the company in trouble. Indeed, this is why many dotcoms folded up in the early 2000s. On the other hand, because debt is more risky, companies tend to be more careful with the money they receive. Consequently, debt often brings in quite a bit of discipline and leads to better financial performance. Inventory is another good example. Managers routinely keep inventory as a buffer against uncertainty. Inventory comes in handy if a supplier is late in delivering parts or delivers defective parts or if a machine in the plant breaks down. In Just-in-Time (JIT) production systems, little inventory is maintained. The entire plant comes to a stand still if something goes wrong. So it is potentially risky. But companies like Toyota, are aware of the possible consequences of things going wrong in a JIT system. So they make sure that suppliers always make delivery in time, always maintain quality and ensure all the machines are maintained well. On the other hand, in companies which hold a lot of inventory, quality control tends to be slack, vendor management highly ineffective and maintenance of machines very poor. In other words, holding inventory undermines the effectiveness of the plant. Instead of acting as a buffer, the inventory creates problems. In short, decisions have to be made carefully after considering various implications. Things give a certain appearance on the surface but deep down, they are different. If we overlook the deeper issues, the most logical decisions will lead to unintended consequences. (See Decision Making) Leadership: A much discussed and widely written about term. A good definition of leadership is offered by Prentice in his 1961 Harvard Business Review Article, “Leadership is the accomplishment of a goal through the direction of human assistants. The man who successfully marshals his human
  • 61. 61 collaborators to achieve particular ends is a leader. A great leader is one who can do so day after day and year after year in a wide variety of circumstances.” According to Stephen Covey, in his recent book, “The 8th Habit”, “Leadership is communicating people’s worth and potential so clearly that they come to see it in themselves. People must feel an intrinsic sense of worth – that is, that they have intrinsic value – totally apart from being compared to others and that they are worthy of unconditional love, regardless of behavior or performance. Then when you communicate their potential and create opportunities to develop and use it, you are building on a solid foundation.” As Covey mentions26 various leadership theories have emerged in the twentieth century. One of the early theories was Great-man theory of leadership, which dominated any discussion of leadership prior to 1900. History and social institutions are shaped by the leadership of great men and women Dowd (1936) maintained that there is nothing like leadership by the masses. Individuals in every society possess different degrees of intelligence, energy, and moral force. They are always led by the superior few. Leaders are endowed with superior traits and characteristics that differentiate them from followers. Research of trait theories addresses the following two questions: What traits distinguish leaders from other people? What is the extent of those differences? According to the situational theories, leadership is the product of situational demands. Situational factors determine who will emerge as a leader rather than a person’s heritage. The emergence of a great leader is the result of time, place and circumstances. Later, theorists began to place a strong emphasis on situational and environmental factors. Subsequently, theories of integration have been developed around persons and situations, psychoanalysis, role attainment, change, goals and contingencies. House and Mitchell 27 describe four styles of leadership. Supportive leadership: The leader believes in considering the needs of his followers, showing concern for their welfare and creating a friendly working environment. The leader focuses on increasing the self-esteem of people and making their jobs more interesting. This approach works best when the work is stressful, boring or hazardous. Directive leadership: Here the leader tells followers what needs to be done and gives them appropriate guidance along the way, often including schedules of specific work to be done at specific times. Rewards may also be increased as needed and role ambiguity decreased. Such an approach may be used when the task is unstructured and complex and the follower is inexperienced. Participative leadership: Consulting with followers and taking their ideas into account when making decisions and taking particular actions. This approach works best when the followers are experts, their advice is needed and they want to give it. Achievement-oriented leadership: Setting challenging goals, both in work and in self-improvement. High standards are demonstrated and expected. The leader shows faith in the capabilities of the follower. This approach works best when the task is complex. 26 Covey, Stephen R. “The 8th Habit: From Effectiveness to Greatness,” Free Press, 2004. 27 House, R.J., Mitchell, T.R. "A path-goal theory of leadership", Journal of Contemporary Business, Vol. 3, 1974, pp.81-97.
  • 62. 62 According to Daniel Goleman28, executives use six leadership styles. Coercive leaders pursue a top down high handed approach. Authoritative leaders mobilize people towards a vision. Affiliative leaders create emotional bonds and harmony. Democratic leaders build consensus through participation. Pace-setting leaders expect excellence and self-direction. Coaching leaders develop people for the future. The most effective leaders switch flexibly from one style to another, depending on the circumstances. Coercive leadership is the least effective in most situations. The leader's extreme top-down decision making kills new ideas. People feel disrespected. Their sense of responsibility evaporates. Unable to act on their own initiative, they lose their sense of ownership and feel little accountability for their performance. The coercive style should be used only with extreme caution and in the few situations when it is absolutely imperative, such as during a turnaround or when a hostile takeover is looming. The authoritative leader motivates people by making it clear to them how their work fits into a larger vision for the organization. When the leader gives performance feedback, the main criterion is whether or not that performance furthers the vision. The standards for success are clear to all. Authoritative leaders give people the freedom to innovate, experiment, and take calculated risks. The authoritative style tends to work well in many business situations but fails, when the team consists of experts or peers who are more experienced than the leader. The affiliative leader strives to keep employees happy, to create harmony and to increase loyalty by building strong emotional bonds. Affiliative leaders give people the freedom to do their job in the way they think is most effective. Affiliative leaders are likely to take their direct reports out for a meal or a drink, to see how they're doing. They will take out the time to celebrate a group accomplishment. They are natural relationship builders. The affiliative style is effective in many situations but it is particularly suitable when trying to build team harmony, increase morale, improve communication, or repair broken trust. One problem with the affiliative style is that because of its exclusive focus on praise, employees may perceive that mediocrity is tolerated. And because affiliative leaders rarely offer constructive advice on how to improve, employees must figure out how to do so on their own. Democratic leaders increase flexibility and responsibility by letting workers themselves have a say in decisions that affect their goals and how they do their work. By listening to employees' concerns, the democratic leaders learn what to do to keep morale high. People have a say in setting their goals and performance evaluation criteria. So they tend to be very realistic about what can and cannot be accomplished. But the democratic style can lead to endless meetings and postponement of crucial decisions in the hope that sufficient discussion and debate will eventually yield a great outcome. The democratic style does not make sense when employees are not competent or informed enough to offer sound advice. Such an approach also does not make sense during a crisis. Pacesetting leaders set extremely high performance standards, are obsessive about doing things better and faster, and demand the same from everyone around them. If poor performers don't rise to the occasion, these leaders do not hesitate to replace them with people who can. The pacesetter's demands for excellence can overwhelm employees and their morale drops. Such leaders also give no feedback on how people are doing. They jump in to take over when they think people are lagging. When they leave, people feel directionless as they're so used to "the expert" setting the rules. Coaching leaders help employees identify their unique strengths and weaknesses and consider their personal and career aspirations. They encourage employees to establish long-term development goals 28 Goleman, Daniel. “Leadership That Gets Results” Harvard Business Review, March-April 2000, pp 78-90.
  • 63. 63 and help them conceptualize a plan for attaining them. Coaching leaders excel at delegating, give employees challenging assignments, are willing to put up with short-term failure, and focus primarily on personal development. When employees know their boss watches them and cares about what they do, they feel free to experiment. People know what is expected of them and how their work fits into a larger vision or strategy. The coaching style works particularly well when employees are already aware of their weaknesses and would like to improve their performance. By contrast, the coaching style makes little sense when employees, for whatever reason, are resistant to learning or changing their ways. And it fails if the leader is inept at coaching. Jim Collins in his book “Good to Great” has introduced the concept of Level 5 leadership. This represents the highest level of leadership, is exhibited by an individual who blends humility with intense professional will. Level 5 leaders are typically modest, talk little about themselves and like to talk more about the company and the contributions of other executives. The Level 5 leader sits on top of a hierarchy of capabilities. Four other layers lie below. Individuals do not need to proceed sequentially through each level of the hierarchy to reach the top, but to be a full-fledged Level 5 leader requires the capabilities of all the lower levels, plus the special characteristics of Level 5. Level 5 leaders are also good at changing their style of leadership from situation to situation. Thus, they can be extremely democratic at times. On other occasions, they can be authoritative. Level 5 leaders are very particular about the quality of people in their team. People in such organizations are self-driven and the CEO does not have to spend much time trying to motivate them. (See Emotional Intelligence, Personal Effectiveness) Lean Manufacturing: Lean manufacturing is a management philosophy which focuses on reduction of the seven wastes (Over-production, Waiting time, Transportation, Processing, Inventory, Motion and Scrap) in manufactured products. By eliminating waste (muda), quality is improved, production time is reduced and cost is reduced. Lean "tools" include constant process analysis (kaizen), "pull" production (Kanban) and mistake-proofing (poka yoke). Lean manufacturing is relentlessly focused on eliminating inventory. The key lean manufacturing principles include: • Perfect first-time quality - quest for zero defects, revealing & solving problems at the source • Waste minimization – eliminating all activities that do not add value & safety nets, maximize use of scarce resources (capital, people and land) • Continuous improvement – reducing costs, improving quality, increasing productivity and information sharing • Pull processing – pulling products from the consumer end, not pushing from the production end • Flexibility –producing different mixes or greater diversity of products quickly, without sacrificing efficiency at lower volumes of production • Building and maintaining a long term relationship with suppliers through collaborative risk sharing, cost sharing and information sharing arrangements. Lean thinking is a broader concept, compared to lean manufacturing. It is basically about getting the right things, to the right place, at the right time, in the right quantity while minimizing waste and waiting time and being flexible and open to change. A term coined by James P. Womack and Daniel T. Jones, lean thinking provides a way to specify value, sequence value-creating actions in the best way, conduct these activities without interruption whenever someone requests them, and perform them more and more effectively. Lean thinking means doing more and more with less and less resources while providing customers with exactly what they want.
  • 64. 64 Lean thinking is the antidote to muda. Muda means “waste,” specifically any human activity which absorbs resources but creates no value:  mistakes which require rectification,  production of items no one wants,  processing steps which aren’t actually needed,  movement of employees and transport of goods from one place to another without any purpose,  groups of people remaining idle because an upstream activity has not delivered on time,  goods and services which don’t meet the needs of the customer. Lean thinking also improves job satisfaction by providing immediate feedback to employees on their efforts to convert muda into value. Unlike process reengineering, it provides a way to create new work rather than simply downsize in the name of efficiency. Licensing: Licensing involves the transfer of some intellectual property right from the licensor to a licensee. The right could be a patent, trademark, or technical know-how for which the licensee pays a royalty. MNCs often use licensing to lower the risk of entry into foreign markets. Licensing is also a handy tool for companies, which want to focus managerial efforts on intangible assets such as design and brands and outsource other non core activities. Two major problems exist with licensing. One is the possibility that the partner will gain experience and become a major competitor over time. The other is that the licensor may lose control on production, marketing and general distribution of its products. So a key success factor is how the licensing agreement should be structured and implemented carefully. A special form of licensing is franchising, which allows the franchisee to sell a product or service, using the principal's brand name or trademark in conformance with policies and guidelines laid down by the franchisor. The franchisee pays a fee to the parent company, typically based on the volume of sales of a defined market area. (See Franchise) Long Term Objectives: These are the objectives a firm would like to achieve in the long run in terms of profitability, productivity, competitive position, employee development, employee relations, technological leadership and public responsibility. Long term objectives should be carefully framed, consistent with the company’s mission, understandable to employees, acceptable to them, flexible enough to be modified in the light of changes in the environment and measurable. To be able to motivate employees, these objectives should be challenging but not impossible to achieve. The performance evaluation criteria should be made clear. (See Goals, Strategic Planning) Loss Leader: A product sold at or below cost in the hope of generating sales of other profitable items. The method is most commonly used in retailing. A shop may advertise a loss leader heavily, to entice customers. The hope is that customers will probably buy other, full-priced items as well. The term loss leader can also be used to describe a manufacturer who prices a lead item low, knowing that the usage of the item requires further, full-priced purchases. M
  • 65. 65 MBO (Management By Objectives): It involves setting objectives and then breaking them down into more specific goals or key result areas. MBO is a systematic and organized approach that allows management to focus on achievable goals and to attain the best possible results from available resources. The principle behind MBO is to make sure that employees have a clear understanding of the aims, or objectives, of the organization, as well as awareness of their own roles and responsibilities in achieving those objectives. Managerial Grid: A management and leadership tool introduced in 1964 by Robert R. Blake and Jane S. Mouton, the grid evaluates managers on two dimensions: I. The Task Function or Concern for Production. 2. The Relation Function or Concern for People. Managers must be able to strike the right balance between a task orientation and people orientation. The grid comprises a 9 x 9 matrix, capturing 81 different leadership styles, e.g. 'country club management', 'team management', 'organizational management', 'impoverished management' and 'authority-obedience management'. (See Leadership) Market Defense: The strategic moves that attempt to minimize or deter threatening actions by existing or potential competitors. Deterrence strategies include: signaling intentions to defend, building barriers to entry or mobility and reducing market attractiveness by lowering prices. If challengers cannot be deterred, then market defense moves can attempt to contain them and minimize the damage. (See Market Signals) Market for Corporate Control: This refers to the market in which mergers & acquisitions take place. A well functioning market for corporate control puts pressure on management to perform. Failure to perform, results in takeover bids. In countries like USA, where the financial system and legal framework are well developed, this market functions very effectively. Hostile takeovers are quite common. But in many parts of the world, including Europe, due to the intervention of the government/regulatory authorities, the market for corporate control does not function very efficiently. Marketing Mix: How a firm implements its marketing strategy. Also known as the four Ps: • product (including range of pack sizes and / or flavors or colors) • price (long-term pricing strategy and pricing method) • place (choosing distribution channels and seeking shop distribution) • promotion (branding, advertising, packing and sales promotions) The relative importance of the different Ps is highly contextual. A company must arrive at the optimum marketing mix to strengthen its competitive position. In the case of services, three more Ps can be added - People, Process, Physical evidence. This leads to the 7 Ps of marketing. Market Power: The degree to which a firm exercises control over its market. Wal-Mart for instance has considerable market power, which it leverages while negotiating with suppliers. Hindustan Lever has a similar advantage while dealing with distributors and dealers.
  • 66. 66 Market Signals: Market signal refers to an action by a competitor that provides an indication of its intentions, motives, goals or internal situation. Market signal may be a bluff or warning or an expression of earnest commitment. Correct interpretation of market signals is important to compete effectively. Michael Porter has given an excellent account of market signals in his book, “Competitive Strategy”. • A player can make a prior announcement of its moves to preempt competition, to threaten a competitor who is going ahead with an earlier planned move, or to elicit competitor reaction. • A firm can announce sales figures, addition to plant capacity, etc., to influence the behavior of other firms. Often, misleading data may also be announced as part of a pre emptive strategy. • A firm may discuss openly the industry, demand and price forecasts, future capacity projection, estimates of future raw material prices, etc. Through such announcements, the firm can try to influence the assumptions of competitors. • A firm may discuss/explain the logic of the move to competitors. It may also communicate its seriousness and earnestness about what it is doing and what it is planning to do. This way, the firm may be able to preempt competition or prevent retaliation. It is often useful to examine the historical relationship between a firm's announcements and its actual moves to understand whether the firm is a serious player or is only trying to “bluff” its way. Among the other issues which need careful examination are competitors' tactics relative to what they could have done, the divergence from past goals, industry precedent, etc. Strategy formulation is usually based on implicit and explicit assumptions about competitors. Market signals can add greatly to a firm's knowledge of its competitors. (See Competitive Moves, Game Theory, Market Defense) Maslow, Abraham: Well-known for his needs hierarchy theory of motivation. Unlike many other behavioral scientists of his time, Maslow did not analyze and study mental dysfunction. Instead, he tried to seek out and probe the healthiest minds and best-balanced personalities he could find. Maslow believed in the innate potential of human beings for goodness and recognized the importance of developing the human capacity for compassion, creativity, ethics, love, and spirituality. All people are born with such basic needs as food and shelter, as well as the emotional yearnings for safety, love, and self-esteem. But these needs are only the foundation of a pyramid of higher aspirations. Man yearns for bread when there is no bread. But when there is plenty of bread and the stomach is full, higher needs emerge. And when these in turn are satisfied, new and still ‘higher’ needs emerge, and so on. Maslow believed altruism resulted when lower order needs had been largely fulfilled, in childhood, leading to the development of a healthy character. (See Motivation) Matrix Structure: A type of structure, which attempts to combine the best of functional and divisional structures. The main advantages of a functional structure are technical specialization and efficiency. The main advantage of a divisional structure is sharp business focus. A matrix structure creates dual reporting relationships. Subordinates are assigned to both a functional area and a project or product group. Some matrix structures can be more complicated. For example, in a global corporation, a three dimensional matrix structure might involve a functional manager reporting to the business unit head, country head and the global head of the function simultaneously. Because of
  • 67. 67 multiple reporting relationships, the matrix structure is inherently more difficult for managers to handle. So in recent times, companies like ABB have considerably simplified the complex matrix structures they followed earlier. (See Divisional Structure, Functional Structure, Organizational Structure) Mayo, Elton and Roethlisberger, Fritz 29: Mayo and Roethlisberger pointed out that, psychological techniques and social interaction held the key to managing the relationships within social systems and to improve employee morale and productivity. Roethlisberger and Mayo insisted that behavior of employees was influenced as much by their role in a work group and their relationship to their colleagues as by the promise of economic gain. They were among the first to draw attention to the power of the informal organization. Mayo traced the root of many problems in the work place to the shift from the skilled trades of the nineteenth century, with their strong community ties, to the rise of unskilled, migrant laborers. Industry had effectively destroyed the self-esteem of skilled tradesmen and was ill equipped to deal with the alienation and disaffection of blue-collar workers, most of whom had been uprooted from their communities. Together Mayo and Roethlisberger conducted the famous Hawthorne experiments to study human motivation. The experiments exposed the inadequacy of the piecework system and challenged the assumption that there was a neat correlation between pay levels and productivity. The experiments also exposed the complex way in which the relationships between supervisors and workers could affect output. In the first set of tests, known as the “illustration experiments,” workers were divided into two groups – a test group in which the workers were submitted to increasing amounts of light and a control group, which worked under a constant light intensity. Contrary to expectations, productivity increased in both groups. The workers seemed to be responding more to the attention they were receiving from management than to any actual change in working conditions. This response of the workers was called “the Hawthorne effect.” In the last set of investigations, known as the Bank Wiring Observation Room experiments, the room was staffed with 14 workmen, paid according to a group piecework system. The more components they turned out, the more money they made. So it was logical to expect that the most efficient workers would put pressure on the slower workers to maintain a high level of output. This did not prove to be the case. Instead, the group established an unofficial output norm based on what was considered a “fair” production quota. Workers who violated the norm by producing either too much or too little, were looked down upon by their coworkers. The informal organization dictated the output of each worker based on its own standards of fairness and the position each worker occupied within the work group. In many smaller organizations, many of the rules of the work place remained implicit, not only the operating rules and standards of performance, but also the rules of communication, that is, to whom one was supposed to go for help. People were bound together by relations that had nothing to do with what they were supposed to be doing. These relations seemed to be important, not only for achieving the objectives of the organization but also for obtaining the cooperation of people. (See Motivation) 29 Abstracted from the book “The essence of Competitive Strategy” written by David Faulkner and Cliff Bowman, published by Prentice Hall of India in 2002.
  • 68. 68 . McGregor, Douglas (1906-1964): An American psychologist whose book THE HUMAN SIDE OF ENTERPRISE categorized managers into two types: Theory X and Theory Y. Many managers assume people to be work-shy and motivated primarily by money. These are Theory X managers. In contrast, Theory Y managers assume that workers look to gain satisfaction from employment. If achievement levels are low, managers must ask whether they are providing the right work environment. In other words, the Theory Y manager assumes that the blame for poor workforce performance lies with the management rather than the workers themselves. The Theory X manager assumes the following: • Workers are motivated by money. • Unless supervised closely, workers will under-perform. • Workers will only respect a tough, decisive boss. • Workers have no wish or ability to help make decisions. The Theory Y manager assumes the following: • Workers seek job satisfaction, no less than managers. • If trusted, workers will behave responsibly. • Low performance is due to dull work or poor management. • People have the desire and right to take part in decision making. McGegor was also against the traditional pay-for performance concept. He was convinced that money could not substitute an environment that was conducive to motivation. McGregor recognized the tremendous improvements in working conditions since the turn of the century, at all levels of the corporation. Drawing on Maslow’s hierarchy of needs, he argued that by satisfying the safety and security needs of its employees, companies had created higher-order needs. The focus had to shift to satisfying those higher needs. McGregor’s work is not completely original. Theory X is derived from the work of F W Taylor and from Adam Smith’s notion of ‘economic man’. Theory Y stems clearly from Mayo’s human relations approach and Maslow’s work on human needs. (See Motivation) McKinsey 7-S Framework30: The Seven-S framework developed by Mckinsey consultants, Pascale and Athos, looks at seven key aspects of an organization: strategy, structure, systems, style, skills, staff and shared values. Strategy: The path chosen by a company to achieve its goals. How the organization allocates its resources to achieve its aims. 30 Tanner Pascale, Richard; Athos, Anthony G. “The Art of Japanese Management: Applications for American Executives,” Warner Books, 1982.
  • 69. 69 Structure: Describes the hierarchy of authority and accountability in an organization. These relationships are frequently indicated in organizational charts and include organization structure, level of centralization, authority and responsibility arrangements. Skills: The core competences and capabilities of the firms that allow them to compete in the market. Systems: Processes used to manage the organization, like customer satisfaction monitoring system, management information systems, budgetary and other control mechanisms. Staff: The quality of a firm's human resources. It refers to how people are developed, trained and motivated. Style: The leadership & operational approach adopted by the management. It also refers to the way in which the company projects itself to the outside world. Shared Values: Also known as super-ordinate goals. The fundamental ideas around which a business is built and the things that influence a group to work together towards a common goal. (See Purpose-Process-Principle Doctrine) McNamara, Robert S: McNamara who presided over the restructuring of Ford, The US defense department, and World Bank, championed a new approach to management that emphasized sophisticated quantitative skills and financial controls. McNamara did more to advocate a rationalist, quantitative approach to management than perhaps any single individual since Taylor. McNamara’s vision encompassed both the need for financial discipline and a belief in the corporate social contract. He was an earnest advocate of safety, environmental responsibility, utility, function, cooperation with government, and accountability to labor. Thanks to McNamara, systems analysis became a popular late-twentieth-century tool of scientific management. It aimed at providing transparency by making both the analysis and the assumptions and calculations behind it available to all interested parties. Yet, as applied by McNamara, it concentrated power in the hands of a few analytical experts. McNamara’s bean counters wrested control of planning from operating executives in both auto manufacturing and the armed services. As time passed, it became clear that tools and techniques could not make up for poor human judgment. Long after the Vietnam War had ended, McNamara admitted: “We failed to recognize that in international affairs, as in other aspects of life, there may be problems for which there are no immediate solutions.” Merger: A merger refers to the combination of two companies into one larger company. Some mergers involve a cash deal while others involve exchange of shares. A combination of the two is also possible. In many instances a merger resembles a takeover but results in a new company name (often combining the names of the original companies) and in new branding. There can be various types of mergers: • Horizontal mergers take place where the two merging companies both produce similar products in the same industry. • Vertical mergers occur when two firms, each working at different stages in the production of the same product, combine. This is some kind of a vertical integration. • Conglomerate mergers take place when the two firms operate in different industries.
  • 70. 70 Mergers must be planned and implemented carefully. Many mergers fail to create value for shareholders because the synergies identified before the merger fail to materialize. (See Anti Takeover Strategy, Valuation) Mintzberg, Henry: A professor of strategic management at McGill University, Canada, Mintzberg also holds a chair at INSEAD. A leading researcher in the area of strategy, his philosophy is based on how managers actually create and implement strategy, rather than how they supposedly should do it. Mintzberg’s first major input came from studying managers at an everyday level. He found that whilst the theory was that managers should be reflective thinkers, the reality was that they were caught up in action most of the time. Mintzberg has been a prolific writer with more than 140 articles and 13 books to his name. His seminal book, The Rise and Fall of Strategic Planning, criticizes some of the practices of strategic planning today and is recommended reading for anyone who seriously wants to consider taking on a strategy-making role within their organization. He has argued that conventional planning processes are inappropriate to the more fluid decision-making processes characteristic of most organizations. Mintzberg along with Joseph Lampel and Bruce Ahlstrand has co-authored “Strategy Safari”, which likens the various schools of strategy to the different kinds of animals which one would literally see, if one were on a safari. Mintzberg’s recently published book Managers Not MBAs outlines what he believes to be wrong with management education today and how obsession with numbers and viewing management as a science actually can damage the discipline of management. Mission: The fundamental purpose that sets a firm apart from other firms of its type and identifies the scope of its operations in product and market terms. Mission embodies the business philosophy of the firm, conveys the corporate image and indicates the firm's principal product or service areas and the primary customer needs the firm will attempt to satisfy. In short, the mission statement describes the firm's business in product, market, and technological terms. According to King & Cleland31, a well-designed company mission must accomplish the following: 1. Ensure unanimity of purpose within the organization. 2. Provide a basis for using the organization's resources. 3. Establish a general tone or organizational climate. 4. Serve as a focal point for those who can identify with the organization's purpose and direction and weed out people who cannot do so. 5. Facilitate the translation of objectives and goals into a work structure involving the assignment of tasks to responsible people within the organization. 6. Specify the organizational purpose and the translation of this purpose into goals in such a way that cost, time and performance parameters can be assessed and controlled. A mission statement ensures that all employees are working towards a common purpose, enables See John A Pearce and Richard Robinson Jr., "Strategic Management - Formulation, Implementation and 31 Control," McGraw-Hill International Edition, 2002.
  • 71. 71 employees to identify better with the organization, and serves to state explicitly or implicitly the beliefs, values and aspirations of the organization. A vision is a broad indication of the organization’s intentions. The ideas and ideals embodied in the vision are often too lofty. Vision is often unwritten. A vision becomes tangible when it is expressed in the form of a mission statement. (See Corporate Purpose, Vision) Motivation: A motivated workforce holds the key to the success of any organization. Probably the most well known theory of motivation is the one developed by Abraham Maslow (Maslow), a behavioral scientist. He proposed the Hierarchy of Needs theory in 1954. According to Maslow, human beings are motivated by unsatisfied needs. Lower needs need to be satisfied before the higher ones become important. When "deficiency needs" are met, other higher needs emerge and when these in turn are satisfied, new (and still higher) needs emerge, and so on. Physiological Needs: Physiological needs are basic needs such as air, water, food, and sex. When these are not satisfied, we feel pain and discomfort. Safety Needs: Comfort and security come next. After the basic requirements of survival are met, we naturally want to preserve and enhance what we have. We think of the security of home and family. Social Needs: Love and belongingness follow. All of us have a desire to belong to groups: clubs, work groups, religious groups, family etc. We want to be loved and accepted by others. Esteem Needs: There are two types of esteem needs. First is self-esteem, which results from competence or mastery of a task. Second is the attention and recognition that come from others. Holding senior posts in organizations and an opportunity to lead initiatives are sources of self-esteem for most people. Self Actualization: In this stage, people seek knowledge, peace, self-fulfillment and salvation. The basic problem with Maslow's model is that people may be having different kinds of needs at the same time, instead of moving sequentially from one to the next. Moreover for many people caught in poverty, especially in third world countries, lower order needs may not be satisfied during an entire lifetime. So the question of self-actualization does not arise. Then there are people who are always greedy for more money, despite being very wealthy! In 1969, Clayton Alderfer improvised on Maslow's Hierarchy of Needs, with his ERG theory (Existence, Relatedness and Growth). Alderfer put the lower order needs, physiological and safety, into the existence category. He fit Maslow's interpersonal love and esteem needs into the relatedness category. The growth category contained the self actualization and self esteem needs. According to the ERG theory, more than one need may be operational at the same time. People can move on to a higher order need without substantially satisfying their lower order needs. For instance, an artist may want to satisfy his basic needs like hunger and shelter but he may be simultaneously interested in his growth as an artist. If a higher-order need is frustrated, an individual may regress towards a lower- order need which appears easier to satisfy. This is known as the frustration-regression principle. Thus, if social needs are not satisfied, an employee might start concentrating on making more money. This might happen for example if a deserving middle manager is denied a promotion for a long time. Another landmark in the body of knowledge about motivation is Herzberg’s two-factor theory of job satisfaction. Every organization has a set of hygiene factors like working conditions, salary etc. The absence of hygiene factors creates employee dissatisfaction but their presence does not improve
  • 72. 72 satisfaction. Herzberg found five factors in particular that were strong determinants of job satisfaction: achievement, recognition, the work itself, responsibility and advancement. Motivators have a long-term positive impact on job performance. In contrast, hygiene factors produce only short- term changes in job attitudes and performance. Another theory proposed by Vroom is that motivation depends on employee expectations about the outcome of their efforts. If people know what they want from an outcome and believe they can achieve it, they will be highly motivated to work towards the goal. This theory contrasts with Maslow and Herzberg’s emphasis on people’s needs. (See Herzberg, Hygiene factors, Maslow) Multi Domestic Industry: An industry in which the competition within the industry is essentially segmented from country to country. Competitive strategies in one country are largely independent of those in other countries. Typically, these are industries where economies of scale are less important and the need for local customization is more critical or where freight costs are significant. The cement industry is a good example. (See Global Industry) Murphy’s law: It is most commonly formulated as "Anything that can go wrong will go wrong." The law is named after Major Edward A. Murphy, Jr., a development engineer who worked for a brief period of time on rocket sled experiments done by the United States Air Force in 1949. N Nearshoring: The practice of outsourcing activities to locations which may not be the cheapest but are reasonably close so that coordination is easier. Eastern Europe is a nearshoring destination for many companies in the US. (See Offshoring, Outsourcing) Net Present Value: Net present value (or NPV) is a standard tool used in capital budgeting. According to the NPV method, a potential investment project should be undertaken if the present value of all cash inflows minus the present value of all cash outflows (which equals the net present value) is greater than zero. The discount rate used is the shareholder’s required rate of return. Managers should undertake only those projects that have an NPV > 0. If two projects are mutually exclusive, they should choose the one with the higher NPV. (See Adjusted Present Value) Nine-Cell Planning Grid: Developed by General Electric (GE), the Nine cell planning grid to some extent, overcomes the limitations of the BCG matrix. In the GE grid, each business is rated low, medium or high on two major dimensions - Market Attractiveness and Business Strength. There are nine cells into which businesses can be grouped based on these two dimensions.
  • 73. 73 (See BCG Matrix) Not-invented-here: The difficulties managers have in accepting an idea or a concept or a product developed by another department/organization. It is a term used to describe a culture that finds it difficult to accept that outsiders can be better or know more. O Offshoring: The increasing trend towards locating non core activities in distant locations to take advantage of lower costs and skilled manpower. A theme well covered in Thomas Friedman’s recent book, “The Earth is flat”. John Hagel III and John Seely Brown have identified four broad waves in the evolution of offshoring: • Locating operations offshore to facilitate cost arbitrage. • Locating operations offshore to gain access to distinctive skills • Locating operations offshore to target the unique and demanding needs of emerging markets. • Using emerging markets as a base from which innovative products and services can be developed for the global markets. Two strategic challenges are involved in off shoring. The company must be able to define clearly the scope and contours of its business. The company must also develop the capabilities and master the techniques needed to access and leverage the expertise of partners. (See Nearshoring, Outsourcing) Ohmae, Kenichi: A former Mckinsey consultant, well known for his work on strategy, in general and globalization in particular. Ohmae’s famous books include Mind of the Strategist, Borderless World, and End of the nation State. His most recent book is “The Next Global Stage: Challenges and Opportunities in Our Borderless World” published in March 2005. Ohmae has published several thought provoking articles in leading journals like Harvard Business Review. Oligopoly: A market which is dominated by a small number of sellers. The word is derived from the Greek for few sellers. As there are few participants, each seller is aware of the actions of the others. The decisions of one seller influence, and are influenced by the decisions of other sellers. Strategic planning by oligopolists must take into account the likely responses of the other market participants. An oligopoly can be quantified using the four-firm concentration ratio, the percentage of
  • 74. 74 the market share accounted for by the four largest firms in an industry. Using this measure, an oligopoly may be defined as a market in which the four-firm concentration ratio is above say 40%. The Herfindal index is another useful measure. In industrialized countries, oligopolies are found in many sectors of the economy, such as cars, consumer goods and steel. In regulated markets such as wireless communications, the state often licenses only two or three providers of cellular phone services, effectively creating an oligopoly. Marketing professor, Jagdish Sheth32 has coined the Rule of Three. In many industries, equilibrium is reached when there are three main players. Oligopolistic competition can result in various outcomes. Firms may collude to raise prices and restrict production in the same way as a monopoly. In some industries, there may be an acknowledged market leader who informally sets prices to which other producers respond. In other situations, competition between sellers can be fierce, with relatively low prices and high production. This can lead to an efficient outcome approaching perfect competition. Competition would be less if the firms are regional and do not compete directly with each other. Oligopsony is a type of market in which the number of buyers are small while the number of sellers is large. A small number of firms compete to control the inputs of production. (See Concentration Ratio, Game Theory, Herfindal Index) Operating Strategies: These refer to the day to day actions that need to be aligned with long term objectives. These may include sales planning, production scheduling, working capital management, inventory management, etc. (See Functional Strategy) Opportunity Cost: The cost of the opportunity foregone. Most decisions involve an opportunity cost. When resources are committed somewhere, some other area is starved of them. Opportunity costs must be considered while taking decisions. Optimizing Planning: The optimizing approach believes in achieving the best possible outcome, using mathematical models. An optimizer tries to minimize the resources required for a given level of performance or to maximize the performance, given a certain level of resources or to obtain the best balance of resources consumed and performance. (See Russell Ackoff) Organic Growth: Means expansion from within the firm, i.e. not as a result of acquisitions. Organic growth is likely to be steady, even slow, but very secure. That is why some CEOs consider it the most “precious” form of growth. In contrast, growth by acquisitions tends to be risky and often fails to add value for shareholders. Organizational Behavior: Organizational behavior is the study of what people think, feel and do in and around organizations. It explores individual emotions and behavior, team dynamics and the systems and structures of organizations. Organizational behavior attempts to provide an 32 Sheth, Jagdish; Sisodia, Rajendra, “The Rule of Three: Surviving and Thriving in Competitive Markets,” Free Press, 2002.
  • 75. 75 understanding of the factors necessary for managers to create an organization that is more effective than its competitors. (See Organizational Development) Organizational Chart: A visual representation of an organization structure. It identifies the organizational unit and indicates each position in relation to others. Positions are usually represented by squares or rectangles (although circles or ovals are sometimes used) that contain the position title. They may show the name of the incumbent as well. Each position is connected by a solid line running to the immediate supervisor and to positions supervised, if any. Broken or dotted lines may be used to show other than reporting relationships (e.g., advisory or functional). (See Organizational Design, Organizational Structure) Organizational Culture: The beliefs and values of people within the organization shape the organizational culture. Culture tells employees what is accepted and what is not, what is important and what is not. Culture implicitly makes employees set priorities. Culture develops over time, as people get exposed to problems and find ways to solve them. Leadership plays an important role in shaping culture. Culture is the knowledge used by people to interpret experiences, set priorities and guide their behavior. The beliefs and values of employees form the core of organizational culture. Culture is acquired by learning and experience. Culture is shaped by various organizational influences. For example, in some companies, employees are encouraged to take risk, while in others, playing safe is the accepted norm. In some companies, the work environment may be very informal with people operating on a first name basis, while in others, it can be very formal with great importance being attached to seniority, designation, etc. Some cultures lay a premium on getting the work done while others attach equal if not more importance to how the work is done. For example, in the Tata group companies, giving bribes to government officials, something very common in a country like India to get work done, is strictly prohibited. Geert Hofstede, the famous Dutch scholar has identified four well-known dimensions of culture: power distance, uncertainty avoidance, individualism and masculinity. • Power distance: The extent to which employees feel that power is unevenly distributed across various levels of the organization from the top to the bottom. Power distance tends to be less in knowledge intensive industries such as computer software. In such industries, individual expertise is as important as seniority and designation. • Uncertainty avoidance: The extent to which people feel threatened by uncertainty. • Individualism: The tendency of people to be self-centered as opposed to collectivism where people care for each other. Individualism is a typical cultural trait found in investment banks. Americans are considered to be more individualistic, compared to the Japanese. • Masculinity: Refers to a strong emphasis on success, money and material objects as opposed to femininity, which emphasizes caring for others and quality of life. For example, academic institutions have a feminine culture. Scandinavian countries in general have a feminine culture. Japan has a masculine culture, where the desire to be a high performer in the work place leads to burn out or Karoshi. Organizational Design: Designing organizations is a complex exercise. Organizational Design involves making choices about how to group individuals and structure their tasks. According
  • 76. 76 to Harvard Business School professor Robert Simons33, organization design must take into account the company’s strategy, competitive environment, stage of the lifecycle and various other factors. In short, it is a fine balancing act. In the early days of an organization, organization design receives little attention. But over time, problems emerge as the charisma of the founders becomes insufficient to manage a larger enterprise. Systems and processes become important. This is when a functional structure is typically chosen. After some time, the functional structure becomes inadequate to respond to the needs of the market place because of centralized decision making. At that point, a divisional structure becomes necessary. But with time, a divisional structure leads to fiefdoms. Coordination becomes difficult, resources are wasted, knowledge sharing does not happen effectively and profitability declines. At this time, headquarters may take control. But this leads to red tape and decision making slows down. The pressure builds for simplifying the organization, divesting non core businesses and removing red tape. In short, organization design is a dynamic concept. The design should change in line with the company’s circumstances. Designing organizations that can adapt over time, effectively means learning to reconcile the tensions between: • Strategy & structure • Accountability and adaptability • Ladders and rings • Self-interest and mission success Managers must design organizations to implement the current strategy and also allow new ideas to flow that will feed into tomorrow’s strategies. Structure determines how information from the market is processed and acted upon. Thus structure determines strategy and strategy determines structure in an interdependent fashion. Accountability is at the heart of organization design. While, people must be answerable for performance on some measured dimension, they should not be discouraged from experimenting and working on new ideas. An effective organization structure must not only take into account the ladders (vertical hierarchy) but also the rings (horizontal networks). Human behavior is a critical design variable. Organization design must promote the kind of behavior that strikes the right balance between employee aspirations and organizational needs. The basic building blocks of any organization structure are market facing units and operating core units. Market facing units gather market data about customers, competitors, opportunities and threats. Responsiveness must drive the design of market facing units. This responsiveness must be balanced by efficiency elsewhere. It is the job of the back office functions to do just that. Managers of these functions are responsible for standardizing work processes, applying best practices to the firm’s internal operations and ensuring efficiency through economies of scale and scope. The scarce resources must be distributed optimally between the market facing and operating core units. Till recently, organization design has essentially amounted to a trade off between responsiveness and efficiency. Information Technology (IT) is facilitating higher efficiency with an acceptable level of responsiveness. IT can forge very close links with customers. Dell is a good example. (See Organizational Structure) 33 Simons, Robert, “How risky is your company?” Harvard Business Review, May – June 1999, pp. 85 – 94.
  • 77. 77 Organizational Development: The field of organizational development (OD) is concerned with the performance, development, and effectiveness of human organizations. According to Warren Bennis, OD aims at changing the beliefs, attitudes, values, and structure of organizations so that they can better adapt to new technologies, markets, and challenges. OD involves organizational reflection, system improvement, planning, and self-analysis. OD helps an organization to develop the internal capacity to be the most effective with respect to its chosen line of business and to sustain itself over the long term. (See Organizational Behavior) Organizational Inertia: The inability to change and adapt to the external business environment is called organizational inertia. Many organizations struggle to cope with the pace of change. They do not recognize that competition has increased or that the company’s products are no longer as distinctive or superior or as much in demand as in the past. Inertia is dangerous under the following circumstances. • Competing or substitute products have come onto the market; • Technology is changing rapidly; • Customer preferences are undergoing a major change; • Substitute products are driving down prices and threatening to take current and potential customers; • Products are maturing, resulting in reduced prices, market saturation and risk to brand reputation; • Social upheavals are taking place; • Political developments have led to regulatory changes, lowering the barriers to entry; • A significant new competitor has arrived; • Rising exit barriers have resulted in intensifying competition, in the face of falling sales; • The company is no longer strong either in product differentiation or cost leadership. (See Change Management) Organizational Learning: Learning is all about going through experiences, observation and reflection, conceptualizing what has been learnt and active experimentation. Learning begins with observation, reflecting on the observation and assessing the underlying factors that drive behavior. Learning is a continuous process. Reflection and action combine to produce learning. Organizational learning means continuous modification of behavior by an organization in line with changes in the environment. A learning organization is good at creating and acquiring knowledge and at modifying its behavior to reflect new knowledge and insights. Learning organizations make conscious attempts to improve productivity, effectiveness and performance on an ongoing basis. The greater the uncertainties in the external environment, the greater the need for learning. Organizational Mapping: Mapping is a well-known technique for understanding how people, departments, customers and other functions in the organization interact. Mapping allows us to examine a business process clearly. It uncovers weaknesses in structure that may need to be resolved. It identifies bottlenecks, barriers and errors and creates a map of the ideal process to put in place and implement improvement plans. Process mapping is particularly effective in determining breakdowns in communication and information sharing. Process mapping helps in improving existing processes and identifying new processes that will increase efficiency and effectiveness. (See Business Process Reengineering)
  • 78. 78 Organizational Structure: The way activities are grouped in an organization. Structure promotes specialization, defines roles more clearly and facilitates efficient execution of day-to-day tasks. However, a rigid structure may reduce flexibility and create watertight compartments that stand in the way of knowledge sharing and innovation. The organizational structure should be sufficiently flexible, so that people from different departments can come together to discuss new ideas and solve complex problems. Indeed, the ability to form and dismantle cross-functional task forces at short notice can be a key competitive advantage in a dynamic environment. (See Organizational Design) Outsourcing: Outsourcing (or contracting out) is essentially the delegation of non-core operations or jobs to an external entity (such as a subcontractor) that specializes in that operation. Outsourcing often aims at lowering costs or sharpening the focus on competencies. A related term, offshoring, means transferring work to another country. Outsourcing has taken off in a big way in recent times thanks to the availability of information and communications technology that facilitates effective coordination of geographically dispersed activities. (See Dynamic Specialization, Nearshoring, Process Networks) Overheads: These are the costs incurred in addition to the direct costs of manufacturing or of providing services. As organizations grow in size, overheads tend to increase. Attacking overheads is usually an integral part of most corporate restructuring activities. (See Activity Based Costing) P Palepu, Krishna G: A well known professor at the Harvard Business School, Palepu’s research and teaching activities focus on strategy and governance. He has published numerous academic and practioner-oriented articles and case studies on these issues. His recent focus has been on the globalization of emerging markets, particularly India and China. In the area of corporate governance, Palepu's work focuses on how to make corporate boards more effective, and on improving corporate disclosure. Palepu has been on the Editorial Boards of leading academic journals, and has served as a consultant to a wide variety of businesses. Two articles written jointly with Tarun Khanna, “The right way to restructure conglomerates in emerging markets,” and “Why focused strategies may be wrong for emerging markets” are widely cited in the literature. (See Tarun Khanna) Pareto’s Principle: The Pareto principle (also known as the 80-20 rule, the law of the vital few and the principle of factor sparsity) states that for many phenomena, 80% of the consequences stem from 20% of the causes. What the principle tells us is that we must focus on the right areas to get results. The principle is named after the Italian economist Vilfredo Pareto, who observed that 80% of income in Italy was received by 20% of the Italian population. In marketing, 20% of clients are responsible for 80% of sales volume. In many processes, 80% of the resources are typically used by 20% of the operations. Sometimes, 80-20 may even become 90-10. Thus, in software engineering, 90% of the execution time of a computer program is spent executing 10% of the code. Pareto’s principle helps focus management attention on critical areas. It is the basis for the Pareto chart, one of the key tools used in total quality control and six sigma. The Pareto principle serves as a
  • 79. 79 baseline for ABC-analysis and XYZ-analysis, widely used in logistics and procurement for the purpose of optimizing inventory and order quantity. The principle of Tipping Point, coined by Malcolm Gladwell appears to be an extreme version of the 80-20 principle. (See Tipping Point) Parkinson’s Law: In many offices, work expands and fills up the time available for its completion. People look busy even when they are not doing any useful work. Personal Effectiveness: Possibly, the most well known model, Stephen Covey’s seven habits provide a simple-to-understand-and-use framework of personal effectiveness. • Be Proactive: People are responsible for their own choices and have the freedom to make decisions based on principles and values rather than on moods or conditions. • Begin with the end in mind: Individuals, families, teams and organizations must have a clear purpose in mind. They must identify and commit themselves to the principles, relationships and purposes that matter most to them. • Put First Things First: Putting first things first means focusing on the most important priorities. Whatever the circumstances, living and being driven by values and key principles is important. • Think win-win: Thinking win-win is a frame of mind and heart that seeks mutual benefit and mutual respect in all interactions. Instead of thinking selfishly or like a loser, people should learn to think in terms of “we”, not “me”. • Seek first to understand, then to be understood: Listening with the intent to understand others is the essence of communication and relationship building. Opportunities to speak openly and to be understood come much more naturally and easily. Seeking to understand takes consideration; seeking to be understood takes courage. Both consideration and courage are important. • Synergize: Synergize means realizing that a third way is better than each party can come up with individually. It’s the fruit of respecting, valuing and even celebrating one another’s differences. It’s about solving problems, seizing opportunities and working out differences. Synergy is also the key to any effective team or relationship. • Sharpen the saw: Sharpening the saw means constant renewal in the four basic areas of life: physical, social/emotional, mental and spiritual. PEST (Political, Economic, Social and Technological Factors) Analysis: A framework, introduced by Steiner and Andrews, for analyzing an organization's external environment. Various political, economic, social and technological trends are identified to formulate and implement strategies. • Political factors include government regulations and legal issues pertaining to tax, employment, environment, trade, etc. • Economic factors include economic growth, interest rates, exchange rates, inflation rates, etc. • Social factors include health consciousness, population growth rate, age distribution, career attitudes, emphasis on safety, attitudes to foreign products and services and average life of human beings. • Technological factors include R&D activity, automation, rate of technological change, etc. (See Environmental Scanning)
  • 80. 80 Peter Principle: According to Laurence Peter, in any hierarchy, employees tend to rise to their level of incompetence. Thus, excellent motor mechanics after being promoted become second-rate foremen and fine teachers become incompetent school heads. Peter pointed out that the main criterion for gaining promotion is success. So competence is rewarded with promotion until the individuals rise to a hierarchy level where they can no longer cope. On arriving at this level of incompetence, the employees become frustrated, stressed and become ineffective. The key message is that promotions should not only take into account current performance but also the performance in a future role. Platform Leadership34: A concept introduced by Annabelle Gower and Michael Cusumano. In the initial phase of many industries, the early movers tend to develop most of the components necessary to make the products. But later, specialized firms typically emerge to develop different components. Along with components, evolve platforms, which consist of various components made by different companies. Some companies become platform leaders. They ensure the integrity of the platform by working closely with other firms to create initial applications and then new generations of complementary products. Platform leaders create interfaces to entice other firms to use them to build products that conform to the defined standards and therefore work efficiently with the platform. It is in the interest of a platform leader to stimulate innovation on complementary products. The more people who use these complements, the more incentives there are for producers of complements to introduce such products. This in turn motivates more people to buy or use the core product, stimulating more innovation, and so on. Standards wars are an integral part of platform strategies. What matters is overall performance. The platform need not be superior to the competition in all product features. Neither was Windows, (particularly the early versions), technically superior to the Macintosh, nor were Matsushita’s VHS video recorders superior to Sony’s Betamax. But in each case, the network as a whole delivered more. Defining the architecture of a system product is a powerful way to raise entry barriers for potential competitors. A potential competitor to Intel not only has to invent a microprocessor with a better price-performance ratio but also rally complementors and Original Equipment Manufacturers (OEMs) to adapt their designs to this component. This would obviously involve huge switching costs. Platform leaders must also be able to maintain architectural control over its platform, by making an ongoing assessment of their existing capabilities and the direction in which the industry or technology is evolving. Platform leaders need to pursue at least two objectives simultaneously. First, they must try to obtain consensus among key complementors with regard to the technical specifications and standards that make their platforms work with other products. Second, they must control critical design decisions at other firms that affect how well the platform and complements continue to work together through new product generations. A platform leader must play the role of industry enabler by encouraging innovations that improve the platform. The platform leader sometimes has to make decisions that might hurt some partners, even if they have been complementors in the past. 34 Cusumano, Michael A; Gawer, Annabelle, “Platform Leadership: How Intel, Microsoft, and Cisco Drive Industry Innovation,” HBS Press, 2002.
  • 81. 81 To gain the trust of third parties, platform leaders must act and be seen to act fairly. They need to establish credibility in technical areas where they want to influence future designs or standards. They must make potential complementors feel comfortable that the decisions are being taken in the interest of the whole industry. Platform leaders usually emerge through the mechanisms of the marketplace, rather than through some magical process. A high market share and a high degree of innovative capabilities alone do not suffice. A platform leader must have the vision and the organizational capabilities to engage complementors to innovate and improve the platform. Such a vision is grounded in the belief that the power of a system is greater than the sum of its parts. (See Michael Cusumano) Poison Pill: An anti takeover strategy in which the company under threat does things that would represent a long-term drain on the resources of the bidder. As a consequence, the bidder may decide against swallowing up the poisoned pill (company), and give up the bid. An example of a poison pill is giving staff employment contracts with a three-year notice of termination clause. This would significantly increase the cost of taking over and restructuring the firm. (See Anti takeover Strategy) Policies: Policies are rules and guidelines to supplement functional strategies. Policies guide the thinking and decisions of managers while implementing the firm’s strategies. Policies serve as specific guides for lower level managers while taking operating decisions. (See Functional Strategy) Political Risk: A term usually used to describe the possibility of loss when investing in a foreign country, because of various factors - changes in a country's political structure or policies, such as tax laws, tariffs, expropriation of assets, restrictions imposed on repatriation of profits, tightened foreign exchange repatriation rules, or increased credit risk due to changes in government policies. (See Country Risk) Porter, Michael E: Porter is probably the most famous strategy guru in the world today. Porter’s Five forces model and the generic strategies, cost differentiation and focus have become the standard reference point for management students, research scholars and practitioners world wide. Porter’s approach to strategic planning has been referred to as the positioning school. A firm’s performance is largely determined by how it is positioned vis-à-vis various forces in the external environment. Porter has also written about the competitive advantage of nations and the linkages between corporate strategy and corporate philanthrophy. Porter’s writings carry deep insights. Though researchers have pointed out the limitations of Porter’s work from time to time, many of the principles developed by Porter remain as relevant as ever. In terms of ability to put together a body of knowledge based on a conceptually elegant framework, few scholars in the area of strategy have been able to rival Porter so far. Porter's five forces model addresses the question of why some industries are more attractive than others. The five forces identified by Porter are: • The bargaining power of the buyers. • Entry barriers. • Competitive rivalry. • Substitutes. • The bargaining power of the sellers.
  • 82. 82 The model guides companies in: • Prioritizing markets according to their inherent attractiveness. • Understanding the critical success factors in the market. • Providing insights for the criteria by which a company can judge itself against competitors. • Generating ideas for changing the rules of the game. Porter has also developed the concept of value chain. The value chain splits a company operations into various components: • In-bound logistics. • Manufacturing. • Service. • Sales and marketing. • Administration • Out-bound logistics. Essentially, the value chain concept explains how value is created in a business. It draws attention to the internal choices which a company makes in determining how it is going to compete. In recent years, it has been called 'the business model' - to indicate that it is specific to a particular business. According to Porter, companies must compete on one of three planks: differentiation, cost leadership, and focus. Porter calls them generic strategies. Differentiation means a company sets out to add more value to target customers (perceived and real) than competitors do. Cost leadership means a company achieves parity of value with competitors, but at a lower cost. A 'focus' strategy involves concentrating only on a small segment of target customers and their specific needs. Such a strategy aims at leveraging the advantage of specialization, either through cost control or superior customization while serving a narrowly defined customer segment. A company must choose one generic strategy. If it does not, the company will get stuck in the middle. (See Competitive Advantage, Competitive Strategy, Five Forces Model, Generic Strategy, Value Chain) Positioning: The process of creating and maintaining a distinctive place in the market for an organization and/or its individual brands. The aim is to steal a march on competitors by offering something different. This is often called unique selling proposition. To be effective, the differences must be important, relevant, noticed and understood by consumers. The perceptions of consumers play a key role in the positioning process. Positioning may erode over time, as competitors copy or improve upon the points of difference or as the needs of the target audience change. In these circumstances, an organization may have to reposition itself. Positioning is all too often defined very narrowly, with a sole focus on distinctive product attributes that offer benefits to consumers. What is forgotten is that many organizations and / or brands succeed in the market place because of non- product-based advantages like supply chain and organizational capabilities. Repositioning can be done on these planks as well.
  • 83. 83 Price/Earnings Ratio (P/E): The ratio of the price of the company’s share to the earnings per share. It is an indication of how the market expects the company to perform in the future. A high P/E implies the company is expected to do well. Process Innovation: A process can be viewed as a set of activities designed to produce a specified output for a particular customer or market. Thus a manufacturing firm has various processes like product development, customer acquisition, procurement, manufacturing, logistics, after sales service, information management, human resources management and planning. Process innovation implies creating a significant improvement in one or more of these processes. Process innovation begins with a good understanding of who the customers are and what they expect from it. Process innovation must not be confused with process improvement which is incremental in nature. Process improvements take the existing process as given, but process innovations question the basic assumptions. Michael Hammer35 uses the term operational innovation which for all practical purposes refers to process innovation. As he puts it, “Operational innovation should not be confused with operational improvement or operational excellence. These terms refer to achieving high performance via existing modes of operation ensuring that work is done as it ought to be to reduce errors, costs and delays but without fundamentally changing how that work gets accomplished. Operational innovation means coming up with entirely new ways of filling orders, developing products, providing customer service or doing any other activity that an enterprise performs.” Successful process innovations typically demand technological and organizational enablers. While information technology has driven many process innovations in recent times, there are various other drivers that must not be ignored. For example, the concept of lean manufacturing pioneered by Toyota, is driven more by common sense and a new mindset than by technology. Process innovation must begin with the identification of processes that are ripe candidates for innovation. Focusing on those processes which require immediate improvement, makes sense because, like in any other change initiative, quick results will build the momentum. If the company is striving for incremental improvement, it is sufficient to work with many narrowly defined processes. But when the objective is radical process change, a process must be defined as broadly as possible. A company like Toyota has been able to get well ahead of competitors by ongoing improvements in all aspects of operations including procurement, manufacturing, vendor management and logistics. According to Davenport36 four criteria can be used to guide process selection:  Centrality of the process: The processes that are most central to accomplishing the organization’s goals must be selected.  Process health: Processes that are currently problematic and in obvious need of improvement must be chosen.  Process qualification: The cultural and political climate of a target process must be guaged. Only processes that have a committed sponsor and exhibit a pressing business need for improvement must be selected.  Manageable project scope. The process must be defined in such a way that the project scope is manageable. Information can play a number of supporting roles in a company’s efforts to make processes more efficient and effective. Just the addition of information to a process can sometimes lead to radical 35 Hammer, Michael. “Deep Change,” Harvard Business Review, April 2004, pp 84-93. 36 Davenport, Thomas H., “Process Innovation – Reengineering Work through Information Technology,” Harvard Business School Press, 1993.
  • 84. 84 performance improvements. Information can also be used to measure and monitor process performance, integrate activities within and across processes, customize processes for particular customers, and facilitate longer-term planning and process optimization. Information can also be used to better integrate process activities both within a process and across multiple processes. Davenport37 has listed nine different ways of supporting process innovation with Information Technology (IT). Automational. IT can be used to automate several processes. Informational. IT can be used within a process to capture information about process performance and to improve it. Analytical: In processes that involve analysis of information, IT can make the decision-making process more efficient and effective. Sequential. IT can enable changes in the sequence of processes or transform a process from sequential to parallel in order to reduce process cycle-time. Tracking. Effective execution of some process designs, notably those employed by firms in the transportation and logistics industries, requires a high degree of monitoring and tracking. IT can play a key role here. Geographical. A key benefit of IT is the ability to overcome geographical barriers. Integrative. More and more companies are finding it difficult to radically improve process performance for highly segmented tasks split across many jobs. IT can help integrate various aspects of a product or service delivery process. Intellectual. Many companies are increasingly using IT to capture and disseminate knowledge. Disintermediating. In some industries, human intermediaries are inefficient for passing information between parties. This is particularly so in case of transactions such as stock brokerage or parts location. IT can play a key role here. (See Innovation, Product Innovation) Process Lifecycle: Just like the product life cycle, there is also a process life cycle. During the formative period of a new product, the manufacturing processes are usually crude and inefficient. Typically, such processes employ skilled labor working with general-purpose machinery and tools. There are no specialized tools or machines. It is the product itself at this point that matters. But processes tend to improve as the rate of product innovation decreases. Finally, when an industry standard is determined, products are likely to become similar in terms of functions and features. Incremental changes in products made by competitors will tend to be copied rapidly. Under these circumstances, processes hold the key to stealing a march on competitors. (See Product Lifecycle) 37 Davenport, Thomas H., “Process Innovation – Reengineering Work through Information Technology,” Harvard Business School Press, 1993.
  • 85. 85 Process Networks: Process networks are a useful mechanism for facilitating knowledge transfer across organizations. According to John Hagel III and John Seely Brown 38, world class companies leverage such networks to gain more flexible access to specialized capabilities on a global scale. Process networks seek to coordinate activities across multiple tiers of enterprises within a business process. These networks attempt to ensure that resources are flexibly provided in response to specific market demand. Such networks are characterized by loose coupling and require formal orchestrators to function effectively. Relatively independent modules of activity are designated, with clear ownership and accountability for each module. The performance levels that each module must meet at the interfaces connecting it with other modules are defined. Module owners can make improvements as long as they comply with the performance requirements. Process networks are not only more scalable but are also more effective in tapping the knowledge of a large number of specialized participants in a flexible way to provide more value to customers. (See Dynamic Capability Building, Offshoring, Outsourcing,) Product Innovation: Product innovation is all about launching new products that appeal to customers. It involves: • Finding out and anticipating what customers might need or want; • Generating ideas; • Developing and launching a product; • Providing various support services to keep customers happy. A stream of successful product introductions can generate rapid sales and profit growth. A good example is Sony which came out with 170 new models of the original Walkman during the period, 1981-89. Similarly, Intel’s market leadership has been facilitated by the launch of a series of microprocessors, each with greater capabilities. Microsoft, which has introduced several versions of its PC operating systems and applications software, is another good example. Companies which are good at product innovation have some common attributes: • An intuitive understanding of what customers need and want. They do not depend excessively on formal market research. • The discipline, skills, methods and processes to optimize product design and manufacturing. • Effective and optimal use of resources. • Short lead times to out-innovate competitors. They renew and expand product lines faster. • Willingness to cannibalize their own products. • Leaving people free and encouraging creativity by eliminating bureaucratic procedures. In short, product innovation calls for a culture that encourages individual initiative, a good understanding of the market, and disciplined execution. Product innovation is all about generating new ideas, developing products and selling it in the market. So the biggest challenge in product innovation is often not technology, but marketing. According to Deschamps and Nayak39, a well-designed product development process is made up of six interlocking and mutually reinforcing sub processes: • Idea management; • Intelligence development; • Technology and resource development; 38 “The Only Sustainable Edge: Why Business Strategy Depends on Productive Friction and Dynamic Specialization” Harvard Business School Press, 2005. 39 Deschamps, Jean-Philippe; Nayak Ranganath ,“Product Juggernauts: How Companies Mobilize to Generate a Stream of Market Winners”, Harvard Business School Press, 1995.
  • 86. 86 • Product/Technology strategy development & planning; • Project and program management; • Product support. Ideas are important for any business. But they need to be tapped efficiently. High performance businesses develop a structured process for idea management. They generate, collect, evaluate, screen, and rank ideas continually. They also have mechanisms to explore and validate ideas in the market and in the labs before they are commercialized and scaled up. The intelligence development process facilitates the collection of relevant data and trends on customers, competitors, and technologies. This process transforms that data into information and insights and uses that intelligence to seed other processes. Most successful companies cultivate intelligence development as their secret competitive weapon. Technology and resource development facilitate the development within the company of a range of new technologies, skills, and competencies for future product generations. Not all resources, however, have to be internal to the corporation. Establishing strategic alliances and close relationships with suppliers is also a part of this process. Product and technology strategy development and planning determines where, how, and with what frequency the company intends to launch new products. It is an integrative process, combining product plans and technological development plans. It should lead to plans determining which new products will be introduced and when and how the company’s developmental capacity will meet the new demands of products. Project and program management is where unresolved problems like deficiencies in market insight, know-how, strategies, and plans show up. Product support starts at the launch of the product and typically ends only when the product is withdrawn. In industries that depend on technical service or applications engineering to add value to customers, this process is vital to success. Application – intensive industries such as performance chemicals, resins and polymers devote a significant portion of their total technical resources to supporting their products. Product development demands major resource commitments. So resources must be managed carefully. If too few new products are being developed, the solution is not necessarily increased spending. Companies that are committed to innovation must employ an investment portfolio approach, with the right mix of incremental improvements, and breakthrough ideas that will deliver consistent returns in the long run. They should also pursue a disciplined approach. Only products with real potential for specific markets should make it to the launch stage. And once they have reached that stage, they need marketing campaigns that are aligned with their sales potential. Companies must aim at getting the right product to the right consumer at a cost that is in line with the product's sales potential. Keeping the breakeven point low is crucial to the success of most innovations. Well-managed companies have a disciplined approach to dealing with new ideas40. Great ideas are often hard to sell early on, and premature demand for numbers and analysis can kill creativity. Nevertheless, an explicit process of business justification is desirable. The key lies in identifying 40 Dalens Francois, Gell Jeff, Rutstein Carl, Birge, Robert, “Winning The New Product War,” bcg.com
  • 87. 87 specific points in the concept-to-launch process, where a project that is not showing promise can be stopped. Perhaps the quickest way to avoid the problem is to call for a “go-no-go” decision at three specific stages in the product launch process. The first stage must appear early on, after concept development. At this time, the target market for the product should be clearly identified, along with a realistic marketing plan and a rough estimate of marketing costs for different scenarios. The next stage can come after the commercialization model has been developed. The product manager must demonstrate that the product can realistically deliver on its claim. The company should be confident about creating sufficient excitement among the customers. The last vetting can come at the time of large-scale commercial launch, when it should be clear that there is a compelling marketing plan in place to reach targeted sub-segments, a plan for meeting all channel requirements, and if it is a consumer product, a plan for merchandizing the product (if it is a consumer product) so that it stands out among competing brands in the store. (See Innovation, Process Innovation) Product Life Cycle: Describes the four stages that a new product goes through from birth to death: (1) introduction – the slow sales growth that follows the introduction of a new product; (2) growth – the rapid sales growth that accompanies product acceptance; (3) maturity – the plateauing of sales growth when the product has been accepted by most potential buyers; and (4) decline – the decline of sales that results as the product is replaced (by a substitute) or becomes increasingly unappealing to customers. Different strategies are required at different stages of the life cycle. An important implication of the product life cycle (PLC) theory is that every product eventually declines and dies. So it is necessary for firms to launch new products from time to time. Ideally, new products should be financed from the cash flows generated by mature brands, and should be launched before maturity turns to decline. During the development phase, there is substantial negative cash flow on account of R&D, market research, and setting up a production line. As demand grows, more cash must be ploughed into expanding factory capacity. Once sales have stabilized, the firm can reap the cash rewards from their success in the decline phase. Brands with a high market share can provide the cash for the development of replacement products. Whether products do indeed go through these stages in any systematic, predictable way is still debated. The PLC concept is primarily applicable to product forms, less to product classes, and even less to individual brands. If the item need be bought only once then market saturation can hit demand. If the item's sales have grown because of fashion, it is likely that they will die quite quickly, for the same reason. A product may also go out of existence quickly because of rapid technological obsolescence. (See BCG Matrix, Process Life Cycle) Product Platform: The building blocks that form the foundation for a series of closely related products. Product platforms generate economies of scope by reuse of components and knowledge. In the automobile Industry, several individual car models may share the same basic frame, suspension and transmission even if the shape, look and feel are important. The Sony Walkman had 160 variations and four major technical innovations between 1980 and 1990, all of which were based on the initial platform. Black & Decker rationalized its hundreds of products into a set of product families, using a platform approach. The platform approach may not be effective when rapid changes in technology, customer needs or competitors’ offerings can demand discontinuous new products rather than incremental change. (See Platform Leadership, Product Innovation)
  • 88. 88 Prospect Theory: Behavioral issues significantly influence decision making. Research by behavioral scientists like Nobel prize winner, Daniel Kahneman and Amos Taversky indicate that people do not always follow the rules of rational choice. Examples of such behaviour include: (1) The certainty effect. People over-weight outcomes that are certain, relative to outcomes that are merely probable. Thus, there is a preference for a sure gain over a larger gain that is merely probable. (2) The reflection effect: There is a risk-seeking preference for a loss that is merely probable, compared to a smaller loss that is certain. This can be seen in the way people buy insurance packages or in the way they respond to product pricing and promotions. (3) The isolation effect: People simplify problems by disregarding the components that are common to alternatives and focus only on the differences. So inconsistent preferences are obtained when choices are presented in different ways. This can be seen in the ways consumers make decisions. Functionally similar products might have the same price, but if one brand presents the price in a distinctive way, it may be seen very differently. (See Hidden Traps of Decision Making) Purpose-Process-People Doctrine: According to Sumantra Ghoshal and Christopher Bartlett, the paradigm is shifting away from strategy-structure-systems to purpose-process-people. According to the Purpose-Process-People doctrine, the main task of top management is to shape the behavior of people and create an environment that enables them to take initiative, cooperate and learn. This is unlike the traditional Strategy-Structure-System doctrine in which senior managers concentrate on allocating resources, assigning responsibilities and controlling efficient execution. The top management must change its role from being the designer of corporate strategy to being the shaper of a broader institutional purpose, from being the architect of a formal structure to being the builder of organizational processes and from managing systems to developing and moulding people. Top management must infuse the company with an energizing purpose - a sense of ambition, a set of values, an overall identity. Rather than trying to formulate strategy, top management must attempt to shape the organizational context. Structure is the framework within which companies can develop the organizational processes and management roles and relationships that support their competitive capability. But structure is only the organization's anatomy. A thorough understanding of the organization's physiology, the processes and relationships that are the company's lifeblood and its psychology, the culture and values of employees, is also vital. Instead of regularly intervening with corrective action, top executives need to find ways to encourage self monitoring, self correcting behavior. (See Christopher Bartlett, Corporate Purpose, Sumantra Ghoshal) Pygmalion Effect: If people start believing in themselves, they prove to be effective. Constant praise by the superior makes subordinates start believing they are good. Soon they become highly productive. On the other hand, if they are regularly reminded about their shortcomings, they become de-motivated and ineffective. (See Motivation) Q
  • 89. 89 q-theory: A theory of investment behavior which suggests that firms tend to invest as long as the value of their shares exceeds the replacement cost of the physical assets of the firm. Developed by economist James Tobin, q-theory encompasses other theories of investment in a simple framework. q is the ratio of the value of a firm to the replacement cost of the assets of the firm like machines, buildings, etc. If q > 1 the firm should expand. If q < 1, it will make sense to sell the assets rather than try to use them. Quinn, James Brian: A well known scholar in the area of strategic management, Quinn has suggested that strategic management is not primarily an analytical or rational activity. Strategic decisions typically evolve in a part random or erratic and part logical way. In 1980, Quinn coined the expression “logical incrementalism” to capture this idea. Quinn’s view is that managers tend to make strategic decisions according to perceptions of incremental opportunities which appear to add to what they already have. (See Strategic Planning) R Real Options: Real options build on the basic theory of financial options, by putting a value on the various options available in a new project subjected to various uncertainties. Thus, a Timing Option, in the form of a delayed expansion in capacity can create value in a situation of uncertain demand. Putting up a plant in an overseas market currently fed by exports may generate new growth options. An Exit Option in the form of a plant closure increases the value of the investment decision. Viewing strategic decisions as options and then using information from financial markets to value these options can greatly enhance the quality of strategic planning. Traditional valuation tools like Net Present Value have limited flexibility. This is a handicap in an uncertain environment in which various outcomes which demand a range of strategic responses are possible. Thinking of the investment in terms of options, allows uncertainty to be taken into account. Managers can identify the embedded options, evaluate the conditions under which they may be exercised and finally judge whether the aggregate value of the options, compensates for any shortfall in the present value of the project's cash flows. This ensures that good projects are not rejected because of excessive caution on the part of managers. (See Net Present Value) Regulatory Capture: Sometimes a regulator might support the interests of the industry it is supposed to be regulating. This may be so because the regulator recognizes that its own self-interest requires a healthy industry to regulate, or because the social context within which the regulator operates, is highly supportive of the industry. Or, because the regulator does not want to become controversial by raising tough questions. Resource-based Theories: These theories focus on the resources of the firm, unlike Michael Porter’s positioning school that looks at how the firm is placed vis-à-vis other players in the industry. During the 1980s and early 1990s, numerous writers were critical of the market-based view of strategy. If a firm’s position in an industry was the key determining criterion for success, why did firms in the same industry with similar market positions differ considerably in their performance? The resource-based view of strategy suggests that a firm’s competitive advantage is dependent on its ability to develop and acquire competencies. Assets and capabilities are the building blocks for distinctive competencies. Tangible assets include production facilities, raw materials, financial resources, real estate, and computers. Intangible assets
  • 90. 90 include brand names, company reputation, technical knowledge, patents and trademarks and accumulated experience within an organization. Organizational capabilities are the skills needed to transform inputs into output. Once managers identify their firm's resources, they must examine which of those resources represents real strengths. Resources must be broken down into more specific competencies. Organizational processes and combinations of resources must be considered, not only isolated assets or capabilities. The value chain must be analyzed to uncover organizational capabilities, activities, and processes that are valuable, potential sources of competitive advantage. Some guidelines can be useful here: • Competitive superiority: Does the resource help fulfill a customer's need better than those of the firm's competitors? • Resource scarcity: Is the resource in short supply? • Replication: Is the resource easily copied or acquired? • Value capture: Who actually gets the profit created by a resource? • Durability: How rapidly will the resource depreciate? Following a systematic assessment of internal resources, these resources can be deployed in an optimal way. (See Core Competence) Responsiveness Planning: A term coined by Russell Ackoff. Some future events are difficult to anticipate. Examples include catastrophes and technological breakthroughs. Here, companies can use responsiveness planning. The focus here is on designing an organization so that deviations from the expected can be quickly detected and suitable responses can be made. Responsiveness planning, a conceptually elegant way of identifying and managing risks, essentially consists of building responsiveness and flexibility into the organization. (See Russell Ackoff) Reverse Engineering: A process of disassembling a product of another company to find out how it works, with the intention of replicating some or all of its functions in another product. Some tinkering is done with the design to avoid violation of intellectual property rights. India's leading pharma companies like Ranbaxy and Dr. Reddy’s have been masters of reverse engineering. Risk: Risks have multiplied in today’s fast changing environment. Risks can be broadly divided into two categories: business and financial. Business risk is the uncertainty associated with the ability to sell the company’s product(s) at an appropriate price. Financial risk arises from the use of debt in the capital. The higher the debt component in the capital structure, more the risk. The Economist Intelligence Unit divides risks into four broad categories. • Hazard risk is related to natural hazards, accidents, fire, etc. that can be insured. • Financial risk has to do with volatility in interest rates and exchange rates, defaults on loans, asset-liability mismatch, etc. • Operational risk is associated with systems, processes and people and deals with succession planning, human resources, information technology, control systems and compliance with regulations. • Strategic risk stems from an inability to adjust to changes in the environment such as changes in customer priorities, competitive conditions and geopolitical developments.
  • 91. 91 From the point of view of corporate strategy, Peter Drucker probably offers the best risk management perspective. In his book, “Managing for results,” Drucker has identified four types of risk at a macro level: • The risk that is built into the very nature of the business and which cannot be avoided. • The risk one can afford to take • The risk one cannot afford to take • The risk one cannot afford not to take (See Enterprise Risk Management) Rivalry: The term refers to the intensity of competitive behavior within an industry. The degree of rivalry determines the attractiveness of the industry. In general, the higher the rivalry, the lower the profit margins. Rivalry generally increases when there are many competitors, who are more or less equally strong. When the industry is dominated by one or a few firms, rivalry tends to be less. 41 Rivalry is high when firms are continuously trying to outsmart their rivals especially through price cuts. Rivalry is low when firms are content with the status quo, are happy with their market shares and are unwilling to upset the balance of the industry by instigating a price war. Various factors influence the intensity of rivalry: • When the industry is growing slowly, the intensity of competition increases. On the other hand when the industry is growing fast, just keeping up with the industry increases the sales volume. Further, in a growing industry, the focus is on exploiting growth opportunities rather than countering competitors. • When fixed costs are high relative to value added, there is tremendous pressure to utilize capacity. This can lead to price cutting and consequently intense rivalry. • When a product is perishable or difficult to store, price cutting may be necessary to reduce stocks. This can intensify competition. • Product differentiation builds customer loyalty and tends to reduce the intensity of competition. Where scope for differentiation is minimal, rivalry tends to be intense. • Switching costs are costs incurred by the buyer in moving from one supplier to another. If switching costs are low, buyers are able to switch between suppliers without any penalty. This increases rivalry. • When capacity can be added only in large increments, overcapacity often results, leading to intense rivalry. • When firms consider the industry to be strategically important for them, they may be prepared to give up profits and compete vigorously and forgo profitability. This intensifies competition. • High exit barriers can increase rivalry. (See Five Forces Model) S Satisficing: Managers do not take optimal decisions after considering all the relevant factors. Instead, they tend to take what they consider to be the most sensible decision under the circumstances, based on the information available. This is called satisficing. Herbert A Simon coined the term Satisficing Planning to describe efforts to attain some level of 41 This term is heavily drawn from the book “The essence of Competitive Strategy” written by David Faulkner and Cliff Bowman, published by Prentice Hall of India in 2002.
  • 92. 92 satisfaction, not necessarily the maximum level. Satisficing means doing well enough, which may not necessarily be the best. Satisficers argue that it is better to produce a feasible plan than an optimal plan that is not feasible. But as Ackoff has mentioned, this is based on a wrong belief that consideration of feasibility cannot be incorporated into the consideration of optimality. It is always possible to seek the best feasible plan. (See Herbert Simon, Russell Ackoff) Scenario Planning: Scenario planning enables firms to plan for the future by visualizing different ways in which the external environment may evolve in the future. The construction of a number of scenarios, each describing a possible future state, can help organizations deal with uncertainty more effectively. Scenario building stimulates creative thinking and helps identify major opportunities and threats in the future by taking into account various political, social, economic and technological factors. By contemplating a range of possible futures, better informed decisions can be taken and linkages between apparently unrelated factors identified. Scenarios allow discussions to be more uninhibited, help challenge established views and enable new ideas to be tested. Seeing reality from different perspectives reduces the risk of increasing commitment to failing strategies. Formal scenario planning emerged during the Second World War, when it was used as a part of military strategy as countries prepared themselves for different contingencies. Since then, the use of scenario planning has become increasingly popular. One company which has used scenario planning very effectively is Royal Dutch Shell. The basic premise behind scenario planning is that reacting in ad hoc fashion to external events is not desirable. Understanding long-term trends enables companies to prepare for different future scenarios. It also helps a company to identify the scenarios for which its strengths and competencies are particularly suited. At the same time, by identifying the scenarios for which it is least prepared, the company can invest in building the required competencies. In extreme cases, it can even divest businesses, which do not look promising in the long run. (See Discovery Driven Planning, Strategic Planning) S Curve in Technology Evolution: The S curve is commonly used to describe the product life cycle. But it is also a useful tool for managing technology risk. Foster 42 describes the S curve as the relationship between the effort put into improving a product or process, and the results one gets back for that investment. As technological limits are reached, the cost of making progress accelerates dramatically. Eventually, a point is reached, beyond which no meaningful gains in performance can be achieved by improving technology. Thereafter, other factors (such as the efficiency of marketing, purchasing and manufacturing) begin to determine the success of the business. (See Innovator’s Dilemma, Technology Risk) Senge, Peter: Peter Senge is famous for the concept of the learning organization, which effectively implies a shift from thinking about strategic issues as part of a formal, bureaucratic process to its being completely infused with organizational learning throughout the organization. 42 Foster R. “The S-Curve: A New Forecasting Tool,” Innovation: The Attacker’s Advantage, Summit Books, Simon and Schuster, 1996.
  • 93. 93 In his best seller, The Fifth Discipline (1990), Senge explains how organizations can achieve success by mastering five disciplines: (a) personal mastery or self-discipline on the part of all members; (b) continual challenge of stereotypical mental models; (c) the creation of a shared vision; (d) commitment to team learning rather than conflict, and (e) systems thinking, a holistic way of looking at problems. Systems thinking is a philosophy which realizes it is not possible to understand complexity by breaking the whole down into parts. The dynamic system has to be understood as a whole. Senge identifies a number of systems archetypes to illustrate this. For example, if a successful group is given more resources at the expense of other, less successful groups, the latter are even less likely to succeed. (See Innovator’s Dilemma, Organizational Learning) Service Level Agreement (SLA): Some organizations formalize the internal customer concept by insisting on agreements that establish the dimensions of service and the relationship between two or more departments of an organization. Service Level Agreements (SLAs) are useful in establishing boundaries of responsibility and facilitating inter departmental collaboration, especially if there have been coordination problems or inter departmental conflicts in the past. Shareholder Value: The primary goal of any listed company is to increase the wealth of its shareholders. For this to happen, the returns to shareholders should outperform certain benchmarks such as the cost of capital. In essence, shareholders’ money should be used to earn a higher return then they could earn themselves, eg. by investing in risk free bonds. Simple Structure: A structure used by organizations in their early days. When the organization is small and activities are easy to track and monitor, all the functions can report directly to the CEO or the owner. But such a structure becomes increasingly inappropriate as the size of the organization increases. (See Organizational Structure) Simon, Herbert A: One of the few Nobel Prize winners till date in the field of management. Simon’s insights about how the limitations of the human brain affect the functioning of organizations are truly land mark. Managers are bombarded with choices and decisions but they possess only finite information storage and processing capabilities. They tend to compensate for the inability to consider and evaluate all the available choices by selecting “good enough” options, rather than the “optimal” solutions. Simon’s theory of the firm is based on four main ideas: First, organizations are not the abstract, one- dimensional entities often depicted by economists. They are complex entities, made up of diverse individuals and interests, all of which are held together by a variety of “deals” and coalitions, ranging from explicit contracts to implicit agreements. Second, organizations do not have a complete list of alternatives. Nor do they have complete knowledge about the consequences of their decisions and actions. Third, rather than searching for optimal solutions, organizations distinguish between outcomes that are “good enough” and those that are not. Fourth, much human behavior involves following rules, rather than rationally evaluating the expected consequences of a given action. (See Decision Making) Six Sigma: Six Sigma is a disciplined, data driven approach that eliminates waste, improves productivity and helps to develop and deliver products and services of high quality. The word, Sigma is a statistical term that measures how far a given process deviates from perfection. The central idea behind Six Sigma is to measure how many defects there are in a process, and systematically figure
  • 94. 94 out how to eliminate them and get as close to zero defects as possible. A Six Sigma quality level means 3.4 defects per million opportunities. Six Sigma tries to analyze the root cause of business problems and solve them. The methodology used in Six Sigma is popularly called DMAIC. D: Define the goals and customer (internal and external) requirements. M: Measure the current performance. A: Analyze the performance and determine the root causes of the defects. I: Improve the process by eliminating the root causes of the defects C: Control the vital factors and implement process control systems. The Six Sigma concept was developed by Motorola in 1979. Within 15 years, Motorola was operating at Six Sigma in many of its manufacturing units. Motorola saved billions of dollars earlier spent correcting defects on the production line and recalling products from the market. Since then many other companies like GE have embarked Six Sigma. Many of India’s leading software companies have also embraced Six Sigma enthusiastically. Skimming: A strategy for pricing a new product at such a high level that it is only purchased by a small segment consisting of trend-setters, enthusiasts or the very rich. High pricing helps in establishing an up-market image and ensures that the initial buyers pay the high price they are willing to pay. Later on, the price is lowered to attract the mass market. But the risk is that a high price may make it easy for a competitor to launch a successful, lower priced imitation. By failing to maximize sales at the start, the firm may not be able to hold on to a viable market share when competitors arrive. (See Strategic Pricing) Skunk Work: Increasingly, companies are realizing that the key to attracting and retaining the best scientists, lies in offering freedom to experiment. Skunk work is a covert research project undertaken by a small, independent group, away from the mainstream operations of an organization. The idea is to allow the initiative to blossom by shielding it from the bureaucracy of the mainstream organization. Sloan, Alfred P: One of the greatest management practitioners in business history. Sloan who led General Motors in its formative years, pioneered the divisional structure. He set up a number of centralized functions and framed policies to help rationalize the work of the divisions and to achieve synergy within the corporation. Sloan attempted to create a deliberate tension between “maximized decentralization” and “proper control.” The new structure left the broad strategic decisions as to the allocation of existing resources and the acquisition of new ones in the hands of a top team of generalists. Divisional executives could run the business, while the general officers set the goals and policies and provided overall appraisal. Sloan’s book “My years at General Motors” is a classic, a must read for any practicing manager. (See Divisional Structure) Slywotzky, Adrian J: Slywotzky is famous for the idea of value migration, which means that businesses often need to reinvent how they add value as industries and their markets change. This might, for example involve: getting rid of activities which add little value, dilute value, or destroy value, exploiting new ways of distribution and rebundling or unbundling existing products or services. In a sense, Slywotzky emphasizes the importance of business model innovation, ie changing the rules of the game by coming up with a new way of doing business. (See Business Model Innovation)
  • 95. 95 Span of Control: Span of control can be viewed as the range of resources for which a manager is given decision rights and held accountable for performance. In more simple terms, it is the number of subordinates answerable directly to a manager. The span of control is 'wide' if the manager has many direct subordinates and 'narrow' if there are few. A wide span of control has several advantages. The boss has less time for each subordinate and is effectively forced to delegate. Fewer layers of hierarchy are needed, thereby improving vertical communication. On the other hand, a narrow span of control is useful when tighter management supervision may be necessary. There is less stress involved for each employee, as the scope of each job is limited. Moreover, as there are more layers of hierarchy, there are more frequent promotion opportunities, i.e. the career ladder has more rungs. The actual span of control chosen depends on what is more important, customer responsiveness or cost control. For example, when customers are price sensitive, the span of control must be wide for managers of internal operating functions, to supply inputs to market facing units efficiently and cost effectively. Market facing managers usually want a wide span of control to maximize customer responsiveness. When the basis for competing is tailoring products and services to suit the tastes and needs of customers in particular geographic regions, a significant portion of value creation must be located close to the customer. So regional managers have a wide span of control. (See Organizational Design) Spender J C: Spender is famous for his concept of ‘strategic recipes’, the taken-for-granted rules of strategic decision-making. Strategic recipes are founded on things that have worked, or not worked in the past. These recipes relate back to a past group, or individual, strategic situations. When a new leader is appointed, particularly from the outside, these are likely to change or be challenged. Stakeholders: Include shareholders, employees, managers, creditors, suppliers, contractors, agents, distributors, customers and the local community, whose interests are directly or indirectly affected by the company's activities. Different stakeholders wish to influence the decision-making within the organization to serve their own interests. For example, customers will want lower prices, suppliers will want prompt payments, employees will want higher wages, shareholders will want a return from their investment of capital and the society will expect the environment to be protected. Corporations have to try and balance these different expectations. (See Corporate Social Responsibility) Strategic Advantage: A term popularly used in the context of globalization. Global companies try to leverage two kinds of advantage while competing – comparative and strategic. Comparative advantage results when value chain activities are performed in cheaper locations. Beyond a point, however, an obsession with comparative advantage may be counter productive. Strategic advantages must not be overlooked. Any advantage which will accrue in the long run, which cannot be easily quantified in monetary terms immediately can be considered a strategic advantage. In other words, if comparative advantages help in cutting costs in the short run, strategic advantages help in adding value in the long run. The US is a strategically important market for products like investment banking, computer software, pharmaceuticals and automobiles. France is an important country for cosmetics and perfumes, while Japan is the world leader in consumer electronics. These are not the cheapest locations in the world but a presence in these markets is important to keep in touch with highly sophisticated customers and leverage the innovations that are happening.
  • 96. 96 In some cases, while generating strategic advantages, comparative disadvantages such as expensive labor can be circumvented through ingenuity and meticulous planning. Nicholas Hayek 43, CEO of Switzerland based SMH, which makes the world famous Swatch watches, once argued that if a company is determined to develop low cost methods of manufacturing, it can do so, no matter what the location. Hayek’s contention was that in watch manufacturing, as long as direct labor accounts for less than 10% of the total costs, Switzerland would remain an attractive place for manufacturing. (See Comparative Advantage, Global Leverage) Strategic Alliance: An agreement between two or more organizations to do business together, in a mutually beneficial way. Through a strategic alliance, the companies involved can gain access to each other's resources, including markets, technologies, capital and people. Alliances can facilitate geographic expansion, cost reduction and generation of manufacturing and other supply-chain synergies. Alliances can also accelerate learning and increase market power. There are some general criteria that differentiate strategic alliances from conventional alliances. An alliance can be considered strategic if it is critical to the success of a core business goal or objective, it blocks a competitive threat or it mitigates a significant risk to the business. Strategic alliances usually succeed when the partners involved, see a mutual benefit and trust each other. In any alliance, mechanisms must be put in place to resolve tensions as and when they surface. Top management commitment and selection of capable executives to manage the alliance are key success factors. (See Joint Ventures) Strategic Architecture: A top management action plan which indicates the new competencies which will be needed in the coming years, how existing competencies have to be strengthened, how business processes have to be reoriented and relationships with external entities, especially customers have to be reconfigured. Strategic Business Unit (SBU): A variation of the divisional structure. An SBU is an operating unit or division of a corporate group that determines its own strategy largely independent of the corporate center. Usually, the SBU will have its own distinct set of products and services, for a customer segment or a geographical region. The terms SBU and profit centre are often used interchangeably. In general, SBUs in Indian companies are far less empowered than the term would suggest. They are heavily dependent on headquarters for key resources and approval of important decisions. (See Divisional Structure, Organizational Structure) Strategic Choice: Strategy is all about making trade offs. A company must avoid competing in some segments while strengthening its presence in others in line with its strategic vision. The choices which the company makes, must address three questions: Who are the customers? What are they looking for? How can these products/services be offered most efficiently? These questions look simple but have profound implications for the viability of a strategy. Strategic Control: A strategic control system links operations to strategic goals, using appropriate financial and non-financial information. It is concerned with tracking the strategy as it is being implemented, identifying problems or changes in underlying assumptions and making 43 Taylor, William, “An interview with Swatch Titan, Nicolas Hayek” Harvard Business Review, March – April 1993, pp 99-110.
  • 97. 97 necessary adjustments. It involves controlling and guiding efforts as the action is taking place. To be effective, a strategic control system needs to be broken down into operational control systems which evaluate the progress in meeting annual objectives. For example, the company can identify key success factors like improved productivity, high employee morale, high product quality, increased EPS, growth in market share, etc. Performance standards can be established and deviations from standards evaluated as the strategy is implemented and the causes identified. Corrective action can then be taken. (See Strategy Implementation) Strategic Cost Management: A holistic approach to managing costs, using a cross- functional perspective. A systematic approach to understanding cost drivers can create various benefits. Companies must have a good understanding of what activities add value and what do not. Accordingly, they must cut costs in some areas while increasing spending in others. (See Activity Based Costing) Strategic Fit: A term, which is commonly used in the context of diversification and mergers & acquisitions. Strategic fit refers to the extent to which the activities of the two businesses/organizations complement each other. A good strategic fit exists when there is scope for cost reduction due to rationalization of activities/economies of scale. Strategic fit may also exist if there are cross selling opportunities, or if market power can be increased. In general, it is easier to quantify the impact on costs, compared to that on the bottom-line. Strategic Groups: 44Strategic Group is a concept that helps to bring sharper focus into strategy formulation. There are groups of companies within an industry that have similar business models or similar strategies. Strategic groups45 are essentially companies who are aware of each other as competitors in a particular market, and who are collectively separated from other such groups by mobility barriers such as scale economies, proprietary technology, possession of government licences, control over distribution, marketing power and so forth. Such barriers vary widely in nature from group to group. Different companies within a group may relate to them to varying degrees. The number of groups within an industry and their composition depends on the dimensions used to define the groups. Strategists often use a two dimensional grid to display the position of each company along the two most important dimensions. The term was coined by Hunt (1972). Michael Porter (1980) developed the concept and explained strategic groups in terms of "mobility barriers" or entry barriers. (See Entry Barriers, Industry) Strategic Inflection Point: A term coined by Andrew Grove, former CEO of Intel to describe a dramatic change in competitive forces. At that time, the leaders must give up the past, see closely how the industry is evolving and find new ways of competing. This point of dramatic change in the industry is known as Strategic Inflection Point. For example, the arrival of containers marked a strategic inflection point in the shipping industry. The introduction of the IBM PC was a strategic inflection point in the computer industry. The emergence of large discount store chains like Giant and Big Bazaar may well turn out to be a strategic inflection point in the Indian retailing industry. The rise of virtual book stores like Amazon has also marked a 44 http://en.wikipedia.org/wiki/Strategic_group 45 This term is heavily drawn from the book “The essence of Competitive Strategy” written by David Faulkner and Cliff Bowman, published by Prentice Hall of India in 2002.
  • 98. 98 point of severe discontinuity. The entry of low cost airlines like Air Deccan represents a strategic inflection point in the airline industry in India. In his fascinating book, “Only the Paranoid Survive,” Grove calls a very large change in one of the competitive forces in an industry, a “10X” change, suggesting a sudden tenfold increase in the force. The business no longer responds to the company’s actions as it used to in the past. Put another way, a strategic inflection point marks a shift from the old ways of doing business to new ones. Grove offers some useful insights to cope with the situation. When a technology break or other fundamental change comes their way, companies must grab it. Only the first mover has a true opportunity to gain time over its competitors. Companies must also show discipline by setting a price that the market will bear and then work hard to cut costs so that they can make money at that price. Cost plus pricing will not work in such cases. When is a change really a strategic inflection point? Most strategic inflection points, instead of coming in with a bang, appear slowly. They are often not clear until we can look at the events in retrospect. So how do we know whether a change signals a strategic inflection point? Grove suggests managers must ask a few basic questions. Are we no longer clear about who the key competitors are? Does the company that in past years mattered the most to us and our business seem less important today? Does it look like another company is about to eclipse them? Are people who for years have been very competent, suddenly becoming ineffective? The best way of identifying a strategic inflection point is to engage in a broad and intensive debate, involving employees, people outside the company, customers and partners who not only have different areas of expertise but also have different interests. Such a debate can consume a lot of time and intellectual energy. It can also take courage to enter a debate the top management may lose, in which weaknesses may be exposed and the disapproval of people may be encountered. (See Disruptive Technology) Strategic Innovation: A term introduced by Vijay Govindarajan and Chris Trimble46. Strategic innovation, which goes beyond process or product innovation, addresses three fundamental questions: a) Who is the customer? b) What is the value the company offers to the customer? c) How does the company deliver that value? Strategic innovation must not be left to chance. It must be viewed as the outcome of strategic experiments. These are deliberately planned strategic moves, which have ten common characteristics: a) They have high revenue growth potential b) Typically, they target emerging or poorly defined industries c) Such experiments are launched before any other competitor and before any profit making formula has been established. d) They depart from the company’s proven business definition and its assumptions about how the business will succeed. 46 Ten Rules for Strategic Innovators: From Idea to Execution” by Vijay Govindarajan, Chris Trimble, Harvard Business School Press, 2005.
  • 99. 99 e) These experiments leverage some of the corporation’s existing capabilities and assets in addition to capital. f) They need some new knowledge and capabilities g) They involve discontinuous rather than incremental value creation. h) They involve greater uncertainty across multiple functions i) They may remain unprofitable for several quarters or more. j) Such experiments give no clear picture of performance early on. Strategic innovations involve unproven business models. Companies that are good at strategic innovation change the rules of the game and delight investors with sustained growth. Their business models are difficult to imitate. Govindarajan and Trimble have explained in great detail, the challenges involved in implementing innovations. Typically three stages are involved in any innovation. Creativity dominates the beginning of the innovation process. Efficiency is important towards the end of the innovation process. The middle involves unique challenges - a forgetting challenge, a borrowing challenge and a learning challenge. It is in the middle, where companies often stumble. The new initiative must forget the parent company’s business definition, assumptions, mindsets and biases to develop new competencies to exploit new business possibilities. The new initiative must learn how to borrow assets from the parent company. These may include manufacturing capacity, expertise, sales relationships, distribution channels, etc. The new initiative must learn and constantly improve its predictions of business performance. It must be able to resolve various critical unknowns in its business plan and put in place a working business model as quickly as possible. (See Innovation, Process Innovation, Product Innovation, Value Innovation) Strategic Intent: An ambitious organizational goal that is disproportional to current resources and capabilities. The top management articulates a desired leadership position and then establishes the criterion that the organization will use to chart its progress. The management must motivate people by communicating the value of the target; sustain enthusiasm by providing new operational definitions as circumstances change and make the intent the basis for resource allocations. Strategic intent can be viewed as an animating dream that energizes a company by setting stretch targets, providing a sense of direction and conveying a sense of destiny to the company's employees. For example, Dabur's intent states: We intend to significantly accelerate profitable growth. To do this, we will 47: • Focus on growing our core brands across categories, reaching out to new geographies, within and outside India, and improve operational efficiencies by leveraging technology. • Be the preferred company to meet the health and personal grooming needs of our target consumers with safe, efficacious, natural solutions by synthesizing our deep knowledge of ayurveda and herbs with modern science. • Provide our consumers with innovative products within easy reach. • Build a platform to enable Dabur to become a global ayurvedic leader. • Be a professionally managed employer of choice, attracting, developing and retaining quality personnel. • Be responsible citizens with a commitment to environmental protection. 47 www.dabur.com
  • 100. 100 • Provide superior returns, relative to our peer group, to our shareholders. Source: www.dabur.com (See Bhag) Strategic Management: Strategic management is concerned with the formulation and implementation of strategies to achieve the objectives of an organization. The major areas of strategic management are: i) Articulating the Corporate Mission. ii) SWOT analysis. iii) Identifying various strategic options like capacity expansion, vertical integration and diversification. iv) Selecting the desired option(s). v) Formulation of long term objectives and strategies consistent with the desired options. vi) Formulation of short term objectives and strategies consistent with the long term objectives and strategies. vii) Implementation. vii) Control. The term strategic implies heavy, irreversible resource commitments, long-term implications and organization wide consequences. But strategic management is not only about the long term. Short term strategies and objectives must be aligned with the long term objectives to facilitate effective implementation. Strategic management leads to those crucial decisions which effectively determine the future of the firm. Indeed, the outcome of strategic management can make or break a firm. Consider the examples of Metal Box (India) Ltd, Asian Paints and Microsoft. Metal Box diversified into bearings manufacture with disastrous consequences. Asian Paints on the other hand successfully pursued a strategy of backward integration, to become self sufficient in critical raw materials such as pentaerythrytol. Today, Asian Paints is far ahead of other leading paint manufacturers in the country including the MNCs. In the early days of the global computer industry, Microsoft decided to bet on software unlike many other companies which emphasized hardware or a combination of hardware and software. Microsoft also decided to focus on capturing the desktop. By setting its targets right, Microsoft went on to become one of the most successful companies in business history. In contrast, others like Apple struggled. (See Mission, Environmental Scanning, Strategic Planning, SWOT Analysis, Vision) Strategic Market: A market, which scores high on either market potential or learning potential or both for a global company. By competing in such a market, a company can gain strategic advantages. The US is a strategic market for a wide range of goods and services, especially for information technology, pharmaceuticals and biotech. So, most European and Japanese MNCs have a major presence there. A strategic market demands significant commitment of human and material resources. Usually, such a market calls for a long-term orientation, i.e. making necessary investments and waiting patiently for results to come. The Japanese car makers like Toyota have succeeded globally by targeting the strategic US market. (See Globalization, Strategic Advantages) Strategic Options48: Based on a careful analysis of the external environment and the 48 For more detailed account refer “Strategic Management: Formulation, Implementation & Control” by John A. Pearce and Richard B. Robinson, Irwin, 1995.
  • 101. 101 company’s profile, various strategic options are available for a company. The company must choose one or more of these and commit resources accordingly. A few are listed below: • Concentration: The firm can continue to allocate resources for making more of the current products with the existing technology. • Market Development: Existing products can be modified slightly and sold to customers in related market areas. Alternatively, sales can be boosted by adding new distribution channels or by changing the promotion mix. • Product development: Existing products can be modified significantly and new related products created. They can then be sold to current customers through established channels. • Innovation: A firm may decide to keep launching new products. Even if new players enter the market and increase rivalry, the firm can stay ahead by moving on to a new product. • Horizontal Integration: The company can acquire one or more similar businesses which are operating at the same stage of production/marketing. • Vertical Integration: The firm can enter businesses that either provide inputs or that serve as consumers for the firm's output. • Joint ventures: Two or more business partners may get together if each of them is lacking in some competencies or resources which are necessary for the success of the project. • Concentric Diversification: Entry into a new business which is related to the existing business in terms of technology, markets or products is called concentric diversification. • Conglomerate Diversification: The firm can enter an unrelated business based primarily on profit or growth considerations. • Turnaround: By cutting costs, divesting assets and improving asset utilization, the firm tries to strengthen itself and restore profitability. • Divestiture: The firm can sell the business or a major chunk of the business. This is the last resort, often considered after the failure of a turnaround strategy. • Liquidation: The business may be sold (in parts or as a whole) for its tangible asset value and not as a going concern. The above options need not be mutually exclusive. Based on the company mission and the SWOT analysis, one or more of the above options may be selected. Techniques which help in arriving at a desirable option include the BCG matrix and the GE 9 cell planning grid. (See BCG Matrix, GE 9 Cell Planning Grid, SWOT Analysis) Strategic Planning49: Strategic planning is the determination of the basic long-term goals and objectives of an organization and adoption of courses of action and the allocation of resources necessary to achieve these goals. There are several steps in strategic planning. • The first step is to establish objectives, the results expected, what is to be done and where the primary emphasis is to be placed. • The second step is to establish planning premises, i.e. assumptions about the anticipated environment. These premises can be classified as external and internal, qualitative and 49 See Mintzberg, Henry. “The Rise and Fall of Strategic Planning: Reconceiving Roles for Planning, Plans, Planners” Simon & Schuster, 1993 and Mintzberg, Henry. “The fall and rise of strategic planning” Harvard Business Review, January-February 1994, pp 107-114.
  • 102. 102 quantitative and controllable, non controllable. External premises can be classified into: general environment, (economic, technological, political, social and ethical conditions); the product market; and the factor market, (location of factory, labor, and materials etc). Internal premises include capital investment, sales forecast and organization structure. Some premises can be quantified while others may be qualitative. Some premises are controllable, such as expansion into a new market, adoption of a research program or a new site for the headquarters. Non-controllable premises include population growth, price levels, tax rates, business cycles etc. The semi controllable premises are the firm's assumptions about its share of the market, labor turnover, labor efficiency, and the company's pricing policy. • The third step in planning is to identify alternative courses of action. • The fourth step is to evaluate them by weighing the various factors in the light of premises and goals. • The fifth step is adopting the plan. • The final step is to give meaning to plans by putting in numbers and preparing budgets. Henry Mintzberg has identified ten schools of strategic planning50: • The Design School: Aims at creating a fit between internal strengths and weaknesses and external threats and opportunities. • The Planning School: Strategic planning is viewed as an intellectual, formal exercise using various techniques. • The Positioning School: The company selects its strategic position after thoroughly analyzing the industry. • Entrepreneurial School: The focus here shifts to the chief executive who largely relies on intuition to formulate strategy. The emphasis moves away from precise designs, plans or positions to vague visions or broad perspectives. • Cognitive School: The focus here is on cognition and cognitive biases. • Learning School: Strategies evolve as the organization learns more about the environment and the business. • Power School: Strategy making is rooted in power. • Cultural School: Views strategy formulation as a process rooted in culture. • Environment School: The focus here is on coping with the environment. • Configuration School: Integrates the claims of other schools. The three broad approaches to strategic planning can be summarized as follows: Rational planning involves identifying and understanding gaps between previously established goals and past performance, identifying the resources needed to close these gaps, distributing those resources and monitoring their use in moving the organization closer towards its goals. This approach assumes the environment is predictable and the organization can be effectively controlled. Clearly, such an approach is not advisable if the business environment is complex and unpredictable. Incrementalism means moving from one strategy to the next, depending on the unfolding of events beyond the control of managers. Incrementalism assumes that managers cannot forecast or enforce the developments essential to developing a pre-ordained strategy and therefore must continually adjust. Future developments are likely to be random so that there is little scope to learn from past 50 “Strategy Safari: A Guided Tour through The Wilds of Strategic Management” by Henry Mintzberg, Joseph Lampel, and Bruce Ahlstrand, Free Press, 2005.
  • 103. 103 experiences. Thus, in contrast to rational planning which emphasizes intended strategies, incrementalism is based on emergent strategies. Organizational learning also emphasizes the need for making continuous adjustments. However, these adjustments need not be random. Rather, managers must keep making incremental adjustments to rational plans as they attempt to move the organization toward its goals. Though they may be unable to foresee the future, managers must not allow their organization to drift aimlessly. The role of top management is to encourage all employees to continuously challenge the status quo, generate ideas for improving the status quo, conduct experiments to see which of these ideas are most fruitful and then try to disseminate knowledge gained from these experiments throughout the organization. (See Discovery Driven Planning, Environmental Scanning, Scenario Planning, Strategic Management) Strategic Pricing: Pricing is a key factor in business innovation. Strategic pricing involves aligning the pricing strategy with corporate strategy. The price must be chosen carefully after considering various scenarios and possible implications. Is the price attractive enough to capture the mass of target buyers? Can the company make the offering at the target cost and still earn a healthy profit margin? Can the company profit at a price that is affordable to the target buyers? Strategic pricing is a key component of Blue Ocean Strategy pioneered by Chan Kim and Renee Mauborgne. In a competitive market, cost plus pricing does not work. Costs must be controlled so that profits can be generated at the price the market can take. At the same time, in the process of cost cutting, the company should not reduce utility, i.e. the value customers perceive in the product or service. To hit the cost target, companies can look at various options. They can streamline operations and introduce cost innovations from manufacturing to distribution by addressing relevant questions. Can the currently used raw materials be replaced by unconventional, less expensive ones? Can high-cost, low-value added activities in the value chain be reduced or outsourced? Can the physical location of the product or service be shifted from prime real estate locations to lower-cost locations? Can the number of parts or steps used in production be truncated by changing the way things are made? Can activities be digitized or automated? As goods become more knowledge intensive, product development costs rather than manufacturing costs start dominating. So achieving high volumes quickly has become the need of the hour. Moreover, to a buyer, the value of a product or service increases as more people start using it. As a result of this phenomenon, called network externalities, either millions of units are sold at once, or nothing at all. So it is increasingly important to know from the start what price will quickly capture the mass market. That is why strategic planning is gaining in importance. The main challenge in strategic pricing is to understand the price sensitivity of those people who will be comparing the new product or service with a host of products which on the surface look different, but offer the same benefits to the customers. So companies must list competing products and services that fall into two categories: those that take different forms but perform the same function, and those that take different forms and functions but fulfill the broad objective. The exact price will be guided by two principal factors - the extent of patents or copyrights protection and the ease of imitation. Sometimes, there may be little scope to cut costs but there could be scope to come up with an innovative pricing model. Take telecom. In developing countries, public call offices in rural areas, by eliminating fixed monthly rentals, significantly reduce the price of the service. Another pricing innovation is small packs. Offering products or services in small quantities makes them more
  • 104. 104 affordable to the masses. (See Blue Ocean Strategy, Value Innovation) Strategy Evaluation: How do we know whether the strategy is working? Since results are not usually available for substantially long periods of time, other indicators become necessary. The degree of consensus which exists among executives regarding corporate goals and policies, the extent to which major areas of managerial choice are identified and the degree to which resource requirements are anticipated well in advance, are all pointers to the workability of the strategy. To ensure that it is workable, any strategy needs to be evaluated carefully with respect to the following: Internal Consistency: A corporation may have many policies. If the strategy is sound, the policies should mesh well with each other. External Consistency: The strategy must make sense with respect to events in the external environment, both current and anticipated. Availability of resources: It is resources taken together which represents the capacity of the organization to respond to opportunities and threats in the environment. Resources include cash, competence, facilities, etc. A key issue in strategy formulation is achieving a balance between strategic goals and available resources. The company must decide how much of resources to commit to opportunities currently available and how much to keep in reserve to take care of unanticipated demands. Degree of risk involved: The degree of risk inherent in a strategy depends on the uncertainity about the availability of the resources, the length of the time periods to which resources are committed and the proportion of resources committed to a single venture. Time Horizon: A viable strategy has to indicate the time frame in which goals are to be achieved. The greater the time horizon, the wider the range of strategic choices available. The larger the organization, the longer the time horizon, since adjustment time is larger. Large organizations change slowly and need time to make significant modifications in their strategy. While, it is useful to have a certain consistency of strategy over long periods of time, flexibility is important in a rapidly changing environment. Strategy Implementation: Often the difference between the market leaders and other players in the industry is the ability to execute strategy. Effective strategy implementation involves getting people’s buy in, choosing the right metrics and tracking performance on an ongoing basis. Much of strategy implementation involves managing change. So the behavioral issues involved, must not be overlooked. The following are useful guidelines for strategy implementation. Unlearn the past: Often past strategies stand in the way. So unlearning is important. Increase commitment at lower levels: People at lower levels in an organization are often skeptical about the practical utility of a strategic plan. Without taking the lower level employees along, strategy implementation is difficult.
  • 105. 105 Avoid over ambitious strategies: Functional managers are used to a way of working. They may not be able to adjust suddenly to a new strategy. Identify responsibilities and milestones: The list of specific tasks each function must perform, specific milestones and the names of the individuals who accept responsibility for each major functional program, must be identified. Communicating downward is as important as communicating upward: It is the functional and lower level operating managers who hold the key to the successful implementation of a strategy. Half hearted commitment from functional managers can thwart the goals set for the business. Organizational structure, leadership and culture play an important role in ensuring that strategy percolates into the day-to-day activities of the company. Structure divides tasks so that they can be performed efficiently. Leadership must send out the right signals to facilitate smooth implementation. Culture is the set of important, often unstated assumptions that influence the opinions and actions of the employees. Culture becomes a weakness when the assumptions of the employees interfere with the needs of the business and its strategy. The key to execution is shaping the attitudes and behavior of people. A culture of trust and commitment motivates people to execute the agreed strategy. People's minds and hearts must align with the new strategy so that they embrace it willingly, going beyond compulsory execution to voluntary cooperation. To build people's trust and commitment, Chan Kim and Renee Mauborgne 51 emphasize the importance of getting people's buy-in, building trust and creating a perception that a level playing field exists. Only then will people cooperate voluntarily in implementing strategic decisions. This approach called Fair process has three main components: engagement, explanation and expectation clarity. Engagement means involving individuals in strategic decisions by asking for their inputs and encouraging them to critically examine the merits of the ideas and assumptions of different people. Explanation means that everyone involved and affected should understand why important decisions are made as they are. An explanation of the thinking that underlies decisions makes people confident that managers have considered their opinions and have made objective decisions in the overall interest of the company. Expectation clarity requires that, managers state clearly the new rules of the game. Although the expectations may be demanding, employees should know up front what standards they will be judged by and the penalties for failure. When the expectations are clearly defined, political jockeying and favoritism are minimized, and the focus shifts to execution. By organizing strategic planning around the principles of fair process, execution can be built into strategy making from the start. People will realize that compromises and sacrifices are necessary to achieve the organizational goals. The ensuing discipline and increased collaboration levels will facilitate strategy execution. (See Change Management, Policies, Strategic Control) 51 Kim, W. Chan; Mauborgne, Renée. “Fair Process: Managing in the Knowledge Economy” Harvard Business Review, Jan 2003, pp127-136.
  • 106. 106 Stretch: A concept introduced by Sumantra Ghoshal and Christopher Bartlett in their book, “The Individualised corporation”. Employees must be given challenging goals to motivate them and exploit their full potential. Stretch helps in moving people from satisfactory underperformance to high performance. Stretch encourages managers to see themselves not in terms of the past but in terms of the future. (See Bhag, Purpose-Process-People-Doctrine) Stuck in the Middle52: A firm should be clear about the way it is going to do business. Michael Porter suggests that the firm that has not made a choice about pursuing cost leadership or differentiation runs the risk of being ‘stuck in the middle’. Such a firm tries to achieve the advantages of low cost and differentiation but in fact achieves neither. Poor performance results because the cost leader, differentiator or focuser will be better positioned to compete in their respective segments. (See Cost Leadership, Differentiation, Generic Strategy) Succession Planning: The process of identifying and preparing people for assuming greater responsibility, to ensure that vacant positions are filled smoothly. While the human resources department can take care of succession planning at lower levels, at higher levels, it has strategic implications often involving the CEOs themselves. CEO level succession planning is a challenging task that involves active collaboration between the board and the incumbent CEO. In companies like GE and Unilever, succession planning is taken very seriously and implemented with the help of elaborate mechanisms and processes. In India, companies like Hindustan Lever Limited (HLL) have mastered the art of succession planning. The biggest succession planning problems seem to be in the case of our public sector enterprises because of political interference and in family owned businesses due to lack of professionalism. Witness the recent crisis in Reliance. Supply Chain Management53 (SCM): A supply chain involves the various parties who came together to fulfill a customer request. Manufacturers, suppliers, transporters, warehouses, distributors, wholesalers, retailers and customers together make up the supply chain. These entities are supported by various functions such as sales, product development, operations, logistics, after sales service and finance. At the heart of the supply chain lies the flow of information, products and cash flows. Some of these flow towards and some away from the customer. The main objective of any supply chain is to deliver value to customers in optimal fashion. Value can, in simple terms, be understood as the difference between the price the end customers are prepared to pay and the costs incurred in meeting their needs. Complicated outsourcing arrangements backed by information technology mean that supply chains are no longer linear but quite intricate, taking the shape of a network. Several suppliers, factories and logistics providers may be involved, making supply chain management (SCM) a fairly challenging task. SCM must be treated as an integral part of competitive strategy. Indeed, SCM drives corporate strategy in the case of companies like Dell. There must be a strategic fit between competitive strategy and SCM, i.e. consistency between the customer needs that competitive strategy focuses on and the capabilities that SCM is building. 52 This term is taken heavily from “The Essence of Strategic Management” written by Clief Bowman, published by Prentice Hall of India, 1990. 53 Draws heavily from “Supply Chain Management: Strategy, Planning and Operations” by Sunil Chopra, Peter Meindl, Published by Prentice Hall in 2006, from page 112.
  • 107. 107 A company must have a broad vision of how the supply chain will function and evolve over time. Accordingly, investment decisions must be made. These include manufacturing facilities, warehouses, transportation infrastructure and information technology. Supply chain design decisions typically have long term implications. So they must be made carefully, taking into account uncertainty and anticipated market conditions over the next few years. These strategic design decisions must be backed by appropriate medium term planning decisions and short term operational decisions. Planning may involve making forecasts typically for a year and breaking it down into quarterly figures. Supply chain operations are more focused on handling incoming customer orders in the best possible manner. The design, planning and operation of a supply chain can have a major impact on a company’s overall success in many industries. The computer manufacturer Dell, the Spanish retailer, Zara and the Hong Kong trader, Li & Fung are good examples. Efficiency and responsiveness make up the two conflicting demands of a supply chain. Depending on the market realities, SCM must arrive at a suitable trade off. Usually as investments are made to improve responsiveness to market needs, costs tend to go up. Similarly, as efforts are made to cut costs, responsiveness often suffers. Of course, there are situations, where intelligent supply chain configuration can simultaneously improve responsiveness and lower costs. Thus, in the computer industry, Dell builds-to-order thereby cutting the costs associated with inventory obsolescence. But Dell has also cut down response time and increased the opportunities to customize, so that responsiveness to customer needs has not been compromised. The effectiveness of a supply chain depends critically on how different activities are coordinated. Coordination problems arise because of conflicting objectives or poor information flows. These challenges have increased in recent times on account of multiple ownership of the supply chain and increased product variety. One manifestation of the problem is the bullwhip effect. Fluctuations in orders get amplified as they move backwards along the supply chain from retailers to wholesalers to manufacturers to suppliers. Suppose, there is a random increase in customer demand at the retailer level. Interpreting this rise in demand as a growth trend, retailers may order more than the observed increase in demand to cover anticipated future growth. Similarly the wholesalers may order more than the observed increase in demand from the retailer. This phenomenon extends right down to the suppliers. The bullwhip effect can be minimized by greater coordination across the supply chain by streamlining information flows, by aligning incentives and by improving trust. Another challenge today in SCM is mass customization, the ability to execute small customized orders, without sacrificing the cost advantages of a mass production system. A key tool here is the principle of postponement. Companies must delay the final configuration of a product till the order is received. In general, the demand for intermediate products/components is more stable than that for finished goods. Take the example of paints. The only difference between two shades of a paint could be the addition of a small quantity of pigment. This can always be done at the retail outlet. By only keeping a few primary colors as the core inventory and generating new shades based on actual customer demand, there is scope to reduce inventory and improve customer responsiveness simultaneously. The demand for primary colors fluctuates less than that for individual shades. Information Technology (IT) has a key role to play in SCM. Inventory is nothing but a hedge against uncertainty. Uncertainty arises due to poor information flows. So by streamlining the flow of information, IT can significantly improve the functioning of a supply chain. However, it is wrong to equate SCM with IT as many computer software companies do. The essence of SCM is managing relationships among the different entities involved both within and outside the organization, like
  • 108. 108 customers, suppliers and third party logistics providers. Trust and fair play are the key ingredients for good relationships. (See Value Chain, Value System) Switching Costs: Costs incurred by buyers while changing products, services or suppliers, due to various factors. A buyer's product specification may tie it to particular suppliers. The buyer may have invested heavily in specialist ancillary equipment. The new product may require new learning or its production lines may be connected to the supplier's manufacturing facilities. In addition, the buyer may have developed routines and procedures for dealing with a specific vendor. These routines will need to be modified if a new relationship is established. All else being equal, a buyer will be motivated to continue existing relationships to minimize switching costs. (See Bargaining Power of Buyers, Bargaining Power of Sellers, Barriers to Entry) SWOT Analysis: SWOT analysis is used for identifying those areas where an organization is strong, where it is weak, the major opportunities the company can explore and the threats. SWOT Analysis helps a company to know where it stands by exploring key issues: Strengths: . What do we do well? . How are we better than our competitors? Weaknesses: . What could be done better? . What is being done badly? Opportunities: . What are the opportunities that can be exploited? . What are the interesting trends? Threats: . What obstacles are being faced? . What is the competition doing? . Are the specifications for the products or services changing? . Is changing technology threatening our business? (See Company Profile, Environmental Analysis, Strategic Planning) T Taylor, Frederick W (1856-1915) – An American engineer who invented work study and developed the scientific approach to management. Taylor advocated division of labor, specialized tools, piece-rate payments and tighter management control for improving productivity. Taylor’s management principles had considerable impact in America, the most visible being the mass production system at Ford.
  • 109. 109 While Taylor’s system began as an attempt to develop the perfect pay-for-performance formula, it quickly came to encompass broader issues of “work” and “control.” Taylor realized the need for standardizing work, tools, and maintenance techniques to improve productivity. Standardization, in turn, demanded a level of control over work that had never been attempted before. Taylor began by examining not just how long a particular task took to complete but how long it should take. Taylor used a stopwatch and recorded his observations in a notebook. He broke each job and work process down into discrete parts, studying and timing the movements of men and machines. Taylor realized that while two machinists might be working on entirely different products, such as a railroad tire and an engine part, the “elementary” steps in the job were the same. The secret of improving productivity was to improve and standardize the elementary steps and apply them to a wide range of tasks. By breaking each job down into its component parts, Taylor determined, how production machinery could be modified and individual operations improved or eliminated. Taylor was eager to learn from the best of the skilled workmen, especially machinists, and was prepared to promote them. But those who were left to operate on the factory floor were stripped of their individual artistry. By deskilling the foremen’s jobs, no single foreman needed to understand the entire range of supervisory work. Taylor also introduced an elaborate planning department that was responsible for coordinating the work of the foreman, designing work flow and conducting cost- accounting reviews. The main limitation of Taylorism was that it failed to see a factory as a social system. Today, Taylorism has fallen out of fashion. Knowledge workers like to be left free and do not want to be micro managed as Taylorism would advocate. Technology Risk: Technological changes can wreak havoc on industries. In making decisions regarding technological changes, companies err in two ways. They either commit themselves to a new technology too fast and burn their fingers or wait and watch while another company comes up with a new technology that puts them out of business. The issue of when and how to react to the emergence of a new technology is a matter of judgment. However, this judgment need not be based purely on intuition. By doing a systematic structured analysis of developments in the technological environment and putting in place the necessary organizational mechanisms, technology risk can be considerably reduced. How can managers identify the emergence of a disruptive technology? Clayton Christensen’s research reveals that disruptive technologies are often developed privately by engineers working for established firms. When such technologies are presented to customers, they get a lukewarm response. So, established companies do not give much importance to these technologies. The frustrated engineers consequently join start-ups, who are prepared to look for new customers. Companies must take note when talented scientists and researchers leave them to join start-ups. Often, they do so, to work in an environment where their innovative ideas are taken more seriously. Companies must also learn to assess the impact of a new technology54. The steam engine was developed for pumping water out of flooded mines. It was years before a range of applications was developed in industries and for transportation. Marconi, the inventor of the radio felt that it would mainly be used between two points where communication by wire was impossible. So he targeted shipping companies, the navy and newspapers. Marconi did not even consider the possibility of 54 Read Nathan Rosenberg’s insightful article, “Why technology forecasts often fail,” The Futurist, July-August, 1995.
  • 110. 110 communicating to several people at the same time. It was left to David Sarnoff, an uneducated Russian who migrated to the US to understand the technology’s potential in broadcasting news and entertainment programs. Bell Labs did not think it necessary to apply for a patent covering the use of laser in telecommunications. Only later did it realize what a powerful combination laser and fiber optics made. Thomas Watson Sr. looked at the computer only as a tool for rapid scientific and data processing calculations. Computers are today mostly used in commercial applications. Very often, new technologies tend to be primitive when first developed. The full potential of a new technology is sometimes recognized only decades later. Even though the telephone has been around for more than 100 years, applications like voice mail and data transfer have emerged only recently. Aspirin, one of the world’s most widely used drugs, has been around for 100 years, but its efficacy in reducing the incidence of heart attack, due to its blood thinning properties, was discovered much later. So, while evaluating new technologies, a longer time horizon must be used, than for existing technologies. To better appreciate the impact of a new technology, established companies would do well to go beyond their existing customer base and start talking to potential users whom they have not seriously targeted till now. Conventional planning, budgeting and investment appraisal processes can be counter-productive when applied to disruptive technologies. Creative ideas cannot be filtered through traditional financial screens. Companies must be prepared to jump into the fray and go through a process of learning, instead of waiting for the numbers to start looking good, when the technology gains acceptance. Companies must also note that technological performance often overshoots market requirements. Consequently, today’s under-performing technology may meet the needs of customers tomorrow. On the other hand, technologies which perform satisfactorily today, may over-perform tomorrow. Customers may not be willing to pay for this over-performance. According to Michael Porter, the basic aim of differentiation is to provide something extra that the customers value and charge a premium for it. If customers do not value the additional features, differentiation as a competitive strategy will not be effective. So, if a new technology fares relatively low on some of the currently accepted attributes, but scores heavily on a new attribute, it has the potential to unseat the older technology. Thus, in the disk drive industry, capacity became less important, and factors such as physical size and reliability became the more important attributes. To understand and work with new technologies, the critical requirement is a new mindset. Established players are not short of financial muscle or talented manpower. But, they have a mindset problem. On the other hand, the successful innovators often have less resources but the right mindset. They worry less about what the technology can do and instead, look for markets which will be happy with the current performance levels. One way to encourage a new mindset is to create small empowered teams, outside the main organization and allow them to try new technologies. Since entrenched processes and values stand in the way of change, a separate organization is a more practical arrangement than grandiose attempts to change the entire company’s culture. (See Innovator’s Dilemma, S Curve in Technology Evolution) Threat of Substitutes: Industries are usually defined in terms of the products or services they provide. However, if we define industries from the buyer’s point of view, we might come up with a quite different set of firms, who deal in different products, but who meet the same type of buyer needs. Substitute products are alternative ways of meeting buyer needs. Substitutes lie outside the
  • 111. 111 traditional industry definition adopted by the firm. They can be viewed in two ways. Substitutes-in- kind are products that look alike and represent the same application of a distinct technology to the provision of a distinct set of customer functions. Substitutes-in-use are products that have shared functionality based on the customer’s perceptions of all the ways in which their needs can be satisfied in a given usage or application situation. The attractiveness of a substitute product depends on its initial price, customer switching costs, post purchase costs of operation and the additional benefits the customer perceives and values. (See Porter’s Five Forces Model) Tipping Point: The phrase tipping point coined by Morton Grodzins, is a sociological term that refers to that dramatic moment when something unique becomes common. In the early 1960s, Grodzins discovered that many white families in the US would remain in a neighborhood so long as the comparative number of black families remained very small. But beyond a point, the remaining white families would move out en masse in a process known as white flight. He called that moment the "tipping point." The idea was expanded by Nobel Prize-winner Thomas Schelling in 1972. More recently, Malcom Gladwell has written a best selling book on this theme. Around the principle of Tipping Point, management scholars, W Chan Kim and Renee Mauborgne, have developed the concept of Tipping point leadership. In every company, there are people, acts, and activities that exercise a disproportionate influence on performance. Launching a major strategic initiative is not about launching huge initiatives, which demand heavy investments in time and resources. Rather, it is about conserving resources and cutting time by identifying and leveraging the factors of disproportionate influence. Instead of mobilizing more resources, tipping point leaders attempt to multiply the value of the re- sources they have. Instead of diffusing change efforts widely, tipping point leaders focus on kingpins, fishbowl management, and atomization. Kingpins are the key influencers in the organization. These are well respected and persuasive leaders who have an ability to unlock or block access to key resources. Kingpins can be motivated into action by focusing attention on their actions in a repeated and highly visible way. This is what Chan Kim and Renee Mauborgne refer to as fishbowl management, where kingpins' actions become as transparent as fish in a bowl of water. This way, the stakes of inaction are greatly raised. Finally, there is atomization which relates to the framing of the strategic challenge. People must believe that the strategic challenge is attainable. To overcome resistance to change, tipping point leaders focus on three kinds of people. Angels are those who have the most to gain from the strategic shift. Devils are those who have the most to lose from it. A consigliere is a politically adept but highly respected insider who knows in advance all the potential stumbling blocks, including who will support and also who will block the new initiative. (See Chan Kim, Renee Mauborgne) Total Quality Management (TQM): TQM is an integrated, cross functional approach that attempts to facilitate continuous improvement in the quality of goods and services. TQM is a systems approach that considers interactions between various subsystems of an organization including design, planning, production, distribution, field service and various management processes. The TQM philosophy believes that there is scope for continuous improvement in any product, process or service. A basic notion of TQM is that quality is essential in all functions, not just manufacturing. TQM also emphasizes satisfaction of customers, both internal and external. Implementing TQM involves a cultural shift and change in behavior of employees. (See Deming, William Edwards)
  • 112. 112 U Utterback, James: He has done pioneering work in the area of innovation. Though not as well known as others like Peter Drucker and Clayton Christensen, Utterback’s work is highly insightful and offers a lot of ideas on how innovation takes place in different industries. Utterback has dealt with the relationship between product and process innovation, behavior of established firms when a radical innovation enters the industry, factors that prevent successful firms from transiting from current technologies to new ones and how firms can cope with technological change. (See Innovation, Innovator’s Dilemma, Process Innovation, Product Innovation) V Valuation: A concept commonly used in the context of a merger. The value of the company being acquired must be established carefully. There are various ways to value a company – market price of shares, replacement cost of assets, present value of the future expected cash flows, etc. Ultimately, valuation is a subjective exercise that is as much art as science. (See Merger) Value Chain: A framework developed by Michael Porter for analyzing the various activities a firm performs to create value for its customers. By analyzing the value chain, the firm can understand how it is adding value, in which activities it is strong, where it is weak and how it can further streamline the value addition process. The value chain55 breaks down the firm into various activities in order to understand the behavior of costs and the existing or potential sources of differentiation. A firm gains competitive advantage by performing these activities more cheaply or better than its rivals. Value is the amount buyers are willing to pay for what a firm provides them. A firm is profitable if the value created exceeds the costs incurred. Creating value for buyers that exceeds the cost of doing so, is the goal of any generic strategy. Value chain activities can be categorized into Primary & Support. Primary Value Chain Activities include: · Inbound logistics: Receiving, warehousing, and inventory control of input materials. · Operations: Activities that transform the inputs into the final product. · Outbound logistics: Comprise the activities that get the finished product to the customer, including warehousing, order fulfillment, etc. · Marketing & Sales: Activities that try to persuade buyers to purchase the product, including channel selection, advertising, pricing, etc. · Service: Activities like customer support, after sales service, etc. 55 This term is taken heavily from “The Essence of Strategic Management” written by Cliff Bowman, published by Prentice Hall of India, 1990.
  • 113. 113 One or more of these primary activities may be vital in developing a competitive advantage. For example, logistics activities are critical for a retail chain. Marketing may be a critical activity for a company offering branded consumer goods. Support Activities include: • Procurement: Purchasing the raw materials and other inputs used in the value-creating activities • Technology Development: Activities like research and development and process automation. • Human Resource Management: Activities like recruiting, development, and compensation of employees. • Firm Infrastructure: Activities such as finance, legal services, and management information systems Porter emphasizes that a firm’s value chain must be viewed as an interdependent system or network of activities, connected by linkages. Linkages occur when the way in which one activity is performed, affects the cost or effectiveness of other activities. Linkages often create trade-offs in performing different activities that must be optimized. For example, more expensive components can reduce after-sale service costs. 56 Linkages also require activities to be coordinated. Coordinating linked activities reduces transaction costs, allows better information for control purposes, substitutes less costly operations in one activity for more costly ones elsewhere and can also reduce cycle time. For example, dramatic time savings can be achieved through such coordination in the design and introduction of new products and in order processing and delivery. The value chain can help managers understand the sources of cost advantage. Many managers view cost too narrowly and concentrate on manufacturing. They also need to look at product development, marketing and service and draw cost advantage from throughout the value chain. Gaining cost advantage also usually requires optimizing the linkages among activities as well as close coordination with suppliers and channels. The value chain also helps identify the sources of differentiation. Differentiation results, fundamentally, from the way a firm’s product, associated services and other activities affect its buyer’s activities. The various points of contact between a firm and its buyers, offer scope for differentiation. The value chain allows a deeper look not only at the types of competitive advantage but also at the role of competitive scope in gaining competitive advantage. Scope shapes the nature of a firm’s activities, the way they are performed and how the value chain is configured. By selecting a narrow target segment, a firm can tailor each activity more precisely and effectively to the segment’s needs compared to competitors with broader scope. On the other hand, broad scope may lead to a competitive advantage if the firm can share activities across industry segments or even when competing in related industries. The current trend is towards smaller and more focused value chains. The idea is to help companies focus on core competencies and leave the remaining activities to partners with specialized expertise. What is becoming critical is excellent capability in a small section of the value chain. Taiwanese 56 Porter, Michael E. "The Competitive Advantage of Nations," The Free Press, 1990.
  • 114. 114 semiconductor companies, for example, concentrate on manufacturing. They do not generally get involved in design or marketing. Nike concentrates on brand management and outsources most of its manufacturing. In the PC industry, we have companies like Intel (microprocessors), Samsung (monitors), HP (printers), Microsoft (operating systems) and Mitec (modems) offering specialized products. As value chains fragment, the ability to coordinate value chain activities performed by different entities has also become important. The chain as a whole must perform effectively and provide value to customers in a superior way. Effective coordination depends crucially on trust and relationships between the orchestrator and the different entities involved. Information Technology can facilitate coordination but cannot take the place of trust. (See Process Networks, Supply Chain Management) Value Migration: Companies are in business to create value for the customer. They can do this by offering a product or service that corresponds to customer needs. In a fast changing business environment, the factors that determine value are constantly changing. As Adrian Slywotzky mentions57 value migration is the shifting of value-creating forces. Over time, value migrates from outmoded business models to business designs that are better able to satisfy customers' priorities. That is when established players find it difficult to compete and the circumstances become ripe for challengers. (See Adrian Slywotzky) Value System: A term coined by Michael Porter. A firm's value chain is linked to the value chains of upstream suppliers and downstream buyers. The result is a larger stream of activities known as the value system. The development of sustainable competitive advantage depends not only on the firm’s value chain, but also on the value system of which the firm is a part. In a manner of speaking, value system is equivalent to the supply chain. (See Supply chain management, Value Chain) Values: The set of principles which a company regards as sacrosanct. These principles are non negotiable and cannot be compromised. Values may refer to the company’s philosophy vis-à-vis customers, suppliers, society and investors. Values define what is right, what is wrong and what are the priorities. Values guide employees while taking decisions. (See Core Ideology) Vertical Integration: The expansion of a business by acquiring or developing businesses engaged in earlier or later stages of the value chain. For example, in forward integration, manufacturers might enter retailing while, in backward integration, retailers might enter manufacturing. All firms are vertically integrated to some extent. Arriving at the optimum level of vertical integration involves examination of important trade offs. Outsourcing increases flexibility but vertical integration gives the company a greater sense of control. The most important issue in outsourcing is deciding which resources or capabilities are core and strategic. If such competencies are not developed in- house, the long-term competitive position of the firm would be threatened. For example, the research 57 In his book “Value Migration: How to Think Several Moves Ahead of the Competition,” Harvard Business School Press, October 1995.
  • 115. 115 efforts of global pharmaceutical companies involve tremendous risk, but cannot be outsourced. This is because research forms the basis for competition in the pharmaceuticals business. What a company does in-house and what it outsources has significant strategic implications for the company. One of the best examples is IBM. In a bid to get its PC project going fast, the computer giant decided to entrust the development of the operating system to Microsoft. The rest, as we know is history. Michael Porter has offered deep insights on vertical integration58. Benefits of vertical integration include: A. Economies of integration: By combining technologically distinct operations, there are opportunities for reducing the number of steps in the production process, handling and transportation, and consequently the costs of scheduling and co-ordinating. Integrated operations can reduce information gathering, marketing and purchasing costs. Upstream and downstream stages can take a long term view and develop specialized procedures for dealing with each other in areas like logistics, packaging, record keeping and control. Vertical integration also allows the upstream unit to tune its product to the exact requirements of the downstream unit and for the downstream unit to adapt itself more fully to the characteristics of the upstream unit. B. Technological advantages: A unit may integrate forward to understand the technology in the downstream business. Similarly, it may integrate backwards to familiarize itself with the technology in the upstream business. C. Assured supply/demand: Vertical integration can hedge the firm against fluctuations in supply/demand. D. Offsetting bargaining power: Vertical integration can allow the firm to reduce the bargaining power of powerful suppliers or customers. Further, by gaining a better understanding of costs, the firm has opportunities to improve its profitability. E. Ability to differentiate: By manufacturing proprietary items in house and exercising greater control on the channels of distribution, etc., the firm can increase the scope for differentiation. F. Creation of entry barriers: The more significant the net benefits of integration, the greater the pressure on new entrants to integrate. As a result, the entry barriers increase. G. Entry into a high return business: Integration may allow the company to enter a more profitable part of the value chain. Costs A. Exit barriers: Integration often increases strategic interrelationships and emotional ties to the business. Some commitments are irreversible. As a result, exit barriers are raised. B. Increased operating leverage: Vertical integration increases fixed costs. When an input is produced internally, the firm has to bear the overheads even during downturns. C. Reduced flexibility to change partners: Technological changes, changes in product design involving components, etc can create a situation in which the in house supplier may be providing a 58 In his book, “Competitive Strategy: Techniques for Analyzing Industries and Competitors” Free Press, 1998.
  • 116. 116 high cost, inferior or inappropriate product. It is not easy to switch to an outside supplier at short notice. D. Capital Investment requirements: Vertical integration consumes capital resources which have an opportunity cost. E. Foreclosure of access to supplier/consumer research: By integrating, the firm may cut itself off from the flow of technology from its suppliers or customers. F. Imbalances: When the upstream and downstream units are not balanced, potential problems arise. G. Inefficiencies: Since buying and selling occurs through a captive relationship, the incentive to perform may be less for both the upstream and downstream businesses, resulting in inefficiencies. H. Different managerial requirements: Businesses can differ in structure, technology and management despite having a vertical relationship. For example, manufacturing and retailing are fundamentally different. Understanding how to manage these different activities, can be a major cost of integration. John Hagel III and Marc Singer59 offer a very useful framework for resolving the vertical integration dilemma, by examining the coordination problems which arise when different players are involved in a value chain activity. When the interaction costs can be reduced by performing an activity internally, a company will vertically integrate rather than outsource. Reduction in interaction costs leads to a shakeout in the industry and changes the basis for competitive advantage. The emergence of information technology in general and the internet in particular has dramatically lowered interaction costs. So, the chances are that specialized players will hold the aces. Hagel and Singer add that there are three different core processes which are integral to any business. These are customer relationship management, product innovation and infrastructure creation. The competencies needed to manage them are quite different. Customer relationship management focuses on attracting and retaining customers. It involves big marketing investments that can be recovered only by achieving economies of scope. A wide product range and a high degree of customization to suit the needs of different customers are the critical success factors in customer relationship management. Product innovation aims at bringing out attractive new products and services to the market in quick succession. Speed is important because early mover advantages are often critical. Small organizations with an entrepreneurial style of management are often better at innovation than large bureaucracies. Infrastructure creation (like an Information Technology backbone) is necessary to handle high volume repetitive transactions efficiently. Economies of scale are vital for recovering fixed costs. Standardization and reutilization are the essence of this process. When these three processes are combined within a single corporation, conflicts are bound to arise. Scope, speed and scale cannot be achieved simultaneously. So, many industries like newspapers, credit cards and pharmaceuticals are splitting along these lines. 59 Hagel III, John; Singer, Marc, “Unbundling the corporation,” Harvard Business Review, March-April 1999, pp. 133-141.
  • 117. 117 There are alternatives to vertical integration. A firm can resort to partial integration. Independent suppliers can be used to bear the risk of market fluctuation while in house suppliers maintain steady production rates. Another alternative is Quasi Integration. This refers to a relationship between vertically related businesses that are somewhere in between long term-contracts and full ownership. There can be various forms of quasi integration. i) Minority equity investment ii) Loans or loan guarantee iii) Prepurchase credits iv) Exclusive dealing agreements v) Co-operative R & D. Quasi integration tends to reduce the costs associated with full integration. It also avoids the need to make major capital investments required for integration and eliminates the complexities involved in managing other types of businesses. On the negative side, quasi integration may fail to achieve the full benefits of integration such as differentiation. (See Backward Integration, Forward Integration) Value Innovation: A term coined by Chan Kim and Renee Mauborgne. Smart companies focus on new markets which Kim and Mauborgne call blue oceans, pursuing a strategy called value innovation. Instead of fighting competitors, these companies try to make them irrelevant by creating a leap in value for buyers and the company, thereby opening up new and uncontested business opportunities, called Blue Oceans. Value innovation places equal emphasis on value and innovation. Value without innovation tends to be incremental and does not give the company a competitive edge in the marketplace. Innovation without value tends to be technology-driven, market pioneering, or futuristic, often shooting beyond what buyers are ready to accept and pay for. Value innovation occurs only when companies align innovation with utility, price and cost positions. Companies that seek to create Blue oceans, often pursue differentiation and low cost simultaneously. Buyer value comes from the utility and price that the company offers to buyers. The value to the com- pany is determined by the price and the cost structure. So value innovation is achieved only when the utility, price and cost activities are properly aligned. Such an integrated approach holds the key to the successful implementation of a Blue ocean strategy. (See Blue Ocean Strategy). Vision: A guiding theme that articulates the nature of the business and its intentions for the future. These intentions are based on how the management believes the environment will unfold and what the business can and should be in the future. A vision has the following characteristics: (1) informed – rooted in a deep understanding of the business and the forces shaping the future, (2) shared and created through collaboration, (3) competitive – creates an obsession with winning throughout the organization, and (4) enabling – empowers individuals to make meaningful decisions about strategies and tactics. A vision must be able to inspire people by making a powerful statement in simple terms so that people at all levels can relate to it. (See Corporate Purpose, Mission)
  • 118. 118 W Whistle Blower: A sense of moral outrage may prompt people to expose wrong doing within an organization. A whistleblower is an employee, former employee, or member of an organization who reports misconduct to people or entities that have the power to take corrective action. Generally the misconduct is a violation of law, rule, regulation and/or a direct threat to public interest. Fraud, health & safety violations, and corruption are just a few examples. The vast majority of cases are based on relatively minor misconduct. The most common type of whistleblowers are internal whistleblowers, who report misconduct to a superior within their company. In contrast, external whistleblowers report misconduct to outside persons or entities such as lawyers, the media, law enforcement or watchdog agencies, or to other local, state, or federal agencies. (See Business Ethics, Code of Ethics) White Knight: An expression used to describe a company that comes to the rescue of a firm facing a hostile take-over bid from a predator. The white knight steps in with a counter-offer for the firm, thereby saving it from the predator. The term comes from Lewis Carroll's Through the Looking Glass (1871) in which Alice is captured by a red knight but then rescued immediately by a white knight. (See Anti takeover Strategy) Williamson, Oliver E: An American economist who, building on the work of Nobel prizewinner Ronald Coase, has become closely associated with the economics of transaction costs. Transactions can take place through markets or hierarchies. The mode chosen will depend on the amount of information available and the degree of trust between buyer and seller. Transaction cost theory has important implications for industrial organization, competition policy, corporate governance and employment relations. Transaction costs can affect make-or-buy decisions by companies. (See Vertical Integration) Willpower: Knowing is not enough. Unless managers get into action mode, knowing is of little use. Heike Bruch and Sumantra Ghoshal, mention in their book, “A Bias for Action”, that despite all their knowledge and competence, their influence and resources at their disposal, managers do not grab the opportunities to achieve something significant. Purposeful action requires energy and focus. Motivation alone cannot spur people to purposeful action. What is needed is willpower. Willpower is what enables managers to take action even when they are not inclined to do something. Managers with willpower overcome barriers, deal with setbacks and persevere to the end. Just as defensive reasoning can block learning, lack of will power can block action. (See Knowing-Doing Gap) Winner’s curse: A term often used in the context of a merger or acquisition. In their enthusiasm to close an M&A deal, companies may end up bidding very high. Though the deal is clinched, the win effectively turns out to be a curse. The high premium paid becomes difficult to justify. The end result is that shareholder value gets eroded. (See Merger) Z Zero Base Budgeting: Budgeting usually tends to be an incremental exercise. The current year’s figures are adjusted suitably to arrive at the next year’s figures. Zero based budgeting
  • 119. 119 challenges basic assumptions and tries to arrive at budget figures for the next year from scratch. This kind of an approach to budgeting is useful for exposing and eliminating inefficiencies which have accumulated over a period of time.

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