Strategy is all about making trade-offs between what to do and more importantly what not to do ; consciously choosing to differentiate . It reflects a congruence between external opportunities and internal capabilities. Types of strategies -
Corporate Strategies – It is all about making choices across various businesses and allocating resources among them.
Business Strategies – It is all about developing and leveraging competitive advantage.
Functional Strategies – It is all about doing things differently, rather than doing different things.
Strategic management attempts to align the traditional management functions with the environment to make resource allocations in a way to achieve organisational goals and objectives.
This alignment is called strategic fit .
It serves as a road-map for the organisation in its growth path. It provides the direction – extent – pace – timing .
It depends on the turbulence of the environment and the aggressiveness of the organisation.
It distinguishes winners from the losers.
STRATEGIC MANAGEMENT - FRAMEWORK Fit Fit Fit Political Political Strategic Intent Strategic Management Finance Marketing Economical Social & Cultural Fit Fit Fit Fit Political Technological HR Production Strategic Management
As Peter Drucker refers to it, a radical change in the business environment brings about discontinuity . The things happening around the firm are totally disconnected from the past. It leads to a paradigm shift .
The first major discontinuity in the history of global business environment – Industrial Revolution .
Complicated Processes Organisation Size
Evolving of an emerging paradigm – Survival of the fittest (Fayol & Taylor, 1907).
The second major discontinuity in the history of global economic environment – World War II .
Global market place.
Affluence of the new customer.
Homogeneous to heterogeneous products.
Changes in the technology fore-front.
From uniform performance, performance across firms became differentiated. The question of outperforming the benchmark became the new buzzword.
Survival of the most adaptable becomes a new management paradigm (Ansoff, 1960).
ENVIRONMENTAL CHANGE Phase I : Extrapolation of the past Phase II : Discrete Scenarios Phase III : Range of Scenarios Phase IV : Horizon of Scenarios 1 2 1B 1A 2A 2B 1 3 2 1 Prior to 1950 1950 to 1970 1970 to 1990 1990 onwards 3 2 1
STRATEGIC MANAGEMENT - IMPORTANCE Industry Effects – 45% Strategy Effects – 35% Time Effects – 20% Source: Schmalensee, (1985)
Structure follows strategy. The organisation initially decides which industry to enter, how it will compete, who will be the top managers, and who will directly decide on the type of organisation structure (MCS).
Organisation structure will precede and cause changes in strategy. Successful organisations align authority and responsibility of various departments in way to reach overall objectives.
It is a broad and enduring statement that distinguishes it from another organisation. It helps identify the scope of the organisation in terms of its products and markets. It also serves as a road–map to reach the vision; its reason for existence.
Reliance – Desire to invest Rs.25000 crore in telecom business (circa 1999). It is the process of garnering necessary inputs, coordinating appropriate technologies, and gaining access to desired markets in the near future.
Historical studies have shown that most organisations tend to continue with their existing strategies. Therefore, past strategies tend to have a bearing on future strategies. This tendency to restore continuity is known as inertia (resistance to change) .
When changes in the environment is incremental , equilibrium is maintained. However, radical change may lead to disequilibrium. This state of affairs is known as strategic drift .
In such a context strategies lose touch with emerging environment.
STRATEGIC DRIFT FRAMEWORK Degree of change Time Continuity Incremental Change State of Flux Radical Change Stage of Atrophy Environmental Change Strategic Change Strategic Drift Stage of Transformation
Inertia often leads to organizational politics. Organizational politics is defined as, which involves intentional acts of influence to enhance or protect the self-interest of individuals or groups . It leads to -
According to the incrementalism approach practitioners simply do not arrive at goals and announce them in precise integrated packages. They simply unfold the particulars of the sub-system, but the master scheme of the rational comprehensive scheme is not apparent .
This is not to be treated as muddling ; but as a defensible response to the complexities of a large organization that mitigate against publicizing goals .
Strategy formulation and implementation are linked together in a continuous improvement cycle.
A learning organization is capable of continual regeneration from knowledge, experience, and skills that fosters experimentation and questioning and challenge around a shared purpose. It helps overcome organisational politics. What fosters a learning organisation?
Pluralistic – An environment where different and even conflicting ideas are welcome.
Experimentation – Fosters a culture of risk taking.
An intended strategy is an expression of interest of a desired strategic direction. A realised strategy is what the organisation actually translates into practice. Usually there is wide gap between the two. Causes –
The plans are unworkable.
The environment context has changed.
Influential stake-holders back out.
Strategies are superimposed.
An emergent strategy is one which slowly evolves over time.
The environment is defined as the aggregate of conditions, events, and influences that affect an organisations way of doing things.
Factors can be external as well as internal to the organisation.
Environmental scanning is very important function of strategic planning. Since the pace of change in the environment is increasing rapidly, a strategic manager has to continuously scan the environment to ensure fit with its strategic intent.
Acronym for Strengths – Weaknesses – Opportunities – Threats. It helps an organisation to capitalise on the opportunities by maximising its strengths and neutralising the threats minimising the weaknesses. A SWOT audit should rely on –
Company Records – Annual Reports, Websites, Press Clippings & Interviews.
Case Studies – Structured Questionnaires, Interviews, Observation.
Business Intelligence – Bankers, Suppliers, Customers, Analysts, Competitors.
PIMS is a computer based database model developed by GE and later extended by HBS to examine the impact of a wide variety of strategy issues on business performance. It is also a form of vulnerability analysis.
An organisation can draw upon the experience of its peers in similar situations. PIMS Findings – 75% of the variance in performance is due to:
It involves maintaining status-quo or growing in a slow and selective manner. The size and scale of present operations remains almost intact. Stability however, does not relate to do-nothing. It still has to adopt a strategy to sustain current performance levels. (Eg. Hindustan Motors). The reasons for stability strategy –
Lack of attractive opportunities.
The firm may not be willing to take additional risk associated with new projects.
To stop for a while and assess past records.
Why disturb the existing equilibrium set up?
Limited resource position.
GROWTH - ANSOFF’S MODEL Existing Market New Market Existing Product New Product Market Penetration (+) Market Development (++) Product Development (++) Diversification (+++) Note: (+) indicates type of growth and risk involved .
It is a strategy where a firm directs its entire resources to the growth of a single product, within a well defined market. Market penetration can be achieved by – increasing sales to current customers, convert competitors customers, direct non-users to users. (Eg. Nirma)
Suitable for industries where scope for technological break-through is limited.
The company carries a risk of product obsolescence.
Helps firms which are not comfortable with unfamiliar terrain.
It is a strategy where a firm tries to achieve growth by finding new uses for existing products or its close variants and tap a new potential customer base altogether. (Eg. Du Pont – nylon: parachutes, socks & stockings, fabrics, tyres, upholstery, carpets,……).
The firm should be creative and innovative – thinking out of the box .
Unconventional and flexible channels of distribution.
It is a strategy where a firm tries to achieve growth through a new product or an improved version of an existing product or its variant to repeatedly enter the same market. (Eg. Honda – bikes, cars, generators, lawn mowers).
Leverage on customer loyalty.
Areas of product improvement – quality, features, styling.
Ensure high reach through advertising and promotion.
Product development with related technologies – core competencies.
It marks the entry of a firm into newer markets with new products, thereby creating a new business. The new business is distinct from the existing business in terms of – inputs – technologies – markets. More importantly they are strategically dissimilar.
Consider a hypothetical planet, in which a given year is either under hot or cold wave, either of which is equally likely to prevail. Let us assume that there are two businesses constituting the entire market – coffee and ice-cream. If the hot wave dominates the planet, the ice-cream business would register a return of 30%, while the coffee business would register a return of 10%. If on the other hand, cold wave dominates the planet, ice-cream business would register a return of 10%, while the coffee business would register a return of 30%. What would be your diversification strategy?
If we invested in only one of the two companies, our expected return will be 20%, with a possible risk of 10%. If, we split our investment between the two companies in equal proportion, half of our investment will earn a return of 30%, while the other half would earn 10%, so our expected return would still be 20%. But in the second instance there is no possibility of deviation of returns. Diversification results in 20% expected return without risk, whereas investing in individual businesses was yielding an expected return of 20% with a risk factor of 10%.
The newly formed business should be consistent with the dominant logic of the group. Businesses which are not consistent are said to be opportunistic. Conclusion: Higher the strategic fit; better the performance.
It takes place when a company enlarges its scope of operations by getting into businesses which provides a feeder services to its existing businesses (Eg. Reliance). On the other way existing business may recreate new businesses, which are distinct, but strategically related (Eg. Bajaj – scooters to motorcycles).
It results in increasing market power.
Distinctive capabilities extended to other areas.
Resources can be shared for mutual benefit.
Reduces economic risk, because of differences in business cycles.
HORIZONTAL DIVERSIFICATION - RELIANCE Reliance Industries Reliance Capital Reliance Power Reliance Infrastructure Reliance Ports
It allows a firm to enlarge its scale of operations either in a backward business process or in a forward one. Backward integration occurs when the company starts manufacturing its inputs. Advantages of backward integration –
Full Integration - Where one firm has full ownership and control over all the stages in the production of a product (Eg. Reliance) .
Quasi-integration - A firm gets most of its requirements from one or more outside suppliers that is under its partial ownership and control (Eg. Maruti – Sona Steering).
Tapered integration - A firm produces part of its own requirements and buys the rest from outside suppliers with a variable degree of ownership and control. Usually the firm concentrates on its core activities, and out-sources the non-core activities.
A CASE OF TAPERED INTEGRATION Very Critical Components Full Ownership Critical Components Partial Ownership Ordinary Components Zero Ownership Engine Transmission Design Steering Electricals Windscreen Seats & Carpets
It relates to businesses which are distinct in terms of businesses as well as strategically unrelated. Companies usually engage in conglomerate diversification when industry characteristics are very attractive. Drawbacks of unrelated diversification –
Cost of ignorance.
Cost of failure (i.e. lack of foresight)
Cost of neglect (i.e. core business).
Cost of dysynergy (i.e. synergies pulling in opposite directions).
Divestment is a defensive strategy involving the sale of a business (Eg. Bisleri) in full to an independent entity. It is usually taken into account when performance is disappointing and survival is at stake and nor does the firm have the resources to fend off competitive forces. It may also involve a product (Eg. Glaxo’s “Glucon-D” to Heinz) ; or an SBU (Eg. L&T -Cement Division to Aditya Birla Group) technically known as divestiture.
It is may also be a pro-active strategy , where a company simply exits because the business no longer contribute to or fit its dominant logic. (Eg. Tatas sale of Goodlass Nerolac, Tata Pharma, Tata Press, ACC).
Outright Sale – Popularly known as the asset route; where 100% of the assets (including intangibles) are valued and paid for. (Eg. Sale of Diamond Beverages to Coca-Cola for US $ 40 million).
Leveraged Buy-Out (LBO) – Here the company’s shareholders are bought out through a negotiated deal using borrowed funds. (Eg. Tatas buy-out of Corus for US $ 11.3 billion, involving 608 pence per share).
Spin-Off – A spin off is the creation of a new entity; where the equity is allotted amongst the existing shareholders on a pro-rata basis.
Stars – They have enormous potentials in the long term, provided the industry growth rate continues and the company is able to maintain its market-share (i.e. diversify). These businesses are net users of resources (Eg. TCS).
Question Marks – They have potentials in the long term, provided the company is able to build up on its market-share (i.e. market penetration, market development, product development), which remains a big? These businesses are also net users of resources, but their risk profile is higher than the stars (Eg. Trent, Tata Telecom).
Cash Cow – These are matured businesses, and the company dominates the industry ahead of competition (i.e. stability). Given that the growth potential in the business is low, they are generators of resources. However, cash cows may also need to invest provided the industry takes an upswing (Eg. Tata Motors, Tata Chem, TISCO).
Dogs – They are a drag on the group, and they lack on competencies to take on competition and are basically cash traps (Eg. Nelco, Tata Pharma). Groups prefer to dispose such businesses (i.e. divest).
GE - MATRIX Industry Attractiveness Distinctive Capabilities Strong Medium Weak High Low Med Diversify (++) Intensify (+) Intensify(+) Stability Harvest(-) Divest (- -) Stability Stability Harvest(-)
ARTHUR’ D. LITTLE Invest Consolidate Industry Life-Cycle Competitive Position Growth Inception Maturity Decline Dominant Strong Favourable Tenable Weak Selective Abandon Niche Divest Harvest Hold Improve
SHELL – DIRECTIONAL POLICY MATRIX (DPM) Business Sector Prospects Distinctive Capabilities Attractive Average Unattractive Strong Average Weak Market Leadership Try Harder Double Or Quit Growth Custodial Expand Divest Phased Withdrawal Generate Cash Phased Withdrawal
Cost Leadership – It is a strategy that focuses on making a firm more competitive by producing its products more cheaply than its competitors.
The firm may retain the benefits of cost advantage by enjoying higher margins (Eg. Reliance) or may pass it to customers to increase market-share (Eg. Nirma, Ayur, T-Series). Sources of cost advantage –
Product Differentiation – It is a strategy that attempts to develop products and services that are differentiated from competitive products in terms of value proposition. Usually product differentiation is followed by premium prices. (Eg. Intel, CitiBank, Sony). Sources of product differentiation -
Focus / Niche – It is a combination strategy of cost leadership or product differentiation targeting a specific market or buyer segment (Eg. Rolex, Mercedes, Mont-Blanc, Cartier, Gucci, Armani). Sources of focus –
Matured customer base.
The customer takes pride in the product (i.e. sign of prestige, power, and status).
Emerging Industry – An industry characterised by radical environmental changes, changing customer needs, technological innovations, ending in a different cost economics. Eg. Digital photography and printing. Reasons for emerging –
High level of technological uncertainty.
High initial costs, followed by steep cost reduction.
Declining Industry – An industry which has outlived its utility due to the entry of substitutes which radically improves the cost-benefit relationship, with no sign of recovery. Eg. Typewriters. Reasons for decline –
In a pure strategy game, the strategy each player follows will always be the same regardless of the other players strategy. A saddle point is a situation where both the players are facing pure strategies.
Use Radio Use Newspaper Firm Y’s Strategy Use Radio Use Newspaper Firm X’s Strategy +3 +5 +1 -2 Firm X’s Pay-Off Matrix Saddle Point
Tomorrow’s leading companies will succeed not by battling competitors, but by creating blue oceans of uncontested market space ripe for growth . Such strategic moves - termed value innovation - create powerful leaps in value for both the firm and its buyers, rendering rivals obsolete and unleashing new demand.
Blue Ocean Strategy provides a systematic approach to making the competition irrelevant, by creating uncontested marketplace…………
RED OCEAN Vs BLUE OCEAN Compete in existing markets Beat the competition Exploit existing demand Make the value cost tradeoff Supply is the defining variable Compete in uncontested markets Make the competition irrelevant Create and capture demand Break the value cost tradeoff Demand is the defining variable
RECONSTRUCT MARKET BOUNDARIES Issues Structures Reactive Time/Trends Improving Value Orientation Forecast Scope Serving Buyer Group Short - Medium Competitiveness Within Industry Proactive Shifting Value Dream Redefining Long Beyond
Examining a wide range of strategic moves across a host of industries, Blue Ocean Strategy highlights the six principles that every company can use to successfully formulate and execute blue ocean strategies.
The six principles show how to reconstruct market boundaries - focus on the big picture - reach beyond existing demand - get the strategic sequence right - overcome organizational hurdles - and build execution into strategy.
THE CORE PRINCIPLES Reconstruct market boundaries … overcome beliefs . Reach beyond existing demand … go for uncontested space. Get the strategic sequence right … value (innovation) first . VI COST VALUE
VALUE INNOVATION – GREENER PASTURES A new value curve Reduce Eliminate Create Raise Which factors to be reduced below the industry standard Which of the industry factors that the industry takes for granted should be eliminated Which of the factors should be raised above the industry’s standard Which factors should be created that the industry has not offered
RISK IN BLUE OCEAN Search Risk Planning Risk Scale Risk Business Model Risk Organizational Risk Management Risk Formulation Risks Execution Risks Reconstruct market boundaries Focus on the big picture Reach beyond existing demand Get the strategy sequence right Formulation Principles Execution Principles Overcome key hurdles Motivation
BLUE OCEAN STRATEGY SEQUENCE Buyer Utility Is there exceptional buyer utility in your business idea? Price Is your price easily accessible to the mass of buyers? Cost Can you attain your cost target to profit at your strategic price? Adoption What are the adoption hurdles in actualizing your business idea? Are you addressing them up front? A Commercially Viable Blue Ocean Strategy
It relates to transforming strategy formulations into practices. Performance realisation of a strategy depends on the effort behind it to move it forward. Successful implementation depends on the appropriateness of the strategy. It requires –
Full commitment of the top management.
Optimum resource allocation; including its stretching and leveraging.
Proactive leadership and motivating employees.
Compatible organisation structure.
Strategic evaluation and control.
STRATEGY IMPLEMENTATION - ROUTES Organic Growth Mergers & Acquisition Take Overs Joint Venture Strategic Alliance Strategic Fit - High Strategic Fit - Low
Here a corporate builds up its facilities right from the scratch and continues without any external participation. The entire infra-structural facilities are set up afresh having its own gestation, i.e. green-field projects. (Eg. Reliance Industries).
It has complete control over inputs, technologies, and markets.
Govt. concessions are available for green-field projects. (Eg. SEZ’s, Tax holidays).
It involves a pro-active collaboration between two companies on a particular domain or function. It touches upon a limited aspects of a particular business. Alliances are usually in the areas of technologies or marketing . ( Eg. Reliance & DuPont; Tata Motors & Fiat ).
There is no funding or equity participation.
Both the companies continue to operate independently.
It is short-term; lacks committment.
It intends to do away with competition by joining a common platform (i.e. capabilities).
A joint venture involves a equity participation between two companies usually of similar intent in a particular business. It is a win-win situation for both the companies. (Eg. DSP Financial Vs Merrill Lynch).
For a joint venture to be successful the dominant logic of both the companies should match.
Selecting the right partner is critical for success.
A comprehensive MOU is essential.
Degree and extent of management control must be clearly laid down.
It refers to the fusion of two or more companies into a single entity. Size and synergy are the two main considerations in mergers; it strengthens overall competitiveness. (Eg. Brooke Bond Vs Lipton - HUL)
Economies in scale and scope through larger capacities.
Integrated distribution channel leads to better market penetration ( i.e. synergy ).
Integration of assets and other financial resources.
Revival of a sick-unit through better management practices.
Humane side should be handled properly ( i.e. structure ).
Resources include physical resources (Eg. land, labour, machines), intangible resources (Eg. brands, patents), and distinctive capabilities and competencies. The various methods of resource allocation includes –
Historical Budget – The budgets framed by SBU heads for a particular business keeping in mind past trends.
Zero Based Budget – In this case the budget of a SBU has to worked out from the scratch.
Performance Budget – Here the act of allocation is a function of the performance of the SBU.
An appropriate organisation structure is essential to implement strategies and achieve stated goals. It refers to the ways authority and responsibility is allocated to individuals and groups. The following considerations are to be kept in mind –
Size – An organisation grows steeper its size increases.
Complexity – An organisation grows flatter as its business process complexity increases.
People – An organisation grows flatter as people become more matured.
Technology – An organisation grows flatter as it becomes more technology inducive.
A functional strategy aims at performing a function differently from its closest competitors. Linkages occur in any one or more functional area. However, sustainability of functional strategies are very low. It involves -
The strategic choices are smoothly implemented across all divisions.
The various divisions are bound by a set of integrated policies.
Better coordination of work flow at various levels of hierarchy.
Segmentation – It involves dividing the market into distinct groups of buyers on the the basis of income, location, benefits, age, psychographic. It can be differentiated, undifferentiated or concentrated ( Eg. Ujala, Colorplus, Sumeet ).
Positioning – It is an act of designing the company’s offerings and image to the target market, to portray the company’s standing vis-à-vis its competitors, USP.
Pricing – It involves determining the price to be paid by the consumer in relation to costs, demand, taxes, and competition.
Distribution – It concerns specific objectives in terms of market coverage.
Procurement of Funds – It ensures adequate and regular supply of capital at a competitive cost of capital. ( Eg. The Tatas enjoy one of the lowest cost of debt by virtue of the immense trust their name generates ). It involves fixed as well as working capital through a mix of debt and equity.
Utilisation of Funds – It involves applying various discounting criteria to appraise, rank and select projects in order of their merit. It also includes decisions like make, buy or lease. ( Eg. When Reliance selects a project, they saturate it with resources as much it can absorb. For them time lost is more important than costs ).
Recruitment – It is a process of creating an challenging environment to link the best people with the jobs to be filled ( Eg. Infosys ).
Selection – It is the process of picking the right people to fill up jobs in an organisation. Sometimes it is also a process of elimination. ( Eg. Aptitude & Psychometric Tests ).
Placement – The broad objective is to put the right person in the right job. For mid-level placements experiences relating to previous organisation cultures is an important criteria. ( Eg. Learning & unlearning of skills ).
STRATEGIC CHANGE Market Imperfection Industry & Group Characteristics Dominant Logic Strategy A major shift in the company’s course of action. Prior to 1990 Post 1990
When a corporate has been operating in a certain fashion for a long time, there is a tendency to continue along the same lines. Inertia is a basic characteristic of an organisation that endures status quo. It is retards the process of strategic change. Changes in top management and unlearning helps overcome inertia. Sources of inertia –
Strategy evaluation centers around assessment of strategic fit. Since the internal and external environment is in a state of continuous flux, strategies need to be evaluated on a continuous basis to prevent deviations of fit.
Deviation of fit is detrimental to performance.
To prevent deviation of fit, corporates should move beyond traditional measures of performance (i.e. Returns, EPS, Margins) to strategic performance.
Strategic performance focuses on market share, implementation delays, response time.
It is concerned with trafficking a strategy as it is being implemented detecting changes in the external and internal environment and taking corrective action wherever necessary. (Eg. Reliance Infocomm’s pricing strategy). It attempts to answer questions such as –
Are the organisations capabilities still holding good?
Is the strategic intent appropriate to the changing context?
Has the company acquired any new competency?
Has the company been able to overcome the environmental threats.
Are competitive advantages becoming competitive disadvantages?
Change is becoming pertinent in the external environment. Radical change is superseding incremental change. The past is ceasing to be an indication of the future. Change provides enormous opportunities; it is also a source of potential threat. Companies therefore need to adapt to the environment to stay ahead in competition. Some tools to ensure that –
Selecting the benchmarking partner is critical to solving the problem. Firms should generally avoid selecting the industry leader, because it may not always adopt the best practices for every process or activity. Benchmarking partners may also be from unrelated industries. Types –
Internal – It involves benchmarking against its own branches, divisions, SBU’s.
External – It involves benchmarking against firms that succeeded on account of their best practices.
International - It involves benchmarking against world-class firms.
Redesigning leads to identification of superfluous activities and eliminating them (i.e. business mapping, Eg. single window clearance).
Re-engineering attempts to radically change an organisational products or process by challenging the basic assumptions surrounding it, for achieving performance improvement (Eg. DOS to Windows)
Re-engineering involves complete reconstruction and overhauling of job descriptions from the scratch (i.e. clean sheet).
The task demands a total change in organisational culture and mindset.
REENGINEERING – KEY TENETS Ambition Focus Attitude Enabler Performance Large scale improvement by questioning basic assumptions about how work is done Micro Vs Macro Business Processes Vs Organisational Processes Starting right from the scratch Not historical More IT driven, than people driven Innovative Vs Traditional Customer centric Vs Organisational centric
It is a process by which a product is dismantled and analysed in order to understand how the product was designed and manufactured, with an intention to copy it (Eg. Cheaper versions of Intel chips and mother-boards manufactured in Taiwan).
It generally acts as a threat to innovation. However, protection against RE can be had in the following ways –
A company’s performance depends on how it measures performance. Most managers tend to rely on traditional measures of performance having its origin in finance (Eg. ROI, OPM, EPS) because they are well tried and tested.
All the above measures are subject to lead-lag problems (i.e. poor response time).
As a result modern managers tend to rely on strategic measures of performance where lead-lag is minimum (Eg. cycle time, defect ratio, market-share, patents).
BSC combines the traditional with strategic measures of performance (i.e. cross functional integration).
Firms more often have problems , because they have too many . At the very onset managers must learn to distinguish between operational and strategic ones.
A BSC helps a manager to track and communicate the different elements of company’s strategy. It has four dimensions –
How do customers see us?
What must we excel at?
Can we continue to improve and create value?
How do we look to shareholders?
The authors view that performance is organisational and not people centric.
CUSTOMER PERSPECTIVE GOALS Products Supply Preference Relationship MEASURES Relative market share (%) % of sales from new Vs proprietary products Timely deliveries and service Customer credit analysis (i.e. ageing schedule) % of key customer transactions Ranking of key customer accounts No. of visits or calls made % of bad debts
BUSINESS PERSPECTIVE GOALS Skills Excellence Exposure Introduction MEASURES New capabilities and competencies Implementation & gestation period Bank and supplier credit limits Unit Costs / Conversion Ratio / Defect Ratio No. of times covered in media No. of new product launches Vs competition Product pricing Vs competition
LEARNING PERSPECTIVE GOALS Technology Manufacturing Focus Timing MEASURES No. of new patents registered Time to develop next generation products Average and spread in cycle time % of products that equal 2/3 sales No. of product innovations
FINANCIAL PERSPECTIVE GOALS Survival Success Prosper Valuation MEASURES Cash flows Growth in sales and profits Return on Investment Market capitalisation / PE ratio
BSC - IMPLEMENTATION STRATEGY Mobilise change through effective leadership Translate strategy into operational terms Align the organisation to the strategy Make strategy everyone’s job Make strategy a continual process 1 2 3 4 5 BALANCED SCORE CARD
The only thing constant in today's business environment is change. Radical change brings about strategic variety. Strategic variety may be caused by changes in the as external well as internal environment.
Strategic variety brings paradigm shift, from survival of the fittest ....... to survival of the most adaptable.
To adapt to the changing environment, firms use restructuring strategies.
Restructuring involves consciously driving significant changes in the way an organisations thinks and looks (Eg. Tata Group).
Customer Focus – Restructuring ideally begins and ends with the customer. Company’s should go beyond just asking what he expects. Instead, they should strive to provide unimaginable value ahead of their time (Eg. Walkman, Fax, ATM, etc).
Core Business – Company’s should introspect – What business are we in? Business evolved out of opportunism or myopia should be divested, and dividing the core businesses into SBU’s (i.e. down-scoping).
Structural Changes – Conventional hierarchical structures should be disbanded in favour of more flexible ones (i.e. downsizing or rightsizing).
Cultural Changes – A culture represents the values and beliefs of the employees about the organisation. Restructuring also requires cultural orientation. It is created and institutionalised by the top management (Eg. During the times of JRD the Tatas were considered a benevolent and charitable organisation, ..... Ratan Tata now drives the point the group means business.)
(Eg. Reliance dismantled their industrial embassies ..... started focusing on their capabilities.)
RESTRUCTURING OUTCOMES Organisational Financial Business Reduced labour costs Alternatives Short - Term Long - Term Reduced debt costs Emphasis on strategic control High debt costs Loss of human capital Lower performance Higher performance Higher risk
Only seven of the first fifty business groups in 1947 were even in business by the turn of this century, and that the thirty-two of the country’s largest business groups in 1969 are no longer among the top fifty today.
Less than 10% of the Fortune 500 companies as first published in 1955, still exist as on 2005.
Source: (Business Today, January 1997). (Govindarajan and Trimble, 2006).
It is a course of action that enables firms to consciously move away from deterioration in performance to enduring success. It results in a permanent reversal in negative trend, restoring normal health. Usually a growth strategy follows a turnaround strategy. Indications for turn around –
Identify the theoretical perspectives that explains performance decline –
K-Extinction – It suggests that macro economic and industry wide factors are responsible for decline. It has its origin in I/O Economics and subscribes to the view that a firm has little control over such factors.
R-Extinction – It suggests that organisation factors, primarily dwindling resources and capabilities are responsible for decline. It has its origin in SM and subscribes to the view that a firm has substantial power to override such factors.
Transition usually reflects first signs of recovery. However, substantial amount of time usually passes before results begin to show (i.e. lead-lag). However, many a times early signs of recovery fades out. In this stage sustenance is the key factor. Effective approaches –
Outcome is said to be successful when the firm breaches the equilibrium performance level. Failure is an indication that initial momentum was not sustainable characterised by irreversibility. Effective indicators –
Franchising – It is a contractual agreement between two legally independent firms whereby the franchiser grants the right to the franchisee to sell the franchisor’s product or service or do business under its brand-name in a given location for a specified period of time for a consideration.
It is an effective strategy to penetrate markets in a shortest possible time at a minimum cost .
Switz Foods , owners of the brand Monginis allows its franchisees to sell its confectionary products.
Titan Inds , owners of the brand Tanishq allows its franchisees to sell its jewellery products.
Licensing – It is a contractual agreement between two legally independent firms whereby the licensor grants the right to the licensee to manufacture the licensor’s product and do business under its brand-name in a given location for a specified period of time for a consideration. Different levels –
Manufacturing without embracing any technology (CBU) .
Develop a product, refine it and adopt necessary technologies (SKD) .
Become a systems integrator (CKD) .
HM manufacturing GM range of cars in India with a buy-back arrangement.
It is an short term understanding between two or more firms in a similar business to share knowledge and skills in a particular domain or function for mutual benefit (Eg. Tata Motors – Daimler Benz, Reliance – Du Pont).
A joint venture is a long term association between two equal partners to create an independent firm (SPV) by complementing their resources and capabilities to explore newer businesses or markets for achieving a shared vision, whilst the partners continue to operate independently.
It aims at creating new value (i.e. synergy) rather than mere exchange (i.e. combining parts).
There are substantial linkages in the value-chain.
A merger is a mutually beneficial consent between two or more firms (usually of similar size) to form a newly evolved firm by absolving their individual entities to preempt competition (Eg. Brooke Bond – Lipton).
An acquisition is the purchase of a firm by a firm (of larger size) with a view to acquire conglomerate power and induce synergy (Eg. HLL – Tomco).
An acquisition is said be smooth if it is with the consent of the management (Eg. Tata – Corus) and hostile if it is without the consent of the management (Eg. Chabria – Shaw Wallace, Bajoria – B’B Dyeing).
Most countries have laws that prevents hostile takeovers (Eg. SEBI Takeover Code, 2002).
Diversification – Reduce variability in earnings by diversifying into unrelated industries. However, shareholders can accomplish the same at a much lesser cost, and without paying take-over premiums.
Cash Slack – It reduces asymmetry between cash starved firms with deserving projects and cash cows with no investment opportunities. Synergy comes from projects which would not have been undertaken if the two firms stayed apart (Eg. Hotmail).
Tax Benefits – Tax benefits may accrue from tax entitlements and depreciation benefits unutilised by a loss making firm, but availed after being merged with a profitable firm (Eg. ITC – Bhadrachalam Paper).
Co-Insurance Effect – If the cash flows of the two firms are less than perfectly correlated, the cash flow the merged firm will be less variable than the individual firms. This will induce higher debt capacity, higher leverage, hence better performance.
Default risk comes down and credit rating improves.
Coupon rates may also be negotiated at lower rates.
Reverse Merger – The acquisition of a public company, which has discontinued its operations (i.e. shell) by a private company, small in size but having a promising business, allowing the private company to bypass the usually lengthy and complex process of going public. Objectives –
Traditional route of filing prospectus and undergoing an IPO is costly, time-barred, or costly.
White Knight – It is the placing of stocks to a cash rich investor and bargaining for protection in return. But often the White Knight turns a betrayer himself (Eg. Raasi Dement – Indian Cements – Reliance).
Pac Man – The target company makes a counter bid to take over the raider company, thus diverting the raider company’s attention.
Gray Knight – The target company takes the help of friendly company to buy the shares of the raiding company.
Green Mail – The targeted company buys large blocks from holders either through premium or through pressure tactics (Eg. Shapoorji Pallonji).
Canon overpowering Xerox; Honda overpowering Volkswagen; Nokia overpowering Motorola; Hitachi overpowering Westinghouse; Wal-Mart overpowering Sears; Compaq overpowering IBM. Are the companies too preoccupied with the present than the future?
A survey Prahalad & Hamel revealed that 90% of the companies overpowered, were spending 90% of their precious time dealing with present.
What were they doing with the present? What were they pre-occupied with? What went wrong?
Beyond Restructuring – When a competitiveness problem (stagnant growth, declining margins, falling market share) become inescapable, they brutally pick up the knife and ruthlessly carve away layers of corporate fat (delayering, decluttering, downsizing).
Not knowing when to stop; most often they ended up cutting corporate muscle as well and became anorexic. Thus efficiency was grievously hurt.
These denominator based managers were stuck to their restructuring strategies (like pharaohs) and didn't know what to do next?
Beyond Reengineering – Numerator based managers (products, processes, technologies) atleast offers partial hope. However, incrementalism of effectiveness has reached a plateau, ensuring only survival of the present; but not of the future.
A poll in circa 2000 revealed that 80% of the US managers polled that Quality will be a source of competitive advantage of the future. On the contrary only 20% of Japanese managers polled that Quality will be a source of competitive advantage of the future.
The future is not about catching up; but getting ahead.
Regenerating – Leaner, better, faster; as important as these may be, are not enough to get a company to the future. They need to fundamentally reconcieve itself; reinvent its industry; and regenerate its strategies (consciously choosing to be different). Successful companies steer themselves to the future. It involves the following -
Dream about the company’s future; don’t predict.
Transform the industry; not just the organisation.
Empower from bottom to top; not from top to bottom.
ABOUT THE DREAM Which customers will you be serving? What will the potential customer look like? Who will be your future competitors? What will be the basis of your competitive advantage? Where would your margins come from? What will be your future competencies? Which end product markets would you cater? (5-10 years) Future
Bring about a revolution (a paradigm shift) in the organisation. More importantly, the revolution must start at the bottom and spread in all directions of the organisation. A revolution that is thrust upon from the top seldom sustains.
Most successful revolutions (Gandhi to Mandela) rose from the dispossessed.
The middle management plays a strong moderating role.
Transformational leaders merely show the way.
Such a process is called institutionalisation (from people centric to organisational centric).
There is no rule which says that for every leader there will be a follower. Similarly, there is not one future; but hundreds.
We are in the midst of a 360 0 vacuum; each point in space represents an unique business opportunity. The further a company can see in this endless space, the farther it will be away from competition.
What distinguishes a leader from a laggard; greatness from mediocrity, is the ability to imagine in a different way what the future could be.
THE NEW STRATEGY PARADIGM - I Reengineering Processes Organisational Transformation Competing for Market Share Strategy as Learning Strategy as Positioning Regenerating Strategy Industry Transformation Competing for Opportunity Share Strategy as Unlearning Strategy as Dream Not Only But Also The Competitive Challenge Finding the Future Strategy as Engineering Strategy as Architecture
THE NEW STRATEGY PARADIGM - II Strategic Fit Resource Allocation Product Leadership Single Entity Strategic Misfit Resource Stretch & Leverage Competency Leadership Dominant Coalitions Not Only But Also Mobilising for the Future Getting to the Future First Product Hits & Timing Market Learning & Preemption Existing Industry Structure Future Industry Structure
LEARNING TO FORGET Time Degree of Learning Unlearning Curve Learning Curve P1 : The degree of learning in current period is directly proportional to the degree of unlearning in the previous period. P2 : Unlearning in previous period does not necessarily ensure learning in the current period. t 2 t 3 t 4 t 1 t 5
A core competence relates to a bundle of skills (not an asset or a business). A high degree causal ambiguity between these skills yield sustainable competitive advantage. A core competency is characterised by the following –
Unique – It provides unimaginable customer value ahead of its times.
Inimitable & Insubstitutable – It cannot be matched even by its closest competitors.
Leverage – They are the gateways to tomorrows markets.
Initial resource position is a very poor indicator of future performance. It leads to atrophy and stagnation. Resource crunch was a common factor amongst all those firms that faced a wealthy rival, outperformed them. Strategies to manage a resource gap -
Accumulating – Using existing reservoir of resources to build new resources. It is achieved through -
Mining – Extracting learning experiences from existing body of each additional experience (i.e. success or failure). It is an attitude that can be acquired, but never learnt. It leads to a substantial jump in the experience curve.
Borrowing – Utilising resources outside the firm through licensing, alliances, joint ventures. A firms absorptive capacity is as important as its inventive capacity (Eg. Bell Labs invented the transistor, but it was Sony who popularised it).
Complementing – Using resources of one type with another to create higher order value. It is achieved through –
Blending – Interweaving discrete capabilities to create world class technologies (GM – Honda) through integration and imagination. Different functional skills can also be blended to create a world class product (Yamaha – Keyboard).
Balancing – Taking ownership of resources that accelerate the value of a firms own competencies (Eg. GE acquiring the technological rights of EMI’s CT Scan).
Emerging markets (India, China, Korea, Chile) provide a different context (i.e. high levels of market imperfection). Therefore, strategies suited for the developed markets may not be appropriate for emerging markets.
Emerging markets are characterised by infrastructural bottlenecks, institutional gaps, and high transaction costs. Therefore focused strategies based on core competence may not be suitable for emerging markets (Khanna & Palepu, 1997).
Diversified groups in operating in emerging markets therefore benefit from unrelated diversification.
DIVERSITY - PERFORMANCE (I) Diversity Performance Diversity attempts to measure the degree and extent of diversification (Herfindahl, Concentric, Entropy) . Diversity is initially positively related with performance, subsequently negatively related across developed markets. Synergy, Size & Scale, Experience Strategic Fit Optimum level of diversification Palich, et al. (2000)
DIVERSITY - PERFORMANCE (II) Diversity Performance Diversity is initially negatively related with performance, subsequently positively related across emerging markets. Threshold level of diversification Huge initial investment, brand building Risk diversification, conglomerate power (Khanna & Palepu, 2001)
Cultural Adaptability – It reflects the adaptive ability to a changing environment - culture, way of life, attitude, code of conduct, dress sense, customs, time value, flexibility (Eg. high cultural adaptability in developed markets and vice versa for emerging markets).
Country Risk – It reflects the political and economic risk (Eg. political stability, credit rating, currency, FOREX reserves, inflation, interest rates, terrorism (9/11), corruption, judiciary) of doing business in a particular country (Eg. low country risk in developed markets and vice versa for emerging markets).
Time Sensitiveness – Developed country managers regard time as precious, however, in most emerging markets meetings are delayed and lasts unusually long. Other factors – local celebrations, time-zones.
Language Barriers – Developed country managers expect foreign partners to communicate in their languages; in most emerging markets use of an interpreter may be a standard protocol.
Ethnocentrism – Developed country managers tend to regard their own culture as superior; and vice-versa. High levels of ethnocentrism usually has a negative effect on business.
GATT was a bi-lateral treaty initiated between US and some member countries in 1947 to promote free trade. In 1995 (Uruguay Round) GATT was renamed to WTO . It a multi-lateral treaty with 143 (as on 2002) member countries to reduce tariff and non-tariff (quota) barriers. It focused largely on TRIPS (patents, copyrights, trademarks). It also initiated provisions on anti-dumping.
The 1999 (Seattle Round) saw a lot of protest amidst bringing agriculture under the purview of TRIPS. It also highlighted the nexus between US & WTO.
The 2001 (Doha Round) focused on power blocks (NAFTA, ASEAN, BRIC).
In 1999 twelve member countries joined hands to move over to a single currency (i.e. Euro); three countries joined in 2002 increasing it to fifteen members. The notable exception was Great Britain which still continues with its local currency (i.e. Pound).
The Euro was significantly devalued against the Dollar till 2002. However with current recession in the US 2002 onwards, the Euro slowly started outperforming the Dollar.
However, the Dollar still remains the most preferred currency globally; primarily the OPEC countries.
Classical economists believed that foreign investment (in any form) is basically a zero sum game (i.e. the gain of one country is loss of another). Neo classical economists believe that foreign investment may in fact be a win-win game.
FDI (transfer of tangible resources) is slow but steady for the purpose of economic growth. It is long term with high levels of commitment.
FII (transfer of tangible resources) is fast but may have strong repercussions (i.e. hot money). It is short-medium term with comparatively low levels of commitment.
Product – The various attributes of a product may receive different degrees of emphasis depending on differences in - culture (food habits), economic (middle class buying power), technology (micro-chip).
Pricing – It depends on the competitive structure (PLC – Kellogg's), customer awareness (micro-waves), usage (talk time), promotion (surrogate advertising).
Distribution – It depends on the market characteristics (fragmented – concentrated), buying patterns (spread), lifestyle (petroleum outlets – departmental stores).