Strategic marketing


Published on

Published in: Education
  • Be the first to comment

  • Be the first to like this

No Downloads
Total views
On SlideShare
From Embeds
Number of Embeds
Embeds 0
No embeds

No notes for slide
  • A-Mei, the Taiwanese pop diva sang the Taiwanese anthem at President Chen Shui-bian’s May inauguaration (2000) and raise a political storm. China withdrew her Sprite soft drink ads from TV, newspapers and billboards across the country, almost jeopardising her contract with Coca-cola. Spokesman for Coca-cola was quoted as saying that the company was informed of the withdrawal a day before A-Mei even performed at the inauguration. Puyuma pop star, A-Mei, in a recent Sprite commercial, dances and sings in the old colonial powers quarter of Shanghai. She sings a chorus of "give me true feeling" in Mandarin to promote the product of an American multinational corporation. This ad and her music videos are screened on Hong Kong's TVB, MTV, and on channels of Rupert Murdoch's Star TV Group. Bit 2 In an August 1999 article "China's crazy about A-Mei" by New York Times News Service reporter Seth Faison, A-Mei is described as being "Taiwanese" and No. 1 in China. Feth describes A-Mei's sell out concerts in Beijing as "overpowering any consideration of the current battle over" Taiwan's sovereignty. This is in reference to the latest spat between Taiwan and the PRC due to President Lee's "state to state" relations comments. Bit 3 The shifting images of A-Mei (Chinese name Chuang Hui-mei) are quite market responsive. She has been called a "pop diva", Taiwan's Mariah Carey and other related labels. She is a superstar by regional commercial criteria, her 5 CDs released thus far having sold millions of copies along with concert videos and VCDs. Her brand of cultural products has become well known throughout East Asia. She has large advertising contracts with Fuji Film and Sprite. In general, she's done well commercially.
  • Strategic marketing

    1. 1. Strategic MarketingFaculty : Prof .Ashok Kumar Reference : Subhash Jain, Marketing Planning & Strategy, 6th Ed.) Strategic Marketing Management, Aakers) 1
    2. 2. What should corporations do to survive in the fast changing environment. What policies & business practices should be followed to support changing business environment ?.“SURVIVAL OF THE FITTEST”. What should be the responsibilities of marketing managers to achieve the goals ? Which is the best alternative among the optionsavailable? ( Evaluation and choice of strategy ) What is the system to monitor & control the operational issues ? Benchmark Corporate excellence periodically toevaluate the position. 2
    3. 3. Story of blind men and elephant : Fifth one touched the ear Six blind men went to see an elephant .Each and said it is satisfied himself by feel and observation like a fan. Second one felt theThe sixth one tusk and expressed itcaught the as a spear.swinging tailand said it islike a rope. Third one felt its squirming trunk and said it is like a snake. First one touched the elephant’s side and Fourth one felt expressed it as a big wall. around its knee and 3 said it is like a tree.
    4. 4. All these men disputed loud and long , each was right inhis view , but they all were wrong . What is the morale of the storyManagers often act like blind people, they loosesight of big picture of the business and focus onshort term goal . Strategy formation is our elephant.Since none of them had the vision of the entire beast(elephant) , each caught hold of some part or otherand relied on the utter ignorance about the rest.While you can not get an elephant by just adding allparts, to comprehend the whole , we need tounderstand each part. 4
    5. 5. Strategic Management Process.Strategic management is a process through whichorganizations analyze and learn their internal andexternal environments , establish strategic direction,create plans that are intended to help and achievethe established vision & goals by executing the plans with an effort to satisfy the stakeholders &shareholders. 5
    6. 6. Sun Tze on Strategy• “Know your enemy ( Competition ) , know yourself,( Corporation ) and your victory will not be threatened. Know the terrain,( market ) know the weather ( market forces ) , and your victory will be complete.” 6
    7. 7. Strategic Planning…is the managerial process of developing and maintaining a strategic fit between the organizations objectives and resources and its changing market opportunities. Org Objectives Strategic Fit Resources Changing Environment 7
    8. 8. Strategic planning in an organization aims to achieve a fitbetween the internal resources and capabilities of anorganization and external opportunities and threat in the industryenvironment. According to C.K Prahalad and Gary Hamel, such approachleads to a mind set in which management focuses too much onachieving the best fit between internal resources and externalenvironment and do not focus enough in building new resourcesand capabilities to exploit future opportunities in the business.Therefore the organization which rely on the fit model to strategyformulation are unlikely to build competitive advantage. This ismore apt in dynamic competitive environment.Eg Xerox ignored the rise of cannon, Ricoh, etc in photocopiermarket.GM overlooked Toyota ,Caterpillar ignored komatso. 8
    9. 9. Hence strategic approach by the companies to think beyond theirexisting resources and capabilities create an obsession and questfor global leadership within the top management of the company .This is described as Strategic intent. It is more internally focusedand concerned with building new resources and capabilities . 9
    10. 10. Strategic InnovationInnovation helps to address the demand of new market and orexisting market. This can be explained with Ansoff’s model. New product Disruptive innovation Evolution Revolution Exiting Product Existing New Market Market 10
    11. 11. SustainingRevolutionary or discontinuousAn innovation that creates a new market by allowingcustomers to solve a problem in a radically new way.EvolutionaryAn innovation that improves a product in an existing marketin ways that customers are expecting.DisruptiveAn innovation that creates a new (and unexpected) market byapplying a different set of values. 11
    12. 12. Strategic Innovation 12
    13. 13. 13
    14. 14. Innovation versus sustainability: An age old question Is which is more important Strategy or execution ?You stick to your knitting You think out side the box.You exploit what you know You explore what you don’t know.You meet current customer needs. You anticipate future needs.You Plan You let things emerge.You demand accountability You allow freedom and flexibilityYou impose process and You avoid process and encourageStructure . Unstructured interaction. 14
    15. 15. The Role of Marketing Strategy in businessCorporateVision Strategy: •Corporate Operating •Business Plans •Functional Execution & control Market feedback 15
    16. 16. According to Hofer and Schendel, organizations develop strategies at three structural levels:• Corporate level—(corporate marketing)• SBU level — (Strategic Marketing)• Product/Market level—(Functional Marketing) 16
    17. 17. Strategic Marketing (Marketing at the SBU Level)• Strategic Marketing requires –Detailed understanding of market needs, –Proactive use of competitive intelligence at the corporate as well as SBU’s levels• Strategic Marketing –Focuses on what the firm do best at the SBU level –To secure and maintain a sustainable competitive advantage 17
    18. 18. Strategic Marketing Process. Define Vision, Mission Goal , Objective Environment Analysis Identify core competency Generate strategic AlternativesImplement , feedback and Control 18
    19. 19. SINGAPORE AIRLINES is engaged in air transportation and related businesses. It operates world-wide as the flag carrier of the Republic of Singapore, aiming to provide services of the highest quality at competitive prices for customers to earn the mind share of its customers and profit for the company 19
    20. 20. Examples of Corporate MissionMARRIOTT’S Mission Statement: We are committed to being the best lodging and food service company in the world, by treating employees in ways that create extraordinary customer service and shareholder value 20
    21. 21. Strategic marketing begins starts with defining the visionfor the company.Vision is some thing a company wishes to become oraspire to be.It defines the frame work for the organization taking in toaccount the core ideology and envisioned future.•Core ideology is the unchanging part of the organization, it is like a character .•Envisioned future is the goal to be reached . CORE VALUES CORE IDEOLOGY CORE PURPOSE VISION AUDACIOUS GOALS ENVISIONED FUTURE VIVID DESCRIPTION 21
    22. 22. Core values are deeply held thought which anorganization would not change irrespective of change in industry environment or management fads.Social responsibility, Integrity, Innovation, Customerexcellence etc.Core purpose : It is the idealistic reason for being. Thepurpose sets the direction in which organizationproceeds.Audacious goal : what an organization would like toachieve , a tough and an extra ordinary commitment andeffort of the management .Vivid description is putting the goal in to words thatinvoke an action . ( Putting a measurable system ) 22
    23. 23. Corporate Culture “ Corporate Culture" is peoples ability to collaborate withhumour and energy to to align themselves with the vision ofthe firm & create smart strategy on-the-hoof.Margaret Wheatley said that strategy concept has to movefrom strategic planning to strategic thinking. A betterstrategic thinking comes when people are adept at thinkingcollaboratively. They think better when not being constantlywhipped into line by a hefty strategy document produced bya clever elite.They think better when each member of the organizationfeels the Sense of OwnershipResponsibilityAccountability towards the assigned task in line with thegoal. ( SHARED VISION ) 23
    24. 24. McKinsey 7-S Framework for building corporate level Strategy . STRUCTURE STRATEGY SYSTEMS SHARED VALUES SKILLS STYLE STAFF 24
    25. 25. Commit BuildResources responsibilityDefinemeasurement Measurecriteria Performance Strategic control 25
    26. 26. Frame Work of Marketing StrategyA successful marketing strategy requires customer orientation andcompetitor focus called market orientation 26
    27. 27. Strategy Formulation Mission Goal ObjectiveExternal BPEST InternalAnalysis analysis Analysis Corporate level strategy Business Unit level Functional Level Evaluate business performance , Governance & ethics 27
    28. 28. Key Elements of Marketing Strategy Formulation • The strategic 3 Cs – Customers, Competitors & the Corporation • Environment analysis -- PEST • Strategic Marketing Decisions – Where to compete – How to compete – When to compete 28
    29. 29. A Viable Marketing Strategy • Must have a clearly defined market • Must have a good match between corporate strengths and market needs • Must have significant positive differentiation in the key success factors of the business 29
    30. 30. Marketing strategy of a firm is for :Fast GrowthFast growth is the result of strategies designed to expandthe market size and earnings quickly, in terms of monetaryvalue rather than quantity.Fast InnovationFast innovation involves setting extremely high innovationgoals and securing a competitive edge, over what ourcompetitors can do. 30
    31. 31. GROWTH STRATEGY OF AN ORGANIZATION CAN BE :ORGANIC GROWTH OR INORGANIC GROWTHOrganic growth strategies are business development techniquesthat grow a company via increased output and larger salesvolume. Organic growth is growth that comes from a companysexisting businesses. Organic growth strategies are built onfour main pillars: revenue, headcount, PR, and quality.Inorganic growth strategy : As part of business strategy ,management decide whether the firm should grow naturally(commonly called organic growth) or in the form of goingoutwards to acquire or merge with other businesses .. This is called inorganic growth which normally takes the formof Mergers and Acquisitions (M&A) exercise. 31
    32. 32. 32
    33. 33. While M&A is the easiest way to grow, it is a risky proposition as itcould either be a success or disaster. While the market valuesgrowth, there is a hierarchy in quality of growth drivers.Organic growth is preferred over inorganic growth as the lattercomes at a higher cost and is more risky.Companies go in for M&A activity to boost sagging growth in topline. Typically, growth is slow in maturing markets with intensecompetition. In such a scenario, companies can either boost growththrough product innovation or differentiation.Alternatively, they can acquire a high growth company with goodfundamentals in a fast growing market. 33
    34. 34. In the early 21st century, the beer industry experienced aggressiveconsolidation due to a series of mergers and acquisitions betweenthe big breweries. To strengthen its position in the fastconsolidating industry, South African Breweries (SAB) acquiredMiller brewing company, thereby forming the worlds secondlargest beer company- SABMiller. Instead of establishing its ownbrands, SAB had a history of acquiring companies andtransforming them according to its own model. With the formationof SABMiller, the competition in the US heated up between itselfand Anheuser-Busch, which controlled more than half of the USbeer market. The battle intensified when Anheuser-Busch enteredthe Chinese market, where SABMiller already had a presence. 34
    35. 35. Cisco systems, which is a well know brand in the networkingand communications space, is on a major expansion spree withits recent acquisition of Starent Networks. The $2.9 billion dealaims to leverage Starent’s mobile infrastructure capability byenabling Cisco to provide a strong architecture for rich, qualitymultimedia experiences to mobile subscribers.Starent has an extended expertise in delivering high qualitycontent such as video, mobile TV and gaming to mobilesubscribers. With the rapid explosion of content downloads frommobile phones, especially video transfer, mobile data traffic hasseen an exponential growth in recent times. 35
    36. 36. Accelerating organic growth – The first step to accelerate organicgrowth is securing the customer relationships for effective retentionstrategies.Understanding the factors most important to your customers, whatdrives their loyalty, and what areas deserve the most focus. Develop account managers and sales departments to develop acoordinated strategy to build and grow your company the mostintelligent way – through the eyes of your customers. 36
    37. 37. GE 9 cell matrix or business screen matrix.Ma Organization’s business strengthrk H M Let H gy y eg at t e ra st st rA d Got M ol gy e /h at et rr ct iv o st le Ga Se N oct Li Market Attractiveness : Size, growth, Margin , Regulationv Fewer competition etce Business strength : Skill, financial soundness, technologyne edge , Distribution , Brand , large 37 customer base , R&D, prod Qlty etc.s
    38. 38. Michael Porter’s 5 force model to study the barriers to entryIn a market . 38
    39. 39. 39
    40. 40. Entry mode strategies in new Market .Entry Mode Choice AdvantageExporting Ability to realize on economy of scaleLicensing Low development costs & riskFranchising Low development cost & brand visibilityJV Access to local partner & leverage on their Competitive advantageWholly ownedSubsidiaries. Protection of technology , global strategic coordination , leverage on location & experience curve. 40
    41. 41. 41
    42. 42. 42
    43. 43. 43
    44. 44. 44
    45. 45. •For Outsourcing to be an effective strategy :•Evaluate organizational Cultural compatibility between thepartners.•Technological and managerial skills which complement theprinciple partner’s line of business•Principle’s control over quality•An agreement to ensure that there will be no infringement ofcopyright , IPR etc.•Evaluate if the local partner has potential to turn out to beprinciple’s competitor in near future . 45
    46. 46. Reason for New Product FailuresOverestimating market sizePoor marketing researchDesign problemsExcessive development costsIncorrectly positioned, priced, or advertisedCompetitive reaction 46
    47. 47. New Product Development StrategyOriginal productsAcquisitionProduct improvementsProduct modificationsNew brands through the firm’s ownR&D efforts. 47
    48. 48. NPD Strategy 48
    49. 49. 49
    50. 50. 50
    51. 51. 51
    52. 52. Strategic role of Product Management 52
    53. 53. Consumer decision making process. Buying motives. Benefits desired Product Consumer PurposeGives meaning attributes Perception In consumerTo the product To associate Product choices Brands preference = ∑ P.A + CP Buy 53
    54. 54. Pricing strategy• We need to set price when we have a new product, or when we enter a new market with an existing product.• How? – Need to decide what position you want your product to be in. 54
    55. 55. Pricing StrategiesA Sound Strategy Pays for Itself . Sound pricing strategy creates amore competitive position within your industry and has the potentialto increase profitability across product lines. While it may betempting to implement tactics that yield short-term gains, a well-crafted pricing strategy will help to deliver sustainable profitabilityover the long haul.Pricing strategy addresses 4 key drivers of pricing strategyexcellence: 55
    56. 56. 4 key drivers of pricing strategy . 56
    57. 57. Transaction management : Manages immediate pricing issues for allproducts and services that impact list prices, discount grids,allowances, rebates, and resulting net prices.Value Perception: Perceived value metric and competitiveenvironment analysis determine how your products and servicemeasure up with customers in order to determine base prices.Organization: Work in partnership with clients to transfer pricingmanagement knowledge, establish best pricing practices andprocesses, instill a pricing culture focused on driving profits, andinstall tools to control and manage price . 57
    58. 58. Pricing Grid 58
    59. 59. Price-Quality Strategies• Philip Kotler’s 9 price-quality strategies Price High medium Low High Quality High Super Premium Value Value Over Mid Good Medium Charging Value Value False Rip-off Economy Economy Low Quality 59
    60. 60. 60
    61. 61. New-Product Pricing Strategies1. Skimming pricing – Charging a high price initially and reducing the price over time – Commonly used when introducing new & innovative products .2. Penetration pricing – Charging a low price when entering the market to capture market share – Used when competitors are closing in with similar or better products 61
    62. 62. 3. Intermediate pricing – Pricing somewhere in between the skimming strategy and the penetration strategy 62
    63. 63. Pricing Strategies 63
    64. 64. Pricing Process1. Set Pricing Objectives (see next slide)2. Analyze demand3. Draw conclusions from competitive intelligence4. Select pricing strategy appropriate to the political, social, legal and economical environment5. Determine specific prices 64
    65. 65. Possible Pricing Objectives• Profit objectives e.g. – Targeted profit return• Volume objectives e.g. – Dollar or unit sales growth – Market share growth• Other objectives e.g. – Match competitors’ price – Non-price competition 65
    66. 66. Demand Analysis• Measure the impact of price change on total revenue• Predicts unit sales volume and total revenue for various price levels• Different customers have different price sensitivities and needs 66
    67. 67. Impact of Cost on Pricing Strategy• Fixed and variable costs – Full-Cost Pricing • Markup pricing, break-even pricing and rate-of- return pricing – Variable-cost pricing• 3 types of relationships – Ratio of fixed costs to variable costs – Economies of scales – Cost structure 67
    68. 68. Impact of Ethics on Pricing• How should you price if your product is a life-saving drug?• What are the ethical considerations? – Customers have no choice – Need to pay for the research – When cheaper options doesn’t work – Competition decides 68
    69. 69. Information Needed for Price Change• Customers’ ability & willingness to buy; customer lifestyle; benefits sought; characteristics of the product e.g. – When the kopi tiams, local coffee shops in Singapore tried to raise the price of a cup of coffee by 10 cents in March 1994, the grass-root reaction was stormy – When Starbucks Coffee and Spinelli’s raised their prices in the beginning of 1998 by a hefty 20%, nobody raised an eyelit 69
    70. 70. • Need to know everything about the competitors – How would competitors react to our price change? (see following slide) – In obtaining competitors’ information, remember the value of the information 70
    71. 71. Pricing Strategies for Established ProductsThree strategic alternatives:• Maintain the price if you are the leader e.g. – In 1999, Shell in Singapore maintained its price when other petrol companies engaged in a price war until towards the end of the engagement• Reduce the price e.g. – SIA regularly reduce its airfare in anticipation of the developing market situations• Increase the price – during inflation, or if demand is expected to increase or if you wish to harvest e.g. in Indonesia 71
    72. 72. Price-Flexibility Strategy• One-price policy—setting one fixed price for all markets• Flexible-price policy—setting different prices in different markets based on: – Geographic Location, – Time of delivery, or – The complexity of the product 72
    73. 73. How much flexibility in price?• Depends on the Demand-Cost gap and the influence of competition, social, legal and ethical considerations• Example: Life-saving drugs 73
    74. 74. Product-Line Pricing• When pricing products in different lines, must take cross-elasticities of demand across the set of products into consideration• The idea is to maximize the profits of the entire organization rather than that of a single product or a single line 74
    75. 75. Leasing Strategy• Leasing is more common for industrial goods e.g. – Singapore Airlines sold many of their aircraft and lease them back for their operations• There is a growing trend toward leasing consumer goods as well – e.g. Leasing of office equipment 75
    76. 76. Reactions to Price Change• Customers are more sensitive to price changes if the products cost a lot and/or are bought frequently• Competitors may see each of your price change as a fresh challenge and react according to its self-interest at the time. Need to estimate each close competitor’s likely reaction 76
    77. 77. Responding to Competitors’ Price Change• If competitors lower price for homogenous products – Try augmenting the product – If it doesn’t work or if it is not likely to work, then meet the price cut head-on 77
    78. 78. Responding to Competitors’ Price Change (cont’d)• If competitors raise price – In a homogeneous market, follow if you think the whole market is likely to follow – In a non-homogeneous market, evaluate • The reason for the competitor price change • If the price increase is temporary • The effect on your market share & profit • The likely response(s) from the other competitors 78
    79. 79. When a Market Leader is Being Attacked on PriceOptions available:• Maintain price• Raise perceived quality• Match competitors’ price• Increase price and improve quality 79
    80. 80. Impact of Discounting on Brand Equity• Why discount?• Problems emerging with discounts• The value equation (V=Q/P) 80
    81. 81. Price WarPrice wars are frequent in industries where• Cost differentiation opportunities exists• Capital is intensive and products are homogeneousExamples: Airfares, ISP, Petrol, & Loans e.g. – The Home Loan price war in Singapore in Sept 2000 involving OUB, UOB, DBS among others 81
    82. 82. Yield Management• What is it?• Yield management goals• Industries that benefited from yield management• Common variables 82
    83. 83. 83
    84. 84. 84
    85. 85. Core CapabilitiesProduct LeadershipRefers to the ability to develop creative, premium productsthrough specialized new technologies.Market LeadershipRefers to the ability to achieve the "LG brand is No. 1" goalbacked by its formidable market presence worldwide.People LeadershipRefers to talented people who perform excellently byinternalizing and practicing innovations. 85
    86. 86. LG strives to enhance the customer’s life (and lifestyle) with ourintelligent features, intuitive functionality, and exceptionalperformance. (Positioning Statement)Choosing LG is a form of self-expression and self-satisfaction.Our customer will take pride in owning and take comfort inknowing he/she made a smart, more informed decision.Brand Platform The LG brand is composed of four basic elements: 86
    87. 87. Management Level responsible for strategic management in an Organization LEVEL-I Corporate Management Chmn, B.o.Dir LEVEL-2 S BU ManagementCEO, COO, CFO, CMO LEVEL -3Operating Management . Line &Functional managers 87
    88. 88. Level ResponsibilitiesCorporate Management Set Vision, Goal & Direction for the organization . Chart long range plans . Review the strategies w.r.t Goal & suggest course of correction if any.Strategic Business Unit Make strategies for SBU in line withManagement the corporate goal . Drive strategies to achieve the desired performance at business unit level.Operating Management Execute the plans at all functional level to achieve the target set by the SBU . 88
    89. 89. Summary : Objective of Strategic Management Process in an Organization.Achieve Goal Congruence . Harmonize corporate goals , Visionacross the diversifies corporation of business enterprise.Ensure Smooth communication & coordination between all businessfunction of the corporation for successful implementation ofbusiness strategyEvaluate business strategy , take corrective action plan, formulatecontingency plan in tune with the market condition.Influence change management in the organization .Enhance profit consciousness among the employees. 89
    90. 90. Generic issues in BPEST analysis in external environment.Business Political Economic Social TechnologicalLife Cycle of Legislation Inflation skill DevelopmentIndustry Labor Law Interest rate consumer in IT Company law Currency confidence IndustrialCompetition Taxation fluctuation Consumerism application type Government’s GDP priority Terms of trade Income levels employment levels 90
    91. 91. McKinsey 7-S Framework to create organizationalStructure conducive for growth . STRUCTURE STRATEGY SYSTEMS SHARED VALUES SKILLS STYLE STAFF 91
    92. 92. Internal analysis for building Competitive advantage : MichaelPorter’s value chain model S Organizational infrastructure u HRM p p Technology initiative o v Procurement a r t l Inbound operation Mktg & Service & u logistics Sales support e Out bound logistics Primary Activities 92
    93. 93. Generic building blocks of competitive advantage Quality Process CA through Superior Customer LOW COST & efficiency Responsiveness Differentiation Innovation 93
    94. 94. Long range corporate planning strategy Growth & expansion strategy 1.Hive off 2.Out source 3.ContractExpansion Diversification Divestment Manufac-Strategy Strategy Strategy turing 4 Liquidation1.New market/Existing Related Un RelatedProduct2.New Product/Existing Forward, Backward, Concentric Conglomeratemarket M&A3.Existing market /Existing J.Vproduct 32 94
    95. 95. Entry mode strategies in new Market .Entry Mode Choice AdvantageExporting Ability to realize on economy of scaleLicensing Low development costs & riskFranchising Low development cost & brand visibilityJV Access to local partner & leverage on their Competitive advantageWholly ownedSubsidiaries. Protection of technology , global strategic coordination , leverage on location & experience curve. 95
    96. 96. •For Outsourcing to be an effective strategy :•Evaluate organizational Cultural compatibility between thepartners.•Technological and managerial skills which complement theprinciple partner’s line of business•Principle’s control over quality•An agreement to ensure that there will be no infringement ofcopyright , IPR etc.•Evaluate if the local partner has potential to turn out to beprinciple’s competitor in near future . 96
    97. 97. Corporate Level Growth Strategies.The corporate level strategy identifies the business inwhich an organization should participate , create value, expand or contract by mergers, acquisition & spin-offto maximize the long term profitability & growth. Three corporate level growth strategies are : •Horizontal growth strategy : •Vertical Growth Strategy •Out source strategy 97
    98. 98. Corporate level growth strategies :1.Horizontal integration. The process of acquiring ormerging with industry competitors in an effort toachieve competitive advantage which come with largescale & scope.Eg World COM acquired 60 companies between 1983 to2001 Chrysler merged with Diamler Benz Pfizer acquired Warner lambert2 .Vertical integration is a process of expanding theoperation backward into an industry which producesinputs for the company or forward into an industry tomarket its products.IBM , Reliance Raymond etc. 98
    99. 99. Strategic out-sourcing :: : This involves separatingsome of the value creating activities within thebusiness & allowing them performed by independententity or spinning off the part of that function of theorganization as an independent entity. 99
    100. 100. Strategic Management process at SBU level in anorganization. Reward & recognize ( Satisfied)Business vision Evaluation Strategic Budget & Responsibility & goal of plan Resources. Centers performance Alternative plan/ Budget Corrective Action revision ( Unsatisfied) Contingency plan (Feedback) 100
    101. 101. 101
    103. 103. The objective of defense position or fortress strategy is tostrengthen the strongly held position to build an impregnablefortress capable of repelling attacks by current or futurecompetitors.The marketing actions used are :Retain customer & build CLV by improving customer satisfaction& loyalty.Actions are: Increase quality control process at all level. TPM , Sixsigma Lean manufacturing process , etc.Continue product innovation & modification to increase customerbenefit. 103
    104. 104. Focus on market communication to simulate selective demand ,stress product superiority & build TCO.Build key accounts , customer referrals.Train internal employees , partners, channel members , buildlearning & sharing culture ( knowledge management initiative)Build/expand distribution channel , subcontract , outsource theactivities which are not of competitive strength of the organizationLeverage on technologies for building strength.Reduce attractiveness of switching : create /build brands, brandextensions at every price point . Fill the product gaps. 104
    105. 105. Flanker strategy: Protect against loss of specific segment of customers by developing a second line of products /Brand which takes care of the weakness ofthe original product offering in terms of price point, compactfeatures. etc. More often used in the mass segment for priceconscious customer to deliver the similar benefit of owning areputed brand with more critical features.A strategy for creating a second line of customers who are differentfrom the early adopters & wanting to associate /experiment thebrand .The underlining purpose of the strategy is to close the product gapsthrough which the competitors can enter in the market.( unorganized sector , regional player etc) 105
    106. 106. Confrontation strategy Protect against he loss of share in thecurrent market or customer base by meeting or beating a head tohead competitive offering .Improve ability to win new customers who will other wise attractto competition offing .Develop or modify the product to match superior competitor’soffering. Lower prices & or heavy promotional efforts . Create aprice war & force the competition to to follow it.Market expansion strategy: Increase ability to attract newcustomers by developing new product offering . Build product lineextension, for variety of new applications.Contract or strategic withdrawal . Increase ability to attract newcustomers in select high growth segment & with draw fromsmaller non strategic ( markets , profit ) . Build segment focus. 106
    107. 107. Follower’s growth strategy.Frontal attack strategy : Leapfrog strategy , Flank strategy ,Encirclement strategy , Guerrilla attack strategy.Frontal attack strategy : The challenger builds cost advantagethrough internal efficiency & creates a differentiation good enoughto attract the leaders,s existing & potential customer base. Thestrategy works well only when the consumer do not have strongbrand preference for the leader’s product. Leapfrog strategy: Challenger differentiates its position, ondistribution, price, low cost product etc leveraging on technology,tie ups. More often technology is used as a driver to differentiateitself. Vistacon’s strategy on “Acuve” contact lens, to displaceBausch & Lomb. 107
    108. 108. Flank attack strategy: When the leaders brand does not satisfy thefull need of the segment , which is more fragmented . The strategyis all about re-defining the market. Small car , bike market etc.Encirclement strategy: Targeting several untapped/underdeveloped market segment simultaneously , The strategy isto surround the leader’s brand with variety of offering aimed atseveral peripheral segments.The strategy works well when themarket is fragmented on the basis of multiple applications, &different geographic locations.Guerilla Attack strategy: A challenger makes sporadic unpredictable moves in the market to upset the going strategy of theleader. These strategies can be either a artificial price drop.Short term sales promotion campaign, offensive strategies leadingto lawsuits. Etc. The aim of the strategy is to slow down theleader’s expansion strategies by diverting its resources & 108attention.
    109. 109. Investment center Decisions ROI = PBIT Invested Capital ROCE = PAT + Post tax interest on Loan term Loan Capital EmployedCE=(Shareholder’s capital+ Reserves+ Long term Liabilities) 109
    110. 110. ROI Problems• Feed the Dogs ( Over Investment )• Starve the Stars ( Under Investment ) High STAR PROBLEM CHILD Relative Market Growth CASH COW DOG Low High Market Share Low 110
    111. 111. EVA Basic PremiseManagers are obliged to create value for their investorsInvestors invest money in a company because they expect returnsThere is a minimum level of profitability expected from investors,called capital chargeCapital charge is the average equity return on equity markets;investors can achieve this return easily with diversified, long-termequity market investmentThus creating less return (in the long run) than the capital charge iseconomically not acceptable (especially from shareholdersperspective)Investors can also take their money away from the firm since theyhave other investment alternatives 111
    112. 112. EVA is the gain or loss that remains after assessing a chargefor the cost of all types of capital employed.What an accountant calls profits in an income statement , itincludes a charge for the debt capital employed which iscommonly referred to as interest expense. However, anincome statement does not include a charge for the equitycapital that was employed during the accounting period.Therefore, EVA goes beyond conventionalaccounting standards by including a provision forthe cost of equity capital. The cost of equity needs tobe factored into business investment decisions inorder to enhance shareholder value. 112
    113. 113. •Although EVA is couched in financial analysis, its primarypurpose is to shape management behavior.•EVA can be used as a performance measure to evaluate anoverall company, a division within a company, a locationwithin a division, or an individual manager.•By setting goals, EVA can become a motivational tool atvarious levels of management.•EVA can also be used in downsizing decisions. 113
    114. 114. EVA and Corporate CulturePaying managers for performance is a backward-looking practice,but the capital markets assign value on a forward-looking basis.Therefore, companies that pay for past performance may beunwittingly paying their managers to undermine value creation.When EVA-related performance measurement process isimplemented throughout your company, all affected employees needto understand the goal, as well as how their actions contribute tomeeting it.In this respect, the EVA’s popularity parallels the 1980s “totalquality management” trend. Like quality, value is every employee’sresponsibility. To this end, management and employee trainingprograms are a crucial component of any EVA plan. 114
    115. 115. What is Needed to Calculate Company’s EconomicValue Added (EVA)?Only following the information is needed for acalculation of a company’s EVA:•Company’s Income Statement•Company’s Balance Sheet 115
    116. 116. Illustration: Income Statement ( P/L statement )Net Sales 2,600.00Cost of Goods Sold 1,400.00SG&A Expenses 400.00Depreciation 150.00Other OperatingExpenses - 100.00Operating income 550.00Interest : 200.00Income Before Tax 350.00Income Tax (40%) 140.00Net Profit After Taxes 210.00 116
    117. 117. Illustration: Balance SheetCurrent Assets Current LiabilitiesCash 50.00 Accounts Payable 100.00 NonReceivable 370.00 Accrued Expenses 250.00 InterestInventory 235.00 Short-Term Debt 300.00 Bearing LiabilitiesOther CurrentAssets 145.00Total current Assets 800.00 Total Current Liabilities 650.00Fixed Assets Long-Term Liabilities Long-Term Debt 760.00Land 650.00 Total Long-Term Liabilities 760.00Equipment 410.00 Capital (Common Equity)Other LongTerm Assets 490.00 Capital Stock 300.00Total Fixed Assets 1,550.00 Retained Earnings 430.00 YTD Profit/Loss 210.00 Total Equity Capital 940.00TOTAL ASSETS 2,350.00 TOTAL LIABILITIES 2,350.00 117
    118. 118. CCRDebt = [Debt/(Debt+Equity)](1-t) Where t represents the company’s tax rate. +CCREquity = Equity/(Debt+Equity) Capital Cost Rate (CCR) will be :Assume owners expect 13 % return* for using their moneybecause less are not attractive to them, therefore, companyhas 940/2350 =40% (or 0.4) of equity with a cost of 13%.Company has also 60% debt and assume that it has to pay8% interest for it. So the average capital costs would be:CCR ** = Average Equity proportion * Equity cost +Average Debt proportion * Debt cost = 40% * 13% + 60% *8% = 0.4 * 13% + 0.6 * 8% = 10% 118
    119. 119. ** Note: if tax savings from interests are included (as theyshould if), then CCR would be:CCR = 40% * 13% + 60% * 8% *(1- tax rate) =0.4 * 13% + 0.6 * 8% * (1 - 0.4) = 8.08 % (Using 40 % tax rate)Companies paying high taxes and having highdebts may have to consider tax savings effects, byadding the tax savings component later in thecapital cost rate (CCR) 119
    120. 120. Identify Company’s Capital (C)Company’s Capital (C) areTotal Liabilities less Non-Interest Bearing Liabilities:Total Liabilities 2,350.00lessAccounts Payable 100.00 [ No interest cost incurred on theseAccrued Expenses 250.00 Liabilities. ]----------------------------------Capital : 2,000.00 120
    121. 121. EVA = NOPAT - C * CCR = 210.00 - 2,000.00 * 0.10 = 10.00Note: this is the EVA calculation for one year. If a company calculates & reports EVA in its quarterly report ,then it’s capital costs will be : Q1 Capital costs for 3 months: 3/12 * 10% * 2,000 = 50 Capital costs for 4 months: 4/12 * 10% * 2,000 = 67 Q2 Capital costs for 6 months: 6/12 * 10% * 2,000 = 100 Q3 Capital costs for 9 months: 9/12 * 10% * 2,000 = 150 EVA for Q1, Q2 , Q3, Q4 160 143 110 60 121
    122. 122. Growth market strategies for Market leaders. It is a strategic objective a market leader to maintain its leadingrelative market share in the face of increasing competition. Themarketing strategies followed to maintain leading share positionare :1Fortress or defense position strategy.2Flanker strategy3Confrontation strategy4Market expansion or Mobile strategy5 Contraction or strategic withdrawal strategy.An organization will deploy these strategies singly or incombination to maintain it s leading position. 122
    123. 123. 123
    124. 124. . Missionstatement of Boeing : “People workingtogether as a global enterprise for aerospaceleadership by 2016.”GE : Be No.1 or No2 in all the businesses itventure into.Microsoft: Empower people through greatsoftware any time , any place & in any device. 124
    125. 125. Secrets of success of business corporation. Dell computer is one of the most extraordinary success story in business . Michael Dell started in 1984 , became the highest performer & largest producer of computer’s system .The company is quoted as the best example for logistic & supply chain system. How did Dell register persistently high profitability? South West Airlines has long been a high performer in U.S airline industry , known for low fares ( 30% below its rivals) low cost structures & superior profitability. Cisco Systems started in 1984 as a networking product company ,went public in 1990 with annual sales of $ 70 Mn, & evolved as $19 bn organization having no debt & ROI of 22 % by 1999.The success of these organization lies in strategically planned, executed& monitored business with strong leadership quality which exhibitedwillingness to change with environment. 125
    126. 126. Strategic Planing & Control in an organization. Corporate level planing Control Strategic Business Unit level planing Operational Control level planing & Control 126
    127. 127. Measure financial & non financial performance of activities .Identify the functions deviating from the organizational goal &objective.Take corrective action .( Financial : Top line revenue , Bottom line profit , ROI , EVA , PAT ROCE Working capital, Budget , Debt control , NPA etc)Non Financial : Customer satisfaction , Employee satisfaction &retention, Productivity & efficiency of the employee , Technology& processes . Market share maximization. Business integrity &commitment . ( Corporate Governance ) Supplier integrationConducting Management Audit : Employee (People) audit , processaudit , Financial audit, Infrastructure audit , Supplier audit 127
    128. 128. 128
    129. 129. 129
    130. 130. 130
    131. 131. 131
    132. 132. Competitive strategy in a declining industry . Leadership through Process, quality etc. Niche strategy through differentiated level of product & service Harvest strategy by optimizing the cash flow Divest strategy by selling off the businessThe choice of the strategy depends upon intensity of the competition& the firm’s ability to address it. 132
    133. 133. Corporate performance :Why divide business in to responsibility centers.Is performance affected by governance & business ethics.What made the collapse of Enron ,a principal player in the natural gas pipe line operator in 90’sThe causes of poor performance.Lack of ownership & responsibility at various managementlevels .High cost structurelack of integrity & Business ethics.Improper mechanism for measuring the businessperformance.Poor organizational culture 133
    134. 134. Economic Value Added.Why EVA ?Performance measures like ROI, ROCE , ROE ,EPS Net profit ,operating profit evaluate the performance of the business .They lack proper bench mark for comparison . Shareholdersrequire minimum rate of return on their investment dependingon the risk in the investment. Their wealth is measured in termsof capital appreciation reflected in the market value of shares &dividends . Management’s ability to meet the expectation of theshare holders are reflected in terms of the share value.EVA helps to focus the share holder’s return & mould themanagers of the organization to work like a owners of theirbusiness. 134
    135. 135. Concept of EVA : Started by US financial advisory ; Stern Stewart& Co.Called Economic Income. Subsequently called EVA.An organization creates hare holder’s value only if it generatesreturn in excess of the cost of capital. Net profit > the cost of capitalHence EVA = NOPAT -( Total Capital Employed X average cost of Capital) = Excess of return over CoCIf the EVA is negative , it implies that the organization is destroyingthe shareholder’s wealth , even though organization reports positive& growing EPS, or ROCE. .ROI verses EVA : 1. EVA measures the real profitability . Itindicates the shareholder’s wealth for the risk they take in investingthe capital in the organization. 135
    136. 136. 2.EVA encourages growth in new products, new equipment , market,quality measures etc3.Builds sensitivity towards the resource mobilization , allocation &investment decision.4.It measures the effective productivity of all factors of production.Increasing EVA :1. Increase NOPAT with the same amount of capital2. Reduce the capital employed without affecting the earning.( Discard the unproductive assets)3. Investing in the projects , products etc where the earning is morethan the CoC .EVA & Managerial performance1.Builds the competitive spirit among the managers to create valuefor the share holders , by focusing how capital is being used to create higher cash in flow. 136
    137. 137. 2. Develops the overall competency of the organization to earnhigherreturn operating in a similar risk seeking business environment.3. Makes the mangers to care about the assets & income & helpsthem to assess properly the trade off between the two.4. It helps the managers to focus on the value creating activitiesrather than wasting time & energy with accounting principles.5 EVA linked Incentive : There is no upper limit of incentive forperforming managers who helps to increase the EVA . It createstremendous peer pressure. 137
    138. 138. Who is using EVA in Indian corporate sectorTCSTATA MotorsTISCOICICI bankEureka ForbesGodrej group( GCPL, Godrej Properties , Godgej Sara Lee , GodrejAgrovet Godrej Food )NIITInsights : Godrej recorded an EVA improvement of 35 Cr (FY01-02) Sales grew 24%, Profit grew 71%The EVA target set by the organization was not only met butexceeded . ED & PresidentEVA has no only helped the Godrej Group reward richlyoutstanding performance but also build entrepreneurial spirit. 138
    139. 139. Implementing EVA in an organization4 Step process :Known as 4 M approach1 Measurement2 Management system3. Motivation4. Mindset 139
    140. 140. Evaluation & Management Control Management audit Process. StrategicPeople Process Financial Infrastructure planaudit audit audit audit Work auditCompensation Policy environment BSCcompetency Quality processperformance IT process (ERP)productivity CSIB/M Supplier ratingLTQ Operation audit versus & management audit 140
    141. 141. Performance measures are split in four categoriesI Financial Factors Soundness of the organization to share holdersII Customer Factors Quality , Speed effectiveness, efficiency with which the organization deliver the customer satisfactionIII Internal Business Internal business process support the organization or Process not ?IV learning & Growth Continuos improvement & building capability to sustain change & achieve competitive dominance 141
    142. 142. BSC Frame work Financial perspective Strategic Internal business Customer & process goals & perspective perspective objectives Learning & growth 142