A – Z Strategy
A

Ackoff, Russell L:           One of the early strategy gurus, Ackoff introduced rigor into strategic
pla...
2

uncertainties is by building responsiveness and flexibility into the organization. This is called
responsiveness planni...
3

One way to tackle the agency problem is to align the interests of managers with those of owners by
using appropriate in...
4

are consistent and aligned with the desired customer and financial outcomes. Organization alignment
explores how the va...
5


   •   Product development involves launching a new product in the current market by developing
       new features, i...
6


Argyris, Chris: A social psychologist by training, Chris Argyris has done pioneering work on
how individuals respond t...
7


    •   Low switching costs, resulting in low loyalty.
    •   Many relatively small sellers
    •   The item being pu...
8


Barnard argued that management had to focus on the “strategic” few that would offer “the greatest
leverage over the ou...
9



Barriers to Imitation:           With innovations rapidly diffusing, the key to success in today’s
business environme...
10

turn into a dog overnight if a disruptive technology emerges in an industry. That is what happened to
mini computers w...
11

Markets can be divided into red oceans and blue oceans. Red oceans represent the known or existing
market space. Blue ...
12

suitably, companies have major opportunities to exploit this market. The Bottom-of-the-pyramid is
driven by factors li...
13

not to be done. In some situations, if not all, what is right depends on the context. Many companies
have a code of et...
14

decision-making. BPR must be completed before a major IT intervention. Otherwise, the existing
inefficiencies will get...
15


    •   Likelihood of technological obsolescence.
    •   Probable capacity expansion by competitors.
    •   Future ...
16

Debt costs less. But as interest and principal payments are mandatory, there might be a lot of strain on
cash flows es...
17

organization. The past strategy becomes ingrained in organizational routines. Information that would
modify or challen...
18


Michael Porter8 uses the term “clusters” to describe geographical concentrations of interconnected
companies and inst...
19

supply chain management. In the highly commoditized PC industry, Dell has succeeded largely
because of its excellence ...
20

Firms should pursue one of these strategies and take care not to get stuck in the middle. But care must
also be taken ...
21


    •   Concentrating on large competitors while ignoring smaller players.
    •   Assuming that competitor behavior ...
22

penalize competitors for their stake in these existing strategies.
(See Competitive Strategy)

Competitive Strategy:  ...
23


Achieving competitive advantage requires a firm to make choices. If a firm is to gain advantage, it
must choose the t...
24

(See Dynamic Capabilities, Process Networks, Strategic Alliances)

Core Competence: A term coined by C K Prahalad and ...
25

Replicability: If it is possible, by appropriate investment or by purchasing a similar asset for a
competitor, to cons...
26


Corporate Governance:             Corporate governance has been a hot issue in recent years. The
series of corporate ...
27

(See Corporate Social Responsibility)

Corporate Purpose: As defined by Collins and Porras in their book, “Built to La...
28

various actions involved in realigning the organization in the light of emerging market trends. This
may include a new...
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  1. 1. A – Z Strategy A Ackoff, Russell L: One of the early strategy gurus, Ackoff introduced rigor into strategic planning. In his book, “A concept of corporate planning,” Ackoff mentions that there are some aspects of the future about which we can be virtually certain. Here, companies can pursue commitment planning. There are some aspects of the future about which we cannot be certain, but we can be reasonably sure of what the possibilities are. Here, contingency planning is useful. A good example is planning for a military invasion. Every possibility is identified and analyzed and a suitable action plan prepared, because time is of the essence, once a possibility has become a reality. Finally, there are some aspects of the future, which cannot be anticipated. Here, responsiveness planning can be used, i.e. building flexibility into the organization. (See Adaptive Planning) Activity-Based Costing: Activity Based Costing (ABC) increases the accuracy of cost information by linking overhead and other indirect costs to product or customer segments more precisely. Traditional accounting systems distribute indirect costs on the basis of direct labor hours, machine hours, or material costs. This leads to a distorted picture. Decisions about which product line to invest in and which not to invest in, become difficult. ABC undertakes detailed economic analyses of important business activities to improve strategic and operational decisions. To build a system that will support ABC, companies should: • Determine the key activities performed; • Determine the cost drivers by activity; • Determine overhead and other indirect costs by activity, using clearly identified cost drivers. ABC can be used to: Re-price products - Managers can analyze product profitability more accurately by combining activity-based cost data with pricing information. This can result in the re-pricing or elimination of unprofitable products. Managers can also estimate new product costs accurately. Reduce cost - ABC identifies the components of overhead costs and other cost drivers. Managers can reduce costs by decreasing the cost of an activity or the number of activities per unit. Influence strategic and operational planning – ABC can facilitate target costing, performance measurement for continuous improvement, and resource allocation based on projected demand and infrastructure requirements. ABC can also assist a company in identifying/evaluating new business opportunities. (See Full Costing, Strategic Cost Management) Adaptive Planning: This school of strategic planning, developed by Russell Ackoff, believes that the principal value of planning lies not in the plans themselves but in the process of producing them. Companies should try to put in place a system that will minimize the future need for retrospective planning, i.e. planning aimed at removing deficiencies produced by past decisions. This school classifies the future into three types: certainty, uncertainty and ignorance. When the future is reasonably certain, commitment planning can be used. When the future is uncertain but we can be reasonably sure of what the possibilities are, contingency planning can be used. Finally, there are some aspects of the future that just cannot be anticipated. The only way to deal with such
  2. 2. 2 uncertainties is by building responsiveness and flexibility into the organization. This is called responsiveness planning. (See Russell Ackoff) Adjacencies: A term coined by Chris Zook and James Allen1. These are the markets close to the company’s core business. By identifying and exploiting these markets, companies can create a new growth trajectory. Adjacencies essentially imply related diversification, i.e. moving into a new area which has some resemblance to the core business and taking advantage of the existing competencies. Adjacencies represent new growth opportunities which have a strong fit with the existing business. (See Core Competence, Diversification) Adjusted Present Value: The Net Present Value (NPV) is a popular method of evaluating an investment decision. NPV involves estimating the cash flows expected from the project and discounting them to the present value. NPV is, however, not suitable in some more complex situations where risk is different for different cash flows. Adjusted Present value (APV) is a modified version of NPV. APV uses different discount rates for different cash flows depending on the associated risk. Higher the risk, higher the discount factor used. (See Net Present Value) Agency Theory: Probes the relationship between principals and agents. Principals appoint agents to get the work done. The goals of principals usually differ from those of agents. This gives rise to the agency problem. For example, advertisers (principals) tend to emphasize sales goals and the cost-effectiveness of marketing communications, whereas advertising agencies may be more inclined to think of creative goals and attention-getting commercials. Professors of top Business Schools would like to spend most of their time doing research and consultancy. But the owners expect these professors to spend more time with students both in the classroom and outside. Agency theory is a key concept in corporate governance. Professional managers often pursue strategies that increase their personal payoffs at the expense of shareholders. For example, they may grant themselves lavish perquisites including elegant corner offices, corporate jets, large staffs, and extravagant retirement programs. Managers also often tend to pursue growth at the cost of profitability. Shareholders generally want to maximize earnings, as it results in stock appreciation. Since managers are typically compensated more for sales than earnings growth, they tend to be enthusiastic about strategies like mergers and acquisitions even when this enthusiasm is not really justified. Managers may also pursue diversification opportunities that are not necessarily in line with the company’s best interests. In other cases, managers may become complacent and allow things to drift. They may avoid risk since they feel they are more likely to be fired for failure, than for mediocre performance. Executives may be far less entrepreneurial than they should be. They may not make the bold moves that the situation demands. 1 “Beyond the Core: Expand Your Market Without Abandoning Your Roots,” by Chris Zook, HBS Press, 2004; “Profit From the Core: Growth Strategy in an Era of Turbulence” by Chris Zook and James Allen, Harvard Business School Press, 2001; “Growth Outside the Core” by Chris Zook and James Allen, Harvard Business Review, December 2003, pp 66-73.
  3. 3. 3 One way to tackle the agency problem is to align the interests of managers with those of owners by using appropriate incentives such as stock option and executive bonus plans. But ironically enough, these schemes may also tempt managers to act against the best interests of the firm. For example, they may manipulate the financial statements to increase earnings artificially. (See Corporate Governance) Alignment: A key factor in effective implementation of strategy. Most large organizations are divided into business units which are out of synch and work at cross purposes. The challenge is to coordinate the activities of these units and leverage their skills for the benefit of the organization as a whole. Kaplan & Norton2 call this alignment. By aligning the activities of its various business and support units, an organization can create additional sources of value in various ways. Financial synergies can be generated through centralized resource allocation and financial management. Value can also be created if corporate headquarters can operate internal capital markets better than external market mechanisms and share knowledge across business units, in a manner that would be difficult if the different units were independent entities. Customer synergy means enhancing customer relationships by offering a range of complementary products and services from different business units. Corporations can leverage their multiple products and services to create unique integrated solutions, resulting in customer satisfaction and loyalty that less diversified and more focused organizations cannot match. Companies can also generate value by delivering a value proposition consistently throughout their decentralized units. Cross selling to specific customers can also generate value. Internal process synergies can be created by generating economies of scale in activities such as procurement, logistics, information technology and infrastructure. Sharing processes across units generates economies of scale in such activities and helps cut costs. Centralized resources having specialized expertise and knowledge in how to operate a key process or service can be leveraged. The sharing of common philosophies, programs and competencies across business units can also generate significant benefits. Expertise sharing can reduce the time to respond to customer needs and make the company better equipped to exploit the emerging opportunities in the business environment. Learning and growth synergies can be generated by developing and sharing critical intangible assets including people, technology, culture and leadership. Corporate Headquarters can put in place effective processes for developing intangible assets and promote the sharing of knowledge and best practices throughout all its business and support units. New ideas can rapidly spread across the enterprise and be assimilated by the business units in a manner that would be difficult, were they independent entities. Growing leaders faster than competition can generate competitive advantage. There are different ways of achieving alignment. One way is to start at the top and then cascade down. Another way is to start in the middle, at the business unit level, before building a corporate scorecard and map. Some companies launch an enterprise wide initiative right at the start. Others conduct a pilot test at one or two business units before extending the scope to other enterprise units. Alignment has four components: strategic fit, organization alignment, human capital alignment and alignment of planning and control systems. Strategic fit exists when the internal performance drivers 2 “Alignment - Using the Balanced Score-card to create Corporate Synergies” by Robert S Kaplan and David P Norton, Harvard Business School Press, 2006.
  4. 4. 4 are consistent and aligned with the desired customer and financial outcomes. Organization alignment explores how the various parts of an organization synchronize their activities to generate synergy. Human capital alignment is achieved when employees’ goals, training and incentives become aligned with business strategy. Planning and control systems alignment exists when management systems for planning, operations and control are linked to strategy. As Kaplan and Norton put it, “Strategy execution is not a matter of luck. It is the result of conscious attention, combining both leadership and management processes to describe and measure the strategy, to align internal and external organizational units with the strategy, to align employees with the strategy through intrinsic and extrinsic motivation and targeted competency development programs and finally, to align existing management processes, reports and review meetings, with the execution, monitoring and adapting of the strategy.” (See Balanced Scorecard) Ansoff, Igor H: A famous strategy guru, Igor Ansoff developed the notion of corporate strategic planning. He argued that any business needs to look at its resources, and align them with the business environment. Ansoff's analytical tools such as competence grids, flow matrices, charts and diagrams are popular in contemporary management literature. He used the term competitive advantage years before Michael Porter. Ansoff's “Corporate Strategy: An analytical approach to business policy for growth and expansion” (1987), mentions three classes of decisions: (a) strategic (the selection of the product/market mix); (b) administrative (structure), and (c) operating (process). According to Ansoff, strategy should focus on three fundamental issues: • Definition of the firm’s core objectives • Whether the firm should diversify and, if so, into what areas • How the business should exploit and develop its new or existing market The closer a business stays to its existing products and markets, the lower the risk. Introducing new products into diversified markets carries the highest risk. Hence, the recommendation to stick to the knitting. Ansoff showed this in a matrix form, with four possible strategies, depending on the situation faced. Old Products New Products Old Markets Market Penetration Product development New Markets Market Development Diversification • Market penetration means increasing market share by encouraging current customers to buy more, attracting customers of competitors or convincing non-users to use the product. • Market development implies launching the current product in a new market by expanding distribution channels, selling in new locations or identifying the potential users.
  5. 5. 5 • Product development involves launching a new product in the current market by developing new features, improving quality levels, etc. • Diversification means moving beyond the current business. Concentric (related) diversification involves developing new products for the same segment. Conglomerate (unrelated) diversification involves developing new products for new markets. Ansoff is also famous for: • establishing corporate planning as a formal management process. • popularizing SWOT analysis • developing the idea of environmental scanning. • repositioning ‘strategic planning’ as part of a continuing process rather than a once-a-year (or less frequent) planning process. • Articulating the various advantages and disadvantages of deliberate strategy versus emergent strategy. • ‘Gap’ analysis – which looks at the gap between our aspirations and the likely outcome of current strategies. Ansoff’s seminal book ‘Corporate Planning’ has emphasized the need to break down the strategy process into various steps: • external analysis – understanding market opportunities and threats • internal analysis – understanding strengths and weaknesses. • choice (and our alternatives). • implementation. (See Strategic Options, SWOT Analysis) Anti Takeover Strategy: A takeover means change of ownership and usually change of management. The current management can resist the takeover bid in various ways: • The Golden Parachute is a provision in a CEO's contract to ensure that he will get a large bonus in cash or stock if the company is acquired. • The supermajority is a defense that requires an overwhelming majority of shareholders to approve of any acquisition. This makes a takeover much more unlikely. • A staggered board of directors prolongs the takeover process by preventing the entire board from being replaced at the same time. The terms are staggered so that some members are elected say every two years, while others are elected every four years. The acquirer may not want to wait four years for completely reconstituting the board. • Dual-class stock allows company owners to hold on to voting stock, while the company issues stock with little or no voting rights to the public. That way the new investors cannot take control of the company. • A poison pill refers to anything the target company does to make itself less valuable or less desirable as an acquisition after the raid has begun. For example, high-level managers and other employees may threaten to leave the company if it is acquired. A specific asset of a company like the R&D center or a particular division may be sold off to another company, or spun off into a separate corporation. A flip-in provision may allow current shareholders to buy more stocks at a steep discount in the event of a takeover attempt. The flow of additional cheap shares into the total pool of shares dilutes their value and voting power. A more drastic poison pill involves deliberately taking on large amounts of debt.
  6. 6. 6 Argyris, Chris: A social psychologist by training, Chris Argyris has done pioneering work on how individuals respond to changing organizational situations and the impediments to organizational learning. Argyris has done extensive research on learning in teams and drawn attention to the problems created by defensive behavior. The cleverer the team is, the more difficult it becomes to maintain openness to learning, and to avoid becoming defensive. Argyris describes the process involved here as ‘double-loop learning’. While ‘single-loop learning’ involves doing existing things better, ‘double-loop’ learning entails doing existing things in new ways or inventing new things. Effectively, double-loop learning involves reframing problems and stepping outside existing mind- sets. Argyris’ language is sometimes hard to understand. So he is often perceived as an esoteric rather than a popular guru. But his ideas and thoughts are profound and continue to guide the functioning of today’s organizations. (See Organizational Learning) B Backward Integration: Moving along the value chain towards the inputs side. By producing internally some or all of the inputs, the firm can benefit in various ways. The firm can avoid sharing proprietary data with its suppliers. This can be an important factor if the exact specifications of the component parts may reveal the key characteristics of the final product's design to the supplier. Backward integration may result in inputs with closely controlled specifications, enabling the firm to improve quality and differentiate its product. If the inputs are critical, backward integration helps the firm to gain greater control of the value chain and to mitigate the high bargaining power of suppliers. Some good examples of backward integration are India’s largest aluminium manufacturer Hindalco setting up a power plant, Reliance moving into petroleum refining and Tata Steel setting up its own township in Jamshedpur and mines and collieries in various parts of Orissa and Bihar. (See Vertical Integration) Balanced Scorecard: Designed by Robert Kaplan and David Norton, the Balanced Scorecard provides a comprehensive set of objectives and performance measures to monitor a company’s progress. These include: • Financial performance (revenues, earnings, return on capital, cash flow); • Customer value performance (market share, customer satisfaction, customer loyalty); • Internal business process performance (productivity, quality, delivery, etc) • Learning and Growth (Percent of revenue from new products, employee suggestions, rate of improvement, employee morale, knowledge, turnover, use of best demonstrated practices). The challenge in implementing the balanced scorecard lies in identifying the key metrics and measuring them on an ongoing basis so that the firm can systematically achieve its objectives. Too many metrics can make things complicated. So a few key metrics must be carefully chosen. (See Alignment) Bargaining Power of Buyers3: One of the forces in Porter’s Five Forces Model. The higher the bargaining power of buyers, less attractive the industry. The bargaining power of buyers is high under the following circumstances: • Few buyers who purchase in large quantities. 3 Abstracted from the book “The essence of Competitive Strategy” written by David Faulkner and Cliff Bowman, published by Prentice Hall of India in 2002.
  7. 7. 7 • Low switching costs, resulting in low loyalty. • Many relatively small sellers • The item being purchased is not an important one for buyers, and they can take it or leave it. • Buyers have a lot of information about competitive offers, which they can use for bargaining. • There is a good possibility that buyers may decide to integrate backwards, i.e make the product rather than buy it. (See Five Forces Model) Bargaining Power of Suppliers4: One of the forces in Porter’s Five Forces Model. Higher the bargaining power of suppliers, the less attractive the industry. Bargaining power of suppliers tends to be high under the following circumstances: • The purchase is important to the buyer. • Buyers face high switching costs. • There are few alternative sources of supply • Any particular buyer is not an important customer of the supplier • There is a strong possibility that the supplier may integrate forward. (See Five Forces Model) Barnard, Chester: One of the first management thinkers to think differently from the then gurus, Frederick Taylor and Max Weber. Barnard spent the whole of his career as a business executive with the Bell Telephone Company. He wrote two influential books, The Functions of the Executive (1938) and Organization and Management (1948). Barnard emphasized the importance of communication and shared values in organizations. Barnard excelled at organization-building skills. His tenure as CEO was marked by a sense of public service and personal integrity that are almost unimaginable to many today. He showed exemplary commitment to corporate welfare policies. For example, in 1933, at the height of the Depression, Barnard announced a no-layoff policy choosing to reduce employees’ working hours instead. Management authority, he realized, rested in its ability to persuade, rather than to command. The challenge was to balance the inherent tension between the needs of individual employees and the goals of an organization. He also recognized that much of the creative potential of an organization lay in informal networks, not in the formal hierarchy. He understood the role of constructive conflict. Barnard viewed the organization as a complex social system. The main challenge for management was achieving cooperation among the groups and individuals to facilitate the achievement of organizational goals, i.e. resolving the tension between achieving organizational goals and the need for individuals to achieve personal goals. Organizational goals could not be accomplished unless the leadership of the organization acknowledged individual aspirations and devised a means of helping employees achieve them. For Barnard, conventional incentive schemes were essentially, a self-fulfilling prophecy. Much before Maslow, Barnard argued that beyond a certain level of equitable compensation, employees would not necessarily be motivated by financial incentives. Bonuses and incentives only created a culture of greed. 4 Abstracted from the book “The essence of Competitive Strategy” written by David Faulkner and Cliff Bowman, published by Prentice Hall of India in 2002.
  8. 8. 8 Barnard argued that management had to focus on the “strategic” few that would offer “the greatest leverage over the outcomes of a particular decision”. He suggested that deciding what decisions not to make was as important as which decisions to make. “The fine art of executive decision consists in not deciding questions that are not now pertinent, in not deciding prematurely, in not making decisions that cannot be made effective, and in not making decisions that others should make.” Here, Barnard seemed to be in agreement with Peter Drucker. Barriers to Entry: One of the five forces in Porter’s Famous Five Forces model. Barriers to entry are the obstacles that a firm must overcome to enter an industry. When high entry barriers exist in an industry, competition is usually less intense and profitability tends to be high. On the other hand, when entry barriers are low, new firms can enter the industry. While demand may not go up immediately, they bring additional capacity along and reduce the overall level of profitability in the industry. The barriers to entry can be tangible or intangible. Tangible barriers include capital, and various kinds of physical assets like plant and machinery and infrastructure. Tangible barriers are easier to replicate than intangible barriers, like brands, corporate reputation, customer loyalty and relationships with vendors/distribution channels. 5 Barriers to entry may be high under the following circumstances: Economies of Scale: If there are major cost advantages to be gained from operating on a large scale or scope then new entrants will not find it easy. Learning Curve: If low unit costs can be achieved by accumulated learning, inexperienced new entrants will be at a unit cost disadvantage. Knowledge & Skills: Access to process knowledge and particular skills can make entry difficult. Customer Brand Loyalty: Customers may have preferred brands, or they may have strong relationships with their existing suppliers. New entrants have to persuade customers that it is worth incurring switching costs and move to the product of a new entrant. Capital costs: High capital costs involved in setting up production facilities, R&D centers, dealer networks and brand building will limit the number of potential entrants. Distribution Channels: It is often difficult for a new player to break into an existing distribution network. If all major distribution outlets are already closed to the new entrants, they may have to make heavy investments in setting up their own direct distribution network. High Switching Costs: High switching costs for customers constitute a barrier to entry. Government Policy: Government may restrict licenses, issue exclusive franchises or establish regulations that are troublesome and costly to implement. Access to low-cost inputs: This may act as a barrier to entry if potential entrants do not have such access to inputs which competitors enjoy. (See Barriers to Imitation, Five Forces Model) 5 Abstracted from the book “The essence of Competitive Strategy” written by David Faulkner and Cliff Bowman, published by Prentice Hall of India in 2002.
  9. 9. 9 Barriers to Imitation: With innovations rapidly diffusing, the key to success in today’s business environment is creating barriers to imitation. In general, tangible assets are easier to replicate, compared to intangible resources. Thus brands create formidable barriers to imitation but large factories can be easily replicated. Similarly, when a way of working is built into the company’s culture, imitation becomes difficult. For example, just-in-time, in which Toyota is a master is less about techniques and more about corporate philosophy and culture. That is why companies have found it difficult to implement Just-in-Time even though so much has been written about it and Toyota allows managers from all over the world to visit its factories. (See Barriers to Entry, Five Forces Model) Bartlett, Christopher A: Famous for his work on globalization and strategic management. Bartlett is the author/coauthor of several books, including Managing Across Borders and Individualized Corporation both coauthored with Sumantra Ghoshal. Managing Across Borders is considered one of the best ever books written on business management and possibly the most authoritative book on globalization. The book has been translated into several languages. (See Sumantra Ghoshal, Globalization) BCG Growth-Share Matrix: The Boston Consulting Group (BCG) has developed a matrix to help companies analyze their product lines and businesses. The 2x2 matrix considers two factors, market growth rate and the company's market share, as indicated below. High Low Market High Stars Question Marks Share Low Cash Cows Dogs Market Growth Accordingly, the BCG matrix divides products/businesses into four categories: • Stars: These high growth products in a fast growing market, need more resource commitments. For a company like Satyam Computer Services, the ERP implementation business is a star. • Cash Cows: These are low growth, high market share products, where minimal investments are envisaged. Indeed, cash cows provide the cash flows that support other businesses. The soaps and detergents business is a cash cow for Hindustan Lever Ltd. • Question Marks: These are low market share business units in high growth markets. Investment is needed to build them into stars. The foods division of HLL falls in this category as also the games business of Microsoft, and the retailing venture of Reliance. The long term profitability of these businesses is by no means certain. • Dogs: These are low growth and low market share businesses which generate just enough cash to maintain themselves. They are businesses from which the company is likely to withdraw in the near future. IBM thought the PC business was a dog and sold it to the Chinese computer manufacturer, Lenovo. Businesses evolve over time. According to the conventional product life cycle, question marks may turn into stars, and become cash cows if the market growth falls, finally becoming dogs towards the end of the cycle. It is, however, not necessary that businesses must evolve in this fashion. A star may
  10. 10. 10 turn into a dog overnight if a disruptive technology emerges in an industry. That is what happened to mini computers when PCs arrived. On the other hand, a cash cow can be converted into a star by brand repositioning or by targeting a new customer segment. In India, Cadbury’s has attempted to reposition its chocolates as products that can also be consumed by adults. (See GE 9 Cell Planning Grid) Beachhead Market: A market similar to a targeted strategic market but which provides a low risk learning opportunity. For example, Austria/ Switzerland can be considered beachhead markets for companies planning to enter Germany. Singapore is a beach head market for the Asian region. (See Globalization) Benchmarking: A process by which a company compares itself with another company, in the same or different industry on how well it is faring on various parameters. Benchmarking helps companies in setting stretch targets, improving the way of functioning and avoiding complacency. (See Best Practices) Best Practices: The most effective way to carry out a business activity or process. The term 'best' is highly subjective, is context dependent and also seems to imply that no further improvements are possible. Many people now prefer the term good practice. Best practices are often contextual. So transferring them across organizations may not be as easy as it often looks. Sometimes even within an organization, transfer of a best practice across departments/ functions can be a challenge. When best practices are embedded in an organization’s culture, replication in another organization becomes very difficult. (See Benchmarking, Barriers to Imitation) Big Hairy Audacious Goals (BHAGS): A term coined by James C Collins and Jerry I Porras in their well known book “Built To Last”. Visionary Companies set Big Hairy Audacious Goals (BHAGS) that raise the bar and inspire people across all levels. Examples of BHAGS include: • Boeing’s decision to commit to a Boeing 707 or 747 • Walt Disney’s decision to create Disneyland • Henry Ford’s declaration, “We will democratize the automobile” • Dhirubhai Ambani’s ambition of constructing the world’s largest petroleum refinery. A BHAG should be consistent with the company’s core ideology. It should be so clear and compelling that it must require little or no explanation. It must get people excited and pumped up. A BHAG should fall well outside the comfort zone. While it is important for people in the organization to believe they can pull it off, it should require tremendous effort. A BHAG should be so bold and compelling in its own right that even if the organization’s leaders disappeared, it would continue to inspire progress. (See Core Ideology, Corporate Purpose) Blue Ocean Strategy: Most companies focus on beating the competition. But according to W Chan Kim and Renee Mauborgne, two of the most respected scholars today in the area of strategy, the best way to beat the competition is to stop trying to beat the competition.
  11. 11. 11 Markets can be divided into red oceans and blue oceans. Red oceans represent the known or existing market space. Blue oceans denote the non existent or unknown market space. In red oceans, industry boundaries are defined and accepted, and the basis for competing is known. Here, companies try to grab market share from each other. As competition intensifies, both profitability and growth decline and products become commodities. Blue oceans, in contrast, represent untapped markets, in which the rules of the game are still not defined. There are highly profitable growth opportunities. Although some blue oceans are created well beyond existing industry boundaries, most are created from within red oceans by expanding existing industry boundaries. Identification of blue oceans cannot be done by looking at the past. About 100 years back, many of today's industries, automobiles, music recording, aviation, petrochemicals, health care, and management consulting were unheard of or had just begun to emerge. Only 30 years back, industries like mutual funds, cell phones, gas-fired electricity plants, biotechnology, discount retail, express package delivery, minivans, snowboards, coffee bars, and home videos, did not exist in a meaningful way. Blue ocean strategy is the result of a new mindset that moves the attention of companies away from competitors to alternatives and from customers to non-customers. It involves changing the rules of the game through the careful examination of factors that: • can be eliminated. • should be reduced well below the industry's standard. • should be raised well above the industry's standard. • should be created. In most industries, a common definition tends to emerge of who the target buyers are and what value they are looking for. Some industries compete principally on functionality. Other industries compete largely on emotional appeal. But what is often overlooked is that the appeal of most products or services is rarely intrinsic. Through the way they have competed in the past, companies unconsciously shape buyers' ex- pectations. Over time, functionally oriented industries may become more functionally oriented while emotionally oriented industries may become even more emotionally oriented. In the process, aspirations of customers may be ignored. When companies are willing to challenge the conventional wisdom, they often find new market space. In emotionally oriented industries, removing frills may create a fundamentally simpler, lower- priced, lower-cost business model that customers would welcome. Conversely, functionally oriented industries can often infuse commodity products with new life by adding a dose of emotion. Swatch transformed the functionally driven budget watch industry into an emotionally driven fashion statement. The Body Shop did the reverse, transforming the emotionally driven cosmetics business into a functional, no-nonsense one. (See Chan Kim, Renee Mauborgne, Value Innovation) Bottom-of-the-pyramid: A term coined by the well known guru, C K Prahalad6. Till recently, marketers ignored the people in the lower income groups, because of their low per capita purchasing power. The current thinking is that people at the Bottom-of-the-pyramid comprise a huge market with distinctive characteristics. By understanding these characteristics and tailoring the marketing mix 6 Prahalad C K. “Fortune at the Bottom of the Pyramid: Eradicating Poverty Through Profits” Wharton School Publishing, 2006.
  12. 12. 12 suitably, companies have major opportunities to exploit this market. The Bottom-of-the-pyramid is driven by factors like affordability, access and availability. Affordability. The key to success at the bottom of the pyramid is affordability without sacrificing acceptable levels of quality. Access. Distribution patterns for products and services must take into account where the poor live as well as their work patterns. Distribution networks must penetrate deeply into small towns and villages. Most BOP consumers work the full day before they have enough cash to purchase the necessities for that day. Stores that close at 5:00 PM have no relevance to them, as their shopping begins after 7:00 PM. Further, BOP consumers cannot travel great distances. Stores must be easy to reach, often within a short walk. This calls for effective penetration of the distribution network. Availability. Often, BOP consumers make their purchase decision, based on the cash they have on hand at a given point in time. They tend to buy for immediate consumption. Availability is a critical factor in serving BOP consumers. Brainstorming: A useful technique for generating new ideas when confronting an unfamiliar situation or a problem. A group activity in which members are encouraged to speak freely, say the first answer that strikes them about how to solve a problem, no matter how weird or absurd. Having obtained as many ideas as possible, the group then examines each one in more detail to determine the feasibility of implementation. Brand Management: For companies across industries today, brands are becoming increasingly important in the quest to gain competitive advantage. Brands symbolize trust, reputation and quality. Brands are intangible assets that are not easy to imitate. The high valuation of many of the successful companies today is on account of the brands they own. Brand management must be considered an integral part of corporate strategy and not just the marketing function. No wonder, most CEOs get personally involved in branding related matters. Breakeven Analysis: Companies incur two kinds of costs, fixed costs which are incurred, independent of the level of production and variable costs which vary with the level of output. The breakeven point is the level of output at which the firm makes just enough profit to cover its overheads. The difference between price and variable cost is called contribution. In the short run, a firm may operate below the breakeven point just to recover part of the overheads. But in the long run, the firm must operate above the breakeven point and fully recover its overheads, to justify its existence. Bureaucracy: Bureaucracy refers to the administrative execution and enforcement of rules. A bureaucratic organization is characterized by standardized procedure, formal division of responsibility, hierarchy, and impersonal relationships. Examples of everyday bureaucracies include governments, armed forces and courts. Bureaucracies enforce order and discipline, especially while handling routine matters. But beyond a point they can also frustrate employees. A key task of managers in knowledge-based-organizations is to eliminate bureaucracy. Business Ethics: Business ethics is a form of applied ethics that is concerned with the various moral or ethical problems that can arise in a business setting; and any special duties or obligations that apply to persons who are engaged in business. Ethics is a normative discipline, which involves making specific judgments about what is right or wrong, about what ought to be done or what ought
  13. 13. 13 not to be done. In some situations, if not all, what is right depends on the context. Many companies have a code of ethics that helps employees understand what actions are acceptable and what are not. (See Code of Ethics) Business Forecasting: Business forecasting is an integral part of strategic planning. Various types of forecasts are used by companies depending on the situation: Economic Forecasts are published by governmental agencies and private economic forecasting firms. A business can use these forecasts as a starting point. Financial Forecasts include forecasts of financial variables such as the amount of external financing needed, earnings and cash flows. Sales Forecasts project future sales for the company's goods or services for a certain period. Technological Forecasts estimate the rate of technological progress. Qualitative forecasting approaches are based on judgment and opinion. These include Expert opinions, Delphi and Consumer surveys. Quantitative approaches either crunch historical data (time series analyses) or associative data (causal forecasts). Time series methods include Moving averages, Exponential smoothing and Trend analysis. Causal forecasts include Simple regression, Multiple regression and Econometric modeling. Quantitative models work well in a relatively stable environment. In a highly volatile business environment, the qualitative approach based on human intuition and judgment is more useful than number crunching. The choice of a specific forecasting technique will depend on various factors like: • the cost of developing the forecasting model, • the relationships being forecasted, • time horizon, • degree of accuracy desired • data availability Business Model: The way a company runs its business. A company’s business model must address three issues. Who are the customers? What are they looking for? How do we deliver the products or services needed by customers better than how competitors can? These questions may look simple. But it is the ability to address these questions well that determines the effectiveness of a business model. Business model design implies making major trade offs, deciding which customer segments not to serve, which activities not to do in-house, what kind of risks to avoid and so on. Business model innovation, which goes far beyond process or product innovation, is essentially about changing the rules of the game. (See Process Innovation, Product Innovation, Value Chain) Business Process Reengineering (BPR): BPR involves the radical redesign of core business processes to achieve dramatic improvements in productivity, cycle times, and quality. In BPR, companies start from scratch and redesign existing processes, to increase efficiency and to deliver more value to the customer, often by reducing organizational layers and eliminating unproductive activities. Functional organizations are transformed into cross-functional teams with a strong process orientation. Information technology (IT) is used to improve data dissemination and
  14. 14. 14 decision-making. BPR must be completed before a major IT intervention. Otherwise, the existing inefficiencies will get amplified. (See Process Innovation) Business Risk: Refers to the degree of uncertainty associated with a firm’s sales volume and price realization. This risk is core to the business. Market characteristics and the firm’s business model together determine business risk. Business risk is not easy to quantify. Yet, companies should try to go beyond qualitative statements and arrive at some numbers wherever possible. (See Enterprise Risk Management) Buy Back: When a firm has more capital than it needs, it may buy back shares from the market. Buy backs are often viewed positively by the market because they signal that the company is prepared to return cash to shareholders instead of frittering it away on unproductive investments or meaningless diversification. Companies may also resort to buy backs when the management feels the market is undervaluing the shares in relation to the intrinsic value. C Cadbury Committee Report: A standard reference point for any discussion on corporate governance. Prominent institutions in London concerned about audit and regulatory issues following a number of company collapses in the 1980s, set up a committee chaired by Sir Adrian Cadbury. To keep under control, over-powerful chief executives or overenthusiastic executive management, the committee's 1992 report advocated various checks and balances at the board level. These included: • Wider use of independent non-executive directors; • Establishment of an Audit Committee; • Separation of the posts of Chairman and CEO; • Use of a remuneration committee; • Adherence to a detailed code of best practice (See Corporate Governance) Capacity Expansion: Growing an existing business often involves expansion of capacity, in terms of plant, human resources, technological infrastructure, R&D facilities, etc. Any major capacity expansion is a strategic decision that involves significant resource commitments and is often difficult to reverse. So such a decision has to be made carefully. Capacity expansion is often narrowly applied to manufacturing. But in many businesses, there is no or little manufacturing. So, capacity needs to be understood in terms of the investments made in the most critical area of the value chain. Thus, in the pharmaceutical industry, capacity has to be defined in terms of scientific manpower and sales force. In a software development company, capacity has to be understood in terms of the number of programmers employed. In a Business School, capacity may be defined as the number of professors available to teach students. According to Michael Porter, the decision to expand capacity has to take into account various factors: Some of them are: • Future demand. • Future input prices.
  15. 15. 15 • Likelihood of technological obsolescence. • Probable capacity expansion by competitors. • Future industry capacity and individual market shares. The main risk in capacity expansion is the creation of excess capacity. When there is excess capacity, competition intensifies as players try to increase capacity utilization and profits come down. Excess capacity may result because of various reasons: • Capacity often has to be added in lumps, not in incremental fashion. • Economies of scale or significant learning curve can prompt indiscriminate capacity expansion. • Long lead times in adding capacity may motivate firms to add capacity even when future demand is uncertain. • Changes in production technology may attract new firms even as older plants continue to operate due to exit barriers. • Equipment suppliers, through price cutting and attractive credit schemes, can lure manufacturers into buying their products. • Large buyers, by promising more business in future can tempt the suppliers to add capacity. • In some industries, such as airlines, the firm which has the largest capacity may be able to grab a disproportionately large chunk of the market. • When there are several players in the market, they may all try to increase market share, by increasing capacity. • Firms often build more capacity than is needed in the initial stages when future prospects look favorable. • Excess capacity often results when firms overestimate the potential of their competitors and want to preempt them by adding more capacity. • Many manufacturing firms do not like to be left behind by competition and embark on a regular process of capacity expansion. • Tax incentives sometimes motivate manufacturers to invest in plant and equipment. Capacity expansion can be used as a pre emptive strategy to lock up a major share of the market and to discourage competitors from expanding and potential rivals from entering the industry. According to Porter, a preemptive strategy is risky. It tends to succeed only under the following conditions: • The expansion of capacity is large relative to market size. • There are substantial economies of scale and learning curve advantages. • The firm’s strategy looks credible in terms of availability of resources, technological capabilities, past track record, etc. • The firm announces its plans before competitors develop even a reasonable degree of commitment to the process. A preemptive strategy is unlikely to succeed when competitors pursue non economic goals, consider the business to have strategic importance and are prepared to give up profits in the short run or have equal or better staying power. Capital Structure: The relative proportion of debt and equity used by the company to run the business. Debt is borrowed capital and has to be returned to the investors in the short or medium term.
  16. 16. 16 Debt costs less. But as interest and principal payments are mandatory, there might be a lot of strain on cash flows especially in the early days of a company. Equity is more expensive. But it has to be returned to investors only under exceptional circumstances. Companies must arrive at the appropriate capital structure after making the necessary trade offs. For example, in technology businesses where the markets tend to be volatile and the business risk tends to be high, it may be necessary to reduce financial risk by having a large proportion of equity. (See Financial Risk) Cartel: Cartel is an illegal arrangement in which different market players come together and collude to fix the price or share the market suitably by limiting competition. One of the most famous cartels in business history has been the Organization of Petroleum Exporting Countries (OPEC) (See Oligopoly) Cash Cow: A business that generates more cash than what is required to maintain its earning power. Such a business is expected to continue to generate cash without providing significant opportunities for growth through reinvestment of profits. Cash flows from such a business can be pumped into more promising ventures. (See BCG Matrix) Chandler, Alfred DuPont: One of the most well known business historians of our times, Chandler explored the relationship between strategy and structure. He realized that the overload in decision making at the top was indeed the reason for creating a new structure. This overload resulted not from the larger size of the enterprise per se, but from the increasing diversity and complexity of decisions that senior managers had to make. Chandler argued that growth without structural adjustment could lead only to economic inefficiency. As he wrote, “Unless new structures are developed to meet new administrative needs which result from an expansion of a firm’s activities into new areas, functions, or product lines, the technological, financial, and personnel economies of growth and size cannot be realized.” Chandler’s book, “Scale and Scope,” which was published in 1990, provides several insights on the evolution of the modern industrial enterprise. Chandler pointed out that major industrial corporations clustered in industries in which high-technology production processes made it possible to exploit the cost advantages of economies of scale and scope. These tended to be capital-intensive rather than labor-intensive. In these industries, large-scale, low-cost producers operated at a much greater cost advantage than smaller, labor-intensive producers. As these capital-intensive producers grew in scale (volume), scope (diversification), and consequently, complexity, they also began to invest in their own distribution networks. Over time, scale and scope demanded suitable changes in structure for effective management. (See Economies of Scale, Economies of Scope, Organizational Design, Organizational Structure) Change Management: In a rapidly changing business environment, organizations must learn to adapt themselves quickly. Change is necessary to ensure survival, growth and profitability of' the business enterprise. But change is difficult for many reasons. Change requires effort and a new mindset. People find it difficult to adjust to changing status and power relationships. There is also a tendency to avoid change as it might be interpreted as a tacit admission of the failure of past policies. As Michael Porter mentions7, change is extraordinarily painful and difficult for any successful 7 In his book “The Competitive Advantage of Nations,” The Free Press, 1990.
  17. 17. 17 organization. The past strategy becomes ingrained in organizational routines. Information that would modify or challenge it is not sought or filtered out. As the past strategy becomes rooted in company culture, suggesting change is equated with disloyalty. Successful companies often seek predictability and stability. They become preoccupied with defending what they have. Supplanting or superseding old advantages to create new ones is not considered until the old advantages are long gone. Change often involves a sacrifice in financial performance and unsettling, organizational adjustments. A clear corporate vision is the starting point in any major change management initiative. It helps employees to understand why change is needed. That way, change can be introduced proactively instead of being introduced as a fire fighting measure. Symbolic gestures tend to reinforce change by telling employees that the management means business. To bring about change, it is also essential that responsibilities are clearly allotted. Accountability puts pressure on individuals to move fast. Metrics are also needed to track performance. Change initiatives must focus on a few critical areas to prevent resources from being spread too thin. Culture plays an important role in change management. Culture refers to the beliefs and values of employees. People have set notions about what is to be done and how it should be done on the basis of these beliefs and values. Culture is built up over a period of time and it cannot be changed overnight. But strong leadership which sends out the right signals can hasten the process. Christensen, Clayton M: Best known for his book, “The Innovator’ Dilemma”, Christensen’s writings reflect highly insightful thinking on innovation and is a marked departure from conventional wisdom. Christensen’s main argument is that successful companies lose their competitive edge over time because they try to pamper existing customers by adding more features, instead of looking at new customer segments which are looking for something simpler or cheaper, that has to be necessarily delivered by a new business model. But, it is not easy for successful companies to take actions which threaten their existing business model. This is what gives rise to the Innovator’s Dilemma. Based on his research in a variety of industries, including computers, retailing, pharmaceuticals, automobiles, and steel, Christensen shows how truly important, break-through innovations – or disruptive technologies – are initially rejected by mainstream customers because they cannot currently use them. This makes it difficult for firms with a strong focus on existing customers to find new markets for the products of the future. Even as they let go these opportunities, more nimble, entrepreneurial companies emerge to catch the next great wave of industry growth. The Innovator’s Dilemma presents useful insights for dealing with disruptive innovation. These insights can help managers determine when it is right not to listen to customers, when to invest in developing lower-performance products that promise lower margins, and when to pursue small markets at the expense of seemingly larger and more lucrative ones. “The Innovator’s Dilemma” together with “The Innovator’s Solution” and “Seeing What is Next”, form a trilogy that is compulsory reading for companies serious about innovating and creating value for their shareholders. (See Innovation, Innovator’s Dilemma, S Curve in Technology Evolution, Technology Risk)) Clusters: In a globalized economy, companies can access capital, goods, information and technology from all parts of the world. Thanks to faster methods of transportation and communication, physical location has become less important. Yet, there are geographic concentrations of industrial activities. For example, Silicon Valley in California is reputed for its cluster of computer hardware and software companies. Even though it is a very expensive location, many tech companies continue to perform their key value adding activities in this region.
  18. 18. 18 Michael Porter8 uses the term “clusters” to describe geographical concentrations of interconnected companies and institutions in a particular business. Clusters include suppliers of components, machinery, services and institutions which provide specialized infrastructure. Sophisticated, demanding customers who keep companies on their toes can also be considered a part of the cluster. So can the local government, universities, research centres and think-tanks who play a vital role in encouraging innovation and creating suitable conditions for more efficient value addition. Clusters help in improving productivity, due to the superior quality of the local infrastructure. Other aspects which give a location a head start over other centers include a high quality transportation network, which facilitates fast and efficient movement of goods, availability of skilled, educated and trained manpower, a sound legal system and favorable tax rates. Many leather goods, footwear, apparel and accessories companies operate out of Italy because of the country’s reputation for fashion and design. France is an important country for cosmetics, since it has highly sophisticated customers. In a location with well-established marketing networks, companies can also take advantage of referrals. Clusters help companies to improve as competition with rivals keeps them on their toes. The presence of companies engaged in related value chain activities, downstream and upstream, facilitates effective coordination even without vertical integration. Proximity also builds a greater degree of trust among the various players. The presence of demanding customers in a cluster motivates companies to innovate, while the presence of competent suppliers and partners helps in bringing innovations to the market faster. A company within a cluster can source what it needs much faster, closely involve suppliers and partners in the product development process and obtain relevant technical and service support. (See Comparative Advantage, Global Value Chain Configuration, Strategic Advantage) Coase, Ronald: A British economist and the Clifton R. Musser Professor Emeritus of Economics at the University of Chicago Law School, Coase graduated from the London School of Economics in 1931. He received the Nobel Prize in Economics in 1991. Coase is best known for two articles "The Nature of the Firm" (1937), which introduces the concept of transaction costs to explain the size of firms, and "The Problem of Social Cost" (1960), which suggests that well defined property rights can overcome the problems of externalities. Code of Ethics: Well managed companies take various steps to enforce high ethical standards among employees. The Corporate Code of Ethics defines the company's core values and guiding principles and often describes how employees are expected to behave in different circumstances. Through a Corporate Code of Ethics, the firm can publicly display its commitment to high standards of moral excellence. (See Business Ethics) Commoditization: As industries mature, the scope to differentiate reduces. The offerings of different players begin to look increasingly alike. Price based competition intensifies. This phenomenon is called commoditization. Companies can deal with commoditization in various ways. One way is to wrap value added services around the core product. Differentiation of the core product may be difficult but there may be scope to innovate in packaging, delivery, customer experience or 8 Porter, Michael E. “Clusters and the New Economics of Competition” Harvard Business Review, November- December 1998, pp 77-90.
  19. 19. 19 supply chain management. In the highly commoditized PC industry, Dell has succeeded largely because of its excellence in supply chain management. Online auctions may look like a commodity business but ebay has done well by building a community and providing a great customer experience. A second way of preventing or reversing commoditization is to reposition the product. Repositioning helps change the perceptions of customers and also in differentiating the product. (See Blue Ocean Strategy, Differentiation) Company Profile: A company must have a good understanding of its capabilities and expertise. Effective strategies can be formulated only by developing the company profile accurately and aligning it with corporate mission and environmental factors. One way to develop the company profile is to examine each function and key components under each function critically. See table below. Marketing Product range, Sales organization, Distribution network, pricing strategy, after sales services etc. Fund raising capabilities, Cost of capital, Tax planning, cost Finance & Accounting control, Costing system etc. Raw material availability and costs, supplier relationships, Operations Inventory control systems, Sub contracting, etc. Personnel Employees' skills, morale, Industrial relations, manpower turnover, specialized skills, etc. General management Structure, communication systems, control systems, culture, decision making, strategic planning systems, etc. (See Environment Analysis, SWOT Analysis) Comparative Advantage: The ability to cut costs by the suitable location of value chain activities. Global companies can realize comparative advantages by locating value chain activities in cheaper locations. Some automobile companies have preferred to locate their assembly plants at cheaper locations in Asia and Latin America, rather than North America or Europe. Many companies trying to enter the European Union (EU), including Dell and Intel, have preferred to locate their plants in Ireland, a cheaper location, compared to more developed countries such as France and Germany. Texas Instruments has set up a software design subsidiary at Bangalore in India to access the relatively low cost, highly skilled technical workers available locally. Many global companies such as General Electric (GE) and Citigroup are locating their back office operations in India. (See Strategic Advantage) Competitive Advantage: The key message in Michael Porter’s theory of competitive strategy is that firms must be able to create a defendable position in an industry, in order to cope successfully with competitive forces and generate a superior return on investment. Superior performance within an industry can be achieved through Cost leadership, Differentiation or Focus. Cost leadership involves becoming the lowest cost producer in the industry by pursuing strategies such as economies of scale, process automation, supply chain efficiency, etc. Differentiation means being unique in the industry along some dimensions that are widely valued by buyers. Differentiation can be on the basis of product, distribution, sales, marketing, service, image, etc. Focus means being the best in a carefully chosen segment or group of segments.
  20. 20. 20 Firms should pursue one of these strategies and take care not to get stuck in the middle. But care must also be taken to maintain a proper balance between cost leadership and differentiation. Thus a cost leader should not be seen to be offering distinctly inferior products, compared to rivals who are competing on the basis of differentiation. A differentiator cannot afford to have a very high cost structure. The costs should not exceed the price premium it receives from the buyers. 9 The sustainability of competitive advantage depends on three conditions. The first is the particular source of the advantage. There is a hierarchy of sources of competitive advantage in terms of sustainability. Lower-order advantages, such as low labor costs or cheap raw materials are relatively easy to imitate. Higher-order advantages, such as proprietary process technology, product differentiation, brand reputation and customer relationships are more durable. Higher-order advantages involve more advanced skills and capabilities such as specialized and highly trained personnel, internal technical capability and often close relationships with leading customers. Such advantages also demand sustained and cumulative investment in physical facilities and specialized intangible assets. The second determinant of sustainability is the number of distinct sources of advantage a firm possesses. If there is only one advantage, competitors can more easily nullify this advantage. Firms which sustain leadership over time, tend to proliferate advantages throughout the value chain. The third, and most important basis for sustainability is constant improvement and upgrading. A firm must keep creating new advantages at least as fast as competitors can replicate old ones. The firm must improve relentlessly its performance against its existing advantages. This makes it more difficult for competitors to nullify them. In the long run, competitive advantage can be sustained only by expanding and upgrading sources and by moving up the hierarchy to more sustainable types. To sustain competitive advantage, a firm may have to destroy old advantages to create new, higher-order ones. A company must learn to exploit industry trends and close off the avenues along which competitors may attack by making pre emptive investments. (See Cost Leadership, Competitive Strategy, Differentiation, Focus) Competitor Analysis10: Analyzing competitors is an integral part of strategic planning. Porter’s book, “Competitive Strategy,” gives various insights in this regard. In identifying current and potential competitors, firms must consider several important variables: • How do other firms define the scope of their market? • How similar are the benefits offered by the products and services to those of other firms? • How committed are other firms in the industry? • What are the long-term intentions and goals of competitors? Certain pitfalls must be avoided while doing competitor analysis. These include: • Focusing on current and known competitors while ignoring potential entrants. 9 From, Porter, Michael E. “From competitive advantage to corporate strategy” Harvard Business Review, May- June 1987, pp 43-59. 10 Drawn heavily from “Competitive Strategy: Techniques for Analyzing Industries and Competitors” by Michael E Porter published by Free Press in 1980.
  21. 21. 21 • Concentrating on large competitors while ignoring smaller players. • Assuming that competitor behavior will not change with time. • Misreading signals that may indicate a shift in the focus of competitors or a refinement of their present strategies or tactics. • Excessive focus on the tangible assets of competitors, while ignoring their intangible assets. • Assuming that all the firms in the industry have the same constraints and opportunities. • Getting too obsessed with outsmarting the competition, instead of focusing on customer needs and expectations. The first step in analyzing competition is to understand the goals of competitors, whether they are satisfied with their current position, whether they are likely to change strategy and also how they will react to competitor’s moves. Porter draws a distinction between threatening and non threatening moves. Moves are non-threatening if competitors do not notice or are not concerned. In contrast, threatening moves are taken seriously by rivals. Before making such moves, it is important to estimate the likelihood, timing, effectiveness and extent of retaliation and assess whether the retaliation can be countered effectively. The response of a firm which gives importance to profitability is likely to be different from another, which emphasizes market share. Some strategic moves can threaten certain competitors more than the others, given their goals. In that case, there is greater likelihood of retaliation. The stated and unstated financial goals, capabilities and psyche of competitors of the industry must be studied carefully. Analysis of competitors' goals helps a firm to avoid retaliatory moves that can trigger off intense rivalry. For instance, a move to gain market share from a firm divesting its business, would not provoke any retaliation. On the other hand, rivalry may intensify if an attempt is made to grab market share from a firm which is trying to build the business. A low cost producer is likely to respond very aggressively to the price cutting moves of a competitor. On the other hand, a firm which focuses on differentiation and customer loyalty is less likely to retaliate. It is important to understand the capabilities and psyche of competitors thoroughly. These include the competitor's beliefs about its relative position, historical and emotional identification with particular products/policies, cultural factors, organizational values, the extent to which a competitor believes in conventional wisdom, etc. Historical information on the competitors' past financial performance, track record in the market place, areas of success, past reactions to strategic moves etc. can also be very useful. It is also important to gain greater understanding about the top management, the types of strategies that have worked for the management in the past, other businesses with which the top management had been earlier associated, the events which have influenced top management in the past, the technical background of the management, etc. A firm, serious about a competitive move must communicate clearly that it is committed to the move and has the necessary resources. Then rivals are more likely to resign themselves to the new position. Similarly, if a firm says it loud and clear that it will react strongly to moves by competitors, it may be able to deter them from making competitive moves. The greater the certainty with which the competitor sees the commitment being honored, the greater the deterrent value of the commitment. Competitors should understand that the firm has both the resources and resolve to carry out the commitment quickly. Based on all these considerations, a firm has to select its strategy. An ideal strategy would prevent competitors from reacting. Such a situation arises when the legacy of the past makes some moves very costly for competitors to counter. Small and new firms often have little stake in the strategies practiced by industry leaders. These challengers can benefit substantially by pursuing strategies that
  22. 22. 22 penalize competitors for their stake in these existing strategies. (See Competitive Strategy) Competitive Strategy: Thanks to Michael Porter, companies today have a considerable amount of knowledge on how to take offensive or defensive actions to compete effectively in an industry. For Porter, the essence of competitive strategy formulation is understanding the industry structure and relating the company to its environment. Industries differ widely in the nature of competition and opportunities for sustained profitability. The structural attractiveness of an industry depends on five factors, which form Porter’s famous Five Forces model: • The entry of competitors. How easy or difficult is it for new entrants to enter the business? • The threat of substitutes. How easily can the company’s product or service be substituted? • The bargaining power of buyers. How strong is the position of buyers? • The bargaining power of suppliers. How strong is the position of sellers? • The rivalry among the existing players. Is there intense competition among the existing players? 11 The second central concern in strategy is position within an industry. Some positions are more profitable than others, regardless of what the average profitability of the industry may be. At the heart of positioning is competitive advantage. In the long run, firms succeed relative to their competitors if they possess sustainable competitive advantage. There are two basic types of competitive advantage: lower cost and differentiation. Lower cost is the ability of a firm to design, produce and market a comparable product more efficiently than its competitors. Differentiation is the ability to provide unique and superior value to customers in terms of product quality, special features, after-sale service, etc. Differentiation allows a firm to command a premium price which leads to superior profitability, provided costs are comparable to those of competitors. It is difficult, though not impossible, to achieve lower cost and differentiation simultaneously relative to competitors. So a trade off is involved. However, any successful strategy must pay close attention to both types of advantage while excelling in one. A low-cost producer must offer acceptable quality and service to avoid having to give discounts, while a differentiator’s cost position must not be so far above that of competitors as to offset its price premium. A key variable in positioning is competitive scope. A firm must choose the range of product varieties it will produce, the distribution channels it will employ, the types of buyers it will serve, the geographic areas in which it will sell, and the array of related industries in which it will also compete. Most industries are segmented, with distinct product varieties, multiple distribution channels and several different types of customers. These segments have frequently differing needs. Serving different segments requires different strategies and calls for different capabilities. Competitive scope is also important because firms can sometimes gain competitive advantage by exploiting interrelationships by competing in related industries through sharing of important activities or skills. Both industry structure and competitive position are dynamic. Industries can become more or less attractive over time, as barriers to entry or other elements of industry structure change. Industry attractiveness and competitive position can also be shaped by a firm. Successful firms not only respond to their environment but also attempt to influence it in their favor. 11 See Michael Porter’s, “The Competitive Advantage of Nations,” The Free Press, 1990.
  23. 23. 23 Achieving competitive advantage requires a firm to make choices. If a firm is to gain advantage, it must choose the type of competitive advantage it seeks to attain and the scope within which it can be attained. (See Competitive Advantage, Generic Strategies) Concentration Ratio: A measure of the degree of competition in an industry. Thus the four firm concentration ratio is the percentage of the market accounted for, by the top four players. (See Herfindal Index, Oligopoly) Concentric Diversification: Diversification into related areas. A less risky strategy compared to conglomerate diversification. The new business may be related to the existing business in terms of product, technology or both. (See Diversification) Conglomerate Diversification: Diversification into unrelated areas. Firms sometimes enter a new business simply because it represents the most promising investment opportunity available. The main concern here is the profit generating capacity of the new venture and financial synergies. For instance, businesses with sales patterns moving in opposite trends may balance each other. It is widely accepted that related diversification is more likely to succeed than conglomerate diversification. The key, of course lies in understanding what is related and what is not. (See Diversification) Contestability: The degree to which firms can enter or leave an industry. Contestability provides a measure of the effect of potential competition in an industry. Perfect contestability implies there are no barriers to entry. In the early 1980s, the economist W J Baumol pointed out that perfect contestability could yield the results of perfect competition in a market, even without having a large number of small firms. The airline industry is generally held up as an example of a reasonably contestable industry. (See Barriers to Entry) Contingency Planning: The development of a management plan that uses alternative strategies to ensure the success of a project even in the event of things going wrong. Essentially, it means preparing for highly uncertain situations. (See Adaptive Planning, Russell Ackoff) Contract Manufacturing: Production on behalf of a client who owns the design and brand name. Contract manufacturing helps a company gain access to capacity in a cost effective way. On the other hand, the contract manufacturer does not have the burden of marketing the product and handling end customers. (See Licensing) Co-opetition: 'Co-opetition', a word coined by Ray Noorda (the founder of Novell), is defined by Brandenburger and Nalebuff as a new mindset that combines cooperation and competition. Cooperation generally leads to an expansion of the cake and competition to a slicing up of the cake. Both cooperation and competition are necessary. An exclusive focus on competition ignores the potential for expanding the market or creating new profitable forms of enterprise. A 'co-opetition' mindset actively looks for ways to change and expand the business, as well as newer and better ways to compete.
  24. 24. 24 (See Dynamic Capabilities, Process Networks, Strategic Alliances) Core Competence: A term coined by C K Prahalad and Gary Hamel 12. A core competence is a bundle of skills and technologies that enable a company to provide superior value to customers. A core competence is effectively a company's specialized capability to create unique customer value. This capability is largely embodied in the collective knowledge of its people and the organizational procedures that shape the way employees interact. Over time, investments made in facilities, people and knowledge that strengthen core competencies, create sustainable sources of competitive advantage. A core competence should not be equated with a single skill or discrete technology. If a company identifies too many competencies, it is probably referring to discrete skills. At the same time, if it identifies only one or two competencies, the level of aggregation is too broad. Typically, a firm may have between five and 15 core competencies. Skills which are a pre-requisite for becoming an industry player, should not be confused with core competencies. A core competence is also not a physical asset. For instance, a factory, a distribution channel, brand or patent cannot be referred to, as a core competence. The ability to manage these assets may, however, be a core competence. A core competence should: • Provide significant and appreciable value to customers, relative to competitor offerings; • Be difficult for competitors to imitate or procure in the market; • Enable a company to move into new markets or to develop new technologies. Core competencies are not product specific. They can and should be leveragable to create new products/ services. Indeed, a core competence is truly core when it forms the basis for entry into new product lines/ businesses. Sony's core competence in miniaturization has enabled it to develop a range of popular consumer products. Reliance Industries' core competence in project management has enabled it to complete many complicated projects that span across industries ahead of schedule. The Aditya Vikram Birla group has a similar competence. By understanding core competencies, a firm can identify which businesses to strengthen and which to divest. Identification of core competencies can also lead to greater clarity on potential entrants into the industry who may be using similar core competencies to make other products. To sustain competitive advantage, competencies need to score well on four dimensions: Appropriability: The degree to which the profits earned by a competence can be appropriated by someone other than the firm in which the profits were earned. The lower the appropriability of the asset, the more sustainable the profits. Durability: How durable is the competence as a source of profit? Shortening product and technology life cycles make most competencies less durable than they were, a decade earlier. Transferability: The easier it is to transfer the core competencies and resources, the lower the sustainability of its competitive advantage. 12 In their book, “Competing for the Future,” Harvard Business School Press, 1994.
  25. 25. 25 Replicability: If it is possible, by appropriate investment or by purchasing a similar asset for a competitor, to construct a nearly identical set of capabilities, the competitive advantage is not sustainable. Examples of core competence Company Core Competency Products Sharp/Toshiba Flat screen display Lap Top Computers, Television; Videophone Sony Miniaturisation Personal Audio Federal Express Logistics Management Courier Services Walmart Logistics Management Discount Retailing Motorola Wireless communication Cellular Phones Ranbaxy Labs Reverse Engineering Generic drugs Honda Combustion Engineering Motor Cycles, Cars, Generators Gujarat Ambuja Energy Management Cement Cements Some management scholars feel that core competence has several limitations. It is more useful in explaining why something has gone right or wrong and less useful in predicting what will be right or wrong. For instance, Clayton Christensen, the innovation guru, feels that core competence is too internally focused. Instead of asking what they are good at, companies must ask what customers value. Accordingly, they must develop new competencies when circumstances demand, instead of continuing to exploit existing ones. Prahalad, himself, has warned of core competencies becoming core rigidities. A dramatic structural change in an industry can substantially reduce the value of a core competence. That is why, it is important to assess the value of a core competence by the benefits it generates for customers rather than the technicalities underlying the core competence. (See Diversification) Core Ideology: A term coined by Collins and Porras in their book “Built to Last”. Core Ideology describes an organization’s identity that transcends all changes related to its relevant environment. Core ideology consists of two notions: Core Purpose – the organization’s reason for being – and Core Values – essential and enduring principles that guide an organization, its behaviors and actions. (See Corporate Purpose, Corporate Values) Core Values: Core values are the basic or central values of an organization. They serve to guide the company and have a profound influence on how people in that organization think and act. As long as actions are aligned with core values, no external justification is required. These core values define the organization in terms of what it is and what it does and give the organization an unique identity. In other words, core values provide the glue that holds an organization together. Core values are an organization's essential and enduring tenets that should not be compromised for financial gain or short-term expediency. Even during hard times, the values should not be diluted. These values should undergo modification only in the most exceptional situations. (See Core Ideology, Corporate Purpose, Culture)
  26. 26. 26 Corporate Governance: Corporate governance has been a hot issue in recent years. The series of corporate scandals involving Enron & WorldCom in the US, Parmalat in Italy, etc., has alarmed stakeholders. In India too, corporate governance is attracting a lot of attention. Corporate governance is the subject that deals with the responsibilities of senior managers, directors and shareholders. Directors are expected to safeguard the interests of shareholders by monitoring the actions of managers. But time and again, directors have not been able to impose necessary checks and balances. That explains why boards have come for sharp criticism and independent directors have become so important. In the United Kingdom, the importance of good corporate governance came into the public domain after a series of corporate collapses and scandals in the 1980s and 1990s. The functioning of boards was criticized and the importance of independent, impartial non-executive directors was highlighted. Following the publication of the Cadbury committee report in 1992, a code of best practices was established. Although it is voluntary, all listed companies are expected to comply with it. Since the Cadbury report, a number of other committees have established best practices in specific areas like director's pay. In the US, the Sarbanes Oxley Act 2002 (SOX) has been framed to enhance and enforce corporate accountability, transparency and disclosures in all the activities and transactions the company undertakes. SOX requires the CEO and the CFO of a publicly listed company to certify in the Annual Report that all the disclosures made are accurate and true. In India too, various codes of corporate governance have been formulated through committees like the Kumara Mangalam Birla committee on corporate governance (2000). This report has made various recommendations, both mandatory and non-mandatory for publicly listed companies with respect to the structure and composition of the board, the audit committee, the remuneration committee, accounting and financial reporting standards, functions of the management and shareholders' rights. For instance, the company's half-yearly declaration of financial performance including a summary of the significant events in last six months must be sent to each shareholder. (See Agency Theory) Corporate Image: Corporate image refers to the way the business of an organization is perceived by the investors and customers. A positive corporate image represents a major intangible asset. For example, the Tatas have successfully leveraged their positive image to enter various businesses. Corporate image is shaped by an organization’s history, its beliefs and philosophy, its ownership, its people, the personality of its leaders, its values and its strategies. Public relations play an important role in building a company’s image by explaining what the organization stands for, to the stakeholders. A company’s advertisements, statements made by the leaders, relations with stakeholders and the website all contribute to image building. The financial community, business community, consumers, other ‘thought’ leaders, top managers, employees, shareholders and the government must all be kept in mind, while shaping the corporate image. Corporate Philanthropy: Corporate philanthropy refers to the involvement of business firms in charitable activities through contributions in the form of time, money, goods, or services. Corporate philanthropy is not merely about spending money. It is also about getting the best returns and the best results for the money spent and involving the larger community, especially NGOs. One of the best examples of corporate philanthropy is the Bill Gates and Melinda Gates foundation which has taken up various laudable initiatives across the world, especially to improve healthcare in poor countries.
  27. 27. 27 (See Corporate Social Responsibility) Corporate Purpose: As defined by Collins and Porras in their book, “Built to Last”, corporate purpose is the organization's fundamental reason for existence. The primary aim of corporate purpose is to guide and inspire the company. The corporate purpose should not be confused with specific goals or business strategies. Two companies could have a very similar purpose but operate in different ways in different businesses. A visionary company continues to pursue, but never really reaches its purpose. As Walt Disney once remarked, "Disneyland will never be completed, as long as there is imagination left in the world." Unilever's corporate purpose states13: • Unilever's mission is to add vitality to life. We meet everyday needs for nutrition, hygiene and personal care with brands that help people feel good, look good and get more out of life. • Our deep roots in local cultures and markets around the world give us our strong relationship with consumers and are the foundation for our future growth. We will bring our wealth of knowledge and international expertise to the service of local consumers – a truly multi-local multinational. • Our long-term success requires a total commitment to exceptional standards of performance and productivity, to working together effectively, and to a willingness to embrace new ideas and learn continuously. • To succeed also requires, we believe, the highest standards of corporate behaviour towards everyone we work with, the communities we touch, and the environment on which we have an impact. (See Core Ideology, Mission, Vision) Corporate Renewal: Because of organizational inertia and inflexibility, many companies continue to bet on the strategies that have worked in the past, taking customers and competitors for granted. Corporate renewal implies proactive change management that involves both tightening belts from time to time and inspiring employees with a powerful vision. Leaders must set stretch targets for their employees and constantly encourage them to question the basic assumptions of the business. At the same time, they must move people in a clear direction through an inspiring vision. Organizations need to renew themselves continuously as the external environment changes. But they often do not do so, persisting zealously with what has succeeded in the past. Managers have a tendency to support structures, systems and decisions that have ensured the company's success in the past. This tendency is reinforced by a belief that customers are captive and competitors are weak. Great organizations facilitate renewal, by setting stretch targets and articulating a powerful vision that encourages people not to see themselves in terms of the past, but in terms of the future potential. They go beyond the task of ensuring alignment of existing resources to providing new challenges. They create organizational disequilibrium. And most importantly, within the turmoil, they are willing to make choices and commitments to new options and opportunities. (See Corporate Restructuring) Corporate Restructuring: Over time, as the industry structure changes and markets evolve, the internal profile of an organization may need a major revamp. Corporate restructuring refers to the 13 Adapted from Unilever Website.
  28. 28. 28 various actions involved in realigning the organization in the light of emerging market trends. This may include a new organizational structure, divestment of unviable businesses, alteration of capital structure, reduction of headcount and outsourcing of non core activities. Change management is often a key ingredient of corporate restructuring. (See Change Management, Corporate Renewal) Corporate Social Responsibility (CSR): For any medium sized or large company, society is an important stakeholder. Though companies are primarily guided by the profit motive, they cannot act without considering the larger interests of society. Several years ago, the famous economist, Milton Friedman argued that the social responsibility of a business is to make profits. Friedman was clear that corporate actions motivated by anything other than shareholder wealth maximization threatened the well being of shareholders. Today, that view is considered somewhat extremist. Most businesses accept that they have a responsibility towards society. A responsive corporate social policy may not only enhance a firm's long-term viability but also preempt restrictive government regulations. Ardent supporters of CSR argue that, when a company behaves responsibly, there is a direct impact on the bottom line. Some CSR activities do have tangible economic benefits. Expenses incurred on CSR are often tax deductible. Some socially responsible practices such as recycling of water may even generate cost savings and, as a result, increase profits. For example, recycling may reduce input costs and pollution simultaneously. Corporate philanthropy can also lead to intangible benefits such as goodwill. However, there is no guarantee that CSR will automatically lead to an improvement in profitability, especially in the short run. At the same time, there is a wide acceptance that CSR will generate a positive impact in the long run. (See Corporate Philanthropy) Corporate Venturing: This occurs when a large firm decides to invest in a smaller, but promising venture. Corporate venturing provides an alternative way of generating growth and tapping expertise that would otherwise take time to develop. Corporate venturing enables a company to develop products to expand the core business, to enter new industries or markets, or to develop breakthrough technologies that could substantially change the industry. Corporate venturing can be done by taking a passive, minority position in an outside business, by taking an active interest in an outside company, by building a new business as a stand-alone unit or by building a new business inside the existing firm, with independent management. Cost Leadership: A strategy that focuses on making the operations more efficient and cutting costs wherever possible. It may result from scale/scope efficiencies, tight overhead control, careful selection of customers, standardization and automation. Cost leadership aims at having the lowest costs in a market. This makes the company best placed to survive a price war and generates the highest margins if a price war does not occur. Gujarat Ambuja has pursued this strategy in the Indian cement industry. The largest retail chain in the world, Wal-Mart also believes in cost leadership. TISCO has been a cost leader in the Indian steel industry. (See Generic Strategy) 14 Controlling costs systematically can lead to competitive advantage in industries where price is an important factor. If a company offers a standard product or service at a lower cost when compared to 14 This term is taken heavily from “The Essence of Strategic Management” written by Clief Bowman, published by Prentice Hall of India, 1990.

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