LectureNotes StrategicMgmt

Mgmt study material created/ compiled by - Commander RK Singh rajeshsingh_r_k@rediffmail.
com
Date: 18 Jan 2007
Prof: Mr Kuldip Kawatra
Recommended Books
1. Strategic Management: by John Pearce II and Richard B Robinson (to be used as a
Text Book)
2. The Strategic Process, Concepts and Contexts: by Henry Mintzberg and James
Brian Quinn
3. The Strategy Safari: by Henry Mintzberg
In addition, there are as many as 12 more books which are recommended for reading.
Quite a few of them are authored by Mr Michael Porter.
Additionally, Titanic Shift and Rule of Three by Mr Jagdish Sheth are also recommended
for reading. Rule of Three is a book which propounds that a company should strive to be
among the top of three in its business, else, it should quit.
List of Topics
1. Strategy An introduction
2. Components and Hierarchy of Strategy
3. 5 Ps of Strategy
4. Business Strategy, BCG Matrix
5. Factors influencing competitive success
6. Industry analysis. Michael Porters 5 Forces and three generic strategies. Value
chain analysis.
7. Strategic Management
8. Why Strategies fail?
9. Change Management
10. Entrepreneurship and Strategy
11. Strategy and Competitive advantage of Diversified companies
12. Competitive strategies of Declining Industries
13. Vertical Integration and Diversification
14. Global Strategy
15. Entry Strategies. Strategic Alliances
16. Mergers and Acquisitions
List of Cases:
1. The fundamental of Strategy Formulation
Page 1 of 69 - Strategic Management (Ver - 1.3 - 01.05.2007)
Jamnalal Bajaj Institute of Mgmt Studies
Mgmt study material created/ compiled by - Commander RK Singh rajeshsingh_r_k@rediffmail.com
2. The case of counter strategy
3. Cultural Concerns
4. The case of strategic acquisitions
5. Change: To be or Not to be
6. The case of vendor development
7. Gramophone Company of India: The Digital Challenge
8. Wal-Mart competing in the Global Market
9. The General Electric
10. Richard Branson & the Virgin Group of companies
This is a university paper and therefore requires comprehensive study. Subject requires
special focus since boundaries of this subject are not well defined.
Why is this subject important for every business manager?
The first fundamental of business is to survive. It is euphemistic way of saying that
business needs to make profit. Any business not making profits is sure to sink. And
in order to survive, business needs to grow constantly. Gone are the days of static
business where a business could survive without substantial growth. Your neighbourhood
Kiranawala is no more secure in his small shop. He is being threatened by Reliance,
Subhiksha, Bharti-Walmart and the Mega Malls mushrooming like Pan shops every
where. Your decades old family tailors business is being usurped by the mega branded
apparels. Thus, to be able to survive in this globalising market, the business needs to be
able to grow.
In the business environment that is prevailing and forecasted to unfold over the next two
decades, every business, however big or small, is threatened by the competition. Even
Reliance is scared about Wal-Marts entry and is advancing rollout of its retail ventures.
While there is always the first mover's advantage, in the end it will be business strategies
which will differentiate between successful and failed business.
Good strategies help in achieving the objectives. It reduces the cost, improves the profits
and provides competitive advantage which are so vital for success of any business.
Business Growth Models
1. Organic Growth Growth of existing business by building additional capacities
from raw factors of production as against growth by procurement of readymade
capacities through mergers, acquisitions and takeovers.
2. Inorganic Growth
a. Acquisitions
b. Mergers
c. Takeovers
d. Amalgamations
Growth Involves
1. Managing the Present (Market/Competition) Irrespective of the future
plans, every company needs to grow its present market share. According to Rule of
Three by Dr Jagdish Sheth, a company needs to be in the top three or retire.
3. Managing Future (Tomorrows Competition) Many greatly successful
companies have sunk and been obliterated because they failed to manage the Future. They
did not invest timely into technology, cost management, productivity, etc, and were wiped
out by the new competitors who came with better and/or cheaper products. (The once thriving
lock industry of Aligarh was wiped out by the cheap and better quality Chinese imports because they failed
to invest in quality and cost of their locks).
2. Selectively Forget the Present Between managing the Present and the
Future, is the requirement to Selectively Forget the Present. Few successful companies
have the stomach to come out of the cosy comforts of present success and invest into the
uncertainties of future. (AT&T was the largest land line phone company in the world with its business
spanning whole of American and even Latin American continents. It was first to conceptualise the idea of
mobile phone as early as 1980s but never implemented it. There were many reasons as to why the company
did not launch the mobile phone business. Primary one was that the company could not disassociate itself
from the present ie the success of its land line business. Second was the Ernst and Young report which
forecasted demand of only 90,000 lines per year. Such gross error in estimates happened because of wrong
methodology of market survey).
In order to selectively forget the Present, it is essential that an ownership of new
project is established. Therefore, setup a separate project team delinked from present
business and reporting only to the CEO. Similarly, delink HR department from hiring the
people for project team. Their old mind set will not allow hiring right kind of people for
project. Delink the evaluation/appraisal process as well; since there will no profits,
negative ROI and so on.. for a few years. Even provide a separate financial umbilical
chord since Finance Department is often stingy about releasing finance timely and
adequately for new unproven products.
While managing future, one needs to manage three critical unknowns
1. Consumer Needs It is biggest business challenge to forecast what customer will
need in future. And biggest threat is that a competitor may launch a better (next
generation) product before or shortly after your launch. AT&T lost its numero-uno
position because it failed to gauge customers need for mobile phones.
2. Growth Potential What is the market potential for a particular product? AT&T
did not launch the mobile phone because Ernst & Young failed to correctly assess
the market potential.
3. Threat of Low Cost Technology Newer Designs/features, newer materials,
newer processes and lesser cost are the challenges which are being thrown
regularly at every producer. Once a particular production process has been
installed, it is often not possible to switch over to another process without
incurring huge expenses. While the new entrants come with advantage of newer
technology, oldies are saddled with outdated designs and high production cost/
lower quality technologies. Unless the plant has been deeply depreciated, it is
difficult for old player to match the cost and therefore pricing structure of new
entrants.
What is the key purpose of Strategy Formulation?
Strategy is aimed at creating sustainable competitive advantage.
Definition of Strategy
Strategy is a fundamental pattern of present and planned objectives, resource deployment
and interactions of an organisation with markets, competitors and environmental factors.
In Simple terms Strategy is the action plan aimed at achieving sustainable competitive
advantage.
Components of Strategy
1. Scope A business may have several segments and each segment has several
dimensions; Finance, Production, Marketing, HR, Distribution, Advertising,
Like ITC starts from its primary business of cigarettes and goes into
paper, greeting cards, rural retail, hotels and so on. Similarly, Hindustan Lever has
its presence in 100s of the personal care products. Which segment of the above
is your focus? Scope refers to the business or activities of a business where you
wish to take advantage. Further, scope of each business needs to be decided; like,
in hotel business, whether the company wants to be in the budget hotel segment or
executive segment or in the luxury segment.
2. Mission, Goals and Objective Mission Goals and Objectives need to be clearly
identified. What is the objective of strategy? What do you want to achieve? Do you
want to increase the profitability? Or, do you want to increase the market share?
Or do you want to reduce the competition? Even Profit is not always the motive.
Some times public welfare may be the objective.
3. Deployment of Resources Based on the Mission, Goals and Objectives, resource
deployment is decided.
4. Developing Sustainable Competitive Advantage The plan is formulated which
will give the company a sustainable competitive advantage which is the core
purpose of strategy formulation.
5. Synergise Take advantage of various synergies available. Synergy is all about
creating a sum which is more than arithmetic total of its parts.
Strategy Formulation is done at three levels
1. Corporate Level Corporate Strategy
2. Strategic Business Unit (SBU) Level Business Strategy
3. Functional Level
At each level of business, a strategy needs to be formulated, from macro level to micro
level.
5 Ps of Strategy
1. Plan - Plans are the intended set of the actions to be executed in future. Often
plans evolve from the patterns of the past. However, for an effective strategy, the
plans should have a disconnect from the present.
2. Pattern Patterns are typical progression characteristics of business environment
like market growth, customer behaviour and response, etc.
3. Positioning - Positioning is about locating products in particular markets to
achieve competitive advantage.
4. Perspective - Perspective is about an organisation's culture - its way of doing
things. Tata, Infosys and Wipro would prefer to forego some profit in favour of
following business ethics and corporate governance. Some other business house
will probably have no qualms in burying all ethics below their profit motive.
Strategy will be drawn accordingly.
5. Ploy - Ploy is a specific manoeuvre intended to outwit a competitor.
B T : CASE STUDIES
The Fundamentals of Strategy Formulation
SYNOPSIS
"Do we need a strategy? As an automotive ancillary, we have operated for nearly 15 years
without one. Business has been good, our linkages with our customers have been strong,
technology and funds have never been a problem since dedicated suppliers like us are not
easy to develop. We continue to link our schedules, our costs, and our quality standards
with those of our buyers. But, yes, I can sense that there is a change taking place in the
industry. Post-liberalisation, a realignment has begun, with the emergence of Tier-I, Tier-
II, and Tier-III suppliers. Without your own technology, it is difficult to reach the top of
these tiers. Moreover, it is difficult to compete with global suppliers without investing
in scale. Everybody in my company is aware that the external environment is changing,
but no one is able to fathom its magnitude. Naturally, we are not sure whether a supplier
needs a strategy. If we do, how should we develop one? And should we articulate it? Or
should it be kept a closely-guarded secret? Can we diversify without a strategy?" Vinod
Abhayankar, the young CEO of the Pune-based Auto Components, was tossing the issue
of strategic planning in his mind even as he addressed a meeting of the Young Presidents'
Organisation. A BT Case Study.
OCCASION: Young Presidents' Organisation (YPO) Meeting
DATE: August 7, 1996
TIME: 4 p.m.
VENUE: The Carlton Chambers, Mumbai
PRESENT: Vinod Abhayankar, CEO, Auto Components; Lalit Desai, Chairman, YPO;
Members of the YPO
AGENDA: The Need For Strategic Planning
Lalit Desai: Good evening, ladies and gentlemen. Let me begin by welcoming our guest
speaker for today, Vinod Abhayankar, the CEO of Auto Components, which manufactures
the Zebra brand of shock-absorbers. Founded by his father, Dhanvantri Abhayankar, in
1984, Auto Components now enjoys the status of being a preferred supplier to many of the
Original Equipment Manufacturers (OEMs) in the Indian automobile sector. Vinod will
speak about the problems he faced while implementing a strategy-planning process in the
company. Vinod...
Vinod Abhayankar: Thanks, Lalit. I always look forward to these meetings of the YPO
which, apart from being the country's only association of young CEOs, provides me with
an opportunity to discuss the problems of managing a business I wish to correct Lalit at
the very outset. We haven't implemented strategic planning at Auto Components; we are
in the process of doing so. We are still grappling with two questions. First, do we need
strategic planning at all? That's surprising since strategy is supposed to be high on every
CEO's list of priorities. Second, how should the company formulate a strategy? Should it
be based on Auto Components' present position in the industry? Or should we factor in the
emergence of new forces in the future--such as technology, scale, and costs--and draw up
a strategy in the light of their impact on our operations? I thought I could use this platform
as a sounding-board, and fine-tune my own approach to strategic planning. Please feel free
to interrupt me
It has been nearly a year since I took over as the CEO of Auto Components. I returned
from the US in 1995 where, after completing my MBA, I worked in the Production
Planning Division of a transnational. I was looking forward to a promising career, but
chucked it in deference to the wishes of my father, who wanted me to return home to take
over the family business. A technocrat, he has spent his life in the automotive sector and
decided, in his mid-40s, to set up a company of his own. Auto Components started off as a
captive ancillary unit for Sadgati Motors, then a fledgling four-wheeler manufacturer. Our
initial capacity of 1 million shock-absorbers per annum has grown into 3.20 million units.
Incidentally, the total output in the country is 21 million units per annum. However, the
growth in the top-line has been erratic. There were years when Auto Components grew by
80 per cent; in others, the company registered a negative rate of growth Yes?
That is bound to happen when you are a component-manufacturer. A feeder unit's
fortunes, invariably, move in tandem with those of its OEMs. Is there anything peculiar
about the shock-absorber market?
Yes, there is. The thing is that there is no replacement market. Not only do most auto-
ancillary units fare better than the automotive sector, they are also insulated from
recessions because of the after market. Unlike most auto components, whose life is
between 2 and 3 years, a shock-absorber can last for anything between 6 and 8 years. You
can also re-condition a shock-absorber--a process that extends the life of the product by at
least 2 years. At less than a quarter of the price of a new one, re-conditioning is cheaper
than replacement. Of course, although the owners of premium vehicles will not opt for
re-conditioning, we do not get volumes there. So, we are fully dependent on the OEM
market.
As a manufacturer of shock-absorbers, are there any other market segments you can
target?
No. Basically, the shock-absorber functions as a dampener of shocks resulting from the
vertical vibrations of a vehicle. Its function is to absorb the jerks transferred from the
wheels to the frames, thus ensuring a comfortable ride. Typically, each shock-absorber
consists of 2 oil-chambers. Whenever a vehicle passes over an uneven surface, the
movement of a piston-rod results in the displacement of oil, leading to the generation
of a dampening force. Almost the entire output of shock-absorbers produced in the
country is used by the automotive industry. Shock-absorbers are both technology- and
capital-intensive--a big barrier for new entrants. Since the specifications are unique to
each customer, their design is critical. A shock-absorber with only a few moving parts is
considered to be better. Importantly, the quality of the raw material--bright bars--is crucial
to the production of a quality shock-absorber. Again, there is little possibility of the
unorganised and small-scale sectors making a beeline for this business because of these
factors.
Incidentally, since 1991, we have had a collaboration with Sephantu, a Japanese
component-manufacturer. We chose Sephantu because it supplies shock-absorbers to
quite a few Japanese auto majors, some of which have set up operations here. In fact, this
collaboration has helped us get new customers since Auto Components enjoys a preferred-
supplier partnership with some of them. It has also placed us on a strong wicket as far as
our future plans are concerned. It will now be easier for us to become a sourcing-base for
both European and Japanese auto majors for their global operations--a possibility that we
will examine shortly. I believe that only by becoming a part of the global value-chain can
we become competitive.
Let me raise one question that we have frequently asked ourselves in the past 12 months:
should we cater to other markets as well? I can cite the example of Sephantu, which has a
capacity of about 1 billion shock-absorbers per annum. It also makes telescopic front-forks
for two-wheelers, and has a bearings division manufacturing a complete range of bi-metal
bearings, flanges, and washers. These bearings cater to the requirements of the railways,
the marine, and the power industries. Sephantu looks at them as related diversifications,
and sees nothing wrong in focusing on those segments too
THE SWOT
STRENGTHS WEAKNESSES
Captive Buyer Base Entrepreneur-Driven Culture
Established Customer Links Single-Product Orientation
Access to Technology Little Scope for
Diversification
Healthy Financials Absence of Core Competencies
THREATS OPPORTUNITIES
Transnational Competition Expansion of User Industry
Integration by OEMs Emergence of New Buyers
Dependence on Few Buyers Global Sourcing Base
Sense of Complacency Newer Technologies
You are now dependent on a solitary end-user industry, but have a captive clientele. All
you need to do is to maintain the relationships with your buyers, work closely with them,
and be an integral part of their value-chain. I can see your reservations about the need
to evolve a strategy at Auto Components...
As Lalit mentioned, Auto Components enjoys a preferred supplier status with 5 leading
OEMs in the country. We get technical and financial assistance from our partners. They
encourage outsourcing, and some of their clients have become global sourcing-centres.
We have access to their Total Quality manuals and Management Information Systems,
like the Spider Web Charts. It is a symbiotic relationship, and both partners tend to win.
When the market is assured, production is predictable, the customer-list is captive, and we
have a single-product orientation, why do we need to plan 5 years in advance? After all,
we will continue to enjoy the benefits of bonding. Auto Components can easily operate
through Management By Objectives and annual budgets--as it has been doing in the past.
Our planning schedules are linked to the plans of our customers. We don't need a separate
strategic planning process at Auto Components Yes?
It is worthwhile recalling the introduction of the concept of strategic planning in
the West. The interest in strategy was caused by the realisation that the external
environment was becoming progressively discontinuous with the past. Objectives and
annual targets alone were no longer adequate as tools of managerial initiative. Strategy
was important because a company needed direction in its search for, and the creation
of new opportunities. You had to identify your core strengths as part of developing the
business strategy...
Core has little relevance in a business like ours. That is, if you mean a unique attribute
which straddles several segments, markets, and products. A two-wheeler company would
view itself in the transportation business, and a petroleum company would categorise itself
as an energy business. But there is no common core capability as far as our single-product
business is concerned. There is no common thread I see that can link our present and
future product-markets
I think you are mistaken. Objectives represent the ends that the company seeks to attain.
Strategy is the means to achieve those ends. It provides the roadmap...
I thought as much. That is why I took the next step: enlisting the help of an outsider.
We short listed 2 consultancy firms, Strategic Consultants, a transnational company,
and Transformation Consulting, a local firm, and asked them to submit proposals for
formulating a strategy, and to help us implement it at Auto Components. Teams from both
the firms have spent several hours with us, and submitted their reports. The contrast in
their approach to strategic planning is striking
How does your father view the need for strategy? After all, he was the one who built the
company...
He is sceptical. He feels that strategy is fine for large corporations with diversified
interests, but doesn't make much sense for Auto Components. He often says that nothing
works better in business than gut-feel--his ultimate touchstone. The rest is all frills,
serving no more than an ornamental purpose. I am less sceptical, and more open to the
idea. I feel that it is imperative for us to know where we will be 5 years from now; it will
help us work towards an objective. Once we have identified a goal, we can start building
structures, systems, and an organisational framework that will help us achieve that goal. It
is crucial to have the big picture. That is where the importance of strategy lies
Aren't both these consultancy companies well-known for their work on strategy?
Yes. Strategic Consultants is headquartered in New York, with 32 offices across the world
and over 500 consultants on its pay-roll. It enjoys a formidable reputation in strategy-
formulation. What interested me was the fact that it has done substantial work on the
automotive industry and has a senior partner, based in Frankfurt, who focuses exclusively
on the auto industry. The distinguishing feature of Strategic Consultants' approach is
an underlying belief that strategy must be based on present data--not future trends.
It will identify for us those segments, channels, price-points, product-differentiators,
selling-propositions, and value-chain configurations that will yield us profits. But the
identification is focused strictly within the present framework of the auto components
industry. Incidentally, the firm has made it clear that it will not be involved in the
implementation process
I am not very comfortable dealing with a consultant who stays away from
implementation. What about the second firm?
The sheet-anchor of Transformation Consulting is just the opposite. It believes that
the purpose of strategy is not only to enable Auto Components to compete today, but
also to ensure that it remains competitive in a fluid market situation. The firm aims at
reconfiguring the auto components sector to the advantage of Auto Components--not just
maximising the company's profits.
Both the proposals I have received are well-structured and cover a wide canvas although
I must mention that the fees quoted by them are quite high for a 3-month project. While
Transformation Consulting has quoted Rs 12 lakh, Strategic Consultants has asked for a
fee of Rs 17 lakh. The former says it will depute a senior partner and 3 associates, one of
whom will work full-time on our project. Strategic Consultants will depute a principal and
2 associates on a part-time basis. But its offer is quite attractive since its partner will be
flown in from Frankfurt for all the major discussions
The fee is, indeed, high. But it isn't a major issue as long as the consultant delivers. My
concern is more about the organisational approach of the 2 consultancies...
Strategic Consultants' approach is top-driven. It does not believe in involving employees
at different levels in formulating a strategy. It forms a team consisting of 2 senior
managers of the company and 2 of its consultants. The team lays down the strategy that, it
thinks, is good for the company. That is quite in contrast with Transformation Consulting's
approach, which is both top-down and bottom-up. It seeks the active involvement of
employees, who are asked to define the kind of organisation they want their company to
be given, of course, the changes that are expected in the future
Strategic Consultants is too focused on the present while Transformation Consulting
builds a vision for the future as part of its strategy. The latter's approach is a radical
departure from the conventional route to strategy-formulation. It is the novelty of the
approach that fascinates me...
Permit me to read out the relevant portions from Transformation Consulting's report: "Our
methodology comprises 4 phases: Envisioning, External Analysis, Internal Analysis, and
Action Plan. These phases will be implemented during the course of 4 separate retreats
spread over 3 months at the company's holiday-home at Lonavla (near Mumbai), where all
the senior managers of Auto Components will gather...
At the beginning of the one-day session on Envisioning, the lights will be put out in the
conference-room for a minute to signify a disconnect with the past. Once the lights re-
appear, the designated co-ordinator from Transformation Consulting will announce that it
is 2003. Each manager will then be asked to imagine himself as part of Auto Components
in the 21st Century, and talk of what the company will be as he, or she, sees it. Although
the exercise will be structured, it will be informal and free-flowing to break the ice and
loosen up people. Not used to looking beyond day-to-day operations, many managers are
likely to fumble. But, at the end of the day, everyone will be comfortable with looking
ahead into the future...
External Analysis, spread over the next 3 days, will be more focused. Managers will
be asked for their perceptions about the customer, the competitor, and the macro-
environment in 2003. They will be required to answer the following questions: who are
Auto Components' customers? Are they local or global? What are the specific needs
that they expect these products to fulfil? Why do they prefer Auto Components to other
manufacturers? The competitor-analysis would seek to probe questions like: who are Auto
Components' competitors? What are their cost advantages? What are their strengths and
weaknesses vis-a-vis Auto Components? Why do customers buy these products? What
is their brand equity? The analysis will examine the impact of technology, government
policies, and cultural and demographic trends on the auto components industry. Mainly,
the objective of Phase II will be to arrive at a summary of opportunities and threats for
Auto Components in 2003...
Phase III, comprising Internal Analysis, will begin a month later, and will be spread over
4 days. Aimed at enabling managers to look inwards, the Internal Analysis will be split
into Performance Analysis, and Strategic Options. The performance of the group will be
measured both on financial parameters, like profitability, sales, and returns on assets, and
on non-financial parameters, like supplier relationships, product quality, and customer
satisfaction. The participants will, then, determine the strategic options available to Auto
Components. This would involve reviewing past strategies to identify strategic problems,
organisational capabilities, and constraints. Based on these findings, a summary of the
strengths and weaknesses of the group will be arrived at.
The final part of Phase III will involve defining the core competencies of Auto
Components, and updating a statement of vision. The last session will be used to
determine the strategic plan to move Auto Components from 1998 to 2003. It will address
questions like the core competencies the company should build, the product-market
segments that it should focus on, and the buyer-and-supplier linkages it should leverage
within the industry..."
There is a difference between the two approaches. Strategic Consultants' gameplan
depends solely on the CEO's vision while Transformation Consulting's approach seeks
the involvement of senior managers in obtaining a vision...
Transformation Consulting's approach to strategy is different from the conventional
time-tested approach in many ways. I, for one, am wary of any approach that is untested.
Traditionally, corporate strategic planning has been based on the present position of the
company in the industry. There are a number of grey areas in this approach. Take the
capsule on Envisioning, for instance. Very few middle-level managers, caught up as
they are with routine operational issues, have the ability to look beyond the limited time-
horizon of a year. That's my major apprehension
More fundamentally, I am not sure if strategy-formulation can be a bottom-up exercise.
A vision, for example, is always driven from the top. It is only when a vision needs to
be articulated that the involvement of middle management becomes imperative. But,
as far as envisioning is concerned, it has to be confined to senior management. This
raises a second crucial issue: is there a need to document strategy? Personally, I feel
that the strategy of a company should not be documented. Only then will it ensure
confidentiality. As Strategic Consultants' approach points out, strategy should be
confined to a handful at the top. It can never be an across-the-board initiative...
That is the way I feel too. But I am open to both opinions although, I must confess, I am
unable to decide on which one to follow. I am aware that some companies link strategy
to vision, but this linkage has not been well-documented. Strategy should be based on
the realities of today; not the dreams of tomorrow. We have to make sure that we do not
become the guinea-pigs for a strategy-formulation exercise.
Figures in Rs crore
Is there a need for a strategy at Auto Components? Does a small company operating
in a predictable environment need to formulate one? Can approaches to strategy be so
conceptually different? Should Abhayankar go by gut-feel and, by using in-house talent,
do what he believes is right for the company? Instead of spending time on documenting a
strategy, shouldn't Auto Components just have an informal plan of action, governed by the
intuition of its senior managers? Since the company has a team which knows its business
better than any consultant, why should Auto Components bank on external ideas? Should
strategy ever be documented?
READINGS
Strategic Planning: What Every Manager Must Know; George Albert Steiner
Strategy And Strategic Management; J.I. Moore
Applied Strategic Planning: A Comprehensive Guide; Leonard Goodstein
Business Policy And Strategic Management; Mark L. Sirower
Chart Your Own Course: Strategic Planning Tools For Business Leaders; James C.
Collins & Jerry I. Porras
Creating Strategic Change: Designing The Flexible High Performance
Organisation; William A. Passmore
Fourth Generation Management The New Business Consciousness; Brian L.
Joiner
The New Rules of The Game; James R. Eemshof & Teri E. Denlinger
The New Strategists; Stephen J. Wall & Shanon Rye Wall
Corporate Strategy; Igor Ansoff
Solution:
Let us first analyse various beliefs and assumptions of Mr Abhayankar before we start
with the doubts, dilemma and indecision that he is facing:
Should it be based on Auto Components' present position in the industry?
Any growth strategy should be based on opportunities and threats that the market will
present in future but duly moderated by strengths and weakness of the company at present.
Thus, any strategy that is based totally on todays internal and external environment
without any heed to emerging trends of the future is sure to fail in the medium to long
run. Real growth does not emerge from normal progression of the present but from the
disconnects from the present. (Japan and America were both booming manufacturing power houses
of 1970s and 1980s. They were the sunrise economies those days. American economy, though larger, was
far behind Japan in competitiveness. Yet it continued to surge ahead through 1990s and 2000s while for
Japan, these were the Lost Decades. Despite all the super refined productivity tools in place, hardworking
and honest workforce with highest productivity and commitment anywhere in the world, Japanese economy
is going through a recession. Why?
America spotted the opportunities lying with knowledge economy and created a disconnect by shifting its
thrust from manufacturing to knowledge industry. Japan on the other hand was so deeply obsessed with its
success in manufacturing sector that it refused to look into the future and kept trying to refine its production
processes and quality further and further. Remember the basic fundamental of life. Most of the graphs are
parabolic. Increase in any input will fetch you gains on the principal of diminishing marginal utility till it
reaches zero after which there is negative return on increasing investment).
Input
Gains
Parabolic relationship between investment and ROI
Companys Growth Although the company grew by 220% over a period of one and half
decades, not much comfort could be drawn from it. Its market share in domestic market
was barely 15%. Thus, there was enormous potential for top line growth without even
considering explosive growth in four wheeler market that was just beginning to unfold at
that time.
Scope of Business and Diversification Very few single product companies have been
able to register spectacular growth. Diversified companies, be it Tata, ITC, Wipro or
Reliance, have scripted much faster growth rate. Auto Components is apparently refusing
to see beyond its nose. It has not even considered diversification. There are plenty of
diversification opportunities available. To begin with company can make a bid for
replacement market by establishing own facilities or appointing franchisees for shock
absorber reconditioning the way many tyre units have done for retreading of worn out
tyres or Maruti True Value scheme. Or, the company can opt for horizontal growth by
encashing on existing goodwill as quality conscious company with current customers
and diversify into other auto component businesses. In addition, company can also go
for concentric diversification by diversification into technologically related products like
tubular auto components, marine engine components, and non-auto engineering products.
Threats Company is considering its future position secure under the assumption that the
technological complexity of the product as well as capital requirement will keep away the
new entrants. Its assumption may be true for local small scale sector but there are plenty
of big players with enough technological and financial muscle are available who can enter
the fray and spoil the party. Another factor that company has completed overlooked is the
possibility to competition emerging from overseas in a market which was fast globalising.
Thus, benefits of bonding can not be taken for granted.
Core Competency Company has once again failed to identify its strength by saying
that there is no common thread that links its present and future product markets. 15 years
experience is a substantial competency in the auto ancillary field. As stated earlier, it
can lead to diversification into various other auto components or non auto engineering
products.
Distrust on Middle Level Managers Ability to Contribute in Evolving a Viable Strategy
Almost every one has streak for future planning. Only, people either do not get time
to devote to such ideas or there is not enough incentive and encouragement to forward
those brainwaves and thus get suppressed. Given the right ambience and impetus, they
can resurrect. Transformation Consulting's approach of taking the executives away from
present humdrum to holiday home in Goa for brain storming sessions is based exactly on
this precept.
Envisioning and Strategy Formulation by Senior Management Only It is true that
envisioning and Strategy Formulation should be done by Senior Management or ideally by
Chairman/CEO himself, but there is no harm in taking inputs from all and sundry. Once
inputs are received, final strategy should be chalked by senior management.
Mr Abhayankar is suffering from decisional paralysis. He is completely confused as to
what course of action he should take.
Gut feel is not the call of sixth sense as many people would believe. Gut feel emanates
from long experience and well meditated analysis of all the known and unknown factors.
Only, the thought process is no so well structured. And yet, going by the gut feel is not the
right course of action in such a situation. Two things go against gut feel action in this case.
First is the absence of experience in Mr Abhayankar and secondly, the pace of changes
that were taking place in the business environment at that instant, made gut feel reaction a
risky affair.
Whether a small company operating in a predictable environment needs a strategy?
The false notion of predictable environment has already been busted above. Auto
Components competition is no more going to be limited to local companies only. In view
of the liberalisation that was underway, global competition in the business was a certainty.
Thus, company needed a strong strategy lest it got swept away by the multinational
behemoths.
Can approaches to strategy be so conceptually different?
Mr Abhayankars bewilderment at conceptual divergence between two approaches to
strategy formulation is truly bewildering. Strategies and approaches to strategies follow
no predictable pattern and can be as diverse as ones imagination goes. There are in any
case always more than one ways of achieving a target.
Instead of spending time on documenting a strategy, shouldn't Auto Components just
have an informal plan of action, governed by the intuition of its senior managers?
Although it would be ideal to document the action plan, it can be done away with in
favour of an informal plan of action if it is not too complex. But plan of action, whether
documented or informal, has to emerge from the long term strategy. Therefore, strategy
formulation is inevitable.
Since the company has a team which knows its business better than any consultant, why
should Auto Components bank on external ideas?
It is true that the company has experts in the field of its business. But their experience and
knowledge is probably limited to existing ways of doing business. Their capabilities in
the field of strategy development and business models appropriate for the then unfolding
liberalised, globally competitive environment were untested. Secondly, old occupants
develop a Tunnel Vision Syndrome. They can not see beyond what is existing and
apparent. New people bring new ideas and therefore involvement of external people in
any brainstorming session always pays. Also, strategy development is an art/craft and
experience of particular business is a poor substitute for this art.
And remember, a guide who is willing to walk the distance with you is always better than
one who tells you the path on the map. So, involve an external consultant, who is willing
to work through the implementation of the strategy rather than one who will wash off his
hands after handing you a 1000 page report written in Queens English and collecting his
green backs.
Should strategy ever be documented?
Documentation of strategy should be avoided as far as possible. Ideally it should lie in
the minds of top management for the sake of confidentiality. However, strategy is always
a combination of two or more deeply correlated but seemingly independent course of
actions. Each course has its own action plan which should be well documented so that
middle and lower levels of management can implement it effectively. But when external
consultants are hired, strategy also comes as a document.
Let us now examine the above case study from the perspective of Components of
Strategy:
Scope Mr Abhayankar has limited the scope of his business to just the current business.
If he opts for in-house strategy building, the scope may remain limited to just that.
Engagement of external consultants may widen the scope to include Horizontal, lateral or
concentric diversification.
Mission, Goals and Objectives These are often formulated by Scenario-Building.
Scenario Building is the foundation stone of strategic planning. Future is uncertain and
could take more than one possible course; some logical and other unbelievably dramatic.
Scenario-Building process encourages people for out of the box thinking; to think about
those dramatic turns in the future growth path. Many assumptions (critical unknowns)
about the future of the company future customer needs, changing industry structures,
and the company's response to both--get answered in the process.
However, there is one pitfall that needs to be guarded against. Most people to
tend to extrapolate the future as a logical extension of the present. Strategic planning's
advantage lies in finding the discontinuity in the business environment in near future.
Discover if there is one building up; and create one if there is none developing on
its own. One who is prepared to take advantage of this discontinuity will secure the
biggest competitive advantage. Such an approach would provide an auto-components
manufacturer with critical insights into emerging supplier-buyer configurations. But to be
able to achieve this, a thorough environment scan is essential.
Resource Planning/Deployment Execution of any action plan requires deployment of
resources. Availability of adequate resources, from money to men (5 Ms), is critical to
success of plans. Many strategic plans fall flat since they omitted to pinpoint their resource
requirements and therefore planning. It is vital that the organisational structure, finances,
technologies, and alliances required to achieve the aspirations spelt out in the strategic
plan be clearly spelled out.
Resources assume even more importance when there is a discontinuity. A discontinuity
often calls for resources that are scarce and mustering them is the first challenge during
plan implementation phase. (BPO/Call Centre boom demanded English speaking educated youth
which China and many other low wage countries do not have in adequate numbers. Off late, even India has
begun to feel the shortage. But we still have plenty of non English speaking educated youth. Considering
this resource base, some entrepreneurs have created KPO (Knowledge Process Outsourcing India based
scientific and social research). This is a discontinuity that Indian entrepreneurs have created).
Developing Sustainable Competitive Advantage The eventual aim of entire strategic
planning is to have a competitive advantage. An in-depth understanding of your
competitors--their visible performance and their less-visible management practices--is
important. Competitive analysis enables a company to look for ways in which it can best
position itself not only to exploit its inherent strengths, but also to attack the weaknesses
of its competitors. Minimise your own vulnerabilities and attack the weaknesses of
competitors.
Another important part of developing Competitive Advantage is Gap Analysis. Gaps are
difference between future requirements vis a vis organisations capabilities. Out of the
possible series of gaps that will emerge from scenario building and SWOT analysis, it
is advisable to concentrate only on the few that can provide maximum leverage (Rule of
80:20). This is important from the point of view of focus.
Next important part of development of Sustainable Competitive Advantage is effective
implementation. Unfortunately, implementation of a new idea is inherent strength of only
few organizations/people. So, any key strategic initiative, especially discontinuity, should
be treated as a new project, and assigned to independent project leaders at various levels
of implementation. Apply the strategy of selectively forget the present. Disconnect HR
Department from selecting people for project team, disconnect finance department from
funding this project, disconnect HR Department from appraisal process of project people
and so on. Dont allow non-believers anywhere near the project. Guard tightly against
development of vested interests in the organisation.
CAPABILITY Vs COMPETENCY Vs CORE COMPETENCY
Capability is what you can do (as well as others). Competency is what you can do better
than most; and Core competency is what you are most proficient at.
Let us see the core competencies of some of the companies
Amul Advertising (Copy based on recent high decibel news/event)
Reliance Project Mgmt (Fast and economical execution)
Sony New technology product development
Distinctive/Strategic Competency A competency which gives you edge over your
competitors. Marutis distinctive competency is in manufacturing entry level cars. Despite
close of 100 models of various cars launched, Maruti 800 still retains over 50% of the
total car market. Maruti has not been so successful in other segments. Its Zen and Wagon
R models were successfully challenged by first by Daewoo and then Hundae with Santro
model.
Core Assets Your best assets are your core assets. Take the case of Wipro Ltd. It is a
multibusiness highly diversified company. It has software, lighting, Oils, etc. But their
software division is their core asset.
Distinctive Assets Distinctive Assets Distinctive assets are those assets which
differentiate you from your competitors and give you competitive advantage. Assets need
not be physical/tangible. They could be intangible as well. Brand Value is one such asset
and Tata group has unmatched strength in that. HLLs and ITC distinctive assets are their
distribution network. Toyotas distinctive asset is its production system where productivity
is highest in the world among all car makers.
PORTERS BUSINESS MANAGEMENT STRATEGY
(Porter was originally an engineer, then an economist before he specialised in strategy)
Michael Porters business management strategy is a three step process: -
a. Assessment of problem,
b. Planning to fight the problem and then
c. Application
These three broad steps of Porters business management strategy are christened as: -
(I) Michael Porters Five Forces Model (to identify the profit limiting forces)
(II) Michael Porters Generic Strategy (Plan to fight these forces and meet the
challenges)
(III) Michael Porters Value Chain Analysis (to build competitive advantage which is
the core of any strategy).
(I) Porters Five Forces Model
This model was developed by Michael Porter in 1979. It uses concepts developed in
economics to derive 5 forces that determine the attractiveness of an industry/market. It
is also known as FFF (Fullerton's Five Forces). These are the forces that have maximum
impact on companys ability to make a profit. A change in any of the forces will require a
company to re-assess its business.
Suppliers Bargaining Power
Industry Competitors
(Rivalry among existing firms)
Buyers Bargaining Power
New Entrants
Substitutes
A graphical representation of Porters Five Forces
These five forces are: -
1. Bargaining power of customers,
2. Bargaining power of suppliers,
3. Threat of new entrants,
4. Threat of substitute products, and
5. Level of competition in an industry. (Rivalry among existing players)
Now let us see when, why and how the 5 forces affect the profitabitability of a company: -
1.
Bargaining Power of Customers
a. Buyer Concentration to Firm Concentration Ratio In simple terms,
this is demand supply gap. When there is oversupply of product, and many
competitors for a small group of buyers, buyer has option to switch to
other supplier and there is tendency among suppliers to woo the customer
through price discounts, gifts etc to garner larger share of the market.
b. Bargaining Leverage Many customers have leverage over suppliers
due to various reasons. There could be host of reasons, like political clout,
muscle power, status, locational advantage, etc. Sugarmills have this
advantage while buying sugarcane from farmers. Farmers are unable to
transport sugarcane to other factories because only one mill is permitted in
specified area. Mills often pay the farmers after months and even less than
govt rate. Those who insist immediate payments are denied sale. Similarly
malls insist on higher discount on MRP (approx 40% of MRP).
c. Volume Buyer Customers who are large buyers are often able to bargain
better prices. Like almost 50% of P&Gs world wide sales comes from
Walmart stores. Therefore Walmart has huge bargaining power with P&G.
(For that matter, with any supplier)
d. Buyers Switching Costs relative to Firm Switching Costs Some times
there is substantial cost involved in switching from one supplier to another
supplier. Take the cost of telephones. The cost and efforts involved in
informing all your contacts of change in your number is huge and is the
biggest deterrent in switching your cell number. Thus, once a mobile
phone company is able to retain a customer for about 6 months, he is a
captive customer thereafter. But once number portability is allowed across
telecom service providers, the churnrate among mobile phone companies
will increase substantially.
e. Buyer Information Availability Information is Power. Once the buyer
is aware about inside information of the company, like production cost,
customer base, capacity utilisation, material usage, etc, he will bargain
from a position of strength. If he knows that you have additional unutilised
capacity, he will ask for additonal supplies at marginal cost + small profit.
Similarly, if he comes to know that your production cost is very low, or
you have inventory build up, or your sales are down, he will bargain hard
for higher discounts.
f. Ability to Integrate Backwards If the customer has capacity and
capability to integrate backward into your business, he will bargain harder
with the threat that you will not only lose your business from him but
precipitate another competitor as well.
g. Availability of Competitive/Substitute Products Any one who has easy
and at par cost or cheaper access to competitive/substitute product is a
tough customer. Take instance of soft drinks. For coke and Pepsi, besides
each other, a host of substitutes are available starting with water (yes! mineral
water and even plain cold matka water) to beer, lassi, Nimbu Pani, Jaljeera, etc.
That is why their advertising spend is among the highest in all sectors.
h. Undifferentiated Product If a product is undifferentiated, a customer
will have no difficulty in switching over to another supplier.
i. When His Profit Margins Are Low - Bargains hard to keep his margin
intact.
j. When product is unimportant to him.
2.
Bargaining Power of Suppliers
a. Supplier Switching Costs Relative to Firm Switching Costs Reverse of
above.
b. Degree of Differentiation of Inputs If a supplier has a well
differentiated product, he can command a premium on price. Customer has
little choice but to be a victim of such a suppliers fancy.
c. Absence of substitute inputs If a product does not have substitutes
and there are not multiple suppliers with over capacity of that product in
sourcing area, such suppliers will command premium on their product
d. Supplier concentration to firm concentration ratio
e. Threat of forward integration by suppliers relative to the threat of backward
integration by firms
f. Cost of inputs relative to selling price of the product
g. Insignificance of volume to supplier
h. Cartelisation by Suppliers OPEC is an example which keeps adjusting
production to keep crude prices artificially high.
3.
Threat of New Entrants
a. Existence of Barriers to Entry Any kind of barriers like cartelisation by
existing manufacturers, govt regulations (licences), natuaral barriers, etc.
b. Capital Requirement Capital intensive industries have relatively lesser
threat of new entrants since very few people can afford to invest that kind
of capital.
c. Economies of Scale There are some products which afford huge
economy of scale. While the existing players would have slowly grown
to build adequate market share/demand, new entrant would have to start
with similar capacity without any demand/market to be able to produce
at competitive cost. Maruti could slowly build a network of its service
stations and spare parts vendors across India. Any new entrant can not
afford to build that kind of network unless they have that kind of density of
vehicles on roads and therefore are finding it difficult to compete.
d. Brand Equity If there is a well entrenched product in the market, it hard
for any new product to find a market for itself and therefore discourages
new entrants.
e. Switching Costs
f. Access to Distribution Distribution network is the trump card in the
hands of a company. HLL, with its reach to the remotest corner or the
country, enjoys that advantage and poses a barrier to the new comers.
Many companies, including HLL are known to buy out all the prime shelf
and advertising hoarding space ahead of launch of a competing product to
black out them in the market.
g. Absolute Cost Advantages If a firm is enjoying a cost advantage
due to any reason, may be captive mines, or pit head location (so low
transportation cost) or cheap captive power generation in a power intensive
product like metals, it poses hurdle for new entrants.
h. Learning Curve Advantages
i. Expected Retaliation
j. Government Policies
4.
The Threat of Substitute Products
a. Buyer Propensity to Substitute
b. Relative price Vs performance of substitutes
c. Buyer switching costs
d. Perceived level of product differentiation
5.
The Intensity of Competitive Rivalry
a. Number of Competitors Higher the number of competitors, higher the
struggle for the market share. Bigger group also brings in ego clashes
leading to indiscrimanate poaching even at otherwise prohibitive costs.
b. Industry Growth Rate This happens in later stages of product life cycle
when product demand begins to stabilise or even decline after peaking
while new entrants continue to set up additional capacities without
observing the life cycle stage of the product, leading to overcapacity
c. Intermittent Industry Overcapacity It is again a common phenomenon.
Many people who catch the cyclic demand late end up adding capacity
when demand begins to ebb. Thus, there is huge overcapacity during lean
demand period. This phenomenon is most prominent in agriculture. One
season, there will be scarcity of, say, pulses and therefore very high prices.
Attracted by the good prices, there will be increased acreage under pulses
cultivation. And then due to oversupply of pulses, the prices will not be
adequate even to recover the costs. Having suffered huge losses, farmers
will switch the crop next year and there will be scarcity of pulses once
again and the cycle continues.
d. Exit Barriers If exist routes are not available, existing players will
continue to attempt to garner larger market share through price cuts or
discounts etc.
e. Diversity of Competitors Rivalry becomes intense with diversity of
competitors. Say, a product is being supplied by manufactures from across
the world (take for instance BPO services). Each supplier has a different
cost advantage, different problems, different govt policies, and so on. On
the other hand suppliers have no common forum to meet and plan their
strategy against arbitrary damaging actions by individual player.
f. Informational Complexity and Asymmetry increases distrust and rivalry.
g. Thin Profit Margin Products Rivalry is intense when profit margins are
already thin since only way out to increase profits is by increasing sales.
(Imagine the intensity of competition in salt business. Consumption can not be increased
in any way. Probably this is the only product in the world whose consumption can not be
increased. Profit margins are thin. (Govt would not want a second Dandi March by a new
born Mahatma). What growth strategies can the salt manufactureres follow but to snatch
each others market share? (But Catch salt did it by differentiation and packaging)
h. Lack of Product Differentiation If there is no real avenue for product
differentiation, like in case of soft drinks, rivalry increases.
Though not supported by all, some argue that a 6th force should be added to Porter's list to
include a variety of stakeholder groups from the task environment. This force is referred
to as "Relative Power of Other Stakeholders". Some examples of these stakeholders are
governments, local communities, creditors, shareholders, employees, & so on.
Not every industry faces all the forces. Some industries face as low a two while some
other might face all the five. Again the intensity of individual forces will vay with
industry. Your job is to identify the forces and find a position where the sum total effect of
all the forces is minimum.
Criticism
Porter's framework has been challenged by other academics who have raised objections to
underlying assumptions in the model, viz -
a. That buyers, competitors, and suppliers are unrelated and do not interact
and collude
b. That the source of value is structural advantage (creating barriers to entry)
c. That uncertainty is low, allowing participants in a market to plan for and
respond to competitive behavior.
(II) Porter Generic Strategies
Michael Porter has described three general types of strategies that are commonly used by
businesses. These three generic strategies are defined along two dimensions:
a. Strategic Strength is a supply-side dimension and addresses the core
competency of the firm: Cost Leadership or Product Differentiation.
Please remember that the two strengths are exclusive to each other. Cost
leadership and product differentiation do not go hand in hand. Either a
company goes cost leadership way or opts for product differentiation. Vi-
John (Barbers favourites) and Gillette range of saving products are the
examples of two strategies.
b. Strategic Scope is a demand-side dimension and looks at the size and
composition of the market you intend to target.
In his 1980 classic Competitive Strategy: Techniques for Analysing Industries and
Competitors, Porter lays down the three best strategies. They are
a. Cost Leadership,
b. Product Differentiation, and
c. Market Segmentation (or Focus).
While first two are standalone strategies, and exclusive to each other, Market
Segmentation, as a strategies, can not stand on its own feet without supposrt of one of
the two other strategies. It complements both the other strategies and is necessarily an
accompaniment. It has to be adopted irrespective of cost or differentiation leadership.
Only scope will differ in two cases.
Combining a market segmentation strategy with a product differentiation strategy is an
effective way of matching your firms product strategy (supply side) to the characteristics
of your target market segments (demand side).
Empirical research on the profit impact of marketing strategy indicated that firms
with a high market share were often quite profitable, but so were many firms with low
market share. The least profitable firms were those with moderate market share. Porters
explanation of this is that firms with high market share were successful because they
pursued a cost leadership strategy and firms with low market share were successful
because they used market segmentation to focus on a small but profitable niche market.
Firms in the middle were less profitable because they did not have a viable generic
strategy.
1. Cost Leadership Strategy
This strategy emphasizes efficiency. The product is often a basic no-frills product that is
produced at a relatively low cost and made available to a very large customer base (It is
assumed that benefits of low cost production are passed on to the customer in the form of
low prices. But it does not happen everytime. In many cases company continues to charge
market rate of product despite substantially low cost of production and uses this advantage
strategically). Maintaining this strategy requires a continuous search for cost reductions in
all aspects of the business.
2. Differentiation Strategy
Differentiation involves creating a product that is perceived as superior to its competitors.
The unique features or benefits should provide superior value for the customer if
this strategy is to be successful. Because customers see the product as unrivaled and
unequaled, the price elasticity of demand tends to be reduced and customers tend to be
more brand loyal. (Pears Soap (Glycerine based transparent) and Dove (with moisturising cream) are
two products which have maintained their differentiation for a very very long time). This can provide
considerable insulation from competition. However, there are usually additional costs
associated with the differentiating product features (both glycerine and moisturising cream
are expensive ingredients and this could require a premium pricing strategy.
To maintain this strategy the firm should have:
a. Strong research and development skills
b. Strong Product engineering skills
c. Strong creativity skills
d. Strong marketing skills
e. Focus (Segmentation) Strategy
In this strategy, the firm targets a few selected markets, be it demographics or geography
or any other parameter.. It is also called a focus strategy or niche strategy. It is hoped
that by focusing your marketing efforts on one or two narrow market segments and
tailoring your marketing mix to these specialized markets, you can better meet the needs
of that target market. The firm typically looks to gain a competitive advantage through
effectiveness rather than efficiency. It is most suitable for relatively small firms but can
be used by any company. As a focus strategy it may be used to select targets that are less
vulnerable to substitutes or where a competition is weakest to earn above-average return
on investments.
(III) Value Chain
(Value Chain is a concept that was first described and popularized by Michael Porter in his 1985
best-seller, Competitive Advantage: Creating and Sustaining Superior Performance).
A firm is a bundle of activities. The activities can be broadly divided into two groups
(a) Primary Activities The activities for which the company exists. The
activities that add value to the product.
(b) Secondary Activities Peripheral or support activities.
The primary activities include:
a. Inbound logistics,
b. Operations (production),
c. Outbound logistics,
d. Marketing and sales, and
e. Customer Service
The support activities include:
a. Procurement
b. Human resource management,
c. R&D
d. Administrative
e. Infrastructure management,
Support activities are not specifically related to any one primary activity but span
across all of them. The value chain framework quickly made its way to the forefront of
management thought as a powerful analysis tool for strategic planning. Its ultimate goal is
to maximize value creation while minimizing costs.
BUSINESS STRATEGY
Unlike Corporate Level Strategy which takes care of a Business Houses broad strategies,
Business Level Strategy is strategy at the SBU level.
The classical BCG model (four quadrangles of cash cow, star, dog and Question Mark) is
utilised to fine tune resource deployment plan.
Following factors help in developing competitive advantage
a. Distribution System This is the strongest weapon in the armoury of
market men. Any other marketing strategy can fail but this is hard to fail.
b. Research and Development
c. Field Strength
d. Assets
Five Rules to create competitive advantage
a. .
b. . Michael Porters three rules
c. .
d. First Movers Advantage Walkman and Windows are two products where
the owner companies benefitted hugely.
e. Synergy Advantage A sports goods manufacturing company can start
sports garment business. Since the market is same, customers are same,
distributors and retailers are also same, brand equity can also be encashed.
What is Strategic Competency?
It is defined as strength of companys core competency Vs strength of competitors core
competency
Strategic Competencies
1. Brand Equity Brand Equity create Image assest as well as financial assets. It
helps company to realise better margins on its products and achieve higher sales
with lesser investment in marketing.
2. Creative Methods of Pricing Some companies are capable of making the
prices affordable for the customer. Shampoo bottles even in 50 ml bottles, was
unaffordable for lower middle class segment girls. Shampoo sachets at Re 1/- per
hair wash was like offering shampoo bottle on instalment payment plan. It brought
this elite product within the reach of poor girls and created a huge market for the
company.
3. Market Management Market management is not same as marketing
management. While marketing management is about reaching the minds of
consumer and managing sales and distribution of the product, market management
is about future planning by forecasting the market trends or quick reaction to
changes in the market through product innovation, positioning etc. Planning cycles
in yesteryears used to be pretty long. Long term plans used to be drawn with 5, 7
or even 10 years perspective. Such kind of time frame is unthinkable now. Markets
have become volatile and planning cycles have shortened. Market Management
involves following steps
a. Develop Real Time Information System for collecting information not
only from local market but from across the world. Even though a company
may not be a global player, competitor might source his products from a
foreign country at substantially lower cost. (Ganesh idols (made in China) during
this Ganesh Chaturthi were being sold at one third the last years price. Who would have
envisioned that China, a communist (atheist) would invade the Ganesh idol market? )
b. Developing sensitivity to information (useful information only).
c. Flexibility in Planning Capability to change the plans at short notice in
response to dynamic change in situation.
d. Online Scanning & Analysis of Information There is veritable flood of
information. Therefore, it is beneficial to scan and analyse the information
online itself.
e. Proactive Approach Company should have a proactive approach to
market management. It should analyse and forecast market direction and
take appropriate action.
Characteristic of Company Which Can Manage Market
1. Sensitive to Market
a. In-Out Organisation Such companies scan the prevailing business
environment and react to the changes that are taking place in the market.
b. Out-in Organisation The company scans macro environment and
changes its strategy proactively before the effects of changes in macro
environment manifest themselves in market. The company is ready to
take the advantage of changes in market when the time comes. There are
companies which are even smarter. They manage the environment itself.
They mould the environment according to their need. Take the case of
Reliance. They laid out the cables across length and breadth of country
for CDMA phone which was a WLL (Wireles in Local Loop restricted
area roaming) service. (This technology is much cheaper in installation and equally
cheap in operation. Even licence fee was only a fraction of what GSM cellular services
providers had to pay). After Reliance completed its cable laying and rolled
out the services, restrictions on roaming for CDMA phones were suddenly
removed and the service was offered in completition with GSM cellular
phones.
c. Give Importance to Real Time Information Management They are
good at online analysis of information and action is taken immediately.
Take the case of Walmart Retail Stores. Information about a product sold
and billed is directly communicated to their central server where sales data
is collated from all the stores and is analysed by computer. Depending upon
sales pattern and current stock levels in various stores, order for supply
is placed on the supplier automatically by the computer itself. Or, slow
moving inventory from one store is shifted to other store.
d. Knowledge Management Let us first understand difference between
Information and Knowledge. Information is unorganised raw data, facts
and figures. Knowledge is when this random data is organised in the
mind in a structured and logical form to facilitate deductions/analysis/
forecasts. In simple words, information is knowing what had happened or
who had done it; Knowledge is knowing why did it happen and why did
he do it; and Wisdom is knowing what to do to make the best use of what
had happened. Thus, Knowledge is a mental aspect and very difficult to
manage. Since knowledge lies in the minds of managers, many companies
often call for brainstorming sessions/meetings where free flow of ideas
and discussions take place and strategies are formulated. This is called
knowledge management.
e. Capability to scan information online.
f. Entrepreneurial Thrust The management should be quick at identifying
the opportunities, arranging the necessary resources, building team and
converiting it into a profitable business.
g. Global Perspective Refer to Strategic Competencies. (Page 28).
h. Effective use of various marketing tools.
Process of Strategic Management (Strategic Mgmt Model)
Strategy Formulation
Mission & Objectives
Internal Resource Analysis
Environmental Analysis
Strategy Choice
Generic Corporate Strategy
Generic Business Strategy
Strategy Implementation
Culture
Organisation Culture
Leadership
Reward System
Functional Policies
Strategy Evaluation & Control
Strategic Management process begins after the Vision and Mission statement have been
set. Vision and Mission statement actually indicate the direction of strategic management
process.
Vision Corporate vision is a short, succinct, and inspiring statement of what
the organization intends to become and to achieve at some point in the future.
Vision is intentions that are broad, all-intrusive and forward-thinking. It describes
aspirations for the future, without specifying the means that will be used to achieve
those desired ends.
In simple terms - Vision is the description of desired future form/state of the
company. It is the dream of top management as to where it would like the
company to be in future. It is a common folly to extrapolate the present into future.
Drawing the Vision requires the top management to empty their mind of the past
and present before they sit down for the purpose.
Once the Vision Statement has been drawn, it needs to be communicated to the
employees. It is not enough to communicate just the Vision. Vision statement
does not include the action plan, because it is meant for not only the company but
the general masses as well. But it is a must to communicate the action plan for
achieving those lofty aims to the employees. Else, it will lack the authenticity and
belief of the people whose heart and soul is must for making it a reality.
Mission Mission is the dream for the near future. It is a statement of what
company wishes to achieve in the short term.
Strategy Management Process (Consists of Following Steps)
1. Analysis of External (Macro) Environment Macro environment is source of
threats, opportunities & constraints and uncontrollable. Therefore, the strategy
has to be drawn around those uncontrollables within the contraints imposed and
opportunities offered by them. Macro Environment can be further sub-dived into
following
a.
Remote Environment (Global as well as Domestic)
i. Social
ii. Technological
iii. Legal
iv. Political
v. Economic
b.
Industry Environment Porters Five Forces model
vi. Entry Barriers
vii. Suppliers Powers
viii. Buyers Power
ix. Substitute Availability
x. Competitive Rivalry
c.
Operating Environment
i. Competitors
ii. Creditors
iii. Customers
iv. Labour
v. Suppliers
d.
Socio - Cultural Environment
i. Demographic factors such as:
a. Population size and distribution
b. Age distribution
c. Education levels
d. Income levels
e. Ethnic origins
f. Religious affiliations
g. Housing conditions
ii. Attitudes/Belief towards: Materialism/capitalism/socialism, free
enterprise individualism, role of family, role of government,
collectivism, language, etc
iii. Cultural structures including: Religious beliefs and practices,
consumerism, environmentalism, Work Ethics, Pride of
accomplishment, diet and nutrition, etc.
e.
Technical Environment
i. Efficiency of infrastructure, including: roads, ports, airports, rolling
stock, hospitals, education, healthcare, communication, etc.
ii. New manufacturing processes
iii. New products and services of competitors
iv. New products and services of supply chain partners
v. Any new technology that could impact the company
f.
Legal Environment
i. Minimum Wage laws
ii. Environmental Protection laws
iii. Industrial laws
iv. Union laws
v. Copyright and Patent laws
vi. Effectiveness of Law & Order enforcement machinery.
g.
Political Environment
i. Political Climate Type of govt (Capitalist/Communist/
Democratic/ Autocratic/Monarchy/etc)
ii. Political Stability and Risk What political stability relates to
business is the stability of govt policies. In many countries like
Japan, Italy, France, Germany and even in our own country, govts
have changed but business policies of the govt have remained
constant over the time. Political instability is serious when business
policies change drastically with govts.
h.
Economic Environment
i. GNP or GDP per capita
ii. Economic growth rate
iii. Inflation rate
iv. Consumer and investor confidence
v. Currency exchange rates
vi. Unemployment rate
vii. Balance of payments
viii. Future trends
ix. Budget deficit or surplus
x. Corporate and personal tax rates
xi. Import tariffs and quotas
xii. Export restrictions
xiii. Restrictions on international financial flows
Scanning these macro environmental variables for threats and opportunities
requires that each issue be rated on two dimensions. It must be rated on its
potential impact on the company, and rated on its likeliness of occurrence.
Multiplying the potential impact parameter by the likeliness of occurrence
parameter gives us a good indication of its importance to the firm. Let us see how
Times of India has been affected by the changes in its external environment:
Demographic Changes There is a change in readership of newspapers. The
average age of newspapers readers have come down. TOI has responded to this
demographic change with change in the content and presentation of its articles.
Social Changes TOI has started with various supplements like Matrimonial,
Property, Suburban Specials, etc
Technological Paper is in colour, more prompt (even late hour news gets
coverage due to faster printing technology, and more and more editions.
Economic Lower prices
2. Internal Resource Analysis Let us see how to evaluate our internal resources. We
need to ask a few questions to ourselves -
a. Is it a distinctive Asset?
b. What is the life of resource? (Kodak company which had become a household name
world over due to its photographic films and equipment business failed to see the end of
this business due to advent of digital (filmless) photography. Companies in the business of
non-renewable natural resources have to be specially aware of this fact).
c. Is your resource copyable? If it is, does it have copyright protection? If no
then, it has no value because along with your launch it will proliferate.
d. What is your Brand Power?
e. What is the result of SWOT analysis?
3. Strategy Formulation Once we know the external and internal environment
(SWOT analysis) vis a vis our vision and mission, it is time to formulate the
strategy. Strategy formulation is done on the basis of following principles
a. Cost Leadership
b. Product Differentiation
c. Market Segmentation (or Focus)
d. First Movers Advantage
e. Synergy
Company has to take a call as to which of routes to adopt.
4. Implementing the Strategy
A bad strategy may still succeed if implementation is good but best of the
strategies will not succeed if implementation is bad.
Above matter of fact statement sums up the importance of implementation phase.
Strategy implementation is dependent on organisational strength. Following
organisational factors affect the implementation:
a. Leadership
b. Organisational Structure Flat/Project Team/Matrix/Hierarchical, etc.
c. Reward Systems Appraisals and monetary and non-monetary rewards.
d. Functional Policies Implementation/execution on the ground is done
at the middle and lower manager levels. Thus, HR policies assume high
significance. Implementation is dependent on incentives, employees
motivation and commitment towards company which are shaped by the HR
policies. Marketing policies also affect the implementation some times.
e. Is the organisation a learning organisation? Implementation in a
learning organisation is always much better since lessons from previous
implementations must have been used to strengthen the system.
Based on above requirements, you need to create an organisation capable of
carrying out the strategy successfully in following steps:
a. Allocate necessary and adequate resources.
b. Create strategy supportive systems and procedures.
c. Create work culture conducive to strategy implementation
d. Install information storage and retrieval system.
5. Evaluation and Control System In order to evaluate the performance, targets
need to be set. An effective, accurate and prompt feedback system is essential so
that any deviations from plan can be spotted in time and course correction applied.
High performers need to be kept motivated through awards and rewards and low
performers should be motivated or changed. If the need be fine tune/reformulate
your strategy.
WHY STRATEGIES FAIL?
A strategy is impacted by numerous factors and most of them are uncertain. Some,
like external factors, are uncontrollable. Such factors are forecasted and factored in the
strategy formulation. Success is achieved when all or at least most forecasts turn out
correct. However, if forecasts turnout to be way off the mark, strategy fails. Quite often,
strategies fail because they were not implemented properly. Yet another time, a competitor
comes up with a counter strategy (like ambush marketing done by Pepsi in cricket World
Cup against Coca Cola). In addition, there are a host of other factors that also affect
success of strategy
a. Faulty strategy due to inaccurate/scanty data or assumptions or pure
inaptitude of strategists.
b. Inadequate training/preparation/commitment/inaptitude of people
entrusted with strategy implementation (generally line managers)
c. Faulty definition of business
d. Faulty Definition of SBU Some times so much of independence is given
to SBUs that they start competition with each other. GE CEO had once
deliberately adopted this path hoping to spur company sales person to
perform better.
e. Excessive Focus on Numbers Some companies keep a tab on numbers,
ROI, Sales, etc, but ignore soft issues like, people welfare, ambience, etc.
Results are less than satisfactory in such situations.
f. Imbalance Between External and Internal Considerations Internal
resources of company are inadequate to meet the external challenges or
exploit the opportunities that are presented. A company may not have
liquidity or storage capacity to bulk purchase raw material and take
advantage of huge discounts, which may have been a key element of the
strategy.
g. Unrealistic Self Assessment Over assessment is as dangerous as
underassessment. Over assessment will lead to biting more than it can chew
and underassessment will allow opportunities to pass without attempting to
exploit them.
h. Insufficient Action Detailing God lies in details. Many times only macro
planning is done and nitty-gritties are left to be tackled on the spot. It may
lead to costly delays or complete derailing of plans.
i. Poor management of Corporate-SBU Interface Many top managers
approve plans based on their of personal likes and dislikes of middle level
managers rather than on the strengths of the proposal. Some others are
swept by the glossy presentations. Resources may be denied to some needy
SBU and instead allotted to SBU which can lobby well.
j. Conflict with corporate system and procedures
k. Faulty info systems.
CHANGE MANAGEMENT
Change management is a great challenge. Successful changes will lead to growth while
failures can be catastrophic. One botched change felled the mighty British Empire. The
change which failed and had most dramatic effect was introduction of bullet/cartridges
with cow fat in British Indian Army in 1857, which became the genesis of Indias
Freedom Struggle and eventual fall of the British Empire. Therefore, management of
change is a vital element in a managers job.
In todays fast changing world, CHANGE is the only constant. Change has always been
there. But the rate of change that has been seen in the last two or three decades, has been
unprecedented.
Many organisations (Static variety) were overwhelmed by the changing business climate
and because of their failure to manage the change sweeping their sector, they lost out
completely. Some have been wiped out of the corporate scene and many others are barely
a shadow of what they were once upon a time. But there were some dynamic organisations
also who took this all pervasive change as an opportunity and either changed themselves
or managed the changing environment to keep them competitive.
Changes cannot be wished away. They are inevitable as the environment in which we
function continues to change ceaselessly and we can ignore them only at our own peril.
Change is affecting not only the new technology industries like software, healthcare,
biotech, etc but is also engulfing the old economy companies like banking, insurance,
retailing, etc.
Changes can become necessary due to variety of reasons.
Necessity of Change
a. Technological upgrades
b. Competition
c. Change in Customers tastes and preferences (fashion)
d. Social Changes
e. Political Environment
However, changes are not easy and there is always opposition to change. If due
care and diligence is not taken while effecting the changes, its opposition can lead
to catastrophic results as cited in the beginning. In a typical factory environment,
it can lead to lower morale, loss of productivity and even strikes. When the change
comes calling, old sources of competitive advantage suddenly disappear and the
company is required to create new set of competitive advantage. Building and
sustaining competitive advantage amidst rapid change requires the organizations
to learn/adopt new technologies, explore new markets and devise new ways of
managing. However biggest challenge in managing change is managing personnel.
Reasons for Opposition to Change (Singularly or in Any Combination)
a. Fears of
i. Unknown
ii. Economic loss
iii. Perceived inconveniences
iv. Loss of power/status
b. Need to learn new skills/knowledge
c. Insecurity
d. Social/Peer Pressure
e. Resistance from groups
f. Organisational Culture
g. Lack of incentives
While some of the reasons/fears may genuinely affect the people adversely, in
most cases they are unfounded. Take for instance, the intense opposition to introduction of
computers in banks. Employees unions opposed introduction of computers for fear of job
losses which never happened.
Thus, in order to effect the changes without causing any disruptions, a meticulous
strategy is required to be formulated keeping in mind their effect on the affected section
of the people in terms of various factors like economic, social, religious, physiological,
psychological, etc. The strategy for effecting changes lies in Greatest Political Scientist
Chanakyas Neeti which advocates use of , , , . Translated into modern
management jargon and elaborated , it means : -
a. Education and communication,
b. Participation of affected people from beginning rather than at the end.
c. Facilitation through support to people to people to overcome changes.
d. Buy the acceptance compensate people for their hardships/losses.
e. Negotiations Give some, get some
f. Manipulation Co-option. Making potential hardliners members of the
committee entrusted with designing change, etc.
g. Explicit or implicit coercion.
Use of single method is often unlikely to yield good results. A mixed strategy is
more successful.
What we have discussed above is from the individual perspective. But these individuals
become managers and then either lend their personality to the organisation or borrow
a personality from the organisation depending upon their level in the organisation and
structure of the organisation.
Depending upon the top management, an organisation can be a static organisation where
little ever changes or a dynamic organisation where change is continuous. HMT, who till
1990, boasted as the time keepers of the nation, are no where now. They failed to catch
the wind of change sweeping the country and were swept aside by Titan. Despite having
a trusted and respected brand value, unimaginative management failed to see the need for
exclusive and trendy outlets. Nor did they come out with new modern styles. Similarly,
Bata and Corona, the two Czars of footwear, have lost relevance. Bata is surviving on the
fringes while Corona is completely wiped out.
A successful company or manager often fail to accept new ideas. They fail to realise that
like human being, there is a life cycle of products also. Products also grow, mature and
die. Products also start become less and less efficient to earn profit with age. Therefore,
new products, systems, processes need to be introduced before the old ones die their
natural death leaving the company in a lurch.
Japanese companies have been at the forefront of change. But most surprisingly, as a
nation, Japan proved a static organisation while USA proved to be a learning organisation.
When Japanese companies beat US blue in production efficiency, US changed the tack
and entered into Knowledge Production and Trading.
Japanese had mastered the art of production. Their strength in the sunrise years of 60s, 70s
and 80s was production of quality electronics and automobiles at cheap rates. US kept trying to
match the Japanese pace in production techniques but soon realised that given the difference in
two cultures, it would be hard task. It quickly changed tack to next technological revolution of
IT, internet, and knowledge industry (Nano and Bio technology). While Japan was still trying to
achieve incremental profits by improving the production processes, US was making a killing by
venture capital in knowledge based industry. While Japan was busy importing material resources
from around the world, US was busy importing intellectual resources from the same countries.
While Japan was busy exporting goods to the world, US was hawking software and services.
Reasons for Opposition to Change in the Organisation
1. Inability to spot changes taking place around them
2. Lack of interest even though aware of changes in surrounding
3. Too focussed in current activities
4. Arrogance of current success
5. Love of Current Success. Excellence is the biggest obstacle in the path of
greatness. People and companies, who achieve excellence in a particular arena,
become so immersed in the current success that they forget to move ahead.
How to Change a Static Organisation
1. Sense the need for strategic change
2. Build organisational awareness to need to change
3. Stimulate debate about alternative methods
4. Strengthening consensus for a preferred approach
5. Assigning responsibilities for implementation
6. Allocate resources for sustaining the effort.
Characteristics of a Learning Organisation
1. Frequent Rotation of Managers Cross training of managers helps in bringing new
ways of doing things and makes the managers multiskilled.
2. Continuous training
3. De-centralisation of decision making
4. Multiple experiments
5. Openness to invite and try out new ideas
6. High tolerance to failures
Let us examine the case of General Electric.
General Electric was a much diversified, successful and highly admired company.
However, company refused to rest on its past laurels and under the leadership of Jack
Welch, initiated the process of change. The steps initiated to effect change in the
organisation were
a.
Make GE boundary less organisation
b. Reduce organisations layers
c. Asking each business unit to be No 1 or No 2 or close down
d. Acquired new companies
e. Rotate managers between business
f. Introduce six sigma
g. Aggressive expansion in Asia
h. Expand into services business
Process of Change Involves
1. External environment assessment
2. Strategic planning and alignment
3. Minimising resistance
4. Maximising acceptance
5. Change of Organisational structure and culture
6. Developing work climate to enhance teamwork, trust and co-operation
7. Whole hearted implementation
Process of Implementation of Change Involves
a. Unfreezing - the old set of values system, structure and behaviour
b. Changing - Introducing the new set of values and change planned
c. Refreezing Making permanent the changes. Institutionalising the new set
of rules, values, system, structure and behaviour.
The process of implementation should be gradual. Implement it on pilot basis on a small
section. Assess the effect on organisation and employees. Optimise the changes, and then
implement on the large scale.
Change Management
Most industries and their competitive environments are rapidly changing.
This change is not confined to high-tech or knowledge intensive industries, e.g. software, health-
care, biotech
but also to once stable industries e.g. banking, insurance, retailing, food-processing
When the change come, organizations cannot rely on existing source of competitive advantage, but
learn to create new one as their environments change.
In future the only source of sustainable competitive advantage will be to learn new skills and this can
be traumatic.
Managers and employees at all levels resist change.
Management practices of learning organizations:
Continued learning
Frequent rotation of mgrs
Decentralization
Learning Organization
Openness &
diversity of ideas
Multiple experiments
High tolerance to failure
Continued rotation exposes a manager to new ideas and insights. A manager tends to get
emotionally attached
and promote current strategies. Continuous rotation overcomes this tendency and helps the
manage to learn new
functional skills, new perspectives and competencies
Continued training of personnel helps to overcome resistance to change as it removes the fear of
becoming obsolete
and thus loose promotional opportunities/ career advancement- the main obstacles to change.
Successful companies have long commitment to training as it benefits both the individual and the
organization
Decentralization of decision making to some degree is important. Lower level mangers. front- line
managers
are the first to spot new opportunities or problem areas
Encouragement of multiple or parallel experiments is better bec of high failure rates of new initiatives
It also helps in a superior idea getting rejected. Parallel experimentation helps choose better
technologies,
product standards, marketing approaches and management methods. This also encourages a
healthy internal.
competition
High tolerance for failures: Many innovative companies tolerate failure and reward achievements
Openness & diversity of viewpoints: True openness by managers to new ideas, suggestions and
criticisms is rare
Successful organizations listen to new ideas but encourage diversity of viewpoint and perspectives
thought the firm
Excessive control makes the manager myopic.
We can broadly classify organizations into three types.
Learning organizations that consider change as an opportunity & renewal
Static Organizations that focus on doing better what they
are doing. They do not promote new learning
In between organizations that change after overcoming varying degrees of resistance. They
take time but change. Most organizations fall in this category.
Common reasons for organizational resistance to change:
Lack of awareness for need to change
Lack of interest in opportunity for change
Incompatibility of change with existing values
Fear of cannibalization
Fear of personal loss
Change Steps:
1. Sensing the need for strategic change
2. Building organizational awareness for this need
3. Stimulating debate for alternative solutions
4. Strengthening consensus for a preferred approach
5. Assigning responsibility for implementation
6. Allocating resources to sustain the effort
Case: Transformation of GE
Before Welch took-over GE was profitable and grew slowly. Its home appliances, aircraft engines,
lighting plastics, consumer electronics & motor businesses were mature, profitable.
Each business unit was finally attuned to competing in its own environment with competition and
technology fairly predictable and stable.
The process of transformation from a static to a learning organization that is agile and lean was not
easy.
It took two decades to implement many new management practices that make change an
acceptable part of working at GE. The figure below shows implementation of various changes
that has changed GE to a learning organization.
The steps Mr. Welsh took the following steps:
1. Make GE a boundryless organization meaning people in one department/ division talk with
people in others and at all levels, to share ideas, resources and insights. Ideas can also come
from customers, vendors even competitors

Corporate
Transformatio
ns in the
1990s:
Making GE
Boundryless.
1980 1986 1988-1992 1994
GE vulnerable
to change
Reduce
peripheral
Form strategic
alliances
Reduce SBU
walls
businesses even more
Slow growth Sell no
performing
Work out Invest in Asia/
Europe
assets
Average
earnings
Breakdown
strong
Team with
suppliers/
Foster
continual
training
SBU lines customers &
development
Big
Bureaucracy
Acquire
strong
perform
share
knowledge &
skills
Encourage
best practices
ers elsewhere across SBUs and
benchmarking
High
divisional
walls
Delayer
management
gement Promote risk
takers
Promote
common
vision
hierarchies
Lots of
protected turf
Adopt new
reward
Invest in
streamlined
Hire people with
systems product
development
time
entrepreneuri
al
tendencies
Resistance to
change
Six sigma
Welsh believed that a boundary-less organization would change faster because it will learn faster
2. Welsh dissolved many layers of management. It lead to layoffs. GE became a thin organization
in many units
3. Each business unit was expected to become no 1 or no. 2 in its industry or were sold away.
Several businesses were sold away that were profitable
4. Acquired several new companies. Mr. Welsh acquired 100s of small companies to bolster GEs
growth rate
Mr. Welsh of course resistance from lower level managers who feared erosion of power base. Some
veterans left
others were trained.
Over time he introduced several new initiatives
Managerial rotation and training
Promote openness and idea exchange at all levels
People with the most workable suggestions were given the authority to implement
5. GE introduced six sigma to revamp all its operations, core processes to promote those
practices that best support and improve quality objectives of six sigma to identify and eliminate
all sources of waste, unleashing in greater improvement in quality and productivity
6. GE trainees graduated to black belt in process improvement
7. GE became aggressive to expand into new markets and into new service-based businesses i.e.
investing in Asia
8. Expand services businesses to expand to improve profitability of its major businesses
Some major service areas are Aircraft Engines, Medical Systems, Power Systems, Lighting Plastics,
and transportation systems.
The also moved closer to customers by setting up service operations on customer sites e. g. on-site
repairs.
They adopted change as a way of life.

ENTREPRENEURSHIP AND STRATEGY
Gartener, a market research agency (specialising in IT sector) has done extensive studies
in entrepreneurship also. It was a related field as maximum successful entrepreneurs of
the last two decades have come from IT field only; Bill Gates being the supreme among
them and there after there is whole of Silicon Valley in US and Infosys, TCS, Wipro, etc,
in India.
During their studies, they identified a total of 90 attributes which are found in most
successful entrepreneurs. However, there was lot of overlapping in those attributes.
Therefore, they applied Factor Analysis to identify the stand alone attributes. They thus
identified following seven Unique Personal Characteristics (called UPCs)
Unique Personal Characteristics
a. Risk Taking Ability This is one characteristic which is the most
important of all. Any entrepreneurial venture is like wading into uncharted
waters where dangers are plenty and your strength limited. So, unless
a person is able to take moderate calculated risk, he can not be an
entrepreneur. (Mark the word, Moderate Risk. High risk takers qualify for gamblers
tag and not entrepreneurs).
b. Internal Focus Entrepreneurs have very strong self belief. They believe
that they can overcome any odd.
c. Autonomy Most of the entrepreneurs like to be independent. They hate
interference in their matters. They want to be their own masters and hate
taking orders from any one.
d. Perseverance In a venture full of risks some failures are inevitable.
Unless the person has the perseverance to stay on his course despite
setbacks and failures, he wont succeed.
e. Commitment Entrepreneurs have very strong commitment to their chosen
aim.
f. Vision Entrepreneurs have long term targets. (I personally dont agree with this
attribute. I believe that most real entrepreneurs start small without lofty aims and ideas
with basic survival + a little more as their aim. These management jargons of Vision &
Mission enter into their vocabulary only after achieving a reasonable level of success).
g. Creativity Most entrepreneurs are creative. (Once again I dont agree with this
attribute. It helps in achieving success but is not a must have attribute. A poor farmers
son, dissatisfied with income from his meagre farming land, may become an entrepreneur
by opening a grocery or even a Paan shop in the village. No creativity is involved in
entering or running these businesses at basic level. It appears that Gartener has done its
study majorly among IT entrepreneurs only for whom creativity is almost a must).
One attribute which I rate as the top among the Must Have attributes, even higher
than Risk Taking Ability, is Ambitiousness. As they call it Need is mother
of all inventions. Ambition is the need for material achievement. Unless this
all consuming passion is present, person with all the abilities will be satisfied
with whatever he has and will rarely attempt entrepreneurship. So, Ambition is
the primary driving force for entrepreneurship. For unknown reasons, this all
important attribute does not find a place in Garteners list.
There are two ways to look into Entrepreneurship
a. From Inputs side
i. Unique Personal Characteristics
ii. Insight into business
iii. Thinking abilities
b. From Output side
i. Innovations - New Products/services/technology
ii. Transforming Organisations
iii. Creating wealth/adding value
What is Corporate Entrepreneurship?
When the whole company behaves like a entrepreneur, takes an entrepreneurial approach
to business; spotting opportunities, taking risks, seeking innovations in business,
creating value by unconventional means, etc; such a phenomenon is called corporate
entrepreneurship. Some of the examples of corporate entrepreneurship are Google, Virgin
Corporation, Microsoft, etc.
Corporate Entrepreneurship consists of three critical mechanisms
1. Identification of Entrepreneurial Opportunity; like Sony CEO did for Walkman.
(Idea of a portable music system was born when Mr Akio Morita saw his
production head walking into his cabin with a music system. When the production
head stated that he can not live without music, Mr Morita realised that there would
be many in world like his production head who would love to carry a music system
with them).
2. Emergence of Entrepreneurial Initiative Every day a million entrepreneurial
ideas are born across the world but few get attempted. Not every one has the
initiative to pursue his idea.
3. Renewal of Organisational Capacity Inspiring people and motivating them.
Keep developing competitive advantage through entrepreneurship.
How to Link Entrepreneurship to Strategy (7 Cs)
1. Context Seeking opportunity all the times and finding how to create value
2. Culture Build culture that supports value creation
3. Competencies Acquire required resources, skills, etc
4. Competing Outperforming competitors
5. Change Believing in change
6. Control Control by example.
DIVERSIFICATION STRATEGIES
What is Vertical Integration and how do you differentiate it from
Diversification?
Vertical Integration is when a company expands in the value chain of its existing business;
forward or backward; towards suppliers or customers businesses. Eg. When a cloth
mill expands into the business of yarn manufacturing (backward integration suppliers
business) or into cloth retailing (forward integration customers business), as was done
by Reliance, it is vertical integration.
Thus integrative growth can be achieved by
a. Backward Integration Co seeks ownership or increased control of its
raw material supply system. Like Reliance, which has refinery at Jamnagar,
diversified into Oil exploration.
b. Forward Integration Co seeks ownership or increased control of its
distribution system. Reliance company is also opening retail petroleum
outlets. Thus, it has grown to marketing its own products.
c. Horizontal Integration Co seeks ownership or increased control of some
of its competitors. Like Birla Group (Grasim) which has strong presence in
cement production
Diversification is when the company expands into unrelated business; outside the value
chain of its present business; like Wipro moved into IT business from its traditional
business of Oils, Soaps and lighting. There is no commonality between their old and new
businesses. Such a move is called Product Diversification.
There are three types of diversifications: -
a. Concentric Diversification New products that have technological and/
or marketing synergies with existing ones for new class customers. Like a
plastic kitchen ware company deciding to diversify into plastic chairs and
tables or industrial storage bins/crates business. It already has know-how
and equipment for manufacturing plastic articles.
b. Horizontal Diversification New products appealing its present customers
though technologically unrelated. Like a CD manufacturing company
coming out with CD Storage Racks. The technology required by the two
products is entirely different, but the customers are same.
c. Conglomerate Diversification New products for new classes. This is
diversification into area which has no relation with companys present
business or customers in any way. Take the case of Raymond. A cloth
manufacturing company ventured into cement production at one time.
There is no synergy between cement and cloth business either in terms of
the product or the customers.
Strategic Initiatives for Diversification
1. Pick new industries to enter and decide the mode of entry; own venture (a green
field project), partnership, Joint Venture, strategic partnership, licensing or
acquisition.
2. Initiate actions to boost combined performance of existing and new companies.
a. Establish/improve the competitive position through economy of scale,
larger market share, leveraging/improving brand value, etc
b. Make each business more profitable by improving competitive position.
c. Offer new business your resources to minimise cost and improve
profitability.
d. Acquire a third company through combined resources of two companies.
3. Pursuing opportunities to leverage cross business value chains, like, when a sports
goods manufacturer diversifies in sports apparels business, his forward value
chain is common; same distribution network and customers. Thus, he can benefit
from this common part of value chain. He can use his brand name, ware houses,
distribution network, etc.
4. Establish investment priorities
When and why should you diversify?
Reasons for diversification are many.
1. Spread the Business Risk - Most of the businesses are cyclic in nature. On the
up for some time and then going into recession for some time. Cash flow crunch
at recession times can impact the company adversely in terms of meeting debt
servicing, modernisation, expansion, etc. Strategically diversified companies will
have stable cash flow and can cross utilise the cash.
2. Need for Growth - Existing product sector may be getting saturated with capacity
and it may be imprudent to add any further capacity.
3. Opportunity - Often a new sector opens up by virtue of change of govt policies,
R&D, social changes, etc, where the profitability is high. Take the case of
Wipro. They diversified into IT sector when they found a new sector emerging
and saw the opportunity there. Similarly, United Breweries Group of Mr Vijay
Mallya diversified into aviation sector when the Indian aviation sector was being
opened up even though they continued to strengthen their liquor business through
acquisitions.
4. Product Obsolescence - Take the case of photographic films. Digital Photography
has begun to erode the market for films. A horizontally diversified company
like Kodak is still surviving because the market for photographic printing paper,
chemicals and equipment is still intact and growing. It is high time that these
companies begin to have a serious re-look on their business strategies from
diversification angle. One of the most successful typewriter company, Remigton
Rand, is out of business because it did not diversify when computers began to
erode its market.
Criteria for Diversification
1. Industry Attractiveness Industry attractiveness is defined by many factors. Some
of them are
a. Market size
b. Growth rate
c. ROI projections (profit margins)
d. Competitive Intensity (existing and proposed capacity Vs demand)
e. Raw material availability
f. Govt Rules (Licensing, Taxes and tax holidays, subsidy, etc)
g. Energy Requirement This has assumed importance in India because
there is acute shortage of power. Therefore any energy intensive industry,
like aluminium foil, in India could face hurdles of availability as well as
high cost. Energy cost in Dubai is as low as Rs 0.25 per KW as against Rs
5-6 in India.
2. Entry Cost (Initial Investment) How much is the minimum investment for a
competitively sized factory? Generally, basic industries like metals are capital
intensive. Similarly, continuous process industries are also capital intensive and
therefore become difficult for entry for small players. So, does the company have
pockets deep enough?
3. Synergetic Effect Does the new industry have any synergy with existing
one? Advantage of synergy will lower the cost and make the company more
competitive.
Strategic Options regarding Diversification
1. Diversify into related business
a. Transfer skills, capabilities and resources of one business into other.
b. Share resources for cost reduction
c. Leverage use of brand name.
d. Combine the resources to create new capabilities or competitive advantage.
2. Diversify into Unrelated business
a. Spread business risk
b. Get into the big league Often there is only limited growth opportunities
in a single segment.
c. Seize profit opportunities suddenly of offer. Refer para 3 of reasons for
diversification above.
d. Manage business portfolio Resources can be re-appropriated from
business in recession to business in upswing.
3. Diversify into Related and Unrelated Business.
Criteria for Unrelated Business Diversification
1. Late stage of business life cycle of current product Photofilm industry (Kodak) is
one example.
2. Assets Undervalued Acquisition method is adopted for unrelated business
diversification when assets of other company are found to be undervalued.
3. When the other company is in financial distress and therefore is available for cheap
valuation.
Pros
a. Business risk is scattered.
b. It may be possible to re-appropriate or share resources between two businesses
and thereby manage costs better.
Cons
a. Availability of trained and competent people to manage a new business.
b. Is the new business really as attractive as it appeared?
Diversification could be Broad or narrow. There are companies like Tata, Reliance
and ITC who have tens of unrelated businesses. Tata starts from salt and at one time
ended with Airlines. This is broad diversification. Then, there are narrowly diversified
companies like JK group, who at one time had diversified into cement along with their
core business of textiles.
Strategies for Already Diversified Companies
1. Make new acquisitions
2. Build new positions ahead of competitors. Strengthen position of business units.
3. Divest some of existing business units that are not in line with companys vision or
are not much profitable. Restructure the portfolio.
4. Become multi industry multi country corporation. This is the most difficult option
of all. It needs tremendous capabilities to operate in multiple businesses in wide
variety of environments. Take the case of a car manufacturer who found his new
successful car complete flop in a new market. Reason the name of car had
distasteful meaning in local language. Currently, Tata is adopting this strategy. It
has its presence in many countries in automobiles (Tata trucks and cars), software
(TCS), Tea (Tata Tetley brand) and Steel (Tata Corus).
Competitive Strategies for Fragmented Industries
What is a fragmented Industry?
A fragmented industry is one where no company has a dominant market share. It is quite
possible that some company may be established brand name but unless this company
holds market share large to influence the market, it is not dominant player. Take for
example the case of Mercedes Cars. While every car owner and even an aspiring car
owner round the world would have heard the name of Mercedes, it has no capacity to
influence the car market in general. In the luxury segment, it has some potential to affect
the market. But in the domestic market scene, Maruti has enough market share of its own
to be called the dominant player. Thus, existence of a well known brand is not enough to
call it an un-fragmented industry.
Eg. of Fragmented Industries Sugar, Construction, Toys, Fashion Garments, Frozen
Foods, etc.
What leads to fragmentation?
1. Low Entry/Exit Barriers Entry barriers, like, licensing, high capital cost,
economies of scale, high technologies, etc, pose considerable barriers for new
entrants and build monopolistic situations for few old players. However, if entry
barriers are low, particular sector gets flooded with new companies. Similarly, if
exit barriers are low, companies tend to enter with the hope that they can exit any
time if the going gets tough.
2. No Product Differentiation In case of undifferentiated products, brand loyalty of
customers is missing. No brand loyalty means no clout of any company and easy
entry for others.
3. Absence of Economies of Scale This gives a fair play ground to new and small
players who begin to enjoy the cost advantage due to small setup (while production
cost often comes down due to economy of scale, supervisory costs often go up as a result of large
organisation).
4. High Transport Cost High transport cost, like in case of cement and steel, often
take away economies of scale. Thus, the barrier to entry is removed.
5. Fluctuating Sales - In case of fluctuating demand, like in case of fashion goods
where customer preference keeps changing regularly, it is risky to for high
capacity production.
Creative businesses are highly fragmented businesses. Take for instance
advertising or film industry. There are some big names in Hollywood and
Bollywood but no one has any substantial market share.
How to manage a fragmented industry?
1. Franchising
2. Co-ordination Tightly managed decentralisation
3. Autonomy Managers of various plants need to be given adequate autonomy to
take their decision regarding the business.
4. Performance Based Compensation to Managers Many managers are capable
to delivering more than they do but are not motivated enough to do so. Monetary
incentives inspire them to dedicate their full potential towards your business.
How to overcome fragmentation?
1. Acquisition Buy market share by acquisition route.
2. Make it Easier for Others to Exit Many small players remain in business
because they can not exit. Provide them avenues for exit; may be by acquiring their
businesses at reasonable prices. Once smaller players exit, fragmentation comes
down.
3. Standardisation of your product.
Competitive Strategies in Declining Industries
What is a declining industry?
A declining industry is one where product demand growth is outright negative or slower
than economic growth as a whole.
1. Leadership Seek market share and industry leader position by
a. Acquisition to purchase market share
b. Aggressive Competitive Action Get into price war. Weak hearted
competitors will quit leaving market for you.
c. Strategy of Ploy Create an impression of position of strength that you
are here to stay. Knowing that there is not enough space for all to survive,
others will quit.
2. Focus on Niche Segments Even in a declining industry there are always
certain segments where decline is not there or atleast comparatively less. In some
segments profit margins are pretty high though the volumes may be less. Focus on
these segments within the industry.
3. Imphasise Product Innovation and Quality Improvement This strategy can
be adopted only if it can be done in a cost effective manner. There is no point in
pumping huge money in R&D in a declining industry.
4. Enhance Production and Distribution Efficiency Production and Distribution
take away almost 80% of the total cost. Efficiency in these processes will reduce
costs and improve profits. High cost production centres may be closed.
5. Gradually Harvest the Business
a. Maximise the cash by reducing maintenance, lesser expense on marketing
and avoiding any further investments.
b. Stop production of certain models (having negative contribution),
c. Drop low margin customers
d. Reduce service costs Reduce after sales service people.
e. Reduce inventory of components and spare parts.
6. Divest Quickly Get out of the business early before market gets the wind of
declining business. To be able to do that you ought to have strong forecasting
skills.
Porter, after studying the stupendous success of Japan in post WW-II era, asked three
basic questions to himself
1. Why did Japan succeed? Why does a nation succeed in a particular industry?
2. What is the influence of a nation on competition in a specific industry?
3. Why do a nations firms select a particular strategy?
Answering above questions, he propounded four hypotheses
1. Nature of competition and source of competitive forces (Porters five forces
model) differ widely among industries in a country. A firm facing stiff competition
in her home country gets ready for competition in the international arena.
2. Successful global competitors form some activities of their value chain outside
their home countries and draw competitive advantage from world market rather
than their home base.
(Multinational corporations have different strategies for each country. Global corporations have
same product and strategy for whole world with only minor adjustments to suit local conditions).
3. Companies gain and sustain competitive advantage through innovations.
4. Firms that successfully gain competitive advantage are industries are those who are
early and aggressively exploit the opportunity of technology.
Porter's 'Diamond' Theory
Factor Conditions
Demand Conditions
Firms Structure, Strategy and rivalry
Related and Supporting Industries
The conventional wisdom of international trade is challenged by Porter's Diamond
Theory. He argues that Comparative advantage can no longer be seen as 'divine
inheritance'. As per Diamond Theory, there are four national attributes which shape the
environment faced by domestic firms that have direct impact on firms ability to compete
internationally.
International success in a particular industry is determined by four broad mutually
reinforcing factors which create an environment which enables these firms to compete.
The four include
a. Factor conditions,
b. Demand conditions,
c. Related and supporting industries, and
d. Firms structure, strategy and rivalry.
Factor Conditions
Porter argues that the factors most important to comparative advantage are not inherited,
but are created and that the broad categories of land, labour, and capital are too simplistic.
He divides factors into basic and advanced, generalised and specialised.
a. Basic factors such as natural resources, climate and un/semi-skilled labour
are 'passively inherited'.
b. Advanced factors are those whose development demands large and
substantial investment in human and physical capital, such as educated and
skilled manpower, infrastructure, etc.
c. The distinction of generalised versus specialised factors is based on their
ability to perform tasks. Generalised factors, such as raw materials, are
available in most nations. They can also be sourced on global markets and
the activities on them can be performed at a distance from the home base,
whereas specialised factors are developed from the generalised factors
with considerable investment, like technological development, marketing
programmes, etc. Porter argues that sustainable competitive advantage
exists when a nation state possesses the factors necessary to compete in
particular industry, which are both advanced and specialised.
Demand Conditions
Porter argues that local demand is at the root of international national advantage. If
domestic market is large then the company gains expertise in various aspects of business
before entering the international market.
a. If domestic customers are sophisticated (understand quality) then
companies will be forced to produce quality products.
b. Media exposure in the home country. A company will be more responsible
and vigilant against malpractice if media is active.
Related and Supporting Industries
Presence of related and supporting industries in home country help the companies to
compete globally. Any automobile company requires ancillary and auxiliary industries.
Similarly, presence of dye and chemical industries is helpful for textile industry in gaining
competitive advantage.
Firm Structure and Strategy and Rivalry
Porter argues that vigorous domestic rivalry is strongly associated with competitive
advantage in an industry. Domestic rivalry creates pressure to innovate and upgrade as
local competitors imitate new ideas and the whole industry benefits from overall industry
innovation.
Porter provides another framework for international business competitiveness. The two
factors of this new framework are
a. Configuration Location of facilities, whether concentrated in a place or
widely dispersed in different countries. High configuration industries are
concentrated within a country where as low configuration facilities are
widely dispersed in many countries.
b. Coordination Harmonisation of various activities.
COORDINATION
CONFIGURATION
MNC
EXPORT BASED STRATEGY
TRUE GLOBAL CORPORATION
R&D OF PHARMA CO. HIGH INVESTMENT
H
L
H
L
In the above diagram, coordination is plotted on the Y axis and configuration
on the X axis. Starting with the bottom left quadrangle, where configuration is high and
coordination is low, this is the strategy adopted by the MNCs. (MNCs operation in each
country are more or less independent). Eg. Retail Chains, McDonalds, Food Products, etc.
Diagonally opposite is High Coordination and Low Configuration which is the hallmark
of True Global Corporation. (Global Companies market same product across the globe). Bottom
right quadrangle where both coordination and the configuration are low is typical of
Export Based Strategy. And finally we have top left quadrangle where both configuration
as well as coordination are high. This kind of situation arises in pharma companies where
high investments are made in R&D of new drugs.
Mazda Sports Car was a true global product. Its design was developed in California, the prototype was
made in England, components were made in New Jersey where as fabrication work was done in Japan. And
the car was sold worldwide.
STRATEGIC ALLIANCES
International operations can be started in any of the following three ways
Start-ups
Acquisitions and Mergers
Strategic Alliances.
What is the difference among the three options?
Start-up means building a new company with your own investment. Obtain licence for
a new company, build the plant, hire the people and start operations. A company might
launch its own subsidiary in another country.
Mergers and Acquisitions involve taking control of an existing running company along
with its brand name and all assets by partial investment in equity.
Strategic Alliances are collaborations with another firm in foreign company without any
involvement of equity capital. Strategic Alliances are opted for when the company does
not have a strategic asset to launch operations in a foreign market. It could be any thing,
technology, market knowledge, local with connections govt, etc. It is necessary that the
other firm should have that particular strategic asset. Thus, for a strategic alliance to
fructify, the two companies should have complementing strengths and weaknesses.
Forms of Strategic Alliances
Marketing Partnerships
Licensing
Franchising
Joint Ventures
1. Marketing Alliances Gains
a. Small company in alliance with a global company can reach the global
market overnight.
b. Big company does not need to invest in manufacturing facilities.
c. Marketing know-how of local company can be utilised.
d. Dealing with local govt becomes easier.
e. Goodwill of large company is transferred to smaller company.
2.
Licensing Gains
Licensing involves transfer of some industrial property right from licensor to
licensee.
It could involve any of the following
a. Brand Name
b. Patents, designs, trademarks, copyrights
c. Product and process know-how and specifications.
d. QC procedures
e. Trade Secrets.
Reasons for Licensing
a. Govt Restrictions for Entry Often there are restrictions imposed by govts
for certain sectors. Thus, a foreign company even though willing to invest
in a start-up can not do so. Take the case of Wal Mart. FDI in Retail Sector
is not allowed by Indian Govt. Wal Mart, therefore, has tied up with Bharti.
b. Market Too Small for Entry Market could be too small for a big
company. For a large multinational, overheads are too high to justify
expansion into small markets. In such cases, licensing is done.
c. Outdated Product/Technology Many companies in advanced countries
license production of goods which have become outdated in their home
countries in third world countries. Thus, they are able to recover residual
value of that product.
d. Negotiated Deal on Large Purchase In case of multi billion defence
equipment deals, often only part of supplies are purchased in readymade
form. For balance quantities, there is a deal involving technology transfer
to allow licensed production in purchasers country. India, having strong
production capabilities but poor R&D facilities, often arm twists foreign
weapon suppliers for license for local production.
To succeed in Licensing
a. Licensor should have exclusive internationally transferable product or
technology rights
b. Licensor should have a way to control the licensee after selling the license
should he start to act irrationally (what if the licensee starts selling the
technology to third parties?)
c. Licensor must have competence or know-how to utilise the license.
What does it financially involve?
It could be
a. A one time down payment, Or
b. A large one down payment with small yearly fee payments, Disney style
(3% of the annual turnover is yearly fee), or
c. A small down payment with large yearly payments (Star TV has started
marketing rights for names of its popular tele serials. Down payment is
small but the deal asks for 50% of the sales revenue as yearly fee), or
d. Deferred Payment Basis There is no payment in the initial years but as
the sales grow in later years, charges are high.
e. Equity Participation Many companies allow license against equal value
of equity shares of the licensee company.
3.
Franchising
Franchising is a special form of licensing which allows the franchisee to sell
a highly publicised product or service using the franchisers brand name or
trademark, carefully developed procedures and marketing strategies. The franchise
is operated by a local investor who must adhere to the strict policies of the
franchising company. Like in case of licensing, in this case too, the franchisee
pays a fee to the franchiser, normally as percentage of sales.
McDonald outlets are all franchisee outlets. Actually most of the food chain
companies outlets are franchisee outlets.
Four Characteristics of Franchising
a. A contractual relationship in which franchise licenses the franchisee to
carry out business under the name owned by or associated with franchiser
b. Controlled by the franchiser over the way in which franchisee carries out
the business
c. Assistance to the franchisee by the franchiser in running the business prior
to commitment and through out the contract period
d. Franchisees business is a separate entity from that of the franchiser. The
franchisee provides and seeks capital in the venture.
Advantage to the Franchiser
a. Rapid expansion of business over a wide area
b. Low overhead cost
c. Avoidance of day to day business details
d. Acquires knowledge of local skills and local customers.
Disadvantage to franchiser:
a. Lowering the quality of brand name
b. There is total absence of control by franchiser
c. Only passive interaction with the market.
4.
Joint Ventures
Joint Ventures are partnership projects. Two or more companies join hands
to launch a third company. While the capital is often shared between the JV
companies, there is a complementary relationship between the strengths and
weaknesses of the two companies. While one firm may have cutting edge
technology but no knowledge of marketing dynamics of other country, second
firm may have obsolete technology but a strong presence in that product segment
of targeted market. Thus, coordination of superior technology and equally strong
marketing and managerial strength creates a formidable company which has all
strengths and few weaknesses.
Airbus Industries of Europe is a joint venture among many companies in Britain,
France, Spain and Germany.
When is JV preferred?
JV is preferred when
a. A company wants quick expansion into foreign markets but has no market
knowledge of the other country.
b. Govt restrictions upon ownership. (Only 74% FDI is permitted in Telecom sector
in India. Therefore, despite having all the necessary resources, Vodafone and AT&T and
Hutch can not start operations in India without a joint venture with local firms. Same is
the condition with Aviation Sector).
Problems in JVs - Despite all the attendant benefits of quick expansion into
unknown territories, JVs pose quite a few problems which need to be addressed
before inking the deal.
a. Managerial approach of the two firms might be diverse and integrating
them without superseding authority becomes a challenge.
b. Other company in the Native country is difficult to control.
c. Fear of other company selling technological secrets to another company.
MERGERS AND ACQUISITIONS
The problems in many alliance strategies like Joint Ventures is finding a suitable partner.
There are any number of cases where the alliance broke and the two companies parted on
a bitter note. Suzuki and Govt of India in their alliance for Maruti Car Project have had
a running battle for years. In the more recent case, Hero and Honda have had difficulties
in their joint venture to manufacture Hero Honda Motor Cycles. Honda has already
started its start-up venture of manufacturing scooters and motorcycles which are in direct
competition with their Joint Venture with Hero.
Even though Mergers and Acquisitions (M&A) are spoken of in the same breadth, they
are not one and same. Merger means that the bought company is merged into the buying
company and the bought companys legal existence is extinguished. All products of that
company (brand name associated with that company is killed). Assets of that company are
used for purchasing company.
Pros and Cons of Merger & Alliances
1. M&A give a readymade capacity for expansion of company.
2. There is no gestation period involved.
3. A large acquisition can put a medium size company into the big league.
However, the old companies come with old machines, old technology, entrenched culture
and managerial practices.
Various Kinds of M&A
1. Vertical Mergers Mergers of companies which are one or two steps up or down
the value chain. When a manufacturing company takes over a retailing business
of the same product, or a raw material supplying company, it is called Vertical
Merger. If Tata Steel acquires coal or iron ore mining company in Australia, it will
be called Vertical Merger.
2. Horizontal Mergers Mergers of companies in the same product business.
Vodafones acquisition of Hutch, Tata and Corus, Ispat Group (LN Mittal) and
Arcelor acquisitions are examples of horizontal mergers.
3. Circular Combinations - In a circular combination, companies producing distinct
products in the same industry, seek amalgamation to share common distribution
and research facilities in order to obtain economies by eliminating costs of
duplication and promoting market enlargement. The acquiring company obtains
benefits in the form of economies of resource sharing and diversification.
4. Conglomerate Combination A conglomerate combination is the amalgamation
of two companies engaged in unrelated industries. It enhances the overall stability
of the acquirer company and improves the balance in the company's total portfolio
of diverse products and production processes. Through this process, the acquired
firm gets access to the existing productive resources of the conglomerate which
result in technical efficiency and furthermore it can have access to the greater
financial strength of the present acquirer which provides a financial basis for
further expansion by acquiring potential competitors. These processes also lead to
changes in the structure and behaviour of acquired industries since it opens up new
possibilities. ITC is one of the most diversified companies. Similarly, Reliance and
Tata are equally diversified. Even Wipro with its Electrical Division, Oils division
and computer hardware division is a fairly diversified company.
5. Geographical combination
Reasons for Failure of M&A
1. Unrealistic Valuation of Synergic Advantages Two out of three M&A failures
are attributed to overzealous valuations of synergic advantages of merger and
therefore high cost of acquisition. Even Tatas buy of Corus at 608 pence per share
is supposed to be a over valued deal. That was the reason that stock took a severe
beating in the stock market after Tata won the deal in battle with CSN of Brazil.
Only time will tell whether Tata were right in their valuation.
2. Poor Business Fit Some times the two businesses do not fit each other well.
It happens due to poor due diligence on part of acquiring company. Jet Airways
failed acquisition of Sahara Airlines would have fallen in the same category had it
materialised. Jet were quick to realise their folly and stop short in their tracks well
in time.
3. High Debt Some times the acquisition fails because the company fails to service
high debts taken to buy the company. Thereafter, the cash flow fall short of
expectations due to various reasons.
4. Cultural Clash Cultural clash between two companies can lead to failure.
Tomco culture was a laid back culture. When HLL acquired it, there were severe
consternations on both sides. Eventually, HLL gave a golden handshake to some
employees, some were transferred to remote locations who then quit the job and
some fell into the HLLs dynamic work culture. But many mergers have failed
because of cultural clash between the two companies.
5. Regulatory Delays Every M&A is required to be ratified by the regulatory
authorities. There have been instances where the approval for merger was delayed
by the regulators and by the time approval was accorded, business environment
had altered significantly wiping out all the perceived advantages. Take a
hypothetical case of some company taking over Bajaj Scooters in 1980 which had
a monopoly then with waiting line running over 5 years. Obviously, it would have
been valued very high. But if the approval was delayed by a few years (years and
even decades delay was not a impossible situation then), and the markets were freed in the
interim, failure was inevitable.
Role of HR in M&A
Mergers and Acquisitions are turbulent times for both companies. There is lot of
uncertainty in the minds of employees of acquired company. HR plays very important role
during these times and in the success of M&A. Major responsibilities on HR department
are
1. Remove Cultural Disparities
2. Retain Key Employees There is often exodus of key employees from taken over
company. We have seen this phenomenon in recent take over of BPL mobile. HR
department needs to draw strategies to sooth their nerves and retain them.
3. Maximise the productivity of two companies
4. Merging the management styles of two companies
5. Act as a Change Agent
6. Internal Communications When a company is taken over, the fastest production
is at RUMOURS MILLS. Rumours fly thick and fast. Some based on half baked
facts and some pure imaginations coming out of fear psychosis. If management
is quiet during these times, these rumours gain ground leading to negative
consequences. Thus, clear communications regarding companys future plans need
to be dished out for all.
MERGERS, ACQUISITIONS AND TAKEOVERS
Introduction
Purpose of business is to earn profit and even more profit. Profit can be increased by
reducing cost or increasing price. But both have narrow limits beyond which neither cost
can be reduced nor price can be increased. Business growth is the third option where onl
sky is the limit.
What we have seen under Strategic Alliances are the growth options wherein there is no
equity participation. We will now see the growth option wherein one company is bought
over by the other company and ownership changes hands. Buyer company invests huge
sums of money in purchasing the other company.
Equity induced growth can be achieved either by Organic way (also called Start-Ups - building
more factories through green field route or capacity additions by adding more machines) or Inorganic
route, ie, Mergers, Acquisitions and Takeovers.
Organic Growth process often works out cheaper, but not always. (Some times sick companies
are available for take over at throw-away prices. Mr LN Mittals initial growth strategy was to buy govt
owned sick steel mills at throw away prices and then revive them. Some times, even political situations throw
a windfall. Political turmoil may lead to exit of foreign firms who dispose off their share in profit making
companies at dirt cheap prices. Such situation occurred in Uganda when Gen Idi Amin drove Indians
out and local industrialists benefitted. Similarly, when Indian Govt in 1971 forced foreign firms to divest
60% of share holding, it presented an opportunity for Indian firms for cheap takeover). Takeovers and
acquisitions mostly come at a hefty price tag and unless there is huge benefit of synergy or
there is opportunity to exploit some dormant capacity of target company, success may be
elusive. Not all M&As have been successful.
Merger
In Merger, a company purchases another company and either merges its balance sheet
into its own balance sheet thereby extinguishing the legal existence of merged company.
Or, the balance sheets of both companies are merged and a new company is formed
extinguishing the legal existence of both the companies. (Novartis is one such example. Novartis
was created in 1996 from the merger of Ciba-Geigy and Sandoz Laboratories).
Normally, the weaker company, with weak balance sheet is merged into the stronger
company. However, in many cases, legal existence of taking over company is
extinguished and weak taken over company survives. This is called Reverse Merger. It
happens when weak company, despite its poor financial health, has a very strong brand
value, while taking over company has weak brand value despite its profitable record.
Acquisition/Takeover
An acquisition/takeover happens when one company takes over control of another
company by purchasing the assets or shares, wholly or partially, in cash or shares or other
securities. In acquisition, though the ownership of the bought company changes hands;
probably management also changes; but both companies continue to exist as hitherto with
all their brands in the market and a layman on the street will not feel any difference.
Amalgamation
Amalgamation is an special case of merger where in both companies lose their identities
and a new company is formed. Novartis quoted above is one example.
Pros and Cons of Mergers and Acquisitions
1. No Gestation Period Organic Growth usually involves a longer period of
implementation and greater uncertainties. There could be time overruns or cost
over runs or even both. Even without delays, very often it happens that by the time
the additional capacity is ready, industry cycle enters into recessionary period and
capacity remains unutilized for long years. Mergers and acquisitions expedites
growth because additional capacity becomes available immediately.
2. Ease of Funding the Growth - Sometimes, raising adequate funds for capacity
expansion is problematic. A merger or an acquisition can obviate, in most of the
situations, finance problems as payments are normally made in the form of shares
of purchasing company.
3. Entry into Big League A large acquisition can put a medium size company into
the big league.
4. No Choices - Organic Growth enables a firm to retain control with itself and
also provides flexibility in choosing equipment, technology, location etc, which
are compatible with existing operations. M&A come as a bundle. There are no
options; take it or leave it.
Merger-mania has struck India Inc. Indian companies are going hammer and tongs at
acquiring companies world over. Tata Group, which had followed Green Field route
for over 100 years, has been at the forefront of M&A activity. Starting with Tetley Tea
brand, it has recently acquired Corus Steel Company. Reliance ADAG made bold but
unsuccessful bid for Hutch, and so on. Even some of the smaller companies are eying
overseas companies as big as 4 5 times their size. Nearly every sector of the world
economy has been affected by the recent wave of mega-mergers.
M&A targets are often unprofitable/inefficient/marginally profitable companies which
have lot of latent value locked within them. Almost every PSU falls in that category.
Every PSU that has been sold till date, whether profitable or loss making, has gone on
to become a gold mine for buyers. Such companies, if allowed to decay and destruct or
are liquidated, are a national waste of resources. Mergers, acquisitions and takeovers are
modern methods of preventing asset-destruction and systemic decay of national resources.
Factors Attracting Foreign Direct Investment in a Country
1. Market Size This is single most determinant. BRIC countries (Brazil, Russia,
India and China) have become such hot international investment centres because of
their market size.
2. Competition Lower the competition, higher the profits. Growing markets have
imperfect markets with poor competition where as developed countries have
mature markets where growth is poor and competition is intense. Thus, developing
economies like BRIC and Indonesia have become attractive FDI destinations.
3. Availability of Factors of Production Availability of Raw Material, Cheap
Labour, technical know how, etc, bring down the production cost and increase
profit margins. BRIC countries again offer all these and therefore are attractive
destinations.
4. Government Incentives Govt incentives lower the investment or improve
profit margins depending on kind of incentive. Tax soaps improve the retained
profits while subsidised land and power lower the cost of production. Developing
countries, in their bid to attract foreign capital, often offer various sops.
Ireland is the hottest destination for high technology FDI. Reasons are manifold.
Firstly, Ireland has abundance of highly trained technology workers. It also has
excellent R&D facilities. Besides, govt offers 45% cash subsidy for any factory set
up there. Tax rate is also as low as 10% only.
5. Availability of R&D institutions
6. Quality of Life Poor quality of life poses problems for the company in terms
of hiring right kind of talent for the country. How many people are willing to
Ethiopia? And even some one eventually agrees to go there, he asks for a fat
compensation which adds to the cost.
7. Market Proximity Proximity saves on costs. Transportation costs, travelling
costs, communication costs, etc are cut down. Proximity also allows better control.
8. Access to Venture Capital
9. Cost of Doing Business Costs of doing business like Rentals for office space,
protection money, etc. Rentals in Mumbais Nariman Point are higher than
London. In many countries with poor law and order situation, businesses can not
survive without paying protection money to local mafia. Even in India, businesses
in North East need to pay monthly protection money to Ultras like ULFA.
10. State of Infrastructure like bandwidth, communication, roads, rail and air
connectivity and finally energy. Poor state of infrastructure adds to the cost of
production and makes investment unattractive.
Motives for FDI
1. Improving Operating Efficiency Many countries offer low cost factors of
production like, cheap labour and raw material. In addition, closer to raw material
reduces cost of transportation of raw material. Also, govt subsidies reduce capital
cost. Thus, operating efficiency improves.
2. Resource Seeking Many companies invest in other countries to overcome
resource shortage problems. FDI in software sector in India, is getting attracted by
abundance of software professionals and quantitative restrictions imposed by US
govt on issue of H
1
B
1
visas to Indian Nationals. In addition, availability of cheap
finance is could be reason for movement of capital to certain countries.
3. Risk Reduction Higher the diversification, lesser the risk. A company diversified
into different markets spreads its risks.
4. Market Development
a. New market may give opportunity for brand differentiation. Nokia in
No 1 brand in India and by a huge margin. But Nokia does not enjoy the
leadership position in very many company. Its diversification has given
it leadership role through differentiation in one of the largest and fastest
growing cell phone markets in the world.
b. Market Growth Diversification into new markets gives new markets for
the product.
c. Competition New market may not have much competition.
5. Government Policies Govt policies regarding investment, repatriation of profits,
monetary policies and incentives influence the FDI movement.
Acquisition as Strategy for Investment Abroad
Three questions need to be answered while making any acquisition
a. What cost are you willing to pay?
b. What are the chances of success of joint company?
c. Degree of control you require whether a simple veto power of 26%,
controlling power of 51% (you can have your own Board of Director) or
absolute control of 76%.
Acquisition can be made either by purchasing shares from the major shareholders
or by going to shareholders body and making an offer. First option is necessarily
a friendly take over. However, second offer could be a hostile take over attempt
also. In cases where controlling group does not own 50% or more shares, taking
over company can buy shares from market by making an open bid for purchase of
shares from all and sundry shareholders. Tatas takeover of Chorus was a friendly
take over where as Mittals acquisition of Arcelor was a hostile one.
In addition, there are some times leveraged buy outs too. Leveraged Buy Out
(LBO) refers to take over of company with only a miniscule amount of equity and
very high debt (Debt to Equity ratio is called Leverage. When debt is high, it called
highly leveraged company).
Reasons for M&A
Besides the need to accelerate business growth (and in particular, profit growth), there are
several other reasons for merger and acquisitions - .
1. To Gain Quick Entry into New Market Acquisition of Hutch has given
Vodafone entry into the Indian Cell Market. Corus has given Tata Steel straight
entry into British and European Market which would have been otherwise very
difficult with all their biases against Indian products.
2. Synergy - It results from complimentary activities, e.g., one firm may have
substantial financial resources while the other has profitable investment
opportunities. Likewise, one firm may be strong in R&D, whereas the other firm
may have a very efficient production department. Similarly, one company may
have well-established brands but lack marketing organization, and another firm
may have a very strong marketing organization. The merged concern in all these
cases will be more efficient than the individual firms. Also, a post-merger firm is
likely to raise finances at lower rates than that at which either of the pre-merger
constituents could have acquired them, as it is perceived to be more secure.
3. Economies of Scale Reduction in the average cost of production and hence
in the unit cost when output is increased is known as Economies of Scale. For
instance, sharing central services such as accounting and finance, the office,
executive and higher management, legal, sales promotion and advertisement, etc.
can be shared between two companies thus substantially reducing these overhead
costs.
4. Tax Advantage If a healthy company acquires a sick one, it can offset losses
of sick company (including accumulated losses) against profits of the healthy
company under section 72-A of Income Tax Act. Thus, tax incidence on healthy
company is reduced.
5. Increased Production Capacity A green field project often takes years to
complete and by then some times the demand cycle goes downhill. M&A give
immediate addition to capacity which can be expoited in a booming market.
6. Diversification A merger between two unrelated firms would tend to reduce
business risk, which in turn reduces the discount rate/required rate of the firms
earnings, thus increasing its market value. In other words, such mergers help
stabilize overall corporate incomes which would otherwise fluctuate.
7. Increased Market Power Combined capacity can give the company substantial
control over the market. Mittal Arcelor is the largest Steel Producing company in
the world now. Tata Steel acquisition of Corus has become the fifth largest steel
producer in the world.
8. Avoiding Cut-Throat Competition: A merger/takeover route may enable
companies to eliminate a major competitor. E.g. VIP took over Universal Luggage
and put an end to the massive price discounting, which was eating up their profits.
Types of Diversification
1. Backward Integration Company seeks ownership or increased control of
its raw material supply system. Like Reliance, which has refinery at Jamnagar,
diversified into Oil exploration.
2. Forward Integration Company seeks ownership or increased control of its
distribution system. Reliance is also opening retail petroleum outlets. Thus, it has
grown to marketing its own products.
3. Horizontal Integration When a company seeks an acquisition or merger which
allows ownership or increased control of some of its competitors. Like Birla Group
(Grasim) which has strong presence in cement production, has acquired cement
division of L&T and renamed Ultra Tech.
4. Related Diversification when a company uses its goodwill and reputation
in a particular business to diversify into new areas where that good name and
reputation will be recognized and translated into strategic advantage. An example
is that of Wilkinson Sword. It was an old company with a good reputation in the
manufacture of ceremonial military swords. Clearly, the market for these products
was limited and declining. The company decided, very profitably, to diversify into
the manufacture of disposable razor blades-- a market previously dominated by
Gillette.
5. Geographical Diversification It is a form of the Horizontal Diversification
wherein a company seeks to expand its traditional business into a different area of
the country or internationally. Tatas acquisition of Corus Steel or Tetley Tea in
England are examples of Geographical diversification.
6. Conglomerate Diversification A company may decide that its strength lies in
its its managerial excellence; its ability to manage subsidiary companies being
its distinguishing factor, the exact business area being largely irrelevant. Such a
company may build a portfolio of subsidiary companies in diverse business areas.
Tatas are the one of the most diversified companies; spanning from ordinary salt
to software. Similarly, ITC is very diversified company; from cigarettes to hotels
to apparels and so on. Such a company would be described as having adopted a
strategy of Conglomerate Diversification.


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