Contents
5
Contents
How to Get the Most Out of
this Book
Strategy: An Introduction
The 10 Schools of Strategy
The Economic Goals of
an Organization
Strategic Planning
Operationalising the
Strategy
Change Management
Strategic Control
Evaluating and Rewarding
Performance
The Road Ahead
9
11
12
13
14
15
17
18
20
21
Ackoff, Russell L.
Activity Based Costing (ABC)
Adaptive Planning
Adjacencies
Adjusted Present Value (APV)
Agency Theory
Alignment
Ansoff, Igor H.
Anti-Takeover Strategy
Argyris, Chris
25
25
26
26
27
27
28
30
32
33
Backward Integration
Balanced Scorecard
Bargaining Power of Buyers
Bargaining Power of Suppliers
Barnard, Chester
Barriers to Entry
Barriers to Imitation
Bartlett, Christopher A.
BCG Growth-Share Matrix
Beachhead Market
Benchmarking
Best Practices
BHAG
Bias for Action
34
34
35
35
36
37
38
39
39
40
40
41
41
41
Big Hairy Audacious Goals
(BHAGs)
Blue Ocean Strategy
Bottom of the Pyramid
Brainstorming
Brand Management
Breakeven Analysis
Bureaucracy
Business Ethics
Business Forecasting
Business Model
Business Process
Reengineering (BPR)
Business Risk
Buy Back
41
Cadbury Committee Report
Capacity Expansion
Capital Structure
Cartel
Cash Cow
Chandler, Alfred DuPont
Change Management
Christensen, Clayton M.
Clusters
Coase, Ronald
Code of Ethics
Commoditization
Company Profile
Comparative Advantage
Competitive Advantage
Competitor Analysis
Competitive Strategy
Concentration Ratio
Concentric Diversification
Conglomerate Diversification
Contestability
Contingency Planning
Contract Manufacturing
Co-opetition
49
49
51
51
52
52
53
54
55
56
56
56
57
57
58
59
62
63
64
64
64
64
64
65
42
44
44
45
45
45
45
46
47
47
47
48
6
A to Z of Business Strategy
Core Competence
Core Ideology
Core Values
Corporate Governance
Corporate Image
Corporate Philanthropy
Corporate Purpose
Corporate Renewal
Corporate Restructuring
Corporate Social Responsibility
(CSR)
Corporate Venturing
Cost Leadership
Cost of Capital
Counterparry
Country of Origin Effect
Country Risk
Critical Success Factor (CSF)
Cross Country Subsidization
Cross Holding
Customer Relationship
Management (CRM)
Customer Switching Costs
Cusumano, Michael
65
67
68
68
69
69
70
71
71
71
Decision Making
Deming, William Edwards
Demographic Environment
Devil’s Advocacy
Diamond
Differentiation
Discovery Driven Planning
Diseconomies of Scale
Disruptive Technology
Diversification
Divestiture
Divisional Structure
Downsizing
Drucker, Peter F.
Due Diligence
Dynamic Capability Building
Dynamic Specialization
77
78
80
80
80
83
84
84
85
85
88
89
89
89
90
91
91
Earnings Before Interest and
Taxes (EBIT)
Economic Value Added (EVA)
Economies of Scale
Economies of Scope
93
72
72
74
74
74
74
74
75
75
75
76
76
93
94
94
Emotional Intelligence
End-game Strategies
Enterprise Resource Planning
(ERP)
Enterprise Risk Management
(ERM)
Entrepreneurship
Environmental Scanning
Experience Curve
94
95
96
96
96
97
98
Fayol, Henri
First Mover Advantage
Five Forces Model
Flat Organization
Focus
Follett, Mary Parker
Force Field Analysis
Forward Integration
Franchise
Free Rider
Full Costing
Functional Strategy
Functional Structure
99
99
100
101
101
102
102
103
103
104
104
104
105
Game Theory
Garbage In, Garbage Out
Generic Strategy
Ghoshal, Sumantra
Global Corporations
Global Industry
Global Leverage
Global Value Chain
Configuration
Globalization
Goals
Golden Handcuffs
Golden Handshake
Golden Hello
Golden Key
Golden Parachute
Govindarajan, Vijay
106
106
106
107
108
108
108
109
Handy, Charles
Hedgehog Principle
Herfindahl Index
Herzberg, Frederick
Hierarchical Organization
Hostile Bid
113
113
113
114
115
115
109
111
111
111
112
112
112
112
Contents
Human Capital
Hygiene Factors
115
115
Independent Director
Industry
Industry Shakeout
Innovation
Innovator’s Dilemma
Institutional Investor
Intrapreneurship
116
116
118
120
122
123
123
Japanese Style of
Management
Joint Venture
Judo Strategy
Just–in-Time
124
Kaizen
Kanban
Kaplan and Norton
Keiretsu
Kepner-Tregoe Matrix
Khanna, Tarun
Knowing-Doing Gap
Knowledge Management (KM)
126
126
126
127
127
127
128
128
124
124
125
Lateral Thinking
130
Law of Conservation of Profits 130
Law of Unintended
130
Consequences
Leadership
132
Lean Manufacturing
136
Lean Thinking
137
Licensing
137
Long Term Objectives
138
Loss Leader
138
MBO (Management By
Objectives)
Managerial Grid Model
Market Defense
Market for Corporate Control
Marketing Mix
Market Power
Market Signals
Maslow, Abraham
Matrix Structure
Mayo, Elton and
Roethlisberger, Fritz
139
139
140
141
141
141
142
143
143
144
7
McGregor, Douglas
McKinsey 7-S Framework
McNamara, Robert S.
Merger
Mintzberg, Henry
Mission
Motivation
Multi Domestic Industry
Murphy’s Law
145
146
147
147
148
149
150
151
152
Nearshoring
Net Present Value (NPV)
Nine-Cell Planning Grid
Not-Invented-Here
153
153
153
154
Offshoring
Ohmae, Kenichi
Oligopoly
Operating Strategies
Opportunity Cost
Optimizing Planning
Organic Growth
Organizational Behavior
Organizational Chart
Organizational Culture
Organizational Design
Organizational Development
(OD)
Organizational Inertia
Organizational Learning
Organizational Mapping
Organizational Structure
Outsourcing
Overheads
155
155
156
157
157
157
157
157
158
158
160
161
Palepu, Krishna G.
Pareto’s Principle
Parkinson’s Law
Personal Effectiveness
PEST (Political, Economic,
Social and Technological
Factors) Analysis
Peter Principle
Platform Leadership
Poison Pill
Policies
Political Risk
Porter, Michael E.
164
164
165
165
166
161
162
162
163
163
163
167
167
169
169
169
169
8
A to Z of Business Strategy
Positioning
Price / Earnings Ratio (P / E)
Process Innovation
Process Life Cycle
Process Networks
Product Innovation
Product Life Cycle (PLC)
Product Platform
Prospect Theory
Purpose-Process-People
Doctrine
Pygmalion Effect
171
172
172
174
175
175
178
179
180
180
q-theory
Quinn, James Brian
182
182
Real Options
Regulatory Capture
Resource-based Theories
Responsiveness Planning
Reverse Engineering
Risk
Rivalry
183
183
183
184
185
185
186
Satisficing
Scenario Planning
S-Curve
Senge, Peter
Service Level Agreement (SLA)
Shareholder Value
Simple Structure
Simon, Herbert A.
Six Sigma
Skimming
Skunk Work
Sloan, Alfred P.
Slywotzky, Adrian J.
Span of Control
Spender, J. C.
Stakeholders
Strategic Advantage
Strategic Alliance
Strategic Architecture
Strategic Business Unit (SBU)
Strategic Choice
Strategic Control
Strategic Cost Management
188
188
189
189
190
190
190
191
191
192
192
192
193
193
194
194
194
195
196
196
196
197
197
181
Strategic Fit
Strategic Groups
Strategic Inflection Point
Strategic Innovation
Strategic Intent
Strategic Management
Strategic Market
Strategic Options
Strategic Planning
Strategic Pricing
Strategy Evaluation
Strategy Implementation
Stretch
Stuck in the Middle
Succession Planning
Supply Chain Management
(SCM)
Switching Costs
SWOT Analysis
197
198
198
199
201
202
203
203
205
207
209
210
211
212
212
213
Taylor, Frederick W.
Technology Risk
Threat of Substitutes
Tipping Point
Total Quality Management
(TQM)
217
218
220
221
222
Utterback, James
223
Valuation
Value Chain
Value Migration
Value System
Values
Vertical Integration
Value Innovation
Vision
224
224
227
227
227
228
231
232
Whistle Blower
White Knight
Williamson, Oliver E.
Willpower
Winner’s curse
233
233
233
234
234
Zero Base Budgeting
235
Bibliography
236
215
215
Strategy: An Introduction
9
How to Get the Most
Out of this Book
Alphabetization:
All entries are alphabetized by letter rather than by
word so that multiple-word terms are treated as single words. In cases
where abbreviations or acronyms are more commonly used than full
terms, they are given as entries in the main text. For example, MBO is
more commonly used than MANAGEMENT BY OBJECTIVES, and so the
concept is explained under MBO. Where a term has several meanings, the
various meanings are given.
Cross References:
To offer a fuller understanding of a concept, sometimes it is both necessary and useful to refer to other related entries in
the book as well. Such cross references are printed in SMALL CAPITALS.
Italics
have been used to indicate titles of publications, books, journals,
etc.
Parentheses:
Parentheses have sometimes been used in entry heading
to indicate that an abbreviation is as commonly used as the term itself,
for example, BIG HAIRY AUDACIOUS GOALS (BHAG).
Examples, Illustrations and Tables:
The book contains numerous examples to help you better understand a concept, or to relate it to the real
business world. Illustrations and tables are also given at many places
along with their related entries.
10
A to Z of Business Strategy
Strategy: An Introduction
As the business environment becomes more complex, strategic management is gaining in importance. Few words are as commonly used in
management as strategy.
In simple terms, strategy means looking at the long term future to
determine what the company wants to become, and putting in place a
plan of getting there.
Strategy is both art and science. Strategy is an art because it requires
creativity, intuitive thinking, an ability to visualize the future, and to
inspire and engage those who will implement the strategy. Strategy is
science because it requires analytical skills, the ability to collect and analyze information and take well informed decisions.
Without a strategy, an organization is directionless and vulnerable to
changes in the business environment. Strategy acts as some kind of a
guidepost for a company’s ongoing evolution. Strategy provides a direction for the company and indicates what must be done to survive, grow
and be profitable.
According to Constantinos Markides*, strategy addresses three questions:



Who are the customers?
What products / services should be offered to them?
How can the company do this efficiently?
These questions look deceptively simple. But the answers to these
questions which form the core of corporate strategy.
The term strategic is widely used, but often in the wrong context. So
we must understand the term carefully. We can call an issue strategic if
it requires top management involvement, involves commitment of major
resources, has either a long term impact or organization-wide implica*
Markides, Constantinos C., “A Dynamic View of Strategy”, MIT Sloan Management Review. Spring 1999. pp. 55-63. Also see All The Right Moves by the
same author, published by Harvard Business School Press, 2000.
Strategy: An Introduction
11
tions. Though the involvement of top executives is a must in strategic
management, people at all levels in the different business units and functions must also be involved. Unless plans are understood and implemented effectively at these lower levels, the whole purpose of strategic
management would be defeated.
The 10 Schools of Strategy
The body of knowledge on corporate strategy has evolved over time.
With different schools of thought looking at strategy in different ways,
it’s a good idea to review all of them briefly in order to get an integrated
picture.
According to Henry Mintzerg*, there are ten different schools of
strategy:







*
Aims at creating a fit between a company’s internal strengths and weaknesses and external threats and opportunities.
The Planning School: Views strategy as an intellectual, formal exercise, involving various techniques.
The Positioning School: The company selects its strategic position
after thoroughly analyzing the industry. Effectively, planners become
analysts.
Entrepreneurial School: The focus here shifts to the chief executive
who largely relies on intuition to formulate strategy. The emphasis is
less on precise designs, plans or positions and more on broad vision
and perspectives.
Cognitive School: The focus here is on cognition and cognitive biases.
Learning School: Strategies are emergent, not deliberate. They evolve
as the organization learns.
Power School: Strategy making is rooted in power. At a micro level,
people are involved in bargaining, persuasion and confrontation. At a
macro level, the organization uses its power over others and among
its partners in alliances, joint ventures and other network relationships to negotiate things in its favor.
The Design School:
Mintzberg, Henry; Lampel, Joseph, and Ahlstrand, Bruce, Strategy Safari: A
Guided Tour Through the Wilds of Strategic Management, The Free Press,
2005.
12



A to Z of Business Strategy
Cultural School:
Views strategy formulation as a process rooted in
culture. Culture shot into prominence after the Japanese style of
management became widely written about in the 1980s.
The Environment School: The focus here is on coping with the environment. As Mintzberg mentions, this school sees the strategy formation as a reactive process. The strategy is a response to the challenges imposed by the external environment. Where other schools
see the environment as a factor, the environmental school sees it as
an actor.
Configuration School: This school views the organization as a configuration and integrates the claims of other schools. A variation of this
somewhat academic perspective is a more practitioner-oriented view
which focuses on how an organization moves from one state to another, such as from start up to maturity.
The approaches mentioned above need not be viewed as exclusive,
watertight compartments. They can be combined in appropriate ways.
The Economic Goals of an Organization
Understanding the firm’s long term economic goals is the starting point
in strategy formulation. As Pearce and Robinson* rightly put it, three
economic goals must drive the strategy of any organization — survival,
profitability and growth. A firm has to first survive, if it is to serve the
interests of its stakeholders. Survival is often taken for granted. But
many companies do go bankrupt. Indeed, the average life of a Fortune
500 company is only 40 to 50 years, according to the research of a former Shell executive Aries de Geus†. Reckless or expedient short term
oriented decision making, complacency and quick fixes to structural
problems are some of the ways in which the survival of an organization
is threatened.
Profitability is the main goal of any business. Not only should a firm
make profits but it must also ensure that these profits are sustainable in
the long run. Moves aimed merely at improving short term profitability
*
Pearce, John A. and Robinson, Richard B., Strategic Management — Strategy
Formulation & Implementation, Richard D. Irwin, 1995.
† De Geus, Aries P., “Planning as Learning”, Harvard Business Review, March-
April 1988, pp. 70-74.
Strategy: An Introduction
13
must be avoided. Equally important, profits should come from the company’s core business, not through non operating income (such as sale of
assets) or accounting manipulation.
The third goal is growth or, more precisely, profitable growth. A
profitable organization which is not growing is a cause for alarm. Lack
of growth means the company is not able to identify opportunities to
expand its market, compete with other players, develop new products,
attract new customers, etc. Lack of growth also implies that competitors
are probably moving ahead, thereby marginalizing the company’s competitive position.
For example, slow growth in recent times of famous companies such
as Microsoft and Hindustan Lever has been a major source of worry for
their investors.
Strategic Planning
In general, strategic plans contain the following components:
The organization’s deeply desired future.
The organization’s purpose in terms of products, technology
and markets.
Core Competencies: The tangible and intangible assets the company
will need to build and leverage to gain competitive advantage.
Values: The driving beliefs that define a company’s culture, help
managers to set priorities and guide day-to-day operations.
Strategic Objectives: The targets that allow a company to measure
how it is performing in key result areas such as market share, customer loyalty, quality, service, innovation and human capital.

Vision:

Mission:



The business environment needs to be analyzed carefully before a
strategic plan is prepared. According to Pearce and Robinson*, the business environment can be divided into the remote environment and operating environment. The remote environment includes political, economic, social, technological and industry factors. The operating environment
has a direct impact on the ability of the firm to sell its products and services profitably. Among the factors to be considered here are competi-
*
Pearce, John A. and Robinson, Richard B., Strategic Management — Strategy
Formulation & Implementation, Richard D, Irwin, 1995.
14
A to Z of Business Strategy
tive position, customer profile, reputation among its suppliers / creditors
and the labor market. The operating environment is much more under
the control of a firm, compared to the remote environment. So the firm
should be more proactive in dealing with the operating environment.
Environment data must be collected for a meaningful range of factors. Such data should be analyzed to determine the implications for the
firm in terms of opportunities and threats. Strategic plans should be sufficiently flexible to deal with unexpected variations from environmental
forecasts.
During the planning stage, the company will also have to identify key
issues; for example, weaknesses to be addressed or opportunities to be
exploited with respect to the products and services to be offered to customers, the internal process changes needed to support the company’s
strategy, and the skills and resources needed to create value more efficiently and effectively. Some of the important issues faced by any organization are costs, service, new markets and products, geographic expansion, acquisitions, divestitures, organizational structure, core competencies and processes, new technologies, training and development, and
information systems.
Any strategic plan also involves commitment of resources. Adequacy
of existing resources, training needs, requirement of new information
systems, etc. must be carefully examined.
Strategic management decisions take place at three levels: Corporate,
Business Unit and Function. Corporate level decisions tend to be macro
level and conceptual in nature. The choice of business, the kind of
growth strategy to pursue and the kind of capital structure the company
should have are good examples. Business level decisions cover more
specific areas such as plant location, market segmentation, geographic
coverage and distribution channels. Functional level decisions tend to
cover the next level of detail such as choice of plant / equipment, inventory level, etc.
Operationalising the Strategy
The difference between the best and mediocre companies often lies not
in strategic planning but in the way strategy is implemented. The key
issues must be translated into action plans, which must include the key
metrics, timelines, important steps involved, resources needed, cross
Strategy: An Introduction
15
functional collaboration required, etc. Effective implementation demands identification of annual objectives, functional strategies and appropriate policies that are aligned with the long term plans / objectives.
Annual objectives effectively break down long range goals into what
needs to be achieved during the year. So they must be focused, specific
and measurable. Examples of annual objectives include:



To reduce employee attrition by 10% by the end of the year.
To reduce time from order receipt to order execution by 20%.
To increase the member of consultants in the company, who are Six
Sigma Certified Black Belts by 30%.
Functional strategies represent the action plans for sub-units of the
company. Functional strategies outline how key functional areas like
marketing, finance, operations, R&D and human resources must be
managed. Functional strategies must be framed with respect to each key
activity. Take the case of pricing, for example. The following issues
must be addressed:
1. What segment is being targeted — mass market or premium end of
the market?
2. How much of price discrimination should be practiced across customer segments?
3. Is the cost structure aligned with the price?
4. What kind of discount can be offered, given the cost structure?
5. Should the price be above or below that of competition?
Policies act as specific guides for operating managers and their subordinates. By linking policies to long term objectives, strategy implementation is greatly facilitated. Policies are clear statements about how
things are to be done. They ensure disciplined decision making without
the need for frequent intervention by top management. By standardizing
answers to many questions, policies not only speed up the decision making process but also help establish consistent patterns of action and reduce the uncertainty involved while handling routine problems.
Strategy implementation will not be effective without defining accountability. Managers need to determine who will be responsible for
the overall effort and, in turn, who will “own”, or be responsible for,
each of the different steps.
16
A to Z of Business Strategy
Accountability, autonomy and responsibility go together. Managers
need to clarify how much autonomy individuals and teams will have in
discharging their responsibilities.
Some individuals may like to consult other team members before
making a choice. Others may be capable and confident of making decisions independently. A few others may have relatively little experience
in decision making. Managers may want to empower them to make
some lower risk decisions themselves to gain more exposure.
Communication is an integral part of operationalising the strategy.
Even the best thought-out plans cannot be executed unless team members clearly understand the plan, are enthusiastically convinced about it
and discharge their responsibilities skillfully.
Meetings, informal conversations, e-mails, and other communication
channels can be used to communicate the importance of the company’s
strategy and the role of different groups in implementing it. Communication must focus on the following:





Rationale for the company’s strategy.
How the initiatives that are being carried out support the corporate
strategy.
The implications if the plans are implemented successfully.
The implications if the company fails to implement its plans.
The attitudes and behavior expected from each person in the team.
Regular communication can go a long way in making people believe
that strategy is truly a collective responsibility.
Change Management
Managing change is an integral part of strategic management. Analysis
of industry structure, competitive positioning, resources currently available to the firm or a sharp decline in the company’s financial performance may indicate the need for launching a major change initiative.
Effective change management calls for a clear vision about where the
organization is heading, involvement of people, responsibility for taking
action and appropriate measurement and control systems.
Radical change is usually best implemented by outsiders, who can
bring in fresh perspectives. A new CEO promoted from within but who
Strategy: An Introduction
17
is not closely associated with the past strategy can also spearhead such a
change initiative. Leadership of radical change initiatives usually involves creating an inspiring vision of the future, supporting it with tangible and symbolic actions, and generating support and commitment
across various levels of the organization.
Change is difficult for most people due to various reasons. Change
tends to be seen as an admission that something wrong has happened.
Change also upsets status and power relationships. Resistance might
take the form of outright defiance, apparent agreement to do something
but failure to follow through, an emotional attachment to the way things
have been done in the past and a diminishing commitment to the job.
People who resist change can slow down things. They must be dealt
with on a one-to-one basis. After understanding the reasons for their
resistance, various approaches can be tried out:




Give them plenty of information about market developments and
why a new corporate strategy and initiatives are needed.
Invite them to participate as much as possible in planning and implementation, so that they have a personal investment in the strategy
and initiatives.
Identify the reasons behind the resistance. Mentoring / Counseling
may overcome such resistance.
Training can go a long way in facilitating change. Training can impart new skills and competencies and facilitate behavioral intervention.
If all these approaches fail, managers may have little choice but to move
such people to areas where they are less likely to do harm. In extreme
cases, people resistant to change should be dismissed in the larger interests of the organization.
Strategic Control
Strategy implementation may take years. But companies cannot wait till
a strategy is fully implemented to compare actuals with targets. Strategy
must be tracked even as it is being implemented. Suitable mid-course
correction must be taken in response to various developments, internal
18
A to Z of Business Strategy
and external. According to Pearce & Robinson*, strategic control has
four aspects:




Premise control;
Implementation control;
Strategic surveillance; and
Special alert control.
Premise control aims at systematically checking whether the assumptions made during the strategic planning exercise continue to hold good.
It is not necessary to track all the assumptions made during planning. It
makes sense to focus on those assumptions which are likely to change
and which would have a major impact on the organization if they did.
When these assumptions change, plans also must undergo a corresponding change.
Implementation control examines whether the overall strategy should
be changed in light of unfolding events and the results of the various
actions already taken to implement the strategy. One useful technique is
a milestone review. It involves a full-scale reassessment of the strategy
and the advisability of continuing or changing the direction of the company. Such a review may take place after a passage of time, occurrence
of critical events, or at points before major resource allocations.
Strategic surveillance involves monitoring a broad range of events,
internal and external, that may derail the strategy or significantly influence the implementation. Special alert control is a mechanism to thoroughly, and often rapidly, reconsider the firm’s strategy in the wake of a
sudden, unexpected event. Occurrence of such events must trigger off an
immediate and intense reassessment of the company’s strategy and circumstances, and a re-look at the plan.
At lower levels, operating managers need control systems to guide
the allocation and use of the company’s resources. These systems set
performance standards, measure actual performance, identify deviations
from standards and initiate suitable corrective action or adjustment. Examples of operational control systems include budgets, schedules and
key success factors. A budget is simply a resource allocation plan.
*
Pearce, John A. and Robinson, Richard B., Strategic Management — Strategy
Formulation & Implementation, Richard D. Irwin, 1995.
Strategy: An Introduction
19
Scheduling helps in allocating the use of a time-constrained resource or
arranging the sequence of interdependent activities. Key success factors
must receive constant management attention.
Evaluating and Rewarding Performance
Evaluating performance entails measuring how both a unit as a whole
and its individual members have fared with respect to set objectives,
using both qualitative and quantitative criteria.
Qualitative criteria are those where numbers cannot be put. Some
examples are:







Evaluating whether the unit is exceeding expectations in the accomplishment of strategic initiatives.
Evaluating the commitment to learning.
Evaluating if individuals are developing innovative ways to accomplish the job.
Evaluating how well a unit is working together as a team.
Evaluating how well team members are collaborating with one another, resolving conflicts, and sharing what they’ve learned.
Evaluating how well the unit plans ahead.
Evaluating how deeply team members understand the company’s
business, their own role in supporting the corporate strategy, and the
details of the action plans they’re responsible for.
Quantitative criteria focus on revenue, cost of goods, market share,
and other quantifiable and measurable parameters. For example, a unit
might decide to increase revenue by 20% annually over the next three
years. At the end of Year-1, the unit may review the situation and confirm whether revenue did, in fact, increase by 20% that year.
People can be rewarded for good work in different ways. Most people want some form of financial reward for their work. A few are motivated by non-monetary factors such as recognition, power and influence,
autonomy, job variety and learning opportunities. So a judicious combination of financial and non-financial rewards must be used to encourage
a culture of excellence.
The reward system should be transparent. Employees must understand clearly what is expected of them, and the kind of rewards they will
20
A to Z of Business Strategy
receive if they perform well. Some of the issues that must be communicated to people in a transparent manner include:


Is the reward system permanent, or will it be modified or discontinued after some time?
Will everyone be eligible for rewards?
For example, if the reward system features bonuses for sales of a new
product, will the R&D staff also be rewarded for their contribution?
The Road Ahead
The classical views of strategy have focused on understanding industry
structures and developing suitable capabilities to position a firm effectively in relation to competitors. But in today’s complex and changing
environment, when the very boundaries of many industries are being
constantly reshaped, does it make sense to try and understand the evolving industry structure? Are ad hoc short-term movements the only way
to cope with the uncertain environment? Is long term strategic planning
no longer relevant?
The short answer is that strategic planning is as relevant as ever. It
provides direction. As John Hagel III and John Seely Brown* mention,
speed without a sense of direction may result in random motion. Without
a sense of direction, companies may become reactive and sometimes
spread their resources thin by pursuing too many options simultaneously.
Even in tech industries which are always in a state of flux, long range
planning is important. They give the example of Microsoft which developed a strong sense of direction in two sentences: “Computing power is
moving inexorably to the desktop. To succeed, we must own the desktop.” The directional statement acted as a powerful guiding force even
during times of major challenge over a period of almost two decades. To
be effective, directional statements should be brief and high level. “In
complex, rapidly evolving markets, any attempt to specify outcomes in
detail is bound to create the illusion of greater insight and control over
events than warranted . . . it might be more accurate to describe these
*
Hagel III, John and Seely Brown, John, The Only Sustainable Edge, Harvard
Business School Press, 2005.
Strategy: An Introduction
21
statements of long-term direction as focusing or orienting perspectives
rather than definitive statements of advantaged positions. The statements
help executives know when to look, rather than telling them what they
will find.”
To strike a balance between speed and direction, two different time
horizons are needed — a long term horizon for setting the direction and
a short term horizon to focus on operational initiatives. Hagel III and
Seely Brown have come up with a frame work called FAST — Focus,
Accelerate, Strengthen, Tie it all together. “Focus” refers to long term
positioning, and specialization and capability building in the chosen area
of business. “Accelerate” means moving fast in the short term.
“Strengthen” means removing road blocks that prevent faster movement
in the short run. This includes building shared meaning and trust and
making appropriate investments in information technology. “Tie it all
together” means integrating these three components across networks of
organizations to amplify learning and accelerate capability building. As
they mention: “The sequential approach of traditional strategies simply
cannot generate the rapid learning and capability building that one needs
for moving quickly back and forth between a very short-term operational
horizon and a much longer term strategic horizon.”
In fast paced, intensely competitive markets, how can companies
develop superior strategic decision making skills? According to Kathleen Eisenhardt, effective strategy formulation is about*:




Building collective intuition;
Encouraging healthy conflict;
Maintaining a pace so that decisions are taken within a stipulated
time; and
Defusing political behavior.
Building collective intuition means gathering information on real
time basis and involving people by holding intensive discussions with
them in groups. Through such discussions, the company can get a sense
of how it should move ahead.
*
Cusumano, Michael A. and Markides, Constantinos C. (Editors), “Strategy as
Strategic Decision Making” in Strategic Thinking for the Next Economy, Jossey
Bass, 2001.
22
A to Z of Business Strategy
Inviting and debating divergent views is an important part of strategy
formulation. Conflict promotes creative thinking, a healthy debate on the
various options available, validation of the various assumptions made
and an overall improvement in the quality of decisions.
Companies which are good at strategic planning get into action mode
quickly. They encourage debate and bring a lot of energy into the discussions. But they also know when to end the deliberations and freeze a
decision. While trying to build consensus, they know how to break a
deadlock. They take a decision even when people are finding it difficult
to agree and come to an understanding. On the other hand, companies
which are weak in strategic management tend to postpone strategic decisions and end up making hurried, last minute decisions.
Strategic decision making has its associated share of politics. Politics
must be minimized, if not eliminated, by emphasizing a shared vision
and through a more balanced power structure which gives different decision makers latitude and scope to contribute. A clear definition of responsibilities may make managers feel more secure, more willing to
cooperate and consequently reduce unhealthy competition.
The rise of the knowledge economy and the growing importance of
knowledge workers are putting pressure on companies to change their
style of operating. The three Ss, Strategy, Structure, Systems are giving
way to the 3 Ps, Purpose, Process and People. The 3P doctrine developed by Christopher Bartlett and Sumantra Ghoshal* emphasizes that the
focus must shift from enforcing compliance to facilitating cooperation
among people and valuing initiative more than discipline. Top management must establish a sense of purpose within the company. Purpose
allows strategy to emerge from within the organization at different levels. Purpose generates energy and alignment. Instead of emphasizing
structure, the top management should focus on building the core organizational processes that will promote an entrepreneurial mindset that can
help in creating and leveraging knowledge to create value. Finally, instead of building systems, top management should develop people and
help them in fully exploiting their potential. Senior managers should
play the role of mentors rather than rule enforcers.
*
Ghoshal, Sumantra and Bartlett, Christopher A., The Individualized Corporation, Harper Collins, 1997.
Strategy: An Introduction
23
The basic principles of Porter’s competitive strategy also need to be
reinterpreted in a fast paced business environment. As Arnoldo Hax and
Dean Wilde* suggest, in addition to competing on cost leadership or differentiation, companies can explore other options. The “customer solutions” option is based on offering a wider range of products and services
that satisfy most if not all the customers’ needs. This broad bundle of
services might be customized according to market needs. This strategy
emphasizes bonding with customers, anticipating their needs and working closely with them to develop new products. The “system lock in”
option considers all the meaningful players in the system that contribute
to the creation of economic value. The company concentrates on nurturing, attracting and retaining complementors’ share to lock out competitors and lock in customers.
As the new millennium gets under way, there is little doubt that strategy will play a key role for companies across industries. Flexibility,
shorter planning cycles, the ability to gather data in real time, rapid midcourse corrections and efficient execution will hold the key to success in
the coming years.
*
Hax, Arnoldo C and Wilde II, Dean L. “The Delta Model: Adaptive Management for a Changing World”, Sloan Management Review, Winter 1999, pp. 1128.
24
Ackoff, RUSSELL L.
A
Ackoff, Russell L.
One of the early strategy gurus, Ackoff introduced rigor into strategic
planning. In his book A Concept of Corporate Planning, Ackoff mentions that there are some aspects of the future about which we can be
virtually certain. Here, companies can pursue commitment planning.
There are other aspects of the future about which we cannot be certain,
but we can be reasonably sure of what the possibilities are. Here, CONTINGENCY PLANNING is useful. A good example is planning for a military
invasion. Every possibility is identified and analyzed and a suitable action plan prepared because time is of the essence, once a possibility has
become a reality. Finally, there are some aspects of the future, which
cannot be anticipated. Here, RESPONSIVENESS PLANNING can be used, i.e.
building flexibility into the organization.
(See also: ADAPTIVE PLANNING)
Activity Based Costing (ABC)
Activity based costing increases the accuracy of cost information by
linking overhead and other indirect costs to product or customer segments more precisely. Traditional accounting systems distribute indirect
costs on the basis of direct labor hours, machine hours, or material costs.
This leads to a distorted picture. Decisions about which product line to
invest in and which not to invest in, become difficult. ABC undertakes
detailed economic analyses of important business activities to improve
strategic and operational decisions.
To build a system that will support ABC, companies should:



Determine the key activities performed;
Determine the cost drivers by activity; and
Determine overhead and other indirect costs by activity, using clearly
identified cost drivers.
ABC can be used to:
Adjacencies
1.
25
Re-Price Products:
Managers can analyze product profitability more
accurately by combining activity based cost data with pricing information. This can result in the re-pricing or elimination of unprofitable products. Managers can also estimate new product costs accurately.
2. Reduce Cost: ABC identifies the components of overhead costs and
other cost drivers. Managers can reduce costs by lowering the cost of
an activity, or the number of activities per unit.
3. Influence Strategic and Operational Planning: ABC can facilitate
target costing, performance measurement for continuous improvement, and resource allocation based on projected demand and infrastructure requirements. ABC can also assist a company in identifying /
evaluating new business opportunities.
(See also: FULL COSTING, STRATEGIC COST MANAGEMENT)
Adaptive Planning
This school of strategic planning, developed by Russell ACKOFF, believes
that the principal value of planning lies not in the plans themselves but
in the process of producing them. Companies should try to put in place a
system that will minimize the future need for retrospective planning, i.e.
planning aimed at removing deficiencies produced by past decisions.
This school classifies the future into three types: certainty, uncertainty
and ignorance. When the future is reasonably certain, commitment planning can be used. When the future is uncertain but we can be reasonably
sure of what the possibilities are, CONTINGENCY PLANNING can be used.
Finally, there are some aspects of the future that just cannot be anticipated. The only way to deal with such uncertainties is by building responsiveness and flexibility into the organization. This is called RESPONSIVENESS PLANNING.
Adjacencies
A term coined by Chris Zook and James Allen* for markets close to a
company’s core business. By identifying and exploiting such markets,
*
Zook, Chris, Beyond the Core: Expand Your Market Without Abandoning
Your Roots, HBS Press, 2004; Zook, Chris, and Allen, James, Profit From the
Core: Growth Strategy in an Era of Turbulence, Harvard Business School Press,
26
Adjusted PRESENT VALUE (APV)
companies can create a new growth trajectory. Adjacencies essentially
imply related diversification, i.e. moving into a new area which has
some resemblance to the firm’s core business and taking advantage of its
existing competencies. Adjacencies represent new growth opportunities
which have a strong fit with the existing business.
(See also: CORE COMPETENCE, DIVERSIFICATION)
Adjusted Present Value (APV)
NET PRESENT VALUE
(NPV) is a popular method of evaluating an investment decision. NPV involves estimating the cash flows expected from
the project and discounting them to the present value. NPV is, however,
not suitable in other more complex situations where risk is different for
different cash flows. Adjusted present value is a modified version of
NPV. APV uses different discount rates for different cash flows depending on the associated risk. Higher the risk, higher the discount factor
used.
Agency Theory
A theory which probes the relationship between principals and agents.
Principals appoint agents to get the work done. The goals of principals
usually differ from those of the agents. This gives rise to the agency
problem.
For example, advertisers (principals) tend to emphasize sales goals
and the cost-effectiveness of marketing communications, whereas advertising agencies may be more inclined to think of creative goals and attention-getting commercials. Professors of top business schools would like
to spend most of their time doing research and consultancy. But the
owners expect these professors to spend more time with students both in
the classroom and outside.
Agency theory is a key concept in corporate governance. Professional managers often pursue strategies that increase their personal payoffs at
the expense of shareholders. For example, they may grant themselves
lavish perquisites, including elegant corner offices, corporate jets, large
staffs and extravagant retirement programs.
2001 and Zook, Chris, and Allen, James, “Growth Outside the Core”, Harvard
Business Review, December 2003, pp. 66-73.
Alignment
27
Managers also often tend to pursue growth at the cost of profitability.
Shareholders generally want to maximize earnings, since growth in earnings results in stock appreciation. Since managers are typically compensated more for sales rather than earnings growth, they tend to be enthusiastic about strategies such as mergers and acquisitions even when this
enthusiasm is not really justified. Managers may also pursue diversification opportunities that are not necessarily in line with the company’s
best interests.
In other cases, managers may become complacent and allow things to
drift. They may avoid risk since they feel they are more likely to be fired
for failure than for mediocre performance. Executives may be far less
entrepreneurial than they should be. They may not make the bold moves
that a situation demands.
One way to tackle the agency problem is to align the interests of
managers with those of the owners by using appropriate incentives such
as stock option and executive bonus plans. But, ironically enough, these
schemes may also tempt managers to act against the best interests of the
firm. For example, they may manipulate the financial statements to artificially increase earnings.
(See also: CORPORATE GOVERNANCE)
Alignment
A key factor in effective implementation of strategy. Most large organizations are divided into business units which are out of synch and work
at cross purposes. The challenge is to coordinate the activities of these
units and leverage their skills for the benefit of the organization as a
whole. Kaplan & Norton* call this alignment.
By aligning the activities of its various business and support units, an
organization can create additional sources of value in various ways. Financial synergies can be generated through centralized resource allocation and financial management. Value can also be created if corporate
headquarters can operate internal capital markets better than external
market mechanisms, and share knowledge across business units in a
*
Kaplan, Robert S. and Norton, David P., Alignment — Using the Balanced
Score-card to Create Corporate Synergies, Harvard Business School Press,
2006.
28
Alignment
manner that would be difficult if the various units were independent entities.
Customer synergy means enhancing customer relationships by offering a range of complementary products and services from different business units. Corporations can leverage their multiple products and services to create unique integrated solutions, resulting in customer satisfaction and loyalty that less diversified and more focused organizations
cannot match. Companies can also generate value by delivering a value
proposition consistently throughout their decentralized units. Cross selling to specific customers can also generate value.
Internal process synergies can be created by generating economies of
scale in activities such as procurement, logistics, information technology
and infrastructure. Sharing processes across units generates economies
of scale in such activities and helps cut costs. Centralized resources having specialized expertise and knowledge in operating a key process or
service can be leveraged. The sharing of common philosophies, programs and competencies across business units can also generate significant benefits. Expertise sharing can reduce the time it needs to respond
to customer needs and better equip the company to exploit emerging
opportunities in the business environment.
Learning and growth synergies can be generated by developing and
sharing critical intangible assets, including people, technology, culture
and leadership. Corporate headquarters can put in place effective processes for developing intangible assets and promote the sharing of
knowledge and best practices throughout all its business and support
units. New ideas can rapidly spread across the enterprise and be assimilated by the business units in a manner that would be difficult were they
independent entities. Growing leaders faster than competition can generate competitive advantage.
There are different ways of achieving alignment. One way is to start
at the top and then cascade down. Another way is to start in the middle,
namely at the business unit level, before building a corporate scorecard
and map. Some companies launch an enterprise-wide initiative right at
the start. Others conduct a pilot test at one or two business units before
extending the scope to other enterprise units.
Alignment has four components:
Ansoff, IGOR H.
1.
2.
3.
4.
29
Strategic fit;
Organization alignment;
Human capital alignment; and
Alignment of planning and control systems.
Strategic fit exists when the internal performance drivers are consistent and aligned with the desired customer and financial outcomes.
Organization alignment explores how the various parts of an organization can synchronize their activities to generate synergy. Human capital
alignment is achieved when employee’s goals, training and incentives
become aligned with business strategy. An alignment of planning and
control systems exists when management systems for planning, operations and control are linked to strategy.
As Kaplan and Norton put it, “Strategy execution is not a matter of
luck. It is the result of conscious attention, combining both leadership
and management processes to describe and measure the strategy, to align
internal and external organizational units with the strategy, to align employees with the strategy through intrinsic and extrinsic motivation and
targeted competency development programs and finally, to align existing
management processes, reports and review meetings, with the execution,
monitoring and adapting of the strategy.”
(See also: BALANCED SCORECARD)
Ansoff, Igor H.
A famous strategy guru, Igor Ansoff developed the notion of corporate
strategic planning. He argued that any business needs to look at its resources, and align them with its business environment. Ansoff’s analytical tools, such as competence grids, flow matrices, charts and diagrams
are popular in contemporary management literature. He used the term
competitive advantage years before Michael Porter did.
Ansoff’s book, Corporate Strategy: An Analytical Approach to Business Policy for Growth and Expansion (1987) mentions three classes of
decisions:
5. Strategic (the selection of the product / market mix);
6. Administrative (structure); and
7. Operating (process).
30
Ansoff, IGOR H.
According to Ansoff, strategy should focus on three fundamental
issues:



Definition of the firm’s core objectives;
Whether the firm should diversify and, if so, into what areas; and
How the business should exploit and develop its new or existing
market.
The closer a business stays to its existing products and markets, the
lower the risk. Introducing new products into new markets for diversification carries the highest risk. Hence, the recommendation to stick to the
knitting. Ansoff depicted this in a matrix form, with four possible strategies, depending on the situation faced.
Old Markets
Old Products
New Products
Market Penetration
Product
Development
New Markets




Market Development
Diversification
Market penetration means increasing market share by encouraging
current customers to buy more, attracting competitors’ customers, or
convincing non-users to use the product.
Market development implies launching the current product in a new
market by expanding distribution channels, selling in new locations
or identifying additional potential users.
Product development involves launching a new product in the current
market by developing new features, improving quality levels, etc.
Diversification means moving beyond the current business. Concentric (related) diversification involves developing new products for the
same market segment. Conglomerate (unrelated) diversification involves developing new products for new markets.
Ansoff is also famous for:



Establishing corporate planning as a formal management process.
Popularizing SWOT analysis.
Developing the idea of environmental scanning.
Anti-Takeover STRATEGY



31
Repositioning “strategic planning” as part of a continuing process
rather than a once-a-year (or less frequent) planning process.
Articulating the various advantages and disadvantages of deliberate
strategy versus emergent strategy.
“Gap” analysis — which looks at the gap between our aspirations
and the likely outcome of current strategies.
Ansoff’s seminal book, Corporate Strategy emphasizes the need to
break down the strategy process into various steps:




External analysis — understanding market opportunities and threats;
Internal analysis — understanding strengths and weaknesses;
Choice (and our alternatives); and
Implementation.
(See also: STRATEGIC OPTIONS, SWOT ANALYSIS)
Anti-Takeover Strategy
Methods used by an incumbent management to thwart a takeover bid. A
takeover means change of ownership and, usually, a change of management as well. The current management can resist the takeover bid in
various ways. Important methods used in thwarting takeovers include:





The golden parachute is a provision in a CEO’s contract to ensure
that he will get a large bonus in cash or stock if the company is acquired.
The supermajority is a defense that requires an overwhelming majority of shareholders to approve of any acquisition. This makes a takeover much more unlikely.
A staggered board of directors prolongs the takeover process by preventing the entire board from being replaced at the same time. The
terms are staggered so that some members are elected, say, every two
years, while others are elected every four years. The acquirer may not
want to wait four years for completely reconstituting the board.
Dual-class stock allows company owners to hold on to voting stock,
while the company issues stock with little or no voting rights to the
public. This way the new investors cannot take control of the company.
A poison pill refers to anything the target company does to make itself
less valuable or less desirable as an acquisition once such a raid has
32
Argyris, CHRI S
begun. For example, high-level managers and other employees may
threaten to leave the company if it is acquired. A specific asset of a
company, such as its R&D center or a particular division may be sold
off to another company, or spun off into a separate corporation. A
flip-in provision may allow current shareholders to buy more stocks
at a steep discount in the event of a takeover attempt. The flow of additional cheap shares into the total pool of shares dilutes their value
and voting power. A more drastic poison pill involves deliberately
taking on large amounts of debt.
Argyris, Chris
A social psychologist by training, Chris Argyris conducted pioneering
work on how individuals respond to changing organizational situations
and the impediments to organizational learning. Argyris has undertaken
extensive research on learning in teams and drawn attention to the problems created by defensive behavior. The cleverer the team is, the more
difficult it becomes to maintain openness to learning, and to avoid becoming defensive. Argyris describes the process involved as “doubleloop learning”. While “single-loop learning” involves doing existing
things better, double-loop learning entails doing existing things in new
ways, or inventing new things. Effectively, double-loop learning involves reframing problems and stepping outside existing mind-sets. Argyri’s language is sometimes hard to understand. So he is often perceived as an esoteric rather than a popular guru. But his ideas and
thoughts are profound and continue to guide the functioning of today’s
organizations.
(See also: ORGANIZATIONAL LEARNING)
Balanced SCORECARD
33
B
Backward Integration
Moving along the VALUE CHAIN towards the inputs side. By producing
internally some or all of the inputs, a firm can benefit in various ways. It
can avoid sharing proprietary information and data with its suppliers.
This can be an important factor if the exact specifications of component
can reveal the key characteristics of the final product’s design to the
supplier. Backward integration may result in inputs with closely controlled specifications, enabling the firm to improve quality and differentiate its product. If the inputs are critical, backward integration helps a
firm to gain greater control of the value chain and to mitigate the high
BARGAINING POWER OF SUPPLIERS. Some good examples of backward
integration are India’s largest aluminum manufacturer Hindalco setting
up a power plant, Reliance moving into petroleum refining and Tata
Steel setting up its own township in Jamshedpur as also mines and collieries in various parts of Orissa and Bihar.
On the flip side, backward integration can also reduce the flexibility
of a business if the demand for the end-product slows down. Margins
might then reduce due to high overheads. Moreover, the activities involved in backward integration can often be handled more efficiently by
a specialized external supplier.
(See also: VERTICAL INTEGRATION)
Balanced Scorecard
Designed by Robert KAPLAN and David NORTON, the balanced scorecard
provides a comprehensive set of objectives and performance measures to
monitor a company’s progress. These include:


Financial performance, namely revenues, earnings, return on capital,
cash flow, etc.
Customer value performance, namely market share, customer satisfaction, customer loyalty, etc.
34


Bargaining POWER OF BUYERS
Internal business process performance, namely productivity, quality,
delivery, etc.
Learning and growth — percent of revenue from new products, employee suggestions, rate of improvement, employee morale,
knowledge, turnover, use of best demonstrated practices.
The challenge in implementing balanced scorecard lies in identifying
the key metrics and measuring them on an ongoing basis so that the firm
can systematically achieve its objectives. Too many metrics can make
things complicated. So a few key metrics must be carefully chosen.
(See also: ALIGNMENT)
Bargaining Power of Buyers
One of the forces in Porter’s FIVE FORCES MODEL. The higher the bargaining power of buyers, less attractive the industry.
The bargaining power of buyers is high under the following circumstances:






Few buyers who purchase in large quantities.
Low switching costs, resulting in low loyalty.
Numerous, and relatively small, sellers.
The item being purchased is not an important one for buyers who can
either take it or leave it.
Buyers have a lot of information about competitive offers, which
they can use for bargaining.
There is a good possibility that buyers may decide to integrate backwards, namely make the product themselves rather than buy it.
(See also: PORTER, MICHAEL E.)
Bargaining Power of Suppliers
One of the forces in Porter’s FIVE FORCES MODEL. Higher the bargaining
power of suppliers, the less attractive the industry.
*
Abstracted from the book, The Essence of Competitive Strategy by David
Faulkner and Cliff Bowman, Prentice Hall of India, 2002.
Barnard, CHESTER
35
Bargaining power of suppliers tends to be high under the following
circumstances:





The purchase is important to the buyer.
Buyers face high switching costs.
There are few alternative sources of supply.
Any particular buyer is not an important customer for the supplier.
There is a strong possibility that the supplier may integrate forward.
(See also: PORTER, MICHAEL E.)
Barnard, Chester
One of the first management thinkers to think differently from the then
gurus, Frederick Taylor and Max Weber, Barnard spent his whole career
as a business executive with the Bell Telephone Company. He wrote two
influential books, The Functions of the Executive (1938) and Organization and Management (1948). Barnard emphasized the importance of
communication and shared values in organizations.
Barnard excelled at organization building skills. His tenure as CEO
was marked by a sense of public service and personal integrity that are
almost unimaginable to many today. He showed exemplary commitment
to corporate welfare policies. For example, at the height of the Depression in 1933, Barnard announced a no-layoff policy choosing to reduce
employee’s working hours instead.
Management authority, he realized, rested in its ability to persuade
rather than to command. The challenge was to balance the inherent tension between the needs of individual employees and the goals of an organization. He also recognized that much of the creative potential of an
organization lay in informal networks, not in its formal hierarchy. He
understood the role of constructive conflict.
Barnard viewed the organization as a complex social system. The
main challenge for management was achieving cooperation among its
groups and individuals to facilitate the achievement of organizational
goals, i.e. resolving the tension between achieving organizational goals
and the need for individuals to achieve personal goals. Organizational
goals could not be accomplished unless the leadership of the organization acknowledged individual aspirations and devised a means of helping employees achieve them.
36
Barriers TO ENTRY
For Barnard, conventional incentive schemes were essentially a selffulfilling prophecy. Much before Maslow, Barnard argued that beyond a
certain level of equitable compensation, employees would not necessarily be motivated by financial incentives. Bonuses and incentives only
created a culture of greed.
Barnard argued that management had to focus on the “strategic” few
that would offer “the greatest leverage over the outcomes of a particular
decision”. He suggested that deciding what decisions not to make was as
important as which decisions to make. “The fine art of executive decision consists in not deciding questions that are not now pertinent, in not
deciding prematurely, in not making decisions that cannot be made effective, and in not making decisions that others should make.” Here,
Barnard seemed to be in agreement with Peter Drucker.
Barriers to Entry
One of the five forces in Porter’s famous FIVE FORCES MODEL. barriers to
entry are the obstacles that a firm must overcome in order to enter an
industry. When high entry barriers exist in an industry, competition is
usually less intense and profitability tends to be high. On the other hand,
when entry barriers are low, new firms can enter the industry more easily. While demand may not go up immediately, the new entrants bring
along additional capacity and reduce the overall level of profitability in
the industry.
The barriers to entry can be tangible or intangible. Tangible barriers
include capital and various kinds of physical assets like plant and machinery and infrastructure. Tangible barriers are easier to replicate than
intangible barriers, such as brands, corporate reputation, customer loyalty and relationships with vendors / distribution channels.
Barriers to entry may be high under the following circumstances*:

*
Economies Of Scale:
If there are major cost advantages to be gained
from operating on a large scale or scope then new entrants will not
find it easy.
Abstracted from the book, The Essence of Competitive Strategy by David
Faulkner and Cliff Bowman, Prentice Hall of India, 2002.
Barriers TO IMITATION








37
Learning Curve:
If low unit costs can be achieved by accumulated
learning, inexperienced new entrants will be at a unit cost disadvantage.
Knowledge and Skills: Access to process knowledge and particular
skills can make entry difficult.
Customer Brand Loyalty: Customers may have preferred brands, or
they may have strong relationships with their existing suppliers. New
entrants have to persuade customers that it is worth incurring switching costs and move to the product of a new entrant.
Capital Costs: High capital costs involved in setting up production
facilities, R&D centers, dealer networks and brand building will limit
the number of potential entrants.
Distribution Channels: It is often difficult for a new player to break
into an existing distribution network. If all major distribution outlets
are already closed to the new entrants, they may have to make heavy
investments in setting up their own direct distribution network.
High Switching Costs: High switching costs for customers constitute
a barrier to entry.
Government Policy: Government may restrict licenses, issue exclusive franchises or establish regulations that are troublesome and costly to implement.
Access to Low-Cost Inputs: This may act as a barrier to entry if potential entrants do not have such access to inputs which competitors enjoy.
(See also: BARRIERS TO IMITATION, FIVE FORCES MODEL)
Barriers to Imitation
With innovations rapidly diffusing, the key to success in today’s business environment is creating barriers to imitation. In general, tangible
assets are easier to replicate compared to intangible resources. Thus,
brands create formidable barriers to imitation but large factories can be
easily replicated. Similarly, when a way of working is built into the
company’s culture, imitation becomes difficult. For example, just-intime, in which Toyota is a master is less about techniques and more
about corporate philosophy and culture. That is why companies have
found it difficult to implement just-in-time even though so much has
been written about it and Toyota allows managers from all over the
world to visit its factories.
38
Bartlett, CHRISTOPHER A.
(See also: BARRIERS TO ENTRY, FIVE FORCES MODEL)
Bartlett, Christopher A.
Famous for his work on globalization and strategic management. Bartlett
is the author / coauthor of several important books, including Managing
Across Borders and Individualized Corporation both coauthored with
Sumantra GHOSHAL. Managing Across Borders is considered one of the
best ever books written on business management and possibly the most
authoritative book on globalization. The book has been translated into
several languages.
(See also: GLOBALIZATION)
BCG Growth-Share Matrix
The Boston Consulting Group (BCG) developed a matrix to help companies analyze their product lines and businesses. The 2x2 matrix considers two factors, market growth rate and the company’s market share,
as indicated below.
Accordingly, the BCG matrix divides products / businesses into four
categories:
Beachhead MARKET




39
Stars:
These high growth products in a fast growing market need
higher resource commitments. For a company like Satyam Computer
Services, its ERP implementation business is a star.
Cash Cows: These are low growth, high market share products where
minimal investments are envisaged. Indeed, cash cows provide cash
flows that support other businesses. The soaps and detergents business is a cash cow for Hindustan Lever Ltd.
Question Marks: These are low market share business units in high
growth markets. Investment is needed to build them into stars. The
foods division of HLL falls in this category as also the games business of Microsoft, and the retailing venture of Reliance. The long
term profitability of these businesses is by no means certain.
Dogs: These are low growth and low market share businesses which
generate just enough cash to maintain themselves. They are businesses from which the company is likely to withdraw in the near future.
IBM thought the PC business was a dog and sold it to the Chinese
computer manufacturer, Lenovo.
Businesses evolve over time. According to the conventional product
life cycle, question marks may turn into stars, and then become cash
cows if the market growth falls, finally becoming dogs towards the end
of the cycle. It is, however, not necessary that businesses must evolve in
this fashion. A star may turn into a dog overnight if a DISRUPTIVE TECHNOLOGY emerges in an industry. That is what happened to mini computers when PCs arrived. On the other hand, a cash cow can be converted
into a star by brand repositioning or by targeting a new customer segment. In India, Cadbury’s has attempted to reposition its chocolates as
products that can also be consumed by adults.
(See also: NINE-CELL PLANNING GRID)
Beachhead Market
A market similar to a targeted strategic market but which provides a
low-risk learning opportunity. For example, Austria / Switzerland can be
considered beachhead markets for companies planning to enter Germany. Singapore is a beachhead market for the Asian region.
(See also: GLOBALIZATION)
40
Benchmarking
Benchmarking
A process by which a company compares itself with another company in
the same or different industry on how well it is faring on various parameters. Benchmarking helps companies in setting stretch targets, improving the way of functioning and avoiding complacency.
(See also: BEST PRACTICES)
Best Practices
The most effective way to carry out a business activity or process. The
term “best” is highly subjective, context dependent, and also seems to
imply that no further improvements are possible. Many people now prefer the term good practice. Best practices are often contextual. So transferring them across organizations may not be as easy as it often looks.
Sometimes the transfer of a best practice across departments / functions
even within an organization, can be a challenge. When best practices are
embedded in an organization’s culture, replication in another organization becomes very difficult.
(See also: BENCHMARKING, BARRIERS TO IMITATION)
BHAG
See BIG HAIRY AUDACIOUS GOALS.
Bias for Action
Many managers fail to take purposeful action. They tend to ignore or
postpone dealing with crucial issues which require reflection, systematic
planning, creative thinking, and above all, time. Instead, they tend to be
happy dealing with operational activities that require more immediate
attention. Daily routines, superficial behaviors, poorly prioritized or unfocused tasks make unproductive busyness the most critical behavioral
problem in large companies.
Managers who want to cultivate a bias for action must take full responsibility for the intentions or goals. Without this kind of personal
commitment, they will easily go astray or else blame others for setbacks.
Big Hairy Audacious Goals (BHAGs)
A term coined by James C. Collins and Jerry I. Porras in their wellknown book, Built To Last. Visionary companies set big hairy audacious
Blue OCEAN STRATEGY
41
goals for themselves that raise the bar and inspire people across all
levels.
Examples of BHAGs include:




Boeing’s decision to commit to a Boeing 707 or 747;
Walt Disney’s decision to create Disneyland;
Henry Ford’s declaration, “We will democratize the automobile”;
Dhirubhai Ambani’s ambition of constructing the world’s largest
petroleum refinery.
A BHAG should be consistent with the company’s core ideology. It
should be so clear and compelling that it must require little or no explanation. It must get people excited and pumped up. A BHAG should fall
well outside the comfort zone. While it is important for people in the
organization to believe they can pull it off, it should require tremendous
effort. A BHAG should be so bold and compelling in its own right that
even if the organization’s leaders disappeared, it would continue to inspire progress.
(See also: CORE IDEOLOGY, CORPORATE PURPOSE)
Blue Ocean Strategy*
Most companies focus on beating the competition. But according to W.
Chan Kim and Renee Mauborgne, two of the most respected contemporary scholars in the area of strategy, the best way to beat the competition
is to stop trying to beat the competition.
Markets can be divided into red oceans and blue oceans. Red oceans
represent the known or existing market space. Blue oceans denote the
non-existent or unknown market space. In red oceans, industry boundaries are defined and accepted, and the basis for competing is wellknown. Here, companies try to grab market share from each other. As
competition intensifies, both profitability and growth decline and products become commodities. Blue oceans, in contrast, represent untapped
*
Kim, W. Chan; Mauborgne, Renee, “Blue Ocean Strategy”, Harvard Business
Review, October 2004, pp. 76-84, and Kim, W. Chan; Mauborgne, Renee, Blue
Ocean Strategy: How to Create Uncontested Market Space and Make Competition Irrelevant, Harvard Business School Press, 2005.
42
Blue OCEAN STRATEGY
markets in which the rules of the game are still not defined. Blue oceans
offer highly profitable growth opportunities.
Although some blue oceans are created well beyond existing industry
boundaries, most are created from within red oceans by expanding existing industry boundaries. Identification of blue oceans cannot be done by
looking at the past. About a hundred years ago, many of today’s industries, automobiles, music recording, aviation, petrochemicals, health care
and management consulting were either unheard of or were just emerging. Even as recently as thirty years back, industries such as mutual
funds, cell phones, gas-fired electricity plants, biotechnology, discount
retail, express package delivery, minivans, snowboards, coffee bars and
home videos did not exist in a meaningful way.
Blue ocean strategy is the result of a new mindset that moves the attention of companies away from competitors to alternatives, and from
customers to non-customers. It involves changing the rules of the game
through the careful examination of factors that:




Can be eliminated;
Should be reduced well below the industry’s standard;
Should be raised well above the industry’s standard; and
Should be created.
In most industries, a common definition tends to emerge of who the
target buyers are and what value they are looking for. Some industries
compete principally on functionality. Other industries compete largely
on emotional appeal.
But what is often overlooked is that the appeal of most products or
services is rarely intrinsic. Through the way they have competed in the
past, companies unconsciously shape buyer’s expectations. Over time,
functionally oriented industries may become more functionally oriented
while emotionally oriented industries may become even more emotionally oriented. In the process, aspirations of customers tend to get ignored.
When companies are willing to challenge conventional wisdom, they
often find new market space. In emotionally oriented industries, removing frills may create a fundamentally simpler, lower-priced, lower-cost
business model that customers would welcome. Conversely, functionally
oriented industries can often infuse commodity products with new life
by adding a dose of emotion.
Brainstorming
43
Swatch transformed the functionally driven budget watch industry
into an emotionally driven fashion statement. The Body Shop did the
reverse, transforming the emotionally driven cosmetics business into a
functional, no-nonsense one.
(See also: VALUE INNOVATION)
Bottom of the Pyramid
A term coined by the well-known guru, C. K. Prahalad*. Till recently,
marketers tended to ignore people in the lower income groups because
of their low per capita purchasing power. The current thinking is that
people at the bottom-of-the-pyramid (BoP) comprise a huge market with
distinctive characteristics. By understanding these characteristics and
tailoring the marketing mix suitably, companies can unearth major opportunities to exploit this market. The bottom-of-the-pyramid is driven
by factors such as affordability, access and availability.



Affordability:
The key to success at the bottom of the pyramid is affordability without sacrificing acceptable levels of quality.
Access: Distribution patterns for products and services must take into
account where the poor live as well as their work patterns. Distribution networks must penetrate deeply into small towns and villages.
Most BoP consumers work the full day before they have enough cash
to purchase the necessities for that day. Thus, for example, stores that
close at 5:00 PM have no relevance to them, as their shopping begins
after 7:00 PM. Further, BoP consumers cannot travel great distances.
Stores must be easy to reach, often within a short walk. This calls for
effective penetration of the distribution network.
Availability: Often, BoP consumers make their purchase decision
based on the cash they have on hand at any given time. They tend to
buy for immediate consumption. Availability, thus, is a critical factor
in serving BoP consumers.
Brainstorming
A useful technique for generating new ideas when confronting an unfamiliar situation or a problem. Brainstorming is a group activity in which
*
Prahalad, C. K., Fortune at the Bottom of the Pyramid: Eradicating Poverty
Through Profits, Wharton School Publishing, 2006.
44
Brand MANAGEMENT
members are encouraged to speak freely, say the first answer that strikes
them about how to solve a problem, no matter how weird or absurd it
might be. Having obtained as many ideas as possible, the group then
examines each one in more detail to determine the feasibility of implementation.
Brand Management
For companies across industries today, brands are becoming increasingly
important in the quest to gain competitive advantage. Brands symbolize
trust, reputation and quality. Brands are intangible assets that are not
easy to imitate. The high valuation of many of the successful companies
today is on account of the brands they own. Brand management must be
considered an integral part of corporate strategy and not just part of the
marketing function. Little wonder that most contemporary CEOs get
personally involved in branding related matters.
Breakeven Analysis
Companies incur two kinds of costs, fixed costs which are incurred independent of the level of production, and variable costs which vary with
the level of output. The breakeven point is the level of output at which a
firm makes just enough profit to cover its overheads. The difference between price and variable cost is called contribution. In the short run, a
firm may operate below the breakeven point just to recover part of the
overheads. But in the long run, the firm must operate above the breakeven point and fully recover its overheads in order to survive and grow.
Bureaucracy
Bureaucracy refers to the administrative execution and enforcement of
rules. A bureaucratic organization is characterized by standardized procedure, formal division of responsibility, hierarchy, and impersonal relationships. Common examples of bureaucracies include governments,
armed forces and the courts. Bureaucracies enforce order and discipline,
especially while handling routine matters. But beyond a point they can
also frustrate employees. A key task of managers in knowledge-based
organizations is to eliminate bureaucracy.
Business FORECASTING
45
Business Ethics
Business ethics is a form of applied ethics that is concerned with the
various moral or ethical problems that can arise in a business setting, and
any special duties or obligations that apply to persons who are engaged
in business. Ethics is a normative discipline which involves making specific judgments about what is right or wrong, about what ought to be
done or what ought not to be done. In some situations, if not all, what is
right depends on the context. Many companies have a code of ethics that
helps employees understand what actions are acceptable and what are
not.
(See also: CODE OF ETHICS)
Business Forecasting
Business forecasting is an integral part of strategic planning. Various
types of forecasts are used by companies depending on the situation:

Economic Forecasts

Financial Forecasts include

Sales Forecasts

Technological Forecasts
are published by governmental agencies and
private economic forecasting firms. A business firm can use these
forecasts as a starting point.
forecasts of financial variables such as the
amount of external financing needed, earnings and cash flows.
project future sales for the company’s goods or services for a certain period.
estimate the rate of technological progress.
Qualitative forecasting approaches are based on judgment and opinion. These include expert opinions, Delphi and consumer surveys. Quantitative approaches either crunch historical data (time series analyses) or
associative data (causal forecasts). Time series methods include moving
averages, exponential smoothing and trend analysis. Causal forecasts
include simple regression, multiple regression and econometric modeling. Quantitative models work well in a relatively stable environment. In
a highly volatile business environment, the qualitative approach based
on human intuition and judgment is more useful than number crunching.
The choice of a specific forecasting technique will depend on various
factors, like the:
46
Business MODEL

Cost of developing the forecasting model;

Relationships being forecasted;

Time horizon;

Degree of accuracy desired; and

Data availability.
Business Model
The way a company runs its business. A company’s business model
must address three issues:
8. Who are the customers?
9. What are they looking for?
10. How do we deliver the products or services needed by customers
better than how competitors can?
These questions may look simple. But it is the ability to address these
questions well that determines the effectiveness of a business model.
Business model design implies making major trade offs, deciding which
customer segments not to serve, which activities not to do in-house,
what kind of risks to avoid, and so on. Business model innovation,
which goes far beyond process or product innovation, is essentially
about changing the rules of the game.
(See also: PROCESS INNOVATION, PRODUCT INNOVATION, VALUE CHAIN)
Business Process Reengineering (BPR)
BPR involves the radical redesign of core business processes to achieve
dramatic improvements in productivity, cycle times, and quality. In
BPR, companies start from scratch and redesign existing processes to
increase efficiency and to deliver more value to the customer, often by
reducing organizational layers and eliminating unproductive activities.
Functional organizations are transformed into cross-functional teams
with a strong process orientation. Information technology (IT) is used to
improve data dissemination and decision-making. BPR must be completed before any major IT intervention, otherwise the existing inefficiencies will simply get amplified.
Buy BACK
47
(See also: PROCESS INNOVATION)
Business Risk
Business risk refers to the degree of uncertainty associated with a firm’s
sales volume and price realization. This risk is core to the business.
Market characteristics and the firm’s business model together determine
business risk. Business risk is not easy to quantify. Yet, companies
should try to go beyond qualitative statements and arrive at some numbers wherever possible.
(See also: ENTERPRISE RISK MANAGEMENT)
Buy Back
When a firm has more capital than it needs, it may buy back shares from
the market. Buy backs are often viewed positively by the stock market
because they signal that the company is prepared to return cash to its
shareholders instead of frittering it away on unproductive investments or
meaningless diversification. A company may also resort to buy back
when the management feels that the market is undervaluing its shares in
relation to their intrinsic value.
48
Cadbury COMMITTEE REPORT
C
Cadbury Committee Report
A standard reference point for any discussion on corporate governance.
Prominent institutions in London concerned about audit and regulatory
issues following a number of company collapses in the 1980s, set up a
committee chaired by Sir Adrian Cadbury. To keep under control overpowerful chief executives or overenthusiastic executive management,
the committee’s 1992 report advocated various checks and balances at
the board level. These included:





Wider use of independent non-executive directors;
Establishment of an Audit Committee;
Separation of the posts of Chairman and CEO;
Use of a remuneration committee; and
Adherence to a detailed code of best practice.
(See also: CORPORATE GOVERNANCE)
Capacity Expansion
Growing an existing business often involves expansion of capacity in
terms of plant, human resources, technological infrastructure, R&D facilities, etc. Any major capacity expansion is a strategic decision that
involves significant resource commitment, and is often difficult to reverse. So such a decision has to be made carefully.
Capacity expansion is often narrowly applied to manufacturing. But
in many businesses, there is little or no manufacturing. So capacity
needs also to be understood in terms of the investments made in the most
critical area of the value chain. Thus in the pharmaceutical industry, capacity has to be defined in terms of scientific manpower and sales force.
In a software development company, capacity has to be understood in
terms of the number of programmers employed. In a business school,
capacity may be defined as the number of professors available to teach
students.
Capacity EXPANSION
49
According to Michael PORTER, the decision to expand capacity has to
take into account various factors. Some of these are:





Future demand.
Future input prices.
Likelihood of technological obsolescence.
Probable capacity expansion by competitors.
Future industry capacity and individual market shares.
The main risk in capacity expansion is the creation of excess capacity.
When there is excess capacity, competition intensifies as players try to
increase capacity utilization and profits come down. Excess capacity
may result because of various reasons:












Capacity often has to be added in lumps, not in incremental fashion.
Economies of scale or significant learning curve can prompt indiscriminate capacity expansion.
Long lead times in adding capacity may motivate firms to add capacity even when future demand is uncertain.
Changes in production technology may attract new firms even as
older plants continue to operate due to exit barriers.
Equipment suppliers, through price cutting and attractive credit
schemes, can lure manufacturers into buying their products.
Large buyers, by promising more business in future, can tempt their
suppliers to add capacity.
In some industries, such as airlines, the firm which has the largest
capacity may be able to grab a disproportionately large chunk of the
market.
When there are several players in the market, they may all try to increase market share by increasing capacity.
Firms often build more capacity than is needed in the initial stages
when future prospects look favorable.
Excess capacity often results when firms overestimate the potential
of their competitors and want to preempt them by adding more capacity.
Many manufacturing firms do not like to be left behind by competition and embark on a regular process of capacity expansion.
Tax incentives sometimes motivate manufacturers to over-invest in
plant and equipment.
50
Capital STRUCTURE
Capacity expansion can be used as a pre-emptive strategy to lock up
a major share of the market and to both discourage competitors from
expanding and potential rivals from entering the industry. According to
Porter, a preemptive strategy is risky. It tends to succeed only under the
following conditions:




The expansion of capacity is large relative to market size.
There are substantial economies of scale and learning curve advantages.
The firm’s strategy looks credible in terms of availability of resources, technological capabilities, past track record, etc.
The firm announces its plans before competitors develop even a reasonable degree of commitment to the process.
A preemptive strategy is unlikely to succeed when competitors pursue non-economic goals, consider the business to have strategic importance and are prepared to give up profits in the short run, or have
equal or better staying power.
Capital Structure
The relative proportion of debt and equity used by a company to run its
business. Debt is borrowed capital and has to be returned to the lenders
in the short or medium term. Debt costs less but the mandatory interest
and principal payments can cause strain on cash flows, especially in a
company’s early or difficult days. Equity is more expensive. But it has to
be returned to investors only under exceptional circumstances. Companies must arrive at the appropriate capital structure after making appropriate trade offs. For example, in technology businesses where the markets tend to be volatile and the business risk high, it may be necessary to
reduce FINANCIAL RISK by having a larger proportion of equity.
Cartel
An illegal arrangement in which different market players come together
and collude to fix the price or share the market suitably by voluntarily
limiting competition. One of the most famous cartels in business history
has been the Organization of Petroleum Exporting Countries (OPEC).
(See also: OLIGOPOLY)
Chandler, ALFRED DUPONT
51
Cash Cow
A business that generates more cash than is required to maintain its earning power. Such a business is expected to continue to generate cash
without providing significant opportunities for growth through reinvestment of profits. Cash flows from such a business can be pumped into
more promising ventures.
(See: BCG GROWTH-SHARE MATRIX)
Chandler, Alfred DuPont
One of the best-known business historians of our times, Chandler explored the relationship between strategy and structure. He realized that
the overload in decision making at the top was indeed the reason for
creating a new structure. This overload resulted not from the larger size
of an enterprise per se, but from the increasing diversity and complexity
of decisions that senior managers had to make.
Chandler argued that growth without structural adjustment could lead
only to economic inefficiency. As he wrote, “Unless new structures are
developed to meet new administrative needs which result from an expansion of a firm’s activities into new areas, functions, or product lines,
the technological, financial, and personnel economies of growth and size
cannot be realized.”
Chandler’s book, Scale and Scope, which was published in 1990,
provides several insights on the evolution of the modern industrial enterprise. Chandler pointed out that major industrial corporations clustered
in industries in which high-technology production processes made it
possible to exploit the cost advantages of economies of scale and scope.
These tended to be capital intensive rather than labor intensive. In these
industries, large-scale, low-cost producers operated at a much greater
cost advantage than smaller, labor intensive producers. As these capital
intensive producers grew in scale (volume), scope (diversification) and,
consequently, complexity, they also began to invest in their own distribution networks. Over time, scale and scope demanded suitable changes
in structure for effective management.
(See also: ECONOMIES OF SCALE, ECONOMIES OF SCOPE, ORGANIZATIONAL DESIGN, ORGANIZATIONAL STRUCTURE)
52
Change MANAGEMENT
Change Management
In a rapidly changing business environment, organizations must learn to
adapt themselves quickly. Change is necessary to ensure survival,
growth and profitability of any business enterprise. But change is difficult for many reasons. Change requires effort and a new mindset. People
find it difficult to adjust to changing status and power relationships.
There is also a tendency to avoid change as it might be interpreted as a
tacit admission of the failure of past policies.
As Michael PORTER mentions*, change is extraordinarily painful and
difficult for any successful organization. The past strategy becomes ingrained in organizational routines. Information that would modify or
challenge it is either not sought or simply filtered out. As the past strategy becomes rooted in company culture, suggesting change is equated
with disloyalty. Successful companies often seek predictability and stability. They become preoccupied with defending what they have. Supplanting or superseding old advantages to create new ones is not considered until the old advantages are long gone. Change often involves a
sacrifice in financial performance, and unsettling organizational adjustments.
A clear corporate vision is the starting point in any major change
management initiative. It helps employees to understand why change is
needed. Change can then be introduced proactively instead of being introduced as a fire fighting measure. Symbolic gestures tend to reinforce
change by telling employees that management means business. To bring
about change, it is also essential that responsibilities are clearly allotted.
Accountability puts pressure on individuals to move fast. Metrics are
also needed to track performance. Change initiatives must focus on a
few critical areas in order to prevent resources from being spread too
thin.
Culture plays an important role in change management. Culture refers to the beliefs and values of employees. People have set notions
about what is to be done and how it should be done on the basis of these
beliefs and values. Culture is built up over a period of time and it cannot
*
Porter, Michael E., The Competitive Advantage of Nations, The Free Press,
1990.
Christensen, CLAYTON M.
53
be changed overnight. But strong leadership which sends out the right
signals can hasten the process.
Christensen, Clayton M.
Best known for his book, The Innovator’s Dilemma, Christensen’s writing reflects highly insightful thinking on innovation and is a marked departure from conventional wisdom. Christensen’s main argument is that
successful companies lose their competitive edge over time because they
try to pamper existing customers by adding more features, instead of
looking at new customer segments which are looking for something
simpler or cheaper that has necessarily to be delivered by a new business
model. But it is not easy for successful companies to take actions which
threaten their existing business model. This is what gives rise to the INNOVATOR’S DILEMMA.
Based on his research in a variety of industries, including computers,
retailing, pharmaceuticals, automobiles, and steel, Christensen shows
how truly important, break-through innovations — or disruptive technologies — are initially rejected by mainstream customers because they
cannot currently use them. This makes it difficult for firms with a strong
focus on existing customers to find new markets for the products of the
future. Even as they let go these opportunities, the more nimble entrepreneurial companies emerge to catch the next great wave of industry
growth.
The Innovator’s Dilemma presents useful insights for dealing with
disruptive innovation. These insights can help managers determine when
it is right not to listen to customers, when to invest in developing lowerperformance products that promise lower margins, and when to pursue
small markets at the expense of seemingly larger and more lucrative
ones. The Innovator’s Dilemma, together with The Innovator’s Solution
and Seeing What is Next, form a trilogy that is compulsory reading for
companies serious about innovating and creating value for their shareholders.
(See also: INNOVATION, INNOVATOR’S DILEMMA, S-CURVE, TECHNOLOGY
RISK)
54
Clusters
Clusters
Michael PORTER* uses the term “clusters” to describe geographical concentrations of interconnected companies and institutions in a particular
business. In a globalized economy, companies can access capital, goods,
information and technology from all parts of the world. Thanks to faster
methods of transportation and communications, physical location has
become less important. Yet, there are geographic concentrations of industrial activities. For example, Silicon Valley in California is reputed
for its cluster of computer hardware and software companies. Even
though it is a very expensive location, many tech companies continue to
perform their key value adding activities in this region.
Clusters include suppliers of components, machinery, services and
institutions which provide specialized infrastructure. Sophisticated, demanding customers who keep companies on their toes can also be considered a part of the cluster. So can the local government, universities,
research centers and think tanks who play a vital role in encouraging
innovation and creating suitable conditions for more efficient value addition.
Due to the superior quality of the local infrastructure, clusters help in
improving productivity. Other aspects which give a location a head start
over other centers include a high quality transportation network, which
facilitates fast and efficient movement of goods, availability of skilled,
educated and trained manpower, a sound legal system and favorable tax
rates.
Many leather goods, footwear, apparel and accessories companies
operate out of Italy because of the country’s reputation for fashion and
design. France is an important country for cosmetics, since it has highly
sophisticated customers. In a location with well-established marketing
networks, companies can also take advantage of referrals. Clusters help
companies improve as competition with rivals keeps them on their toes.
The presence of companies engaged in related value chain activities,
both downstream and upstream, facilitates effective coordination even
without vertical integration. Proximity also builds a greater degree of
trust among the various players.
*
Porter, Michael E., “Clusters and the New Economics of Competition” Harvard Business Review, November-December 1998, pp. 77-90.
Commoditization
55
The presence of demanding customers in a cluster motivates companies to innovate, while the presence of competent suppliers and partners
helps in bringing innovations to the market faster. A company within a
cluster can source what it needs much faster, closely involve suppliers
and partners in the product development process and obtain relevant
technical and service support.
(See also: COMPARATIVE ADVANTAGE, GLOBAL VALUE CHAIN CONFIGURATION, STRATEGIC ADVANTAGE)
Coase, Ronald
A British economist and the Clifton R. Musser Professor Emeritus of
Economics at the University of Chicago Law School, Coase is best
known for two articles, “The Nature of the Firm” (1937), which introduced the concept of transaction costs to explain the size of firms, and
“The Problem of Social Cost” (1960), which suggested that well defined
property rights can overcome the problems of externalities. A graduate
of the London School of Economics, Coase received the Nobel Prize in
Economics in 1991.
Code of Ethics
The corporate code of ethics defines a company’s core values and guiding principles and often describes how employees are expected to behave in different circumstances. Well managed companies take various
steps to enforce high ethical standards among employees. Through a
corporate code of ethics, a firm can publicly display its commitment to
high standards of moral excellence.
(See also: BUSINESS ETHICS)
Commoditization
As industries mature, the scope to differentiate reduces. The offerings of
different players begin to look increasingly alike. Price-based competition intensifies. This phenomenon is called commoditization.
Companies can deal with commoditization in various ways. One way
is to wrap value added services around the core product. Differentiation
of the core product may be difficult but there may be scope to innovate
in packaging, delivery, customer experience or supply chain management. In the highly commoditized PC industry, for example, Dell suc-
56
Company PROFILE
ceeded largely because of its excellence in supply chain management.
Online auctions may look like a commodity business but ebay has done
astonishingly well by building a community and providing a great customer experience. A second way of preventing, or reversing, commoditization is to reposition the product. Repositioning both helps change the
perceptions of customers and also in differentiating the product.
(See also: BLUE OCEAN STRATEGY, DIFFERENTIATION)
Company Profile
An explicit mapping of a company’s capabilities and expertise. A company which has a good understanding of its capabilities and expertise
can formulate effective strategies by accurately aligning its profile with
its corporate mission and environmental factors. One way to develop the
company profile is to critically examine each function, and the key components under each function. An example of various functions and key
components of each is illustrated in the table below:
Marketing
Product range, sales organization, distribution network, pricing strategy, after sales services, etc.
Finance &
Fund raising capabilities, cost of capital, tax planning,
accounting
cost control, costing system, etc.
Operations
Personnel
Raw material availability and costs, supplier relationships, inventory control systems, sub contracting, etc.
Employees’ skills, morale, industrial relations, manpower turnover, specialized skills, etc.
General
Structure, communication systems, control systems, cul-
management
ture, decision making, strategic planning systems, etc.
(See also: ENVIRONMENTAL SCANNING, SWOT ANALYSIS)
Comparative Advantage
The ability to cut costs by a suitable location of value chain activities.
Global companies can realize comparative advantages by locating
value chain activities in cheaper locations. Some automobile companies
have preferred to locate their assembly plants at cheaper locations in
Asia and Latin America, rather than North America or Europe. Many
companies trying to enter the European Union (EU), including Dell and
Intel, have preferred to locate their plants in Ireland, a cheaper location,
Competitive ADVANTAGE
57
compared to more developed countries, such as France and Germany.
Texas Instruments set up a software design subsidiary at Bangalore in
India to access the relatively low cost, highly skilled technical workers
available locally. Many global companies such as General Electric (GE)
and Citigroup are locating their back office operations in India.
(See also: STRATEGIC ADVANTAGE)
Competitive Advantage
Competitive advantage is the key message in Michael Porter’s theory of
COMPETITIVE STRATEGY. Competitive advantage means that a firm must
be able to create a defendable position in an industry, in order to cope
successfully with competitive forces and generate a superior return on
investment. Superior performance within an industry can be achieved
through COST LEADERSHIP, DIFFERENTIATION, or FOCUS.



Cost leadership involves becoming the lowest cost producer in an
industry by pursuing strategies such as economies of scale, process
automation, supply chain efficiency, etc.
Differentiation means being unique in an industry along some dimensions that are widely valued by buyers. Differentiation can be
achieved on the basis of product, distribution, sales, marketing, service, image, etc.
Focus means being the best in a carefully chosen segment, or group
of segments.
Firms should pursue one of these strategies and take care not to get
stuck in the middle. But care must also be taken to maintain a proper
balance between cost leadership and differentiation. Thus a cost leader
should not be seen to be offering distinctly inferior products compared to
rivals who are competing on the basis of differentiation. Similarly, a
differentiator cannot afford to have a very high cost structure. The costs
should not exceed the price premium it receives from the buyers.
The sustainability of competitive advantage depends on three conditions*. The first is the particular source of the advantage. There is a hierarchy of sources of competitive advantage in terms of sustainability.
*
From Porter, Michael E., “From Competitive Advantage to Corporate Strategy”, Harvard Business Review, May-June 1987, pp. 43-59.
58
Competitor ANALYSIS
Lower-order advantages, such as low labor costs or cheap raw materials
are relatively easy to imitate. Higher-order advantages, such as proprietary process technology, product differentiation, brand reputation and
customer relationships are more durable. Higher-order advantages involve more advanced skills and capabilities such as specialized and
highly trained personnel, internal technical capability and often close
relationships with leading customers. Such advantages also demand sustained and cumulative investment in physical facilities and specialized
intangible assets.
The second determinant of sustainability is the number of distinct
sources of advantage a firm possesses. If there is only one advantage,
competitors can more easily nullify this advantage. Firms which sustain
leadership over time, tend to proliferate advantages throughout the value
chain.
The third, and the most important, basis for sustainability is constant
improvement and upgrading. A firm must keep creating new advantages
at least as fast as competitors can replicate existing ones. The firm must
improve its performance relentlessly against its existing advantages.
This makes it more difficult for competitors to nullify them.
In the long run, competitive advantage can be sustained only by expanding and upgrading sources and by moving up the hierarchy to more
sustainable types. To sustain competitive advantage, a firm may have to
deliberately destroy old advantages to create new, higher-order ones. A
company must learn to exploit industry trends and close off the avenues
along which competitors may attack by making pre-emptive investments.
(See also: COST LEADERSHIP, COMPETITIVE STRATEGY, DIFFERENTIATION, FOCUS)
Competitor Analysis
Analyzing competitors is an integral part of strategic planning. Michael
Porter’s book, Competitive Strategy*, offers valuable insights in this regard. In identifying current and potential competitors, firms must consider several important variables:
*
From the book, Competitive Strategy: Techniques for Analyzing Industries and
Competitors by Michael E. Porter, The Free Press, 1980.
Competitor ANALYSIS




59
How do other firms define the scope of their market?
How similar are the benefits offered by the firm’s products and services to those of other firms?
How committed are other firms in the industry?
What are the long-term intentions and goals of competitors?
Certain pitfalls must be avoided while doing competitor analysis.
These include:







Focusing on current and known competitors while ignoring potential
entrants.
Concentrating on large competitors while ignoring smaller players.
Assuming that competitor behavior will not change with time.
Misreading signals that may indicate a shift in the focus of competitors, or a refinement of their present strategies or tactics.
Excessive focus on the tangible assets of competitors, while ignoring
their intangible assets.
Assuming that all the firms in the industry have the same constraints
and opportunities.
Getting too obsessed with outsmarting the competition, instead of
focusing on customer needs and expectations.
The first step in analyzing competition is to understand the goals of
competitors, whether they are satisfied with their current position or are
likely to change strategy, and also how they might react to a competitor’s moves. Porter draws a distinction between threatening and nonthreatening moves. Moves are non-threatening if competitors do not notice or are not concerned. In contrast, threatening moves are taken seriously by rivals. Before making such moves, it is important to estimate
the likelihood, timing, effectiveness and extent of retaliation and assess
whether the retaliation can be countered effectively. The response of a
firm which gives importance to profitability is likely to be different from
another which emphasizes market share. Given their goals some strategic moves can threaten certain competitors more than the others. In such
cases, there is greater likelihood of retaliation. The stated and unstated
financial goals, capabilities and psyche of a firm’s competitors in the
industry must be studied carefully.
Analysis of competitor’s goals helps a firm to avoid retaliatory
moves that can trigger off intense rivalry. For instance, a move to gain
60
Competitor ANALYSIS
market share from a firm divesting its business would not provoke any
retaliation. On the other hand, rivalry may intensify if an attempt is made
to grab market share from a firm which is trying to build its business. A
low cost producer is likely to respond very aggressively to the price cutting moves of a competitor. On the other hand, a firm which focuses on
differentiation and customer loyalty is less likely to retaliate.
It is important to thoroughly understand the capabilities and psyche of
competitors. These include a competitor’s beliefs about its relative position, historical and emotional identification with particular products and
policies, cultural factors, organizational values, the extent to which a competitor believes in conventional wisdom, etc. Historical information on the
competitor’s past financial performance, track record in the market place,
areas of success, past reactions to strategic moves, etc. can also be very
useful. It is also important to gain greater understanding about the top
management, the types of strategies that have worked for the management
in the past, other businesses with which the top management had been
earlier associated, events which have influenced top management in the
past, the technical background of the management, etc.
A company which is serious about a competitive move must clearly
communicate that it is committed to the move and has the necessary resources to back it. Rivals are, then, more likely to resign themselves to
the new position. Similarly, if a firm says it loud and clear that it will
react strongly to moves by competitors, it may be able to deter them
from making competitive moves. The greater the certainty with which
the competitor sees the commitment being honored, the greater the deterrent value of the commitment. Competitors should understand that the
firm has both the resources and resolve to carry out the commitment
quickly.
A firm should select its strategy based on all these considerations. An
ideal strategy would prevent competitors from reacting. Such a situation
arises when the legacy of the past makes some moves very costly for
competitors to counter. Small and new firms often have little stake in the
strategies practiced by industry leaders. These challengers can benefit
substantially by pursuing strategies that penalize competitors for their
stake in such existing strategies.
(See also: COMPETITIVE STRATEGY)
Competitive STRATEGY
61
Competitive Strategy
A coherent set of offensive or defensive actions to compete effectively
in an industry. Thanks to Michael PORTER, companies today have considerable knowledge of competitive strategy. For Porter, the essence of
competitive strategy formulation is understanding the industry structure
and relating the company to its environment.
Industries differ widely both in the nature of competition and opportunities for sustained profitability. The structural attractiveness of an
industry depends on five factors, which form Porter’s famous FIVE FORCES MODEL:

The Entry of Competitors.
How easy or difficult is it for new entrants
to enter the business?

The Threat of Substitutes.
How easily can the company’s product or
service be substituted?

The Bargaining Power of Buyers.
How strong is the position of buy-
ers?

The Bargaining Power of Suppliers.
How strong is the position of
sellers?

The Rivalry Among Existing Players.
Is there intense competition
among the existing players?
The second central concern in strategy is a company’s position within
an industry*. Some positions are more profitable than others, regardless
of what the average profitability of the industry may be.
At the heart of positioning is COMPETITIVE ADVANTAGE. In the long
run, firms succeed relative to their competitors if they possess sustainable competitive advantage. There are two basic types of competitive
advantage: COST LEADERSHIP and DIFFERENTIATION. Cost leadership is
the ability of a firm to design, produce and market a comparable product
at a lower cost, i.e. more efficiently than its competitors. Differentiation
is the ability to provide unique and superior value to customers in terms
of product quality, special features, after-sale service, etc. Differentiation
allows a firm to command a premium price which leads to superior profitability, provided costs are comparable to those of competitors.
*
See: Michael Porter’s The Competitive Advantage of Nations, The Free Press,
1990.
62
Concentration RATI O
It is difficult, though not impossible, to achieve lower cost and differentiation simultaneously relative to competitors. So a trade-off is involved. However, any successful strategy must pay close attention to
both types of advantage while excelling in one. A low-cost producer
must offer acceptable quality and service to avoid having to give discounts, while a differentiator’s cost position must not be so far above
that of competitors as to offset its price premium.
A key variable in positioning is competitive scope. A firm must
choose the range of product varieties it will produce, the distribution
channels it will employ, the types of buyers it will serve, the geographic
areas in which it will sell, and the array of related industries in which it
will also compete. Most industries are segmented, with distinct product
varieties, multiple distribution channels and several different types of
customers. These segments have frequently differing needs. Serving
different segments requires different strategies and, correspondingly,
calls for different capabilities. Competitive scope is also important because firms can sometimes gain competitive advantage by exploiting
interrelationships by competing in related industries through sharing of
important activities or skills.
Both industry structure and competitive position are dynamic. Industries can grow more or less attractive over time, as barriers to entry or
other elements of industry structure change. Industry attractiveness and
competitive position can also be shaped by a firm. Successful firms not
only respond to their environment but also attempt to influence it in their
favor.
Achieving competitive advantage requires a firm to make choices. If
a firm is to gain advantage, it must choose the type of competitive advantage it seeks to attain and the scope within which it can be attained.
(See also: GENERIC STRATEGIES)
Concentration Ratio
A measure of the degree of competition in an industry. Thus the fourfirm concentration ratio is the percentage of the market accounted for by
the top four industry players.
(See also: HERFINDAL INDEX, OLIGOPOLY)
Contract MANUFACTURING
63
Concentric Diversification
Diversification into related areas. A less risky strategy compared to
CONGLOMERATE DIVERSIFICATION. The new business may be related to
the existing business in terms of product, technology — or both.
(See also: DIVERSIFICATION)
Conglomerate Diversification
Diversification into unrelated areas. Firms sometimes enter a new business simply because it represents the most promising investment opportunity available. The main concern here is the profit generating capacity
of the new venture and financial synergies. For instance, businesses with
sales patterns moving in opposite trends may balance each other. It is
widely accepted that related diversification is more likely to succeed
than conglomerate diversification. The key, of course, lies in understanding what is related and what is not.
(See also: DIVERSIFICATION)
Contestability
The degree to which firms can enter or leave an industry. Contestability
provides a measure of the effect of potential competition in an industry.
Perfect contestability implies there are no barriers to entry. In the early
1980s, the economist W. J. Baumol pointed out that perfect contestability could yield the results of perfect competition in a market, even without having a large number of small firms. The airline industry is generally held up as an example of a reasonably contestable industry.
(See also: BARRIERS TO ENTRY)
Contingency Planning
The development of a management plan comprising alternative strategies to ensure the success of a project even in the event of things going
wrong. Essentially, it means preparing for highly uncertain situations.
(See also: ADAPTIVE PLANNING, ACKOFF, RUSSELL.)
Contract Manufacturing
Production on behalf of a client who owns the design and brand name.
Contract manufacturing helps a company gain access to capacity in a
cost effective way. On the other hand, the contract manufacturer does
64
Co-opetition
not have the burden of marketing the product and handling end customers.
(See also: LICENSING)
Co-opetition
Co-opetition, a word coined by Ray Noorda (the founder of Novell), is
defined by Brandenburger and Nalebuff as a new mindset that combines
cooperation and competition. Cooperation generally leads to an expansion of the cake and competition to a slicing up of the cake. Both cooperation and competition are necessary. An exclusive focus on competition ignores the potential for expanding the market or creating new profitable forms of enterprise. A co-opetition mindset actively looks for
ways to change and expand the business, as well as newer and better
ways to compete.
(See also: DYNAMIC CAPABILITY BUILDING, PROCESS NETWORKS, STRATEGIC ALLIANCES)
Core Competence
A core competence is a bundle of skills and technologies that enable a
company to provide superior value to customers. A term coined by C. K.
Prahalad and Gary Hamel*, core competence is effectively a company’s
specialized capability to create unique customer value. This capability is
largely embodied in the collective knowledge of its people and the organizational procedures that shape the way employees interact. Over
time, investments made in facilities, people and knowledge that
strengthen core competencies create sustainable sources of competitive
advantage.
A core competence should not be equated with a single skill or discrete technology. If a company identifies too many competencies, it is
probably referring to discrete skills. At the same time, if it identifies only
one or two competencies, the level of aggregation is too broad. Typically, a firm may have between five and fifteen core competencies.
Skills which are a pre-requisite for becoming an industry player,
should not be confused with core competencies. A core competence is
*
Prahalad, C. K. and Hamer, Gary, Competing for the Future, Harvard Business
School Press, 1994.
Core COMPETENCE
65
also not a physical asset. For instance, a factory, a distribution channel,
brand or patent cannot be referred to as a core competence. The ability to
manage these assets may, however, be a core competence.
A core competence should:



Provide significant and appreciable value to customers, relative to
competitor offerings;
Be difficult for competitors to imitate or procure in the market;
Enable a company to move into new markets or to develop new technologies.
Core competencies are not product specific. They can and should be
leveragable to create new products or services. Indeed, a core competence is truly core when it forms the basis for entry into new product
lines or businesses. Sony’s core competence in miniaturization has enabled it to develop a range of popular consumer products. Reliance Industries’ core competence in project management has enabled it to complete
many complicated projects that span across industries ahead of schedule.
The Aditya Vikram Birla group has a similar competence.
By understanding core competencies, a firm can identify which businesses to strengthen and which to divest. Identification of core competencies can also lead to greater clarity on potential entrants into the industry who may be using similar core competencies to make other products.
To sustain competitive advantage, competencies need to score well
on four dimensions:




Appropriability:
The degree to which the profits earned by a competence can be appropriated by someone other than the firm in which
the profits were earned. The lower the appropriability of the asset, the
more sustainable the profits.
Durability: How durable is the competence as a source of profit?
Shortening product and technology life cycles make most competencies less durable than they were a decade earlier.
Transferability: The easier it is to transfer the core competencies and
resources, the lower the sustainability of its competitive advantage.
Replicability: If it is possible for a competitor, to construct a nearly
identical set of capabilities by appropriate investment or by purchasing a similar asset, the competitive advantage is not sustainable.
66
Core IDEOLOGY
The following are some examples of core competence:
Company
Core Competency
Products
Sharp / Toshiba
Flat screen display
Laptop computers,
Television; Videophone
Sony
Miniaturization
Personal audio
Federal Express
Logistics management
Courier services
Walmart
Logistics management
Discount retailing
Motorola
Wireless communication
Cellular phones
Ranbaxy Labs
Reverse engineering
Generic drugs
Honda
Combustion engineering
Motor cycles, cars,
Gujarat Ambuja
Energy management
generators
Cement
Cements
Some management scholars feel that core competence has several
limitations. It is more useful in explaining why something has gone right
or wrong and less useful in predicting what will turn out right or wrong.
For instance, the innovation guru Clayton CHRISTENSEN feels that core
competence is too internally focused. Instead of asking what they are
good at, companies must ask what customers value. Accordingly, they
must develop new competencies when circumstances demand, instead of
continuing to exploit existing ones. Indeed, Prahalad himself has warned
of core competencies becoming core rigidities. A dramatic structural
change in an industry can substantially reduce the value of a core competence. That is why it is important to assess the value of a core competency by the benefits it generates for customers rather than the technicalities underlying the core competence.
(See also: DIVERSIFICATION)
Core Ideology
A term coined by Collins and Porras in their book, Built to Last. Core
ideology describes an organization’s identity that transcends all changes
Corporate GOVERNANCE
67
related to its relevant environment. Core ideology consists of two notions:
 Core Purpose — the organization’s reason for being; and
 Core Values — the essential and enduring principles that guide an
organization, its behavior and actions.
(See also: CORPORATE PURPOSE)
Core Values
Core values are the basic or central values of an organization. They
serve to guide the company and have a profound influence on how people in that organization think and act. So long as actions are aligned with
core values, no external justification is required. These core values define the organization in terms of what it is and what it does, and give the
organization a unique identity. In other words, core values provide the
glue that holds an organization together. Core values are an organization’s essential and enduring tenets that should not be compromised for
financial gain or short-term expediency. Even during hard times, core
values should not be diluted. These values should undergo modification
only in the most exceptional situations.
(See also: CORE IDEOLOGY, CORPORATE PURPOSE, CULTURE)
Corporate Governance
Corporate governance is the subject that deals with the responsibilities of
senior managers, directors and shareholders. Directors are expected to
safeguard the interests of shareholders by monitoring the actions of
managers. But time and again, directors have not been able to impose
necessary checks and balances. That explains why boards have come in
for sharp criticism and independent directors have become so important.
In the United Kingdom, the importance of good corporate governance came into the public domain after a series of corporate collapses
and scandals in the 1980s and 1990s. The functioning of boards was
criticized and the importance of independent, impartial non-executive
directors was highlighted. Following the publication of the CADBURY
COMMITTEE REPORT in 1992, a code of best practices was established.
Although it is voluntary, all listed companies in UK are expected to
comply with it. Since the Cadbury Report, a number of other committees
have established best practices in specific areas, such as director’s pay.
68
Corporate IMAGE
In the US, the Sarbanes Oxley Act 2002 (SOX) was framed to enhance and enforce corporate accountability, transparency and disclosure
in all the activities and transactions the company undertakes. SOX requires the CEO and the CFO of a publicly listed company to certify in
the annual report that all the disclosures made are accurate and true.
In India, too, various codes of corporate governance have been formulated through committees like the Kumara Mangalam Birla committee on corporate governance (2000). This report made various recommendations, both mandatory and non-mandatory, for publicly listed
companies with respect to the structure and composition of the board,
the audit committee, the remuneration committee, accounting and financial reporting standards, functions of the management and shareholders’
rights. For instance, a company’s half-yearly declaration of financial
performance, including a summary of the significant events in last six
months, must be sent to each shareholder.
(See also: AGENCY THEORY)
Corporate Image
Corporate image refers to the way the business of an organization is perceived by its investors and customers. A positive corporate image represents a major intangible asset. For example, in India the Tatas have successfully leveraged their positive image both to raise funds and enter
various businesses.
Corporate image is shaped by an organization’s history, its beliefs
and philosophy, its ownership, its people, the personality of its leaders,
its values and its strategies. Public relations play an important role in
building a company’s image by explaining to its stakeholders what the
organization stands for. A company’s advertisements, statements made
by its leaders, relations with stakeholders and the website all contribute
to image building. The financial community, business community, consumers, other thought leaders, top managers, employees, shareholders
and the government must all be kept in mind, while shaping the corporate image.
Corporate Philanthropy
The involvement of business firms in charitable activities through contributions in the form of time, money, goods, or services. Corporate phi-
Corporate PURPOSE
69
lanthropy is not merely about spending money. It is also about getting
the best returns and the best results for the money spent and involving
the larger community, especially NGOs. One of the best examples of
corporate philanthropy is the Bill Gates and Melinda Gates Foundation
which has taken up various laudable initiatives across the world, especially to improve healthcare in poor countries.
(See also: CORPORATE SOCIAL RESPONSIBILITY)
Corporate Purpose
As defined by Collins and Porras in their book, Built to Last, corporate
purpose is the organization’s fundamental reason for existence. The primary aim of corporate purpose is to guide and inspire the company. The
corporate purpose should not be confused with specific goals or business
strategies. Two companies could have a very similar purpose but operate
in different ways in different businesses. A visionary company continues
to pursue, but never really reaches, its purpose. As Walt Disney once
remarked, “Disneyland will never be completed as long as there is imagination left in the world.”
Unilever’s corporate purpose states*:




*
Unilever’s mission is to add vitality to life. We meet everyday needs
for nutrition, hygiene and personal care with brands that help people
feel good, look good and get more out of life.
Our deep roots in local cultures and markets around the world give us
our strong relationship with consumers and are the foundation for our
future growth. We will bring our wealth of knowledge and international expertise to the service of local consumers — a truly multilocal multinational.
Our long-term success requires a total commitment to exceptional
standards of performance and productivity, to working together effectively, and to a willingness to embrace new ideas and learn continuously.
To succeed also requires, we believe, the highest standards of corporate behavior towards everyone we work with, the communities we
touch, and the environment on which we have an impact.
Adapted from Unilever website.
70
Corporate RENEWAL
(See also: CORE IDEOLOGY, MISSION, VISION)
Corporate Renewal
Proactive change management that involves both tightening belts from
time to time, and inspiring employees with a powerful vision. Because
of organizational inertia and inflexibility, many companies continue to
bet on strategies that have worked in the past, taking customers and
competitors for granted. Leaders must set stretch targets for their employees and constantly encourage them to question the basic assumptions of the business. At the same time, they must move people in a clear
direction through an inspiring vision.
Organizations need to renew themselves continuously as the external
environment changes. But they often do not do so, persisting zealously
with what has succeeded in the past. Managers have a tendency to support structures, systems and decisions that have ensured a company’s
success in the past. This tendency is reinforced by a belief that customers are captive and competitors are weak.
Great organizations facilitate renewal by setting stretch targets and
articulating a powerful vision that encourages people not to see themselves in terms of the past, but in terms of the future potential. They go
beyond the task of ensuring ALIGNMENT of existing resources to providing new challenges. They create organizational disequilibrium. And,
most importantly, within the turmoil they are willing to make choices
and commitments to new options and opportunities.
(See also: CORPORATE RESTRUCTURING)
Corporate Restructuring
The various actions involved in realigning the organization in the light
of emerging market trends. Over time, as industry structures change and
markets evolve, the internal profile of an organization may need a major
revamp. This may include a new organizational structure, divestment of
unviable businesses, alteration of capital structure, reduction of headcount and outsourcing of non core activities. CHANGE MANAGEMENT is
often a key ingredient of corporate restructuring.
(See also: CORPORATE RENEWAL)
Corporate VENTURING
71
Corporate Social Responsibility (CSR)
A concept that a company has a responsibility to the society at large in
which it operates. For any medium sized or large company, society is an
important stakeholder. Though companies are primarily guided by the
profit motive, they cannot act without considering the larger interests of
society.
Several years ago, the famous economist Milton Friedman argued
that the social responsibility of a business is to make profits. Friedman
was clear that corporate actions motivated by anything other than shareholder wealth maximization threatened the well being of shareholders.
Today that view is considered somewhat extreme. Most businesses accept that they have a responsibility towards society. A responsive corporate social policy may not only enhance a firm’s long-term viability but
also preempt restrictive government regulations.
Ardent supporters of CSR argue that, when a company behaves responsibly, there is a direct adverse impact on the bottom line. Some CSR
activities do have tangible economic benefits. Expenses incurred on
CSR are often tax deductible. Some socially responsible practices such
as recycling of water may even generate cost savings and, as a result,
increase profits. For example, recycling may reduce input costs and pollution simultaneously. CORPORATE PHILANTHROPY can also lead to intangible benefits such as goodwill. However, there is no guarantee that
CSR will automatically lead to an improvement in profitability, especially in the short run. At the same time, there is wide acceptance that CSR
will generate a positive impact in the long run.
Corporate Venturing
A large firm investing in a smaller but promising venture. Corporate
venturing provides an alternative way of generating growth and tapping
expertise that would otherwise take time to develop. Corporate venturing
enables a company to develop products to expand its core business, to
enter new industries or markets, or to develop breakthrough technologies
that could substantially change the industry. Corporate venturing can be
done by taking a passive, minority position in an outside business, by
taking an active interest in an outside company, by building a new business as a stand-alone unit, or by building a new business inside the existing firm but with independent management.
72
Cost LEADERSHIP
Cost Leadership
A strategy that focuses on making the firm’s operations more efficient
and cutting costs wherever possible. It may result from scale / scope efficiencies, tight overhead control, careful selection of customers, standardization and automation. Cost leadership aims at achieving the lowest
costs in a market. This makes the company best placed to survive a price
war or generate the highest margins if a price war does not occur. Gujarat Ambuja Cement has pursued this strategy in the Indian cement industry. The largest retail chain in the world, Wal-Mart also believes in cost
leadership. Tata Steel has been a cost leader* in the Indian steel industry.
Controlling costs systematically can lead to competitive advantage in
industries where price is an important factor. If a company offers a
standard product or service at a lower cost when compared to the industry average, the company will earn higher profits. If required, low cost
can enable the company to compete on price. It can also generate profits
that can be reinvested to improve product quality while charging the
same price as the average in the industry. Low cost producers are more
likely to survive a price war. If suppliers hike prices, the low cost leader
will not be squeezed as much as the other players. The firm’s low cost
position may also act as an entry barrier, particularly if the potential entrant hopes to compete on price. A cost leader can also use price as a
weapon to ward off threats from substitute products.
There are also some risks associated with the cost leadership strategy:



*
If the buyer perceives the product to be cheap or of low quality, then
the company would have to reduce the price to sell it. In such a case,
cost leadership will not lead to superior profitability.
Too much focus on costs can lead to the firm losing touch with the
changing requirements of its customers.
Many routes to a low cost position can be easily copied. Competitors
can purchase the most efficient scale of plant. As industries mature,
the experience curve effect confers fewer benefits. But perhaps the
greatest threat comes from competitors who are able to price at mar-
This term is taken from the book, The Essence of Strategic Management by
Clief Bowman, Prentice Hall of India, 1990.
Country RISK
73
ginal cost in one industry because they have other, higher profitearning product lines to recover the fixed costs.
(See also: GENERIC STRATEGY, OFFSHORING, OUTSOURCING)
Cost of Capital
The cost related to the capital needed to set up and run a business. The
capital employed by a firm must yield returns that exceed costs incurred
for it to create value for shareholders. So it is important to measure the
cost of capital and keep tracking it on an ongoing basis. Debt is a cheaper source of capital compared to equity. Within debt, there are various
instruments available. Corporate treasurers must choose the appropriate
mix of debt instruments and equity to achieve the targeted cost of capital.
(See also: CAPITAL STRUCTURE)
Counterparry
A term coined by globalization guru, George Yip, to describe a firm’s
response to a competitive attack in one country by retaliation in another.
The retaliation is done in a country where the competitor will be hurt
most. To make a counterparry effective, a company needs strong presence in important markets, especially the home countries of its major
competitors. Kodak used this strategy against Fuji.
(See also: CROSS COUNTRY SUBSIDIZATION, GLOBAL LEVERAGE)
Country of Origin Effect
The special preference given by customers to goods produced in certain
countries. Japan, for example, symbolizes quality and reliability in consumer electronics business. Similarly, Switzerland represents excellence
in watch making, and Germany in precision engineering.
Country Risk
The risk associated with a particular country, either because of an investment made there by the firm, a loan given or some other commitment. Understanding and estimating country risk involves the examination of economic, political and geographical factors. Country risk is an
important factor to be considered in international business.
(See also: POLITICAL RISK)
74
Critical SUCCESS FACTOR ( CSF)
Critical Success Factor (CSF)
Those critical areas where things must go right for the firm in order for it
to flourish. For example, the ability to attract and retain talented people
is a critical success factor for Indian IT services companies such as Infosys, TCS and Satyam. Similarly, the ability to control freight costs is a
critical success factor for steel manufacturers. The ability to manage
R&D effectively is a critical success factor for global pharma companies
like Merck. Supply chain management is a critical success factor for
large retail chains.
Cross Country Subsidization
Using profits from one country to subsidize losses in other countries.
This strategy is closely related to COUNTERPARRY. Global companies,
thanks to their presence across countries, have this capability.
Cross Holding
The holding of equity shares by companies in each other. In countries
like India this is a common practice that enables promoters to retain
management control of a company with minimal investment. It also provides opportunities for tunneling, i.e. movement of funds across subsidiaries. Cross holding is considered bad for corporate governance because
there is an imbalance between control and cash flow rights. Cross holding also leads to unrelated diversification resulting in unwieldy conglomerates, which often generate less than satisfactory returns for shareholders.
Customer Relationship Management (CRM)
Efforts by companies to understand their customers and manage them in
the most profitable way. CRM is an age-old concept which has become
hot in recent times because of the rise of information technology. CRM
aims at improving customer retention, offering differentiated products
based on customer needs, smart customer acquisition and reward programs, and better customer service programs. CRM usually employs
information technology to manage large amounts of customer data and
automate various steps in order to prevent human error. Data collected
through CRM enables firms to serve target segments more effectively by
tailoring products to closely match customer needs. CRM also provides
Cusumano, MICHAEL
75
data to educate employees, align their incentives, and make a company
better placed to profit from evolving market needs.
Customer Switching Costs
The costs that tend to tie buyers to their current supplier. These costs
tend to be high when a product needs specialized inputs, when the customer has invested a lot of time and energy in learning how to use the
product, or when the customer has made special-purpose investments
that cannot otherwise be used. Enterprise resource planning (ERP) software falls in this category.
(See also: BARRIERS TO ENTRY)
Cusumano, Michael
Well known for his work on business strategy, especially in the computer software industry, Cusumano has extensively studied tech companies
across the world, including Microsoft, Netscape, and Intel. Based on his
research, he has contributed valuable insights on the strategic management of tech companies. Cusumano argues that strategic planning is important even in a fast changing industries such as information technology. The only difference is the planning cycles have to be shorter. Among
the ideas for which Cusumano is famous are PLATFORM LEADERSHIP and
knowledge transfer across projects.
76
Decision MAKING
D
Decision Making
Decision making is a key element in strategic management. Good decision making is as much about collecting hard data and doing painstaking
analysis as it’s about behavioral issues. According to Nobel laureate
Herbert Simon, decision making takes place in four stages:




Intelligence
involves discovering, identifying and understanding the
problem.
Design includes identifying and exploring solutions to the problem.
Choice means choosing one of the alternatives.
Implementation means making the chosen alternative work.
These stages explain how decision making should logically take
place. In practice, the influence of various behavioral issues cannot be
overlooked. Moreover, the four steps, instead of occurring sequentially,
may overlap. And, in many cases, decision making takes place in iterative fashion, accepting things that work and rejecting those that do not.
Three key factors that are an impediment to good decisions are information quality, human filters, and resistance to change. Thus, information may not be accurate, complete, consistent or available on a timely basis. Managers have selective attention, various biases and focus on
some dimensions of the problem while ignoring others. Last, but not the
least, people are resistant to change. So, decisions often tend to be a balancing of the firm’s various interest groups rather than the most optimal
solution.
The way people think, both as individuals and in groups, affects the
decisions that they make*. Bad decisions take place when the alternatives are not clearly defined; the right information is not collected and
the costs and benefits are not accurately weighed. Sometimes the fault
*
Hammond, John S. III, Keeney, Ralph L. and Raiffa, Howard, “The Hidden
Traps in Decision Making” Harvard Business Review, 24 June 2006.
Deming, WILLIAM EDWARDS
77
lies not in the decision making process, but in the mind of the decision
maker. Managers often do not realize the various traps that exist while
taking decisions. Some common traps include:






The Anchoring Trap:
Managers tend to give disproportionate weight
to the first piece of information they receive.
The Status quo Trap: People like to maintain the status quo, even
when better alternatives exist.
The Sunk Cost Trap: Companies often perpetuate the mistakes of the
past because they have invested so much in an approach or decision
that they find it difficult to alter course.
The Confirming Evidence Trap: Managers tend to seek information to
support an existing tendency and discount opposing information.
The Overconfidence Trap: Most people have an exaggerated belief in
their ability to understand situations and predict the future.
The Framing Trap: People’s roles in an organization influence the
way problems are framed. So often a problem or situation is incorrectly stated.
Deming, William Edwards*
An American engineer who is regarded as the founder of total quality
management. It was under Deming’s stewardship that Japan became
renowned for producing innovative high quality products. In times, the
Japanese have named their premier quality award after him.
Deming’s Key Ideas
Deming understood that technology was not enough to tackle quality
problems. The people best equipped to resolve such problems were
those who worked with the system on a daily basis, and who knew it
best. Insights into the system and useful ideas for changing it had to percolate up from the bottom of the organization. So management had to
shake up the hierarchy, drive fear out of the workplace and foster the
intrinsic motivation of its employees.
Deming emphasized the systems approach, namely, the interdependence of all the organizational units that work to accomplish the goals of
*
Adapted from www.wikipedia.org.
78
Deming, WILLIAM EDWARDS
an organization. Strongly opposed to traditional performance appraisal
and merit pay, Deming argued that merit rating encouraged short-term
performance and undermined long-term planning, built fear, destroyed
teamwork and fueled rivalry and politics. Deming argued that pay for
performance was intrinsically unfair because it ascribed to the people in
a group differences that might actually be caused by the system they
were working in. If management did its job well in terms of hiring, developing employees, and keeping the system stable, most employees
would perform as well as the system permitted.
Deming believed that the desire for achievement was fundamental to
human nature. Employees wanted to be given the chance to demonstrate
their abilities and exploit their potential. The greatest competitive advantage would accrue to companies that helped employees achieve their
full potential. Deming contended that within a stable system, most fluctuations in individual performance over time would be attributable to
natural variations in the system. Moreover, it was almost impossible to
measure the contribution of a single individual within a system that was
subject to the vagaries of numerous other variables.
Deming emphasized that by embracing appropriate principles of
management, organizations could increase quality and simultaneously
reduce costs — by reducing waste, rework, staff attrition and litigation
while increasing customer loyalty. The key lay in practicing continual
improvement and viewing manufacturing as a system, not as bits and
pieces.
Principles for Successful Business Transformation
Deming articulated various principles for successful business transformation, some of which are:



Reduce dependence on mass inspection to achieve quality. Instead,
improve the process and build quality into the product in the first
place.
Build leadership capabilities for managing people, recognizing their
unique abilities, capabilities, and aspirations. Leaders should help
people, machines, and gadgets do a better job.
Drive out fear and build trust so that everyone can work more effectively.
Diamond




79
Break down barriers between departments. Abolish competition and
build a win-win system of cooperation within the organization.
Eliminate slogans, exhortations, and targets asking for zero defects or
new levels of productivity. Such exhortations only create adversarial
relationships, as the bulk of the causes of low quality and low
productivity lie in the system and thus lie beyond the power of the
work force.
Remove barriers that rob people of joy in their work. Abolish the
annual rating or merit system that ranks people and creates competition and conflict.
Involve people at all levels.
(See also: TOTAL QUALITY MANAGEMENT)
Demographic Environment
Comprises factors such as age, population, immigration, marital status,
sex, education, religious affiliations and geographic dispersion. Based on
these characteristics, demand forecasts can be made and the market appropriately segmented. Unlike many other trends, demographic trends
are generally stable and easy to predict. Also, they are unlikely to change
suddenly. So market forecasts can be made with a fair degree of accuracy. One of the important demographic trends of recent times, the ageing
of Japan and Europe, for example, has major implications for marketers
and pension fund managers.
(See also: ENVIRONMENTAL SCANNING)
Devil’s Advocacy
A way of improving the decision making process. When a proposal is
being discussed, someone can act as a devil’s advocate and argue why
the proposal should not be accepted. By examining the downside, the
risks associated with the proposal can be better understood and managed. Creativity guru Edward De Bono calls this black hat thinking.
However, if taken too far devil’s advocacy may be equated with cynicism or obstructionism.
Diamond
A term coined by Michael Porter to describe the COMPETITIVE ADVANTAGE an industry derives from the national diamond, i.e. four differ-
80
Diamond
ent determinants which are created within the nation state: factor conditions, demand conditions, related and supporting industries, and firm
strategy, structure and rivalry.
Factor Conditions
Factors can be grouped into a number of broad categories:

Human Resources:

Physical Resources:



the quality, skills and cost of personnel.
land, water, mineral or timber deposit, hydro
electric power sources, fishing grounds and other physical traits.
Knowledge Resources: scientific, technical and market knowledge.
Capital Resources: the amount and cost of capital available.
Infrastructure: the transportation system, the communications system, mail and parcel delivery, payments or funds transfer, health
care, and so on.
A nation’s firms gain competitive advantage if they possess factors
that are significant for competing in a particular industry.
Basic factors are either unimportant to national competitive advantage or the advantage they provide for a nation’s firms is unsustainable. Advanced factors are more significant for competitive advantage.
They are scarcer because their development demands large and often
sustained investments in both human and physical capital.
Generalized factors, such as the highway system, a supply of debt
capital, or a pool of well motivated employees with college education
support only rudimentary types of competitive advantage. These are
usually available in many nations and tend to be more easily nullified,
circumvented, or sourced through global corporate networks. Specialized factors involve narrowly skilled personnel, infrastructure with specific properties, knowledge in particular fields, and other factors with
relevance to a limited range of industries or even to just a single industry. Specialized factors which provide a more decisive and sustainable
bases for competitive advantage require a more focused, and often riskier, private and social investment.
The most significant and sustainable competitive advantage results
when a nation possesses advanced and specialized factors needed for
competing in a particular industry. Nations must also be good at upgrading the needed factors.
Diamond
81
Demand Conditions
The composition of home demand, the size and pattern of growth of
home demand, and the mechanisms by which a nation’s domestic preferences are transmitted to foreign markets shape the rate and character of
improvement and innovation by a nation’s firms.
A nation’s firms are likely to gain competitive advantage in global
segments that represent a large or highly visible share of home demand
but account for a less significant share in other nations. Small nations
can be competitive in segments which represent an important share of
local demand but a small share of demand elsewhere, even if the absolute size of the segment is greater in other nations.
A nation’s firms are likely to be globally competitive if domestic
buyers are among the world’s most sophisticated and demanding buyers
for the product or service concerned. Such buyers put pressure on local
firms to meet high standards in terms of product quality, features and
service. A nation’s firms gain a competitive advantage if the needs of
home buyers anticipate those of other nations and become an early indicator of global buyer needs.
Related and Supporting Industries
National advantage is also determined by the presence in the nation of
supplier industries, or related industries, that are internationally competitive. For example, Japanese machine tool producers draw on the expertise of world-class suppliers of numerical control units, motors and other
components. Sweden’s fabricated steel products (like ball bearings and
cutting tools) industry leveraged the country’s strength in specialty
steels. Japan’s global competitiveness in facsimile machines owed much
to the country’s strength in copiers.
The presence of globally competitive suppliers creates advantages in
downstream industries in several ways — efficient, early, rapid and
sometimes preferential access to the most cost-effective inputs, superior
coordination, and faster innovation and upgrading. Competitive advantage emerges from close working relationships between world-class
suppliers and the industry.
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Differentiation
Firm Strategy, Structure and Rivalry
The way in which firms are created, organized and managed as well as
the nature of domestic rivalry determine global competitiveness.
Nations will tend to succeed globally in industries where management practices and modes of organization prevalent in the country are
well suited for generating competitive advantage. Italian firms, for example, are world leaders in a range of fragmented industries, such as
lighting, furniture, footwear, woolen fabrics and packaging machines, in
which economies of scale are either modest or can be overcome through
networks of loosely affiliated companies. Italian companies tend to pursue focus strategies, avoiding standardized products and operate in small
niches with their own particular style or customized product variety.
These firms do not have depth of management talent. Indeed, they are
often dominated by a single individual. Yet these firms can take quick
decisions, rapidly develop new products, and adapt to market changes
with great flexibility.
Competition is possibly the biggest driver of improvisation and innovation. Rivalry increases the pressure to lower costs, improve quality
and service, and create new products and processes. Active pressure
from rivals stimulates innovation as much from fear of falling behind as
the inducement of getting ahead. Intense rivalry also puts pressure on
domestic firms to sell abroad in order to grow. Particularly when there
are economies of scale, rivalry increases the pressure to globalize.
Toughened by intense rivalry, stronger domestic firms also become
equipped to succeed abroad.
(See also: CLUSTERS)
Differentiation
A strategy that lays emphasis on offering a product that is superior, on
some dimension(s), compared to what competitors are providing. Differentiation is possible along one or more of various dimensions — product
features, quality, customer service, guarantee, distribution, delivery,
product customization, etc.
Discovery DRIVEN PLANNING
83
A successful differentiation strategy emphasizes uniqueness in ways
that are valued by buyers*. If buyers are willing to pay for these unique
features and the firm’s costs are under control, then the price premium
will lead to higher profitability. The CRITICAL SUCCESS FACTOR in differentiation is sound understanding of the buyer’s needs. A differentiator
needs to know what buyers value, deliver that particular bundle of attributes, and charge accordingly. By effectively serving a sub-group of
buyers who will not consider other firms’ offerings as substitutes, the
company can effectively lock up the segment.
A successful differentiation strategy reduces the head-to-head rivalry
witnessed in price based competition. If suppliers raise prices, loyal customers who are not price conscious are more likely to accept the higher
price that the differentiator passes on. Customer loyalty also acts as a
barrier to new entrants and as a hurdle that potential substitute products
have to overcome.
However, the differentiation strategy is not without its risks:




If the basis for differentiation is easily imitated, it will not lead to a
sustainable advantage. Rivalry within the industry is the likely to
switch to price-based competition.
Broad based differentiators may be outmaneuvered by specialist
companies who target one particular segment.
If the strategy is based on continual product innovation, the company
runs the risk of exploiting risky territory merely for followers to exploit the benefits.
If a firm ignores the costs of differentiating, the premium prices
charged may not lead to superior profits.
(See also: GENERIC STRATEGY)
Discovery Driven Planning
A term coined by Rita Gunther McGrath and Ian C. MacMillan, it refers
to planning in the case of highly uncertain ventures where new data and
assumptions are incorporated on an ongoing basis and plans revised on
the basis of new information flowing in from the market. This technique
can be really useful for a multinational corporation entering an emerging
*
Abstracted from The Essence of Strategic Management by Clief Bowman,
Prentice Hall of India, 1990.
84
Diseconomies OF SCALE
market. It is also useful in the case of a new technology when it is difficult to make market forecasts based on the past. If past assumptions
change, sales and cost projections and also investment plans need to be
altered.
(See also: STRATEGIC PLANNING)
Diseconomies of Scale
Factors which increase unit costs with increasing scale of operations. For
example, the costs of coordinating activities tend to be high when the
scale of operations is unwieldy. Large firms have many layers of hierarchy. Communication can get distorted as it is typically done through
memos, reports or written requests. Worse still, written messages are
often impersonal and less motivating than conversation. In small firms,
decisions are usually made by the proprietor, or a small group of people
at the top. One person taking the decisions ensures coordination of the
firm’s strategy and actions. Large firms are typically organized as business units. Different units may head in different directions. So regular
meetings involving senior managers are required to ensure coordination.
This drives up costs significantly. While all these coordination and administration costs go up, the scale economies that come as a result of
using large plant and equipment may disappear after a certain size. As a
result of all these reasons, costs may actually go up as the scale of operations increases beyond a point.
(See also: ECONOMIES OF SCALE)
Disruptive Technology
A term coined by Clayton CHRISTENSEN to describe a technology that is
not only quite different from an existing one but also offers a totally new
price-value proposition.
A disruptive technology may have fewer features but it may be
cheaper and more user friendly. Such a technology tends to attract new
customers for whom existing products are either too expensive or too
sophisticated. It is often newcomers and not established players who
succeed in developing disruptive technologies. For example, the PC was
a disruptive technology in relation to mainframe and mini computers.
Despite being inferior to a mainframe in terms of performance capabilities, the PC was cheaper and easier to use for most people and led to a
Diversification
85
revolution that put computers on every executive’s desks and in millions
of homes and schools.
(See also: INNOVATOR’S DILEMMA, INNOVATION, TECHNOLOGY RISK)
Diversification
A strategy that involves going beyond the current line of business into a
new one for various reasons:





Opportunities to grow may be limited in the existing business.
What starts out as a technology for one product may soon become a
whole family of technologies generating a range of products targeted
at different markets.
Tired of doing the same type of work, managers may think actively
in terms of entering a new business.
Diversification may be prompted by the need for vertical integration
to get greater control over the value chain.
Most tax legislation incorporate incentives for reinvestment of profits. Firms may find it tempting to invest the surplus capital in a taxadvantaged new business.
The strategic challenge in diversification is to determine whether
there is a fit between the old and the new businesses. In general, the
least risky form of diversification is offering a new product to existing
customers. Then comes offering the existing product to a new market.
The highest degree of risk is involved while introducing a new product
in a new market. Companies which embark on diversification in response to the poor performance of their existing business usually fail.
This is because such a diversification tends to be opportunistic rather
than strategic and does not take into account the fundamental strengths
of the organization. Moreover, if a business is not doing well, it makes
more sense to first structure and streamline it rather than take on the
added responsibility of a new business.
There are numerous instances of both successful and unsuccessful
diversification. Among the successful diversified conglomerates are
General Electric, Siemens, Hoechst and ICI. On the other hand, there
have been some classic failures, like the Ruias of the Essar group in
India and Metal Box (India) Ltd.; the latter went into a terminal decline following its ill-advised diversification into bearings.
86
Diversification
In general, the less complex a business is the easier it is to manage
it and lower the probability of things going wrong. Highly diversified
businesses tend to have more layers of management and more complicated structures and control systems. The top management has to depend on reports, figures and other quantitative data rather than a fundamental understanding of the customers and technology. So before
diversifying, a firm must critically examine whether the move can create value for its shareholders that they cannot create on their
own by diversifying their investment portfolio. A small checklist is
given below:






Core Competencies:
These are the value creating skills which can be
extended to new products or markets. A company can create value
for its shareholders by leveraging its core competencies.
Market Power: By becoming larger through diversification, a business might be able to gather extra market power vis-a-vis competition, buyers, suppliers and substitutes.
Sharing of Infrastructure: Infrastructure represents tangible resources
such as production facilities. There may be scope to leverage this infrastructure and enter a newer business.
Financial Stability: A diversified business portfolio can balance cash
flows across businesses effectively. For instance, businesses in growing markets may need more cash than they have while those in mature markets may have more cash than they need.
Growth: Diversification can provide opportunities for fast growth.
Risk: When different businesses respond differently to economic cycles, diversification can reduce business risk.
Peter Drucker’s insights on diversification though articulated several
years ago, are still useful. The diversified company must have a common
core of unity to its businesses. The different businesses, technologies,
products and activities could be united within a common market. Alternatively, the markets, products and activities must be linked together by a
common technology. In general, market diversification based on common
technology is more difficult than technological diversification based on a
common market. Expertise in technology can be readily identified and
acquired whereas expertise in markets is in the form of tacit knowledge
which comes from experience and is rather more difficult to assimilate.
Diversification
87
Under what circumstances does diversification work? Milton Lauenstein* argues that well-managed conglomerates do not tolerate mediocre
performance of unit managers. On the other hand, in focused firms the
CEO is rarely sacked unless the performance is disastrous. Moreover,
well managed conglomerates tend to have a corporate staff who go
through the annual budgets and long range plans of the operating units
with a microscope. In contrast, directors of a focused company often do
not spend enough time going into details. If a conglomerate selects able
unit managers, energizes them with a strong corporate purpose, monitors
their progress and provides guidance and support when needed, it can
outperform the boards of many independent companies. This is exactly
what GE, the most successful large diversified company in corporate
history, seems to have done under the leadership of Jack Welch.
However, diversified corporations must avoid heavy bureaucracy.
They must focus on basic governance using a small corporate staff. As
Lauenstein puts it: “If it begins trying to coordinate the activities of various units, it will be drawn into operating management functions. The
corporate office will expand and begin making decisions which would
be better made by executives in operating units. It then becomes an easy
mark for a well managed independent competitor.”
Lauenstein also points out that in focused firms, the top management’s role is to understand the industry, make the key operating decisions and run the business. In a conglomerate, the top management must
govern, not run operations. Its focus must be on selecting, motivating
and mentoring the general managers of individual units.
At GE, Jack Welch killed bureaucracy, encouraged innovation and
selected extraordinarily talented managers to manage each of the company’s diverse businesses. Welch was also ruthless with non-performers.
In India, JRD Tata successfully built a portfolio of diverse businesses.
Even though his management style was quite different, Tata like Welch
had the extraordinary knack of selecting some truly outstanding managers to run the different companies.
(See also: CONCENTRIC DIVERSIFICATION, CONGLOMERATE DIVERSIFICATION)
*
Lauenstein, Milton C., “Diversification — The Hidden Explanation of Success,” Sloan Management Review, Fall 1985, pp. 49-55.
88
Divestiture
Divestiture
A divestiture strategy involves the sale of a business or part of a business
for various reasons. One could be its lack of fit with the core business. A
second reason could be that the business has entered the decline phase of
its life cycle. The third might be an urgent need for cash. A fourth could
be government antitrust action when a corporation is perceived to monopolize or unfairly dominate a particular market.
Divisional Structure
A type of ORGANIZATIONAL STRUCTURE in which the grouping is done
either on the basis of product or geographic segments. The famous Japanese company, Matsushita has been one of the pioneers in the use of the
divisional structure, as was General Motors under Alfred Sloan. The
idea is to empower managers who have an intimate understanding of the
individual businesses. At the same time some functions, such as finance,
are centralized and tightly controlled. The divisional structure creates a
sharper focus on different market segments. But duplication of functions
makes it less efficient, when compared to the functional structure.
Moreover, when capabilities — especially knowledge — are spread
across divisions, pooling them together for the benefit of the organization as a whole can be a major challenge.
(See also: ORGANIZATIONAL DESIGN, ORGANIZATIONAL STRUCTURE)
Downsizing
In the face of slowing or declining sales, companies often reduce the size
or scope of their business, usually accompanied by a cut in manpower
strength. Downsizing can cut costs but it may also result in lower employee morale and a sense of uncertainty across the organization. Creative ways to avoid downsizing include hiring freezes, salary cuts, shortened work weeks, restricted overtime hours, unpaid vacations, and temporary plant closures. When downsizing becomes unavoidable, the aim
should be to eliminate non-essential company resources while minimizing the negative impact on the remaining organization. This calls for a
frank and free explanation of the circumstances and transparent communication with employees.
Due to the negative connotation of the term, companies now often
use the term rightsizing.
Drucker, PETER F.
89
Drucker, Peter F.
Widely considered the father of modern management, Drucker was arguably the most popular and influential management philosopher of the
20th century. Writer, management consultant and teacher, Drucker highlighted the importance of the corporation as the defining social institution of our time before anyone else did so, and more clearly than anyone
else. Drucker’s contention that management was as decisive a factor in
economic growth as capital and labor firmly placed the practice of management as a central factor of economic and growth. Equally, his prolific
writings did yeoman service in laying the groundwork for codifying a
body of knowledge about management.
Drucker published his first book, The End of Economic Man, in
1939. He then joined New York University’s Graduate Business School
as Professor of Management in 1950. In 1971, he became Clarke Professor of Social Science and Management at the Claremont Graduate University in Claremont, California. In 1987 the university named its management school after him.
Drucker wrote several books on management, including the landmark The Practice of Management and The Effective Executive. In the
former, Drucker introduced the enduring concept of MANAGEMENT BY
OBJECTIVES. His other books include Management Challenges for the
21st Century, Managing for Results, Management: Tasks, Responsibilities, Practices, Innovation and Entrepreneurship, The Age of Discontinuity, and The New Realities. Drucker also served as a regular columnist
for The Wall Street Journal from 1975 to 1995 and contributed essays
and articles to numerous publications, including the Harvard Business
Review, The Atlantic Monthly, and The Economist. He served as a consultant to various organizations.
Drucker’s writings cover a wide range of areas. Drucker’s great
strength was his ability to absorb vast amounts of information, to see
patterns in what would appear as a jumble of chaotic events, trends, and
economic indicators, and to anticipate trends. Though some academics
consider Drucker no more than a “journalist”, his admirers consider him
to be one of the most perceptive observers of all time.
Drucker’s interest in nonprofit organizations was a logical evolution
of both his commitment to the importance of organizations and his
recognition that many corporations had failed to live up to expectations
90
Due DILIGENCE
in discharging social responsibility. Drucker’s most compelling argument may be that for capitalism and democracy to survive, society must
find a way to mitigate the social costs of a free market economy.
Due Diligence
The examination of the books of accounts of a company which has been
identified as a takeover target by the acquiring company. Due diligence
is important because the financial statements may not tell the complete
story. Many skeletons may be hidden in the cupboard by the company
being acquired. If these are not taken into consideration, the bidder may
end up paying an excessively high price. Due diligence can play an important role in identifying specific problem areas, such as overvalued
assets, window dressed financial statements or wrong market projections.
Dynamic Capability Building
Strengthening existing capabilities and building new ones smartly in a
dynamic environment. John Hagel III and John Seely Brown in their
book, The Only Sustainable Edge define capability as the recurring mobilization of tangible and intangible resources for the delivery of distinctive value in excess of cost. They emphasize that companies must take a
more dynamic view of capabilities to stay ahead of competitors. Sustainable competitive advantage will ultimately come from a firm’s institutional capacity to rapidly strengthen its distinctive capabilities and to
accelerate learning across enterprise boundaries. As Hagel and Brown
put it, “. . . the primary role of the firm should be to accelerate the
knowledge and capability building of its members so that all can create
even more value. This perspective broadens managerial attention from
the tasks of allocating existing resources to the tasks of deepening
knowledge and capability in an increasingly uncertain environment.”
Hagel and Brown suggest three mechanisms to accelerate capability
building:
1. Processes can be outsourced or offshored to gain access to specialized capabilities.
2. Distributed networks of specialized companies can also help in mobilizing resources.
Dynamic SPECIALIZATION
91
3. People with diverse backgrounds and skills can be brought together
to solve business problems.
(See also: PROCESS NETWORKS, STRATEGIC ALLIANCES)
Dynamic Specialization
A term introduced by John Hagel III and John Seely Brown in their
book, The Only Sustainable Edge. It implies eliminating resources and
activities that no longer act as differentiators and focusing on capabilities
that can truly distinguish the firm in the market place. Such firms are
more focused, have a greater sense of urgency and are more responsive
to the potential threats and opportunities unfolding in their environment.
Within the area they choose, firms with dynamic specialization can serve
a broader range of customers. Senior executives in such companies have
a deeper understanding of the operational details of their business and
can therefore encourage and facilitate innovations more effectively.
(See also: CORE COMPETENCE)
92
Earnings BEFORE INTEREST AND TAXES (EBIT)
E
Earnings Before Interest and Taxes (EBIT)
The profits earned by a company before deducting interest and taxes. It
is a measure of how profitable the company is, without taking into account the impact of its capital structure and tax planning.
Economic Value Added (EVA)
The excess of present value of future cash flows over what is required to
service the cost of capital. EVA has become an increasingly popular way
of financially evaluating both new and existing business strategies. It can
also be used both to identify businesses for disposal and closure and any
new acquisition or alliance.
EVA is based on cash flows rather than conventional accounting
method of profit measurement. Cash flows are a better indicator of the
economic worth of a business than are accounting profits which are often distorted by many non-cash adjustments. EVA also takes into account longer-term cash flows whereas accounting profit is by and large
shorter term oriented. Also, using EVA it is possible to trade off long
and short term cash flows thereby avoiding short-termism in economic
valuation of strategic decisions. EVA analysis helps firms to understand
how best to increase shareholder value: reinvesting in existing businesses, investing in new businesses, or returning cash to stockholders. By
making the cost of capital visible to executives, EVA encourages investment in projects that increase shareholder value.
EVA analysis consists of three steps. The income generated by a
business is first determined. Then the return required by investors, i.e.
the cost of capital is estimated. For some businesses, one cost of capital
is sufficient. However, if business units have vastly different situations
or levels of risk, separate costs of capital may need to be calculated. The
EVA of each business is determined by subtracting the expected return
to shareholders from the value created by the firm or business unit.
Emotional INTELLIGENCE
93
Firms with positive EVA generate profits above that expected by shareholders.
Economies of Scale
Cost savings that a company can achieve due to a larger scale of operations. When the volume of production increases, the average unit cost
tends to decline. In other words, doubling the output results in a less than
double the increase in costs, as factor inputs can be used more efficiently. The fixed costs can be spread over many units of output. A large
scale of operations can also lead to job specialization and consequently
higher labor productivity. Bulk buying may reduce input costs. Larger
firms also enjoy a lower cost of capital. Banks may charge lower rates of
interest and equity investors may be more willing to accept low dividend
yields from bigger firms if they feel a large firm is less risky.
(See also: DISECONOMIES OF SCALE)
Economies of Scope
Economies of scope arise when a company can reduce the average unit
cost for each product by widening the product range. It occurs when
highly specialized inputs or expensive infrastructure such as a logistics /
distribution network can be shared by different goods. For instance,
firms can hire specialist computer programmers, designers and marketing experts, or leverage their skills across the product range, thereby
spreading their costs and lowering the average total cost of production of
each of the products. FMCG companies such as Unilever and ITC can
generate economies of scope by pushing a wide range of products
through the existing distribution network.
Emotional Intelligence
An increasingly popular concept in leadership, pioneered by Daniel
Goleman. There is growing evidence that emotional balance and maturity play a far more critical role than does intelligence per se in the success of professionals in their careers.
There are five components of emotional intelligence — selfawareness, self-regulation, personal motivation, empathy, and social
skills.
94
End-game STRATEGIES
Self-awareness means having a deep understanding of one’s emotions, strengths, weaknesses, needs, and drives. Self-regulation means
the ability to control one’s feelings. A high level of personal motivation
is another trait of emotionally intelligent leaders. Empathy means a
thoughtful consideration of the feelings of employees along with other
factors in the process of making intelligent decisions. Social skills imply
the ability to develop relationships with people and get the work done.
Stephen Covey* has explained the relationship between emotional
intelligence and the seven habits of highly effective people as follows.





Self-awareness:
An awareness of self, of the freedom and power to
choose, is the core of Covey’s habit labeled “Be proactive”. Human
beings are aware of the environmental forces around them and can
make wise choices.
Self-regulation: This is another way of expressing what Covey calls,
“Put first things first” and “Sharpen the saw”. People must decide
what their priorities are and live by them. They must master what
they intend to do, live by their values and constantly renew themselves.
Personal Motivation: Personal motivation is the basis for choices.
People must decide what their highest priorities, goals and values are.
That’s essentially what Covey’s mantra “Begin with the end in mind”
is all about.
Empathy: Empathy is the first half of “Seek first to understand, then
to be understood”. It’s learning to understand the viewpoints and
emotions of other people and becoming socially sensitive and aware
of the situation before attempting to influence others.
Social Skills: Covey’s “Think win-win”, “Seek first to understand,
then to be understood” help build social skills.
(See also: LEADERSHIP, PERSONAL EFFECTIVENESS)
End-game Strategies
Plans for dealing with the decline phase of a product or industry life cycle. It is wrongly believed that the only way to respond to declining sales
is to cut prices or prune marketing spending. Other options may be
*
Covey, Stephen R., The 8th Habit: From Effectiveness to Greatness, The Free
Press, 2005.
Enterprise RISK MANAGEMENT (ERM)
95
available to reverse the decline phase and create a new growth trajectory.
For example, products can be repositioned, or new market segments
identified.
(See also: PRODUCT LIFE CYCLE)
Enterprise Resource Planning (ERP)
Information systems that integrate and automate many of the business
processes across the various functions of an organization, such as manufacturing, logistics, distribution, inventory, shipping, invoicing, and accounting. ERP facilitates better control of many business activities, like
sales, delivery, billing, production, inventory management, quality management, and human resources management by providing real time information. ERP systems are often called back office systems indicating
that customers and the general public are not directly involved, unlike
front office systems, such as CUSTOMER RELATIONSHIP MANAGEMENT
(CRM) systems that deal directly with the customers.
Enterprise Risk Management (ERM)
Enterprise risk management (ERM) involves the identification, measurement and control of various risks an organization faces, in a systematic and integrated manner.
In a fast changing environment, business risks are many and diverse.
So risk management is becoming an increasingly important discipline.
By considering the interrelationships that exist among different risks and
all the risk mitigation mechanisms available, risk can be managed more
effectively.
The essence of ERM is changing the way decisions are made by systematically collecting and processing information. ERM should not be
viewed as a defensive tool. Rather, it is about creating conditions which
encourage managers to achieve the right balance between minimizing
risks and exploiting new opportunities. Indeed, the ultimate aim of ERM
is to make available a steady stream of cash flows that can be utilized to
maximize shareholders’ wealth.
(See also: RISK)
96
Entrepreneurship
Entrepreneurship
Entrepreneurship is the practice of starting a new business. Since many
new businesses fail, it is widely believed that entrepreneurship is risky.
However, if the risks involved are carefully understood and managed
well, there is no reason an entrepreneurial venture cannot succeed. Another point to be noted is that entrepreneurship can also be displayed by
professional managers in the way they identify and pursue opportunities.
Our understanding of entrepreneurship owes a lot to the work of the
famous economist, Joseph Schumpeter. Schumpeter viewed an entrepreneur as a person, willing and able to convert a new idea or invention into
a successful innovation. According to Schumpeter, entrepreneurship
forces “creative destruction” across markets and industries, creating new
products and business models while eliminating inefficient ones. Creative destruction is largely responsible for the dynamism of industries and
long-run economic growth.
There are different views of entrepreneurship. Entrepreneurs are persons who are willing to put their career and financial security on the line
for an idea, spending their time and capital, working on it in an uncertain
venture. An entrepreneur can also be described as a person who excels in
discovering, evaluating and exploiting opportunities. Another way of
viewing an entrepreneur is as “someone who acts without regard to the
resources currently under his control in relentless pursuit of opportunity”* (Robert Simons).
Environmental Scanning
Systematic collection of information about various environmental factors that have an impact on business to identify threats and opportunities
and formulate appropriate responses. These include:
Political
Political parties in power, anti-trust legislation, regulatory framework, etc.
Economic
Availability of credit, interest rates, inflation, GNP
growth rate, etc.
Social
*
Beliefs, attitudes, values, opinions, lifestyles of cus-
Simons, Robert, Leverages of Organization Design, Harvard Business School
Press, 2005
Experience CURVE
97
tomers, etc.
Technological
Degree of obsolescence, speed of innovation, etc.
Competitive
Market share, breadth of product line, distribution net-
position
work, raw material costs, operational efficiency, R & D
capabilities, etc.
Customer
Geographic, demographic, psychographic segmenta-
profile
tion, consumer behavior, etc.
Understanding the environment is the starting point of strategic planning. There are three ways of scanning the business environment. Adhoc scanning involves short term, infrequent examinations, often in response to a crisis. Regular scanning involves studies done according to a
regular schedule. Continuous scanning involves structured data collection on an ongoing basis and processing with respect to a wide range of
environmental factors. In today’s turbulent business environment, continuous scanning is necessary to enable firms to act quickly, take advantage of opportunities before competitors do, and respond to threats
effectively.
(See also: SWOT ANALYSIS)
Experience Curve
As companies accumulate experience, people learn to do their jobs more
efficiently and effectively because of accumulated learning. So costs
come down significantly over time. That puts the firm in a position to
cut price and further expand the market. One strategy which firms can
pursue is to start with a relatively high price and bring down the price
progressively over time.
(See also: BARRIERS TO ENTRY)
98
Fayol, HENRI (1841-1925)
F
Fayol, Henri (1841-1925)
A French management pioneer who focused on the problems of organizational structure within large firms at the turn of the last century.
Whereas his contemporary, F. W. Taylor, concentrated on efficiency of
shop-floor labor, Fayol looked at senior management. Fayol played a
key role in developing the concepts of CHAIN OF COMMAND, ORGANIZATIONAL CHART, and SPAN OF CONTROL.
First Mover Advantage
The COMPETITIVE ADVANTAGE realized by a company by entering a
market first. First movers are usually better placed to reap economies of
scale, to reduce costs through cumulative learning, to establish brand
names and customer relationships, to control distribution channels and to
obtain the best locations for facilities or the best sources of inputs. The
danger with the first mover strategy is that the company may end up
creating a market which may be better exploited by a later entrant offering a superior product. First mover strategies seem to work best when
both technology and market conditions remain reasonably steady, economies of scale are significant and customers are conservative about
switching suppliers. When both technology and market are changing
rapidly, later entrants have ample opportunities to uproot the first mover.
As Michael PORTER* has mentioned, to succeed first movers must
correctly anticipate industry changes. American companies were early
entrants into electronic watches. However, they bet heavily on light
emitting diode (LED) displays. This technology proved inferior to liquid
crystal displays (LCD) for less expensive watches and traditional (analog) displays combined with quartz movements for watches in higher
price ranges. The introduction of LCD and quartz enabled Japanese
firms to become industry leaders in watches targeted at the mass market.
*
The Competitive Advantage of Nations, The Free Press, 1990.
Five FORCES MODEL
99
Often the wise strategy is to be an early mover, not necessarily the
first mover. Just like in a marathon race, a company can be in the front
but not necessarily at the top of the pack. That way it can learn from the
first mover and yet move fast when necessary and reach the winning
line. The global software giant Microsoft has succeeded by pursuing this
kind of a strategy in many of its markets.
(See also: FREE RIDER)
Five Forces Model
Probably the most widely used tool in business strategy which helps
analyze the attractiveness of an industry. It can be seen as one of two
dimensions in maximizing corporate value creation. The other dimension, value creation is how well a company performs relative to its competitors. Here the VALUE CHAIN framework and the COMPETITIVE ADVANTAGE concept, both developed by Porter come in handy. The five
forces are:





Barriers to Entry:
The barriers to entry are high or low, depending
upon factors such as economies of scale, brand image, capital requirements, access to distribution channels, government policies, etc.
Higher the barriers to entry, the more attractive the industry.
Bargaining Power of Buyers: This is influenced by buyer volume, buyer information, buyer profits, substitute products available, etc. The
lower the bargaining power of buyers, the more attractive the industry.
Bargaining Power of Suppliers: This is affected by various factors
such as switching costs, differentiation of inputs, supplier concentration, presence of substitute inputs, threat of forward / backward integration, etc. The lower the bargaining power of suppliers, the more
attractive the industry.
Threat of Substitutes: The threat of substitutes is high if there are
alternative products with lower prices or better performance parameters for the same purpose. The lower the threat of substitutes, the
more attractive the industry.
Rivalry: This refers to the intensity of competition among existing
players in an industry. Competition among existing players is likely
to be high when there exists a large number of companies, slow market growth, high fixed costs, and high exit barriers. The lower the degree of rivalry, the more attractive the industry.
100
Flat ORGANIZATION
Some scholars argue that the model emphasizes an outside-in approach and underemphasizes the importance of the (existing) strengths
of the organization (inside-out). That is the main argument behind a
competing school of strategy, RESOURCE BASED THEORIES. Notwithstanding this criticism, the five forces model remains a conceptually elegant
way of analyzing the structural attractiveness of an industry.
(See: BARRIERS TO ENTRY, BARGAINING POWER OF BUYERS, BARGAINING POWER OF SUPPLIERS, INDUSTRY, THREAT OF SUBSTITUTES, RIVALRY)
Flat Organization
An organization with only a few layers of management between the
highest and the lowest levels. It presents a stark contrast to the classic
hierarchical organization which has several layers of managers, each of
whom supervises a lower layer. The basic premise behind the flat organization is that trained, empowered workers with assigned goals, who are
encouraged to work innovatively, will be more productive than workers
who are closely supervised by managers. A flat organization is more
transparent, less bureaucratic and improves communication. One problem with a flat organization is that opportunities for career advancement
may be limited.
(See: ORGANIZATIONAL DESIGN, SPAN OF CONTROL)
Focus
A strategy which believes in concentrating on a small segment defined
either in terms of customer segment or geographical territory. A focus
strategy means carefully choosing the arena to compete in and narrowing the competitive scope. By selecting carefully*a segment and meeting
the needs of that segment better than can competitors who target more
broadly defined segments, companies can gain competitive advantage. A
focus strategy takes advantage of the differences between the target
segments and other segments in the industry. It is these differences that
result in a segment being poorly served by the broad-scope competitor.
The firm that focuses on cost may be able to outperform the broad-based
firm through its ability to strip out frills not valued by the segment. Al*
This term is taken from the book The Essence of Strategic Management by
Cliff Bowman, Prentice Hall of India, 1990.
Force FIELD ANALYSIS
101
ternatively, the product or service itself can be differentiated taking into
account the unique needs of a segment.
The obvious danger with the focus strategy is that the target segment
may shrink or disappear over time for some reason. A new player may
“outfocus” the firm. Alternatively, shifting from broad to narrow targeting usually means a dramatic reduction in volumes. This can raise unit
costs if the overheads have not been trimmed to match the smaller outputs demanded by the narrower customer base.
(See also: GENERIC STRATEGY)
Follett, Mary Parker
One of the earliest and strongest advocates of collaborative, participative
approaches to management and cross-functional problem solving. Follett
argued that true authority and leadership were a function of the
knowledge and experience of people, not their rank in a corporate hierarchy. If Taylor was the father of scientific management, Follett pioneered a behavioral, post-scientific approach to managing human organizations. She pioneered ideas such as constructive conflict resolution,
participative management, and flatter organizations. According to Follett, the proper response to conflict was “integration” of different points
of view to reflect multiple viewpoints. Collaboration and cooperation
with labor, she argued, were the only rational ways to run a business.
Follett can be considered an early advocate of organizational learning
through she never used those words explicitly.
Force Field Analysis
Developed by Kurt Lewin, force field analysis is a useful technique for
diagnosing situations, especially when planning and implementing a
change management program.
In any situation, both driving and restraining forces operate. Take the
example of productivity. Driving forces include pressure from a supervisor, incentive earnings, and competition. Restraining forces may include
apathy, hostility, and poor maintenance of equipment. Equilibrium is
reached when the sum of the driving forces equals the sum of the restraining forces.
The level of productivity can be raised, or lowered, by changing the
balance between the driving and restraining forces. Suppose a new man-
102
Forward INTEGRATION
ager takes over a work group in which productivity is high but the
maintenance of equipment has been ignored. The earlier manager had
increased the driving forces to increase output in the short run. By doing
this, however, new restraining forces developed, such as machine breakdown. When the new manager takes charge, the restraining forces may
have begun to increase, resulting in repeated breakdowns and frequent
maintenance. The new manager now faces a new equilibrium at a significantly lower productivity.
The new manager may decide not to increase the driving forces but
to reduce the restraining forces by spending more time on maintenance
and modernization. In the short run, output will tend to come down still
further. In the long run, however, the new driving forces will move the
plant towards a higher level of output.
Managers often have to strike the right balance between short term
and long term goals to ensure sustained performance in the long run. The
force field analysis is a useful framework for doing so.
Forward Integration
Forward integration means moving into downstream activities, i.e. getting closer to customers. Such a strategy can help a firm to differentiate
its product more effectively by controlling a larger number of elements
of the value chain. For example, forward integration into retailing can
allow the firm to control areas such as customer interactions, store ambience, etc. Forward integration can also solve the problem of access to
distribution channels.
Forward integration can help a company understand the market better. Since the forward stage determines the size and composition of demand for the upstream stages of production, the firm can determine the
demand for its products quicker. The firm might also gain first hand information about market trends and competitive developments. This can
be very useful in an environment of cyclical, erratic and changing demand. Forward integration may also allow prices to be better matched to
market conditions. By setting different prices for different customers,
forward integration may facilitate higher overall price realization.
(See also: VERTICAL INTEGRATION)
Functional STRATEGY
103
Franchise
A business in which one entity (the franchisee) operates a business in
conformance to the name, logos and trading method of an existing, successful business (the franchiser). Various restrictions may be placed on
the franchisee in terms of facility design, inputs used, processes and the
training of manpower. A franchising arrangement enables the franchiser
to avoid heavy investments and penetrate a new geographic region
quickly. For the franchisee, the risks are limited. The trading strategy
and methods have been tried and tested elsewhere. The franchiser’s
name and logos may have wide customer recognition and loyalty, ensuring adequate demand for the product or service from day one.
(See also: LICENSING)
Free Rider
A player who moves into an industry later, after learning from the experiences of the first mover and avoiding similar mistakes. Sometimes, it
does not make sense to be the first mover. In the Internet browser market
for instance, Netscape moved first but it was Microsoft which ultimately
turned out to be the winner.
(See also: FIRST MOVER ADVANTAGE).
Full Costing
A budgeted method which attempts to allocate all costs incurred in an
organization to various cost centers. Both direct and indirect costs are
considered and the possibility of losses by under pricing is avoided. Direct labor and material costs can be easily allocated to an activity or a
product. Some direct overheads may also be easy to allocate. But indirect overheads cannot be allocated easily. An example of full costing
would be allocating 35 per cent of the overhead cost of rent to the machine shop if it occupies 35 per cent of the factory space. ACTIVITY
BASED COSTING (ABC) is a better technique for allocating overheads.
ABC would look at the actual pattern of usage of the machine shop, instead of just going by the space occupied.
Functional Strategy
Strategies pursued by various individual functions such as marketing,
finance, operations and human resources. Functional strategies facilitate
104
Functional STRUCTURE
the implementation of corporate strategy in the sub-units of a company
and must be aligned with the long-term corporate strategy. Thus, functional strategies in marketing may deal with product, price, place and
promotion. Those in finance may deal with capital mobilization, capital
allocation, cash flow management, working capital management, etc.
Those in operations may be concerned with facilities, purchasing, operations planning and control. Human resources strategies span employee
recruitment, selection and orientation, career development and counseling, performance evaluation, compensation, labor relations, etc.
(See also: OPERATING STRATEGIES)
Functional Structure
A type of ORGANIZATIONAL STRUCTURE wherein the managers of each
major function — such as marketing, production, research and development, and finance — report to the chief executive, who provides overall
direction and coordination. The same logic can be extended to sub functions. In a functionally organized marketing department, for example,
the managers of various marketing functions, such as sales, advertising,
marketing research, and product planning, report to the marketing manager. A functional structure emphasizes specialization and increases efficiency. But such a structure lacks the overall perspective and the
sharper market focus which the divisional structure can bring. Functions
often work in silos and do not leverage the knowledge and expertise
available in the organization, creating serious problems in activities,
such as new product development, which need excellent coordination
across functions. Such problems have led to the concept of crossfunctional teams.
Generic STRATEGY
105
G
Game Theory
A branch of applied mathematics that is useful in analyzing situations
where players choose different actions in an attempt to maximize their
returns. First developed as a tool for understanding economic behavior,
game theory is now used in many diverse fields, including biology, psychology, sociology and philosophy. Game theory is relevant in strategy
formulation in that it studies decisions under circumstances where various players interact. In other words, game theory studies choice of optimal behavior when costs and benefits of each option are not fixed, but
depend upon the choices exercised by other individuals. Porter’s competitive strategy seems to draw heavily from game theory.
(See also: COMPETITIVE STRATEGY, OLIGOPOLY)
Garbage In, Garbage Out
A concept which holds that the quality of inputs into any process determines the quality of output. If incorrect data is entered for processing,
the output will be garbled. Similarly, if incompetent people are recruited,
the organization will under-perform.
Generic Strategy
A concept associated with Michael Porter, which holds that a company
must be committed to one of three generic strategies in order to compete
effectively in the market place:

Cost Leadership:
Here the firm lays great emphasis on improving its
cost competitiveness. Cost leadership is facilitated by efficient-scale
facilities, tight overhead control, careful selection of customers and
standardization of activities. Gujarat Ambuja has pursued this strategy in the Indian cement industry. Maruti has done the same in the Indian car industry. The largest retail chain in the world, Wal-Mart is
also a cost leader. So is Dell in the context of the global PC industry.
106
Ghoshal, SUMANTRA
Differentiation:
A business strategy which attaches more importance
to providing value to customers in some unique way, that competitors
cannot easily imitate. Different methods can be employed to achieve
differentiation: design or brand image, technology, features, and customer service. In the process of differentiation, the firm cannot afford
to ignore costs. But cost cutting is not the primary focus here. The
emphasis is on creating unique value and charging a premium for it.
A good example is Mercedes Benz.

Focus: A means of gaining competitive advantage by concentrating
on one particular aspect of a product / service / market / geographic
region that is important to a particular type of customer. In this way,
a firm can be more effective than the other players in that chosen
segment.
(See also: COST LEADERSHIP, DIFFERENTIATION, FOCUS, COMPETITIVE
STRATEGY)

Ghoshal, Sumantra
One of the best-known management gurus of our times, Ghoshal graduated from Delhi University and worked for Indian Oil Corporation, rising through the management ranks before moving to the United States
on a Fulbright Fellowship in 1981. There, he produced simultaneously
two Ph.D. dissertations at the MIT Sloan School of Management and
then at Harvard Business School. He joined INSEAD Business School
in France and later moved to the London Business School. His book,
Managing Across Borders: The Transnational Solution, coauthored with
Christopher Bartlett, is considered as one of the most influential management books ever written and has been translated into nine languages.
Ghoshal’s extensive research for the book led to the conclusion that
global companies need to combine three capabilities — global standardization to cut costs, local customization where necessary to suit the
needs of national markets, and knowledge sharing across business units.
Ghoshal is also well known for his PURPOSE-PROCESS-PEOPLE DOCTRINE. Instead of concentrating on strategy, structure and systems, top
management must articulate a purpose, redefine management processes
and show a high degree of commitment to the development of people.
Global LEVERAGE
107
Global Corporations
An organization with a global network of subsidiaries across the world.
When used in the strict sense of the term, a global company is one which
emphasizes uniform products and policies across the world. It does not
take into account the need to customize its products and services to suit
the needs of specific markets. In contrast, a multinational corporation
(MNC) lays great emphasis on being sensitive and responsive to differences in national environments around the world. An MNC is organized
as a portfolio of several national entities. Operations in different countries are managed on a stand-alone basis, without any serious attempts to
integrate them. Till recently, the Dutch multinational, Philips, followed
this model. Unilever is another good example. The problem in MNCs is
that the firm may lose valuable opportunities for cutting costs, improving efficiency and leveraging organizational knowledge due to weak
global integration. According to GHOSHAL and BARTLETT, today’s business environment demands both global standardization and local customization, giving rise to a new breed of MNCs called the transnational
corporation. Such a company strikes the right balance by standardizing
those activities where scale and efficiency are important and customizing where responsiveness to customer needs is the priority.
(See also: GLOBALIZATION)
Global Industry
An industry in which strategic moves in one country have to be made
after taking into account their global implications. Typically, these are
industries where there are significant economies of scale and the need
for local customization is minimal. In a global industry, the strategic
positions of competitors in major markets are fundamentally affected by
their overall global positions and firms have to coordinate their activities
worldwide to emerge as global leaders.
(See also: GLOBAL VALUE CHAIN CONFIGURATION, MULTI DOMESTIC
INDUSTRY)
Global Leverage
The advantage a global corporation is able to realize due to scale efficiencies, co-ordination and integration of worldwide operations, and the
ability to transfer good ideas and best practices across the world. For
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Global VALUE CHAIN CONFIGUR ATION
example, a GLOBAL CORPORATION can defend itself against an attack by
a competitor in its home country with a counter attack in the competitor’s home country. A global company can also leverage its world wide
pool of talent and capabilities. Global leverage results when cost and
strategic advantages are combined.
(See also: COMPARATIVE ADVANTAGE, STRATEGIC ADVANTAGE)
Global Value Chain Configuration
A highly sophisticated and well-coordinated approach to global value
chain management. Firms can be in business only if the activities they
perform add value for their customers. If they can add value efficiently
and effectively and charge a price which is more than the total cost of
the activities, they can make a profit. The value chain, a concept developed by Michael PORTER, is a useful tool for analyzing the value adding
activities of a company. While the value chain is important for all companies, in the case of global companies it becomes critical. This is because global companies must carefully locate different activities in different countries to optimize the effectiveness of the value chain as a
whole.
Global value chain configuration increases competitive leverage by
helping a company access global resources and capabilities. In a multi
domestic company, each subsidiary’s competitive position is determined
locally. On the other hand, by taking an integrated view of their worldwide activities, global companies are better equipped not only to cut
costs but also to generate value. At the same time, managing a network
of activities spread across the world poses major challenges.
(See also: COMPARATIVE ADVANTAGE, GLOBAL LEVERAGE, PROCESS
NETWORKS, STRATEGIC ADVANTAGE, VALUE CHAIN)
Globalization
A very commonly used term, globalization can mean different things to
different people. At a broad level, globalization refers to the growing
economic interdependence among countries, reflected in the increasing
cross border flow of goods, services, capital and technical know how.
The booming business process outsourcing (BPO) business in India is a
reflection of this trend. At the level of a specific company, it refers to the
degree to which competitive position is determined by the ability to lev-
Globalization
109
erage physical and intangible resources and market opportunities across
countries.
There are a number of factors driving globalization. More and more
countries across the world are embracing free market philosophy and
dismantling trade barriers. Better and cost effective ways of communication are making the world a smaller place. Due to the heavy R&D costs
involved in developing new products, the pressure is increasing on companies to look for global markets to quickly recoup their investments.
Satellite television is playing an important role in creating global markets by promoting uniform tastes among customers across the world.
Globalization has created major opportunities for poor countries. In
the past, poor countries remained poor and rich countries remained rich
for generations. Now societies can develop skills and wealth in a much
shorter time. In less than 40 years, Singapore went from developing
country to developed country status. Taiwan and South Korea are also
good examples. Globalization has leveled the playing ground for smaller
companies. What matters in the global economy is not simply size; it is
other intangible factors such as nimbleness, reputation and the ability to
innovate.
At the same time, the more global we become, the more tribal is our
behavior. John Naisbitt, author of Global Paradox, has argued that the
more we become economically interdependent, the more we become
possessive about our core basic identity. Fearing globalization and, by
implication, the imposition of a western (predominantly American) culture, many countries have become paranoid about preserving their distinctiveness and identity.
Typically, in the process of globalization of companies evolves
through distinct stages.
In the first stage, companies normally tend to focus on their domestic
markets. They develop and strengthen their capabilities in some core
areas.
In the second stage, companies begin to look at overseas markets
more seriously but the orientation remains predominantly domestic. The
various options a company has in this stage are exports, setting up warehouses abroad and establishing assembly lines in major markets. The
company gets a better understanding of overseas markets at low risk, but
without committing large amounts of resources.
110
Goals
In the third stage, the commitment to overseas markets increases. The
company begins to take into account the differences across various markets to customize its products suitably. Different strategies are formed
for different markets to maximize customer responsiveness. The company may set up overseas R&D centers and full-fledged country or region
specific manufacturing facilities. This phase can be referred to as the
multinational or multi-domestic phase. The different subsidiaries largely
remain independent of each other and there is little coordination among
the different units in the system.
Finally, the transnational corporation emerges. Here, the company
takes into account both similarities and differences across different markets. Some activities are standardized across the globe, while others are
customized to suit the needs of individual markets. The firm attempts to
combine global efficiencies, local responsiveness and sharing of
knowledge across different subsidiaries. A seamless network of subsidiaries across the world emerges. It is very difficult to make out where the
home country or headquarters is.
(See also: COMPARATIVE ADVANTAGE, GLOBAL LEVERAGE, STRATEGIC
ADVANTAGE)
Goals
Goals represent desired future states of organizations. Goals should not
be confused with objectives. Since goals represent the end state, they are
more long term oriented. Objectives represent the building blocks of the
goal and are more short term oriented.
(See also: LONG TERM OBJECTIVES)
Golden Handcuffs
Golden handcuffs refer to deferred compensation, incentives and attractive retirement plans to boost employee loyalty and motivation levels
especially among senior level positions. Retaining good employees has
become one of the major concerns of any organization and golden handcuffs is one way of doing so. A good example is employee stock options.
(See also: GOLDEN HELLO, GOLDEN KEY)
Govindarajan, VIJAY
111
Golden Handshake
Refers to a large cash sum, part of which may be tax free, paid to employees who are forced to leave before the end of a service contract. It is
a method to reduce the number of employees in the organization and
reduce salary expenses.
Golden Hello
A payment made to a senior executive as an incentive to join a company.
This payment is meant to compensate for the benefits forgone by leaving
the previous employer and for the additional risks the executive is taking.
Golden Key
The key, which unlocks golden handcuffs, in order to pay off people not
thought to be worth keeping.
(See also: GOLDEN HANDCUFFS)
Golden Parachute
A provision that enables senior managers to exit from a company with
handsome separation packages in case of events such as a hostile takeover.
Govindarajan, Vijay
Well known for his pioneering book, Strategic Cost Management coauthored with John K Shank. Govindarajan has also done cutting-edge
work in the areas of learning, innovation and globalization. His most
recent book, Ten Rules for Strategic Innovators — From Idea to Execution co-authored with Chris Trimble in 2005, provides a blueprint for
business innovation.
(See also: STRATEGIC COST MANAGEMENT, STRATEGIC INNOVATION)
112
Handy, CHARLES
H
Handy, Charles
One of the most respected gurus in business history, Handy was one of
the first to forecast the rise of outsourcing and a decline in the numbers
of people employed as permanent workers. He is also the author of
many business books, notably Understanding Organizations and Inside
Organizations.
Hedgehog Principle
A term coined by Jim Collins in his book, Good to Great. The fox
knows many things, but the hedgehog knows only one big thing, namely
survival. This principle avers that a company should be like a hedgehog,
not like a fox.
In this context, a company must answer three questions:
(a) What can we be the best in the world at?
(b) What can we be passionate about?
(c) What is our one economic driver?
Thinking like a hedgehog can help to bring a lot of focus into a company’s plans and thinking.
Herfindahl Index
A measure of how concentrated an industry is, or how intense is the rivalry within it. The Herfindahl index is calculated as:
where s is the market share of firm i in the market, and n is the number of firms.
The Herfindahl Index (H) has a value that is always smaller than one.
A small index value indicates intense competition with no dominant
Herzberg, FREDERICK
113
players. If all firms have an equal share, the reciprocal of the index
shows the number of firms in the industry. When firms have unequal
shares, the reciprocal of the index indicates the “equivalent” number of
firms in the industry.
The major benefit of the Herfindahl index, compared to the CONCENTRATION RATIO is that it gives more weight to larger firms because of the
squaring. Take, for instance, two cases in which the six largest firms
produce 90% of the output: We will assume that the remaining 10% of
output is divided among 10 equally sized producers.

Case 1:

Case 2:
All six firms produce 15%.
One firm produces 80% while the five others produce 2%
each.
The six-firm CONCENTRATION RATIO would equal 90% in both cases,
but in the first case competition would be fierce while in the second case
we have a monopoly for all practical purposes. The Herfindahl index
captures this important information. In case 1, H = 0.1350 and in case 2,
H = 0.6420.
(See also: OLIGOPOLY)
Herzberg, Frederick
Well-known for his two-factor theory of job satisfaction. According to
Herzberg, every organization has a set of hygiene factors like working
conditions, salary, etc. The absence of hygiene factors creates employee
dissatisfaction but their presence does not improve satisfaction. Herzberg found five factors in particular that were strong determinants of
job satisfaction: achievement, recognition, the work itself, responsibility
and advancement. Motivators (satisfiers) are associated with a long-term
positive impact on job performance. In contrast, hygiene factors produce
only short-term changes in job attitudes and performance which quickly
fall back to their previous level.
Although Herzberg has been criticized for drawing conclusions about
workers as a whole based on a study of accountants and engineers, his
theory has proved very robust. Many firms have successfully put his
methods into practice. Part of the reason for the popularity of his theory
is that Herzberg has offered a practical approach to improving motiva-
114
Hierarchical ORGANIZATION
tion through job enrichment by redesigning workplaces and work
systems.
(See also: MOTIVATION)
Hierarchical Organization
A traditional organization in which authority flows from the person in
charge through various levels of supervision, while information and requests for approval travel upward through the same channels. As the size
of operations increases, top managers become the bottlenecks. Today,
many business organizations are trying to become flat by delegating
considerable decision making to lower levels of management. This delegation is facilitated by information technology and better methods of
communication that make it possible to operate with much wider spans
of control than was possible earlier.
(See also: BUREAUCRACY, FLAT ORGANIZATION)
Hostile Bid
A bid for taking over a company despite resistance by the takeover target. Hostile bids can lead to acrimony, a war of words and unpleasant
situations where sentiments run high and unreasonably high bids often
get made. Another problem with hostile bids is that key employees may
feel unhappy. Hostile bids are particularly avoidable in high tech industries, where acquisitions are often made to get access to a ready pool of
talent.
(See also: ANTI-TAKEOVER STRATEGY)
Human Capital
The degree of skill and training embodied in labor as a factor of production. The value of human capital can be increased by careful recruitment
and investment, typically in education and training. Human capital is a
major asset in knowledge based industries such as computer software
and pharmaceuticals.
Hygiene Factors
Elements of the work environment that have the potential to cause dissatisfaction, if not adequately provided. These include salary and working conditions. These aspects are taken for granted. By providing them,
Hygiene FACTORS
115
motivation levels will not increase. But if they are not provided, employees will be unhappy.
(See also: HERZBERG, FREDERICK, MOTIVATION)
116
Independent DIRECTOR
I
Independent Director
An outside, or non-executive, director who does not have interests that
affect the exercise of independent judgment while taking decisions on
behalf of the company. A sufficiently large number of independent directors on the board is considered desirable from the point of view of
corporate governance. In the US, institutions like New York Stock Exchange and the Securities and Exchange Commission have prescribed
various tests of independence. But independence alone does not guarantee good corporate governance. Many of the American companies which
collapsed at the turn of the 20th century, including Enron, had a large
proportion of independent directors. The real issue is the willingness and
ability of independent directors to impose checks and balances on a
company’s top managers. That calls for both competence and the right
mental predisposition.
(See also: CORPORATE GOVERNANCE)
Industry
A collection of firms that offer similar products or services, namely
products that customers perceive to be direct alternatives for one another*. A strategically distinct industry encompasses products where the
sources of competitive advantage are similar. Many discussions of competition are based on very broad industry definitions, which are not
meaningful definitions because the nature of competition and the sources
of competitive advantage vary a great deal within them. Consider a firm
in the PC industry. Does the industry include printers? Color monitors?
Modems? These are the kinds of questions that executives face in defining industry boundaries.
*
Porter, Michael E., The Competitive Advantage of Nations, The Free Press,
1990.
Industry
117
Defining industry boundaries enables executives to determine the
arena in which their firm is competing, and the key success factors —
and address some important questions:




Which part of the industry corresponds to the firm’s goals?
What are the key success factors in that part of the industry?
Does the firm have the skills needed to compete effectively? If not,
can it build those skills?
Does the company have the skills to exploit emerging opportunities
and counter future threats?
The industry structure may change over time because of the following reasons:








Demand patterns may change due to demographic factors, changes in
lifestyle, tastes, social conditions, substitutes, complementary products, market penetration, product innovation, etc. New buyer segments may emerge while existing segments may disappear.
As buyers become more knowledgeable, the scope for differentiation
reduces and products tend to become commodities.
The uncertainties with regard to technology, buyer segments, industry growth and industry size may reduce over time. Simultaneously,
there is a great degree of imitation as successful strategies are imitated and failed ones abandoned.
Because of diffusion of knowledge, proprietary advantages tend to
erode over time. The rate of diffusion of proprietary technology,
however, depends on the particular industry.
Accumulation of experience can often result in declining unit costs.
An early mover may be able to reap significant benefits.
Changes in cost or quality of inputs can affect industry structure.
Product innovations can expand the market, promote industry growth
and create opportunities for product differentiation. They can also
create mobility barriers.
Marketing innovations can influence industry structure. New advertising media and distribution channels can facilitate the targeting of
new customers and increase the scope for differentiation. Sometimes,
marketing innovations may also cut costs drastically.
118
Industry SHAKEOUT
Process innovations may influence the economies of scale, proportion of fixed costs and the degree of vertical integration. This can
make the industry more or less capital intensive.

Changes in suppliers and customers’ industries can result in changes
in industry structure.
(See also: BLUE OCEAN STRATEGY, FIVE FORCES MODEL, INDUSTRY
SHAKEOUT, VALUE INNOVATION)

Industry Shakeout
A discontinuity or turning point, as the industry goes through a major
upheaval. Some of the greatest risks which companies face are during
times when an industry is witnessing a shakeout. George S Day* has
provided some useful insights on industry shakeouts. Day refers to two
kinds of shakeout: the boom-and-bust syndrome, and the seismic-shift
syndrome.
The boom-and-bust syndrome typically applies to emerging markets
and cyclical businesses. The dot com industry in the late 1990s is a good
example. During the boom, many companies entered the industry leading to excess capacity. As competition intensified and prices fell, many
players found the going tough. The successful companies focused on
operational excellence and cut costs ruthlessly.
The seismic-shift syndrome is more applicable to mature industries.
Such industries enjoy prosperity for years together in a protected environment, with minimal competition and decent margins. A seismic shift
takes place when these factors disappear. Deregulation, globalization
and technological discontinuities are some of the factors that can cause a
seismic shift. A good example is the pharmaceutical industry before the
emergence of managed health care. In a physician driven environment,
price was not an important factor. Physicians did not hesitate to prescribe expensive medicines which drug companies gleefully marketed.
The emergence of health maintenance organizations† (HMOs) has reduced the importance of physicians. HMOs recommend the use of ge*
Day, George S., “Strategies for Surviving a Shakeout,” Harvard Business
Review, March-April 1997, pp. 92-102.
†
Health maintenance organizations provide health insurance coverage through
hospitals, doctors, and other providers with which the HMO has a contract.
Industry SHAKEOUT
119
nerics wherever possible and control costs wherever they can. Drug
companies are struggling to adjust to this new environment.
Managers need to develop antennae that can sense a shakeout before
their competitors do so. SCENARIO PLANNING can focus attention on
change drivers and force the management team to imagine operating in
markets which may bear little resemblance to the existing ones. Studying
other markets which have already seen a shakeout, and which are similar
in terms of structure and are susceptible to the same triggers, can also be
of great help. Examining how the same industry is evolving in other
countries and regions can also provide useful insights.
Day refers to survivors from a boom and bust shakeout as adaptive
survivors and those from a seismic shift syndrome as aggressive amalgamators.
Adaptive survivors impose discipline in operations and respond efficiently to customer needs and competitor threats. Dell is a good example
of an adaptive survivor. During the initial shakeout in the PC industry in
the 1980s, Dell survived due to its lean build-to-order direct selling
model. In the early 1990s, Dell stumbled when it entered the retail segment and its notebook computers failed to get customer acceptance.
Founder Michael Dell did not hesitate to make sweeping changes in the
organization. He put in place a team of senior industry executives to
complement his intuitive and entrepreneurial style of management. Dell
became the largest manufacturer of PCs in the world, emerging as an
adaptive survivor in an industry, which saw the exit of several players.
Aggressive amalgamators show an uncanny ability to develop the
right business model for an evolving industry. They usually make one or
more of the following moves: rapidly acquire and absorb smaller rivals,
cut operating costs and invest in technologies that increase the minimum
scale required for efficient operations. Mittal Steel is a good example.
The company’s appetite for acquisitions and global consolidation is legendary.
For companies which find it difficult to become adaptive survivors or
aggressive amalgamators, there are alternative strategies to survive a
shakeout. These include becoming niche players, joining hands with
other small players through strategic alliances, and, finally, selling out
and getting the best price possible.
(See also: STRATEGIC INFLECTION POINT)
120
Innovation
Innovation
“The effort to create purposeful focused change in an enterprise’s economic or social potential” (Peter Drucker).
The most effective way to compete in a changing environment is to
churn out new products and services rapidly according to the needs of
the market. Innovation helps a company to stay ahead of the pack and
move into less crowded areas. No wonder increasing attention is now
being paid to innovation in today’s era of global competition. Very often
innovation is misunderstood as invention. Invention is creating new
things. But innovation is all about taking new ideas to the market place.
History is full of examples of many companies that developed a new
technology or product but failed to take it to the market. For example,
Xerox developed many of the concepts associated with the modern day
PC but failed to make a commercial proposition out of them.
Innovation must begin with an analysis of opportunities in a systematic and organized way. The starting point in innovation is identifying
the scope for improvement with respect to customers, suppliers, and internal processes. Innovations must be market focused.
Opportunities to innovate are provided by:




New customer segments which are just emerging;
Customer segments that existing competitors are neglecting or not
serving well;
New customer needs which are emerging; and
New ways of producing and delivering products to customers.
In his book Innovation and Entrepreneurship, Drucker has listed
seven sources of opportunity for innovative organizations. Four are internal to the enterprise and three external. In order of increasing difficulty and uncertainty, they are as follows:
Unexpected Success or Failure
Understanding the reasons for the unexpected success or failure of a
product generates opportunities to innovate. Take the case of IBM which
wanted to sell accounting machines to banks but discovered that it were
libraries that wanted to buy them. IBM’s Univac, designed for advanced
scientific work, became popular in business applications such as payroll.
Innovation
121
Unexpected product failures can also give companies new ideas that
may help them to come up with something that the market likes.
Incongruity between What Actually Happens and What was Supposed to Happen
If things are not happening as they should, there is scope to innovate.
For example, in industries which are growing but where margins are
falling, there is tremendous potential for innovation. Similarly, when
companies continue to work at improving something in order to reduce
costs but fail to do so, an innovator can look at other options to cut costs.
This is exactly how container ships emerged — by focusing on the
ship’s turnaround time rather than its fuel efficiency.
Deficiencies in a Process That are Taken for Granted
If a process is inefficient or suffers from a big gap, there is scope to innovate. Sometimes a process that is widely used may have certain deficiencies. By thinking out of the box, an innovator may come up with a
new idea that removes this deficiency. Pilkington’s float glass manufacturing process, for example, paved the way for the development of glass
with a smooth finish.
Changes in Industry or Market Structure That Catch Everyone by
Surprise
The emergence of new, fast-growing segments provides scope for innovators to serve their needs. The success of the small floppy disk drive
manufacturers had much to do with the emergence of new customer
segments who wanted smaller and lighter disk drives. According to
Drucker*, “New opportunities rarely fit the way the industry has always
approached the market, defined it, or organized to serve it. Innovators
therefore have a good chance of being left alone for a long time.”
Demographic Changes
Demographic changes result in new wants and new lifestyles that call for
new products. The Japanese pioneered robotics because they anticipated
*
Drucker, Peter F., “The Discipline of Innovation”, Harvard Business Review,
November-December 1998, pp. 149-157.
122
Innovator’s DILEMMA
the rising levels of education and the consequent shortage of blue-collar
workers. In recent years, the ageing of Japan and Europe has put pressure on governments there to control health care expenses. This has
fuelled the rise of generic drugs. Demographic changes provide innovation opportunities that are the most rewarding and the least risky, as such
trends are easier to predict.
Changes in Perception
New needs can be created by changing the common perception of people. For example, a booming industry has emerged for exercise and jogging equipment by capitalizing on people’s concern for health and fitness.
Changes Brought About by New Knowledge
New knowledge can be used to develop innovative products. Innovations of this sort usually combine many sorts of knowledge. The development of the computer, for example, was facilitated by a combination
of binary arithmetic, calculating machine, punch card, audion tube, symbolic logic and programming. Such innovations are also risky because
there is usually a gap between the emergence of new knowledge and its
conversion into usable technology and another gap before the product is
launched in the market. Drucker has underlined*, “Contrary to almost
universal belief, new knowledge is not the most reliable or most predictable source of successful innovations. For all the visibility, glamour and
importance of science-based innovation, it is actually the least reliable
and least predictable one.”
(See also: INNOVATOR’S DILEMMA)
Innovator’s Dilemma
A term coined by the innovation guru, Clayton Christensen. Many successful companies fail not because they neglect customers but because
they take them too seriously and continue to pamper them by adding
more features. An excessive focus on satisfying existing customers prevents the current market leaders from creating new markets and from
*
Drucker, Peter F., Innovation and Entrepreneurship, Harper Business Publications, 1986.
Intrapreneurship
123
finding new customers for the products of the future. In the process of
adding new features to please existing customers, the product or service
becomes overpriced, going beyond the reach of customers who might be
looking for a simpler, cheaper product.
According to Christensen, many successful companies face the innovator’s dilemma. Keeping close to existing customers may make sense
in the short run. But long term growth and profitability need a totally
different approach. When successful players are not prepared to embrace
a new business model, they lose market share to more nimble or entrepreneurial companies, which are not encumbered by any baggage.
For example, when PCs entered the market, they were not superior to
minicomputers. But mini computer manufacturers like Digital Equipment lost market share rapidly when standalone workstations and networked desktop computers emerged and successfully targeted a totally
new customer segment.
(See also: CHRISTENSEN, CLAYTON M., INNOVATION)
Institutional Investor
A financial institution with shareholdings in listed companies. Institutional investors include pension funds, investment trusts, mutual funds
(or unit trusts), insurance companies and banks managing investment
portfolios for clients. Institutional investors across the world play an
increasingly important role in equity markets. Through the buying and
selling decisions they make, institutional investors not only move markets but also have an impact on corporate governance.
(See also: CORPORATE GOVERNANCE)
Intrapreneurship
Intrapreneurship is the practice of developing entrepreneurial skills and
approaches by or within a company. In companies which encourage intrapreneurship, employees are encouraged to behave as entrepreneurs by
being given enough freedom and resources to experiment with new ideas.
(See also: ENTREPRENEURSHIP)
124
Japanese STYLE OF MANAGEMENT
J
Japanese Style of Management
The success of Japanese companies in the 1970s and 1980s drew
world‘s the attention towards their management practices. In many
ways, the Japanese style of management is different from the western
style. and has various distinctive elements:
A long term perspective in which establishing a strong market position is more important than short-term profit.

A highly educated, highly trained workforce that is encouraged and
empowered to improve production methods and quality.

Lean production, eliminating wastage of materials and time.

Continuous improvement.

Decision making by consensus.
(See also: KAIZEN, KANBAN, LEAN THINKING, MCKINSEY 7-S FRAMEWORK)

Joint Venture
A joint venture involves two or more parties coming together to undertake an economic activity. The parties typically agree to create a new
entity together by jointly contributing equity capital and share the revenues and expenses. The venture can be only for one specific project, or
for a continuing business relationship. Multinationals often enter emerging markets by forming joint ventures. Such an arrangement not only
helps them to benefit from the expertise of the local partner in managing
the local environment but also minimizes risk, especially political risk.
(See also: POLITICAL RISK, STRATEGIC ALLIANCE)
Judo Strategy
A term coined by David Yoffie of Harvard Business School judo strategy effectively means avoiding direct confrontation and leveraging the
strength of the opponent to create space for oneself. Judo strategy can
help small companies enter new markets and defeat stronger rivals.
Just–IN-TIME
125
Through speed, flexibility, and leverage, new players can occupy uncontested ground and turn the strengths of dominant players against them.
Consider Netscape, which was set up in 1994 and became the hottest
company in the tech world. Netscape’s flagship product, the Navigator
Web browser, dominated its market from day one. And Netscape made a
highly successful IPO in August 1995, just sixteen months after its
founding. But Netscape’s fall was equally spectacular and precipitous
when it decided in favor of a head-to-head confrontation with Microsoft.
In late 1995, Microsoft launched aggressive moves against Netscape.
Under relentless attack, Navigator’s market share soon began an irreversible decline. By the end of the decade, Microsoft had started to dominate the browser business and Netscape survived only as a division of
AOL. In contrast, Palm Computing which first shipped the Pilot, a
handheld electronic organizer in April 1996, succeeded for much longer
by avoiding head-to-head battles with entrenched leaders.
In many competitive battles the answer is not to oppose strength with
strength, as Netscape ruinously chose to do. Instead, the challenger
should study the competition carefully, avoid head-to-head battles and
use the opponent’s strength to its advantage. This is the essence of judo
strategy.
Challengers can be at a severe disadvantage when entering a market
where a powerful incumbent holds sway. Judo strategy can come in
handy in such circumstances.
Just–in-Time
See LEAN MANUFACTURING.
126
Kaizen
K
Kaizen
A Japanese term meaning continuous improvement. In the 1960s, Japanese car makers were far behind their Western counterparts in quality.
Through slow but ongoing improvements in their manufacturing techniques, the Japanese improved their quality and operational efficiency
and became global leaders in various industries. The basic thinking behind Kaizen is that small, ongoing improvements over a period of time,
can lead to a significant competitive advantage.
(See also: JAPANESE STYLE OF MANAGEMENT, LEAN MANUFACTURING)
Kanban
A technique for controlling the flow of inventory through a manufacturing system, which is closely linked to the just-in-time system. The term
in Japanese means a card or signal. In its simplest form, the technique
may be viewed as a card used by operators for instructing their suppliers
to provide more material. Kanban “pulls” inventory through the manufacturing process and forms the core of a just-in-time production system.
(See also: JAPANESE STYLE OF MANAGEMENT)
Kaplan and Norton
Robert S. Kaplan* and David P. Norton† are famous for developing the
BALANCED SCORECARD‡ in 1992. They emphasize the importance of not
focusing over much on financial measures of performance.
Instead, the balanced score card has four perspectives:
*
Robert Kaplan is the Marvin Bower Professor of Leadership Development at Harvard Business School.
†
‡
David Norton is a cofounder, president, and CEO of BSCol.
Kaplan, R. S. and Norton, D. P., Balanced Scorecard: Translating Strategy
into Action, Harvard Business School Press, 1996.
Khanna, TARUN




127
Customer perspective;
Process perspective;
Innovation and learning perspective;
Financial perspective.
The main idea of the balanced scorecard is that one needs to measure
and manage all of these indicators in a balanced way instead of focusing
solely on financial performance. Kaplan and Norton have also developed
the concept of ACTIVITY BASED COSTING.
Keiretsu
A form of organization in Japan in which a group of companies work
closely together, effectively becoming a vertically integrated enterprise.
The companies may be held together by cross-ownership, long term
business dealings, directorship on each other’s board, as well as social
ties. These vertical ties improve trust and facilitate the smooth flow of
goods and services across the different entities of a Keiretsu. In recent
times, as companies have restructured themselves and tried to become
leaner and more focused, Kirietsu ties in Japan have weakened, while
arm’s length market based relationships have become stronger.
(See also: VERTICAL INTEGRATION)
Kepner-Tregoe* Matrix
A structured methodology for identifying and ranking all factors critical
to a decision. The aim is to minimize the influence of conscious and unconscious biases. This methodology can be applied to nearly all decisions, ranging from product marketing to selection of the site for a new
plant. The analysis helps in evaluating alternative courses of action and
optimizing the ultimate results based on explicit objectives.
Khanna, Tarun
A professor at the Harvard Business School who has done extensive
research in corporate strategy, focusing particularly on business houses
*
Kepner-Tregoe provides consulting and training services to organizations
throughout the world. Kepner-Tregoe specializes in using systematic process
approaches to resolve business issues and achieve peak people and project performance.
128
Knowing -Doing GAP
and conglomerates in emerging markets. He seeks to understand how to
build world-class companies from emerging markets worldwide. Much
of his work is focused on China and India, and involves identifying best
practices for local entrepreneurs and multinationals operating in each of
these two countries.
Khanna’s work has been published extensively in academic journals,
including the Journal of Finance, the European Economic Review, the
Strategic Management Journal, the Academy of Management Journal,
Organization Science and Management Science. He has also been profiled in newsmagazines around the world, including The Wall Street
Journal, The Economist, the Far Eastern Economic Review, and numerous newspapers in China, India and elsewhere in Asia and Latin America. He has been a frequent commentator on China and India and has
featured on several television programs.
Khanna’s two articles written jointly with another Harvard Business
School professor, Krishna Palepu, “The Right Way to Restructure Conglomerates in Emerging Markets” and “Why Focused Strategies May Be
Wrong for Emerging Markets” are widely cited in all strategy literature.
(See also: PALEPU, KRISHNA G.)
Knowing-Doing Gap
A concept which holds that knowing amounts to little without doing.
According to Jeffrey Pfeffer and Robert Sutton, who teach at Stanford,
the gap between knowing and doing is more important than the gap between ignorance and knowing. Today there are entities such as consulting firms who specialize in collecting and disseminating knowledge
about management practices. Knowledge workers are also mobile and
move from one organization to another. So better ways of doing things
cannot remain secret for long. In most cases, however, the knowledge
that is successfully transferred in various ways is not used for taking
action. According to Pfeffer and Sutton, the ability to minimize the
knowing-doing gap is the defining characteristic of well managed companies.
(See also: WILLPOWER)
Knowledge MANAGEMENT (KM)
129
Knowledge Management (KM)
A discipline which is becoming increasingly important in today’s
knowledge economy. It refers to the retention, exploitation and sharing
of knowledge in an organization in order to generate sustainable competitive advantage. The crux of knowledge management is the leveraging of
knowledge which resides in individuals for the benefit of the organization as a whole. The biggest challenges arise in the case of tacit
knowledge which is often difficult to extract from individuals. KM has
to strike the right balance between information technology and human
intervention. The key to effective KM is to get into an action mode by
actually using knowledge to create value. This calls for embedding
knowledge into business processes wherever possible. KM really takes
off when knowledge flows in as and when knowledge workers need it.
While many sophisticated KM tools are available today, the key to successful KM is an enabling culture that encourages learning and
knowledge sharing.
(See also: BIAS FOR ACTION, KNOWING-DOING GAP)
130
Lateral THINKING
L
Lateral Thinking
Lateral thinking, a term coined by the Maltese psychologist Edward de
Bono, effectively means solving problems by approaching them indirectly from diverse angles instead of concentrating on any one approach
at length. Lateral thinking involves reasoning that is not immediately
obvious and ideas that may not be obtainable by using only traditional
step-by-step logic. Lateral thinking also implies shifting of thinking patterns away from entrenched or predictable thinking to new, or unexpected, ideas.
(See also: BRAINSTORMING, INNOVATION)
Law of Conservation of Profits
A principle coined by Clayton CHRISTENSEN of Harvard Business School
which holds that the total profit along an industry value chain does not
change. What happens is that profit moves along the value chain. Some
parts of the value chain become more attractive and others less so over
time as both technology and markets undergo a change. Smart companies understand the industry dynamics and occupy the sweet spot on the
value chain. This is the place where there is still scope to improve the
performance of the product or service, differentiate it from competitors,
and charge a premium. In the PC industry, for example, Microsoft and
Intel have occupied sweet spots on the value chain. They have kept coming up with improved versions of their products (software and chips,
respectively) and the market buys them as they deliver enhanced features and better performance.
(See also: VALUE MIGRATION)
Law of Unintended Consequences
Things do not often happen the way we expect them to. Leaders frame
policies with good intentions but at the end of the day, the consequences
of these policies are very often unintended. Leaders should appreciate
Law OF UNINTENDED CONSEQ UENCES
131
this when they take a decision or frame a policy. A few examples will
illustrate the point.
One of the most important decisions in corporate finance relates to
capital structure. Managers often prefer equity to debt as equity is perceived to be less risky. Debt involves mandatory principal and interest
payments. In the case of equity, on the other hand, there is no compulsion to pay dividends. And rarely, if ever, is equity capital (except for
small portions which are bought back) returned to investors. But as equity is less risky, managers tend to take things easy and do not use the capital efficiently, often landing the company in trouble. Indeed, this is why
many dotcoms folded up in the early 2000s. On the other hand, because
debt is more risky companies tend to be more careful with the debt they
raise. Consequently, debt often brings in quite a bit of discipline and
leads to better financial performance.
Inventory is another good example. Managers routinely keep inventory as a buffer against uncertainty. Inventory comes in handy if a supplier is late in delivering parts or delivers defective parts, or if a machine
in the plant breaks down. In just-in-time (JIT) production systems, very
little inventory is maintained. The entire plant comes to a stand still if
something goes wrong. So it is potentially risky. But companies like
Toyota are aware of the possible consequences of things going wrong in
a JIT system. So they make sure that suppliers always make delivery in
time, always maintain quality and ensure all the machines are maintained well. On the other hand, in companies which hold a lot of inventory, quality control tends to be slack, vendor management highly ineffective and maintenance of machines very poor. In other words, holding
inventory undermines the effectiveness of the plant. Instead of acting as
a buffer, the inventory creates problems.
In short, decisions have to be made after carefully considering various implications. Things give a certain appearance on the surface
but, deep down, matters could be different. If the deeper issues are
overlooked, the most logical decisions will lead to unintended consequences.
(See also: DECISION MAKING)
132
Leadership
Leadership
A much discussed and widely written about term. A good definition of
leadership is offered by W. C. H. Prentice* in his 1961 article in Harvard Business Review: “Leadership is the accomplishment of a goal
through the direction of human assistants. The man who successfully
marshals his human collaborators to achieve particular ends is a leader.
A great leader is one who can do so day after day and year after year in a
wide variety of circumstances.”
According to Stephen COVEY, “Leadership is communicating people’s
worth and potential so clearly that they come to see it in themselves.
People must feel an intrinsic sense of worth — that is, that they have
intrinsic value — totally apart from being compared to others and
that they are worthy of unconditional love, regardless of behavior or
performance. Then when you communicate their potential and create
opportunities to develop and use it, you are building on a solid foundation.” †
As Covey points out that various leadership theories emerged in the
twentieth century. One of the early theories was the Great-Man theory of
leadership which dominated any discussion of leadership prior to 1900.
History and social institutions are shaped by the leadership of great men
and women. Dowd (1936) maintained that there is nothing like leadership by the masses. Individuals in every society possess different degrees of intelligence, energy, and moral force. They are always led by
the superior few. Leaders are endowed with superior traits and characteristics that differentiate them from followers. Research of trait theories
addresses the following two questions:
1. What traits distinguish leaders from other people?
2. What is the extent of those differences?
According to the situational theories, leadership is the product of situational demands. Situational factors rather than a person’s heritage determine who will emerge as a leader. The emergence of a great leader is
*
W.C.H. Prentice is a former president of Bryant and Stratton Business Institutes in
Buffalo, New York, former president of Wheaton College in Norton, Massachusetts, and a former dean of Swarthmore College in Swarthmore, Pennsylvania.
†
Covey, Stephen R., The 8th Habit: From Effectiveness to Greatness, The Free
Press, 2004.
Leadership
133
the result of time, place and circumstances. Later, theorists began to
place a strong emphasis on situational and environmental factors. Subsequently, theories of integration have been developed around persons
and situations, psychoanalysis, role attainment, change, goals and contingencies.
Robert J. House* and Terence R. Mitchell† describe four styles of
leadership‡:




Supportive Leadership:
The leader believes in considering the needs
of his followers, showing concern for their welfare and creating a
friendly working environment. The leader focuses on increasing
the self-esteem of people and making their jobs more interesting.
This approach works best when the work is stressful, boring or hazardous.
Directive Leadership: A directive leader tells followers what needs to
be done and gives them appropriate guidance along the way, often
including schedules of specific work to be done at specific times.
Rewards may also be increased as needed and role ambiguity reduced. Such an approach may be used when the task is unstructured
and complex, and the follower is inexperienced.
Participative Leadership: Consulting with followers and taking their
ideas into account when making decisions and taking particular actions. This approach works best when the followers are experts, their
advice is needed and they want to give it.
Achievement Oriented Leadership: Setting challenging goals, both in
work and in self-improvement. High standards are demonstrated and
expected. The leader shows faith in the capabilities of the follower.
This approach works best when the task is complex.
*
Robert J. House is a professor of management at the Wharton School of the
University of Pennsylvania, formerly of University of Toronto. His expertise lies
in the area of leadership,
†
Terence R. Mitchell is currently professor of Management & Organization in UW
Business School.
‡
House, R.J., Mitchell, T.R., “A Path-Goal Theory of Leadership”, Journal of
Contemporary Business, Vol. 3, 1974, pp. 81-97.
134
Leadership
According to Daniel Goleman*, executives use six leadership styles†.
The most effective leaders switch flexibly from one style to another,
depending on the circumstances.
1. Coercive leaders pursue a top down high handed approach and are
the least effective in most situations. The extreme top down decision
making kills new ideas. People don‘t feel respected. Their sense of responsibility evaporates. Unable to act on their own initiative, they lose
their sense of ownership and feel little accountability for their performance. The coercive style should be used only with extreme caution and
in the few situations when it is absolutely imperative, such as during a
turnaround or when a hostile takeover is looming.
2. Authoritative leaders mobilize and motivate people by making it
clear to them how their work fits into a larger vision for the organization.
When the leader gives performance feedback, the main criterion is
whether or not that performance furthers the vision. The standards for
success are clear to all. Authoritative leaders give people the freedom to
innovate, experiment, and take calculated risks. The authoritative style
tends to work well in many business situations but fails when the team
consists of experts or peers who are more experienced than the leader.
3. Affiliative leaders create emotional bonds and harmony, strive to
keep employees happy and to increase loyalty by building strong emotional bonds. Affiliative leaders give people the freedom to do their job
in the way they think is most effective. Affiliative leaders are likely to
take the people who report to them out for a meal or a drink, to see how
they’re doing. They will take out the time to celebrate a group accomplishment. They are natural relationship builders. The affiliative style is
effective in many situations but it is particularly suitable when trying to
build team harmony, increase morale, improve communication, or repair
broken trust. One problem with the affiliative style is that because of its
exclusive focus on praise, employees may perceive that mediocrity is
tolerated. And because affiliative leaders rarely offer constructive advice
*
A world renowned expert in the area of Emotional Intelligence. He has written
the international best-seller book “Emotional Intelligence”.
†
Goleman, Daniel., “Leadership That Gets Results”, Harvard Business Review,
March-April 2000, pp. 78-90.
Leadership
135
on how to improve, employees must figure out how to do so on their
own.
4. Democratic leaders build consensus through participation and increase flexibility and responsibility by letting workers themselves have a
say in decisions that affect their goals and how they do their work. By
listening to employee’s concerns, the democratic leaders learn what to
do to keep morale high. People have a say in setting their goals and performance evaluation criteria. So they tend to be very realistic about what
can and cannot be accomplished. But the democratic style can lead to
endless meetings and postponement of crucial decisions in the hope that
sufficient discussion and debate will eventually yield a great outcome.
The democratic style does not make sense when employees are neither
competent nor informed enough to offer sound advice. Such an approach
also does not make sense during a crisis.
5. Pace-setting leaders expect excellence and self-direction and set
extremely high performance standards. They are obsessive about doing
things better and faster, and demand the same from everyone around
them. If poor performers don’t rise to the occasion, these leaders do not
hesitate to replace them with people who can. The pacesetter’s demands
for excellence can overwhelm employees and their morale drops. Such
leaders also give no feedback on how people are doing. They jump in to
take over when they think people are lagging. When they leave, people
feel directionless as they’re so used to “the expert” setting the rules.
6. Coaching leaders develop people for the future. They help employees identify their unique strengths and weaknesses and consider their
personal and career aspirations. They encourage employees to establish
long-term development goals and help them conceptualize a plan for
attaining them. Coaching leaders excel at delegating, give employees
challenging assignments, are willing to put up with short-term failure,
and focus primarily on personal development. When employees know
their boss watches them and cares about what they do, they feel free to
experiment. People know what is expected of them and how their work
fits into a larger vision or strategy. The coaching style works particularly
well when employees are already aware of their weaknesses and would
like to improve their performance. By contrast, the coaching style makes
little sense when employees, for whatever reason, are resistant to learning or changing their ways. And it fails if the leader is inept at coaching.
136
Lean MANUFACTURING
In his book Good to Great Jim Collins has introduced the concept of
Level 5 leadership. This represents the highest level of leadership, and is
exhibited by an individual who blends humility with intense professional
will. Level 5 leaders are typically modest, talk little about themselves
and like to talk more about the company and the contributions of other
executives. The Level 5 leader sits on top of a hierarchy of capabilities.
Four other layers lie below. Individuals do not need to proceed sequentially through each level of the hierarchy to reach the top, but to be a
full-fledged Level 5 leader requires the capabilities of all the lower levels, plus the special characteristics of Level 5. Level 5 leaders are also
good at changing their style of leadership from situation to situation.
Thus, they can be extremely democratic at times. On other occasions,
they can be authoritative. Level 5 leaders are very particular about the
quality of people in their team. People in such organizations are selfdriven and the CEO does not have to spend much time trying to motivate them.
(See also: EMOTIONAL INTELLIGENCE, PERSONAL EFFECTIVENESS)
Lean Manufacturing
A management philosophy which focuses on reduction of the seven
wastes (over-production, waiting time, transportation, processing, inventory, motion and scrap) in manufactured products. By eliminating waste
(muda), quality is improved, production time is reduced and cost is lowered. Lean “tools” include constant process analysis (KAIZEN), “pull”
production (KANBAN) and mistake-proofing (POKA YOKE). Lean manufacturing is relentlessly focused on eliminating inventory.
The key lean manufacturing principles include:

— quest for zero defects, revealing and
solving problems at the source.
Waste Minimization — eliminating all activities that do not add value
and safety nets, maximize use of scarce resources (capital, people and
land).

Continuous Improvement

Pull Processing

Perfect First-time Quality
— reducing costs, improving quality, increasing productivity and information sharing.
— pulling products from the consumer end, not pushing from the production end.
Lean THINKING
137
— producing different mixes or greater diversity of products quickly, without sacrificing efficiency at lower volumes of production.

Flexibility

Long Term Relationship with Suppliers
— building and maintaining a
long term relationship with suppliers through collaborative risk sharing, cost sharing and information sharing arrangements.
Lean Thinking
Lean thinking is a broader concept compared to lean manufacturing. It is
basically about getting the right things, to the right place, at the right
time, in the right quantity while minimizing waste and waiting time and
being flexible and open to change. A term coined by James P. Womack
and Daniel T. Jones, lean thinking provides a way to specify value, sequence value-creating actions in the best way, conducting such activities
without interruption whenever someone requests them, and performing
them more and more effectively. Lean thinking means doing more and
more with fewer and fewer resources while providing customers with
exactly what they want.
Lean thinking is the antidote to muda. Muda means “waste”, specifically any human activity which absorbs resources but creates no value:






Mistakes which require rectification;
Production of items no one wants;
Processing steps which aren’t actually needed;
Movement of employees and transport of goods from one place to
another without any purpose;
Groups of people remaining idle because an upstream activity has not
delivered on time;
Goods and services which don’t meet the needs of the customer.
Lean thinking also improves job satisfaction by providing immediate
feedback to employees on their efforts to convert muda into value. Unlike process reengineering, it provides a way of creating new work rather
than simply downsizing in the name of efficiency.
138
Licensing
Licensing
Licensing involves the transfer of some intellectual property right from
the licensor to a licensee. The right could be a patent, trademark, or
technical know-how for which the licensee pays a royalty. Multinational
companies often use licensing to lower the risk of entry into foreign
markets. Licensing is also a handy tool for companies which want to
focus managerial efforts on intangible assets such as design and brands
and outsource other non core activities.
Two major problems exist with licensing. One is the possibility that
the partner will gain experience and become a major competitor over
time. The other is that the licensor may lose control on production, marketing and general distribution of its products. So a key success factor is
how the licensing agreement should be structured and implemented
carefully.
A special form of licensing is franchising, which allows the franchisee to sell a product or service using the principal’s brand name or
trademark in conformance with policies and guidelines laid down by the
franchiser. The franchisee pays a fee to the parent company, typically
based on the volume of sales of a defined market area.
(See also: FRANCHISE)
Long Term Objectives
These are the objectives a firm would like to achieve in the long run in
terms of profitability, productivity, competitive position, employee development, employee relations, technological leadership and public responsibility. Long term objectives should be carefully framed, consistent
with the company’s mission, understandable to employees and acceptable to them, flexible enough to be modified in the light of changes in the
environment and measurable. To be able to motivate employees, these
objectives should be challenging but not impossible to achieve. The performance evaluation criteria should be made clear.
(See also: GOALS, STRATEGIC PLANNING)
Loss Leader
A product sold at or below cost in the hope of generating sales of other
profitable items. The method is most commonly used in retailing. Thus,
a store may heavily advertise a loss leader in order to entice customers.
Loss LEADER
139
The hope is that customers will probably buy other, full-priced items as
well. The term loss leader can also be used to describe a manufacturer
who prices a lead item low, knowing that the usage of the item requires
further, full-priced purchases.
140
MBO (MANAGEMENT BY OBJEC TIVES)
M
MBO (Management By Objectives)
Peter Drucker first started popularizing the term management by objectives in 1954, in his book, The Practice of Management.
It involves setting objectives and then breaking them down into more
specific goals, or key result areas. MBO is a systematic and organized
approach that allows management to focus on achievable goals and to
attain the best possible results from available resources. The principle
behind MBO is to make sure that employees have a clear understanding
of the aims, or objectives, of the organization, as well as awareness of
their own roles and responsibilities in achieving those objectives.
But in recent years, this style of management has been receiving
some criticism. It has been reported that MBO triggers unethical employee behavior of distorting the system or financial figures to achieve
the targets set by their short-term, narrow bottom-line, and completely
self-centered thinking*.
Managerial Grid Model
Managerial grid is a management and leadership tool introduced in 1964
by Robert R. Blake and Jane S. Mouton. The grid evaluates managers on
two dimensions:
1. The task function, or concern for production.
2. The relation function, or Concern for People.
*
Castellano, Joseph F.; Kenneth Rosenzweig, and Harper A. Roehm (Summer,
2004). How corporate culture impacts unethical distortion of financial numbers:
managing by Objectives and Results could be counterproductive and contribute
to a climate that may lead to distortion of the system, manipulation of accounting figures, and, ultimately, unethical behavior, Management Accounting Quarterly. Retrieved on 13 November 2006.
**
Blake, R. and Mouton, J., The Managerial Grid: The Key to Leadership Excellence. Houston: Gulf Publishing Co., 1964.
Market DEFENSE
141
As shown in the figure, the model is represented as a grid with concern for production as the X-axis and concern for people as the Y-axis.
Each axis ranges from 1 (Low) to 9 (High). The grid comprises a 9 x 9
matrix, capturing 81 different leadership styles, e.g. country club management, team management, organizational management, impoverished
management, and authority-obedience management, etc.
The five major leadership styles are:
 The impoverished style (1.1)
 The country club style (1.9)
 The produce or perish style (9.1)
 The middle-of-the-road style (5.5)
 The team style (9.9).
(See also: LEADERSHIP)
Market Defense
Strategic moves that attempt to minimize or deter threatening actions by
existing or potential competitors.
142
Market FOR CORPORATE CONTROL
Deterrence strategies include:

Signaling intentions to defend;

Building barriers to entry or mobility; and

Reducing market attractiveness by lowering prices.
If challengers cannot be deterred, then market defense moves can
attempt to contain them and minimize the damage.
(See also: MARKET SIGNALS)
Market for Corporate Control
This refers to the market where mergers and acquisitions take place. A
well functioning market for corporate control puts pressure on managements to perform since failure to perform results in takeover bids. In
countries like USA, where the financial system and legal framework are
well developed, this market functions very effectively. Hostile takeovers
are quite common. But in many parts of the world, including Europe,
due to the intervention of the government / regulatory authorities, the
market for corporate control does not function very efficiently.
Marketing Mix
How a firm implements its marketing strategy. Also known as the four
Ps:




Product (including range of pack sizes and / or flavors or colors);
Price (long-term pricing strategy and pricing method);
Place (choosing distribution channels and seeking shop distribution);
and
Promotion (branding, advertising, packing and sales promotions).
The relative importance of the different Ps is highly contextual. A
company must arrive at the optimum marketing mix to strengthen its
competitive position. In the case of services, three more Ps can be added
— people, process, physical evidence. This leads to the 7 Ps of marketing.
Market Power
The degree to which a firm exercises control over its market. Wal-Mart,
for instance, has considerable market power which it leverages while
Market SIGNALS
143
negotiating with suppliers. In India, Hindustan Lever has a similar advantage while dealing with distributors and dealers.
Market Signals
Market signal refers to an action by a competitor that provides an indication of its intentions, motives, goals or internal situation. Market signals
may be a bluff, or warning, or an expression of earnest commitment.
Correct interpretation of market signals is important to compete effectively. Michael PORTER has given an excellent account of market signals
in his book, Competitive Strategy:

A player can make a prior announcement of its moves to preempt
competition, to threaten a competitor who is going ahead with an earlier planned move, or to elicit competitor reaction.

A firm can announce sales figures, addition to plant capacity, etc., to
influence the behavior of other firms. Often misleading data may also
be announced as part of a preemptive strategy.

A firm may openly discuss the industry, demand and price forecasts,
future capacity projection, estimates of future raw material prices,
etc. Through such announcements, a firm can try to influence the assumptions of its competitors.

A firm may discuss / explain the logic of a move to its competitors. It
may also communicate its seriousness and earnestness about what it
is doing and what it is planning to do. This way the firm may be able
to preempt competition, or prevent retaliation.
It is often useful to examine the historical relationship between a
firm’s announcements and its actual moves to understand whether the
firm is a serious player or is only trying to bluff its way. Among the other issues which need careful examination are competitors’ tactics relative to what they could have done, the divergence from past goals, industry precedent, etc. Strategy formulation is usually based on implicit
and explicit assumptions about competitors. Market signals can add
greatly to a firm’s knowledge of its competitors.
(See also: COMPETITIVE MOVES, GAME THEORY, MARKET DEFENSE)
144
Maslow, ABRAHAM
Maslow, Abraham
Well-known for his needs hierarchy theory of motivation. Unlike many
other behavioral scientists of his time, Maslow did not analyze and study
mental dysfunction. Instead, he tried to seek out and probe the healthiest
minds and best-balanced personalities he could find. Maslow believed in
the innate potential of human beings for goodness and recognized the
importance of developing the human capacity for compassion, creativity,
ethics, love, and spirituality. All people are born with such basic needs
as food and shelter, as well as the emotional yearnings for safety, love,
and self-esteem. But these needs are only the foundation of a pyramid of
higher aspirations. Man yearns for bread when there is no bread. But
when there is plenty of bread and the stomach is full, higher needs
emerge. And when these in turn are satisfied, new and still “higher”
needs emerge, and so on. Maslow believed altruism resulted when lower
order needs have been largely fulfilled in childhood, leading to the development of a healthy character.
(See also: MOTIVATION)
Matrix Structure
A type of organizational structure which attempts to combine the best of
functional and divisional structures. The main advantages of a FUNCTIONAL STRUCTURE are technical specialization and efficiency. The main
advantage of a DIVISIONAL STRUCTURE is sharp business focus. A matrix
structure creates dual reporting relationships. Subordinates are assigned
both to a functional area and a project or product group. Some matrix
structures can be more complicated. For example, in a global corporation a three dimensional matrix structure might involve a functional
manager reporting to the business unit head, country head and the global
head of the function simultaneously. Because of multiple reporting relationships, the matrix structure is inherently more difficult for managers
to handle. So in recent times, companies like ABB have considerably
simplified the complex matrix structures they followed earlier.
(See also: DIVISIONAL STRUCTURE, FUNCTIONAL STRUCTURE, ORGANIZATIONAL STRUCTURE)
Mayo, ELTON AND ROETHLIS BERGER, FRITZ
145
Mayo, Elton and Roethlisberger, Fritz *
Best-known for suggesting that psychological techniques and social interaction hold the key to managing the relationships within social systems and to improve employee morale and productivity.
Roethlisberger and Mayo insisted that behavior of employees was
influenced as much by their role in a work group and their relationship
to their colleagues as by the promise of economic gain. They were
among the first to draw attention to the power of the informal organization.
Mayo traced the root of many problems in the work place to the shift
from the skilled trades of the nineteenth century with their strong community ties, to the rise of unskilled, migrant laborers. Industry had effectively destroyed the self-esteem of skilled tradesmen and was illequipped to deal with the alienation and disaffection of blue-collar
workers, most of whom had been uprooted from their communities.
Together, Mayo and Roethlisberger conducted the famous Hawthorne experiments to study human motivation. The experiments exposed the inadequacy of the piecework system and challenged the assumption that there was a neat correlation between pay levels and
productivity. The experiments also exposed the complex way in which
the relationships between supervisors and workers could affect output.
In the first set of tests, known as the “illustration experiments”,
workers were divided into two groups — a test group in which the
workers were submitted to increasing amounts of light and a control
group, which worked under a constant light intensity. Contrary to expectations, productivity increased in both groups. The workers seemed to be
responding more to the attention they were receiving from management
than to any actual change in working conditions. This response of the
workers was called “the Hawthorne Effect”.
In the last set of investigations, known as the Bank Wiring Observation Room experiments, the room was staffed with 14 workmen, paid
according to a group piecework system. The more components they
turned out, the more money they made. So it was logical to expect that
the most efficient workers would put pressure on the slower workers to
*
From the book The Essence of Competitive Strategy by David Faulkner and
Cliff Bowman, Prentice Hall of India, 2002.
146
McGregor, DOUGLAS
maintain a high level of output. This did not prove to be the case. Instead, the group established an unofficial output norm based on what
was considered a “fair” production quota. Workers who violated the
norm, by producing either too much or too little, were looked down upon by their coworkers. The informal organization dictated the output of
each worker based on its own standards of fairness and the position each
worker occupied within the work group.
In many smaller organizations, many of the rules of the work place
remained implicit, not only the operating rules and standards of performance, but also the rules of communication, that is, to whom one was
supposed to go for help. People were bound together by relations that
had nothing to do with what they were supposed to be doing. These relations seemed to be important, not only for achieving the objectives of the
organization but also for obtaining the cooperation of people.
(See also: MOTIVATION)
McGregor, Douglas
An American psychologist whose book The Human Side of Enterprise
categorized managers into two types: Theory X and Theory Y. Many
managers assume people to be work-shy and motivated primarily by
money. These are Theory X managers. In contrast, Theory Y managers
assume that workers look to gain satisfaction from employment. If
achievement levels are low, managers must ask whether they are providing the right work environment. In other words, the Theory Y manager
assumes that the blame for poor workforce performance lies with the
management rather than the workers themselves.
The Theory X manager assumes the following:




Workers are motivated by money.
Unless supervised closely, workers will under-perform.
Workers will only respect a tough, decisive boss.
Workers have no wish or ability to help make decisions.
The Theory Y manager assumes the following:




Workers seek job satisfaction no less than managers.
If trusted, workers will behave responsibly.
Low performance is due to dull work or poor management.
People have the desire and right to take part in decision making.
McKinsey 7-S FRAMEWORK
147
McGegor was also against the traditional pay-for-performance concept. He was convinced that money could not substitute an environment
that was conducive to motivation. McGregor recognized the tremendous
improvements in working conditions since the turn of the century at all
levels of the corporation. Drawing on Maslow’s hierarchy of needs, he
argued that by satisfying the safety and security needs of its employees,
companies had created higher-order needs. The focus had to shift to satisfying those higher needs.
McGregor’s work is not completely original. Theory X is derived
from the work of F. W. Taylor and from Adam Smith’s notion of “economic man”. Theory Y stems clearly from Mayo’s human relations approach and Maslow’s work on human needs.
(See also: MOTIVATION, MAYO, ELTON AND ROETHLISBERGER, FRITZ)
McKinsey 7-S Framework*
An analytical framework developed by Mckinsey consultants, Richard
Tanner Pascale and Anthony G Athos based on their study of well managed Japanese companies, which looks at seven key aspects of an organization:
1.
2.
3.
4.
5.
*
Strategy:
The path chosen by a company to achieve its goals. How
the organization allocates its resources to achieve its aims.
Structure: Describes the hierarchy of authority and accountability in
an organization. These relationships are frequently indicated in organizational charts and include organization structure, level of centralization, authority and responsibility arrangements.
Skills: The core competences and capabilities of the firms that allow
them to compete in the market.
Systems: Processes used to manage the organization, such as customer satisfaction monitoring system, management information systems, budgetary and other control mechanisms.
Staff: The quality of a firm’s human resources. It refers to how people are developed, trained and motivated.
Tanner Pascale, Richard; and Athos, Anthony G., The Art of Japanese Management: Applications for American Executives, Warner Books, 1982.
148
6.
McNamara, ROBERT S.
Style:
The leadership and operational approach adopted by the management. It also refers to the way in which a company projects itself
to the outside world.
7. Shared Values: Also known as super-ordinate goals. The fundamental
ideas around which a business is built and the things that influence a
group to work together towards a common goal.
(See also: PURPOSE-PROCESS-PRINCIPLE DOCTRINE)
McNamara, Robert S.
Presided over the restructuring of Ford, the US defense department, and
World Bank, and championed a new approach to management that emphasized sophisticated quantitative skills and financial controls.
McNamara did more to advocate a rationalist, quantitative approach to
management than perhaps any single individual since Taylor.
McNamara’s vision encompassed both the need for financial discipline and a belief in the corporate social contract. He was an earnest advocate of safety, environmental responsibility, utility, function, cooperation with government, and accountability to labor.
Thanks to McNamara, systems analysis became a popular latetwentieth century tool of scientific management. It aimed at providing
transparency by making both the analysis, and the underlying assumptions and calculations, available to all interested parties. Yet, as applied
by McNamara, it concentrated power in the hands of a few analytical
experts. McNamara’s bean counters wrested control of planning
from operating executives in both auto manufacturing and the armed
forces.
As time passed, it became clear that tools and techniques could not
make up for poor human judgment. Long after the Vietnam War had
ended, McNamara admitted: “We failed to recognize that in international affairs, as in other aspects of life, there may be problems for which
there are no immediate solutions.”
Merger
Refers to the combination of two companies into one larger company.
Some mergers involve a cash deal while others involve exchange of
shares. A combination of the two is also possible. In many instances
a merger resembles a takeover but results in a new company name
Mintzberg, HENRY
149
(often combining the names of the original companies) and in new
branding.
There can be various types of mergers:



Horizontal Mergers
take place where the two merging companies
both produce similar products in the same industry.
Vertical Mergers occur when two firms, each working at different
stages in the production of the same product, combine together. This
is some kind of a vertical integration.
Conglomerate Mergers take place when the two firms operate in different industries.
Mergers must be carefully planned and implemented. Many mergers
fail to create value for shareholders because synergies identified before
the merger fail to materialize.
(See also: ANTI-TAKEOVER STRATEGY, VALUATION)
Mintzberg, Henry
A leading researcher in the area of strategy, Mintzberg is a professor of strategic management at McGill University, Canada, and also holds a chair at
INSEAD. His philosophy is based on how managers actually create and
implement strategy, rather than how they should supposedly do so.
Mintzberg’s first major input came from studying managers at an
everyday level. He found that whilst the theory was that managers
should be reflective thinkers, the reality was that they were caught up in
action most of the time.
Mintzberg has been a prolific writer with more than 140 articles and
13 books to his name. His seminal book, The Rise and Fall of Strategic
Planning, criticized some contemporary practices of strategic planning
and is recommended reading for anyone who seriously wants to consider
taking on a strategy-making role within an organization. Mintzberg argues that conventional planning processes are inappropriate to the more
fluid decision-making processes characteristic of most organizations.
Along with Joseph Lampel and Bruce Ahlstrand, Mintzberg coauthored Strategy Safari, which likens the various schools of strategy to
the different kinds of animals which one would literally see, if one were
on a safari.
150
Mission
Mintzberg’s recently published book, Managers Not MBAs, outlines
what he believes to be wrong with management education today and
how obsession with numbers and viewing management as a science actually can damage the discipline of management.
Mission
The fundamental purpose that sets a firm apart from other firms of its
type and identifies the scope of its operations in product and market
terms. Mission embodies the business philosophy of the firm, conveys
its corporate image, indicates the firm’s principal product or service areas, and the primary customer needs the firm will attempt to satisfy. In
short, the mission statement describes the firm’s business in product,
market, and technological terms.
According to King & Cleland*, a well-designed company mission
must accomplish the following:
1.
2.
3.
4.
Ensure unanimity of purpose within the organization.
Provide a basis for using the organization’s resources.
Establish a general tone or organizational climate.
Serve as a focal point for those who can identify with the organization’s purpose and direction and weed out people who cannot do so.
5. Facilitate the translation of objectives and goals into a work structure
involving the assignment of tasks to responsible people within the
organization.
6. Specify the organizational purpose, and the translation of this purpose into goals in such a way that cost, time and performance parameters can be assessed and controlled.
A mission statement ensures that all employees are working towards
a common purpose, enables employees to identify better with the organization, and serves to state explicitly or implicitly the organization’s beliefs, values and aspirations.
In contrast, a VISION is a broad indication of the organization’s intentions. The ideas and ideals embodied in the vision are often too lofty.
*
See John A. Pearce and Richard Robinson Jr., Strategic Management — Formulation, Implementation and Control, McGraw-Hill International Edition,
2002.
Motivation
151
Vision is also often unwritten. A vision becomes tangible when it is expressed in the form of a mission statement.
(See also: CORPORATE PURPOSE)
Motivation
Defined variously as the will to work due to enjoyment of the work itself
or anything that leads people to achieve more than they would otherwise
do. Motivation theories hold that a motivated workforce is the key to any
organization’s success. Probably the best known theory of motivation is
the one developed by Abraham MASLOW, a behavioral scientist who proposed the Hierarchy of Needs theory in 1954. According to Maslow,
human beings are motivated by unsatisfied needs. Lower needs need to
be satisfied before the higher ones become important. When “deficiency
needs” are met, other higher needs emerge and when these in turn are
satisfied, new (and still higher) needs emerge, and so on.





Physiological Needs:
Physiological needs are basic needs such as air,
water, food, and sex. When these are not satisfied, we feel pain and
discomfort.
Safety Needs: Comfort and security come next. After the basic requirements of survival are met, we naturally want to preserve and enhance what we have. We think of the security of home and family.
Social Needs: Love and belongingness follow. All of us have a desire
to belong to groups; clubs, work groups, religious groups, family, etc.
We want to be loved and accepted by others.
Esteem Needs: There are two types of esteem needs. First is selfesteem, which results from competence or mastery of a task. Second
is the need for attention and recognition from others. Holding senior
posts in organizations and an opportunity to lead initiatives are some
sources of self-esteem for most people.
Self Actualization: In this stage, people seek knowledge, peace, selffulfillment and salvation.
The basic problem with Maslow’s model is that people may simultaneously have different kinds of needs, instead of moving sequentially
from one to the next. Moreover for many people caught in poverty, especially in third world countries, lower order needs may not be satisfied
during an entire lifetime. So the question of self-actualization simp-
152
Multi DOMESTIC INDUSTRY
lydoes not arise. Then there are people who are always greedy for more
money, despite being very wealthy!
In 1969, Clayton Alderfer improvised on Maslow’s hierarchy of
needs, with his ERG theory (Existence, Relatedness and Growth). Alderfer put the lower order needs, physiological and safety, into the existence
category. He fit Maslow’s interpersonal love and esteem needs into the
relatedness category. The growth category contained the self actualization and self esteem needs. According to the ERG theory, more than one
need may be operational at the same time. People can move on to a
higher order need even without substantially satisfying their lower order
needs. For instance, an artist may want to satisfy his basic needs like
hunger and shelter, but may be simultaneously interested in his growth
as an artist. If a higher-order need is frustrated, an individual may regress towards a lower-order need which appears easier to satisfy. This is
known as the frustration-regression principle. Thus if social needs are
not satisfied, an employee might start concentrating on making more
money. This might happen, for example, if a deserving middle manager
is denied a promotion for a long time.
Another landmark in the body of knowledge about motivation is Herzberg’s two-factor theory of job satisfaction. Every organization has a set
of HYGIENE FACTORS like working conditions, salary, etc. The absence of
hygiene factors creates employee dissatisfaction but their presence does
not improve satisfaction. HERZBERG found five factors in particular that
were strong determinants of job satisfaction: achievement, recognition, the
work itself, responsibility, and advancement. Motivators have a long-term
positive impact on job performance. In contrast, hygiene factors produce
only short-term changes in job attitudes and performance.
Another theory proposed by Vroom is that motivation depends on
employee expectations about the outcome of their efforts. If people
know what they want from an outcome, and believe they can achieve it,
they will be highly motivated to work towards the goal. This theory contrasts with Maslow and Herzberg’s emphasis on people’s needs.
Multi Domestic Industry
An industry in which the competition within the industry is essentially
segmented from country to country. Competitive strategies in one country are largely independent of those in other countries. Typically, these
Murphy’s LAW
153
are industries where economies of scale are less important and the need
for local customization is more critical, or where freight costs are significant. The cement industry is a good example.
(See also: GLOBAL INDUSTRY)
Murphy’s Law
A popular maxim most commonly formulated as “Anything that can go
wrong will go wrong”. The law is named after Major Edward A. Murphy, Jr., a development engineer who worked for a brief period of time
on rocket sled experiments conducted by the United States Air Force in
1949.
154
Nearshoring
N
Nearshoring
The practice of outsourcing activities to locations which may not be the
cheapest but are reasonably close so that coordination is easier. Eastern
Europe is a nearshoring destination for many companies in the US.
(See also: OFFSHORING, OUTSOURCING)
Net Present Value (NPV)
A standard tool used in capital budgeting. According to the NPV method, a potential investment project should be undertaken if the present
value of all cash inflows minus the present value of all cash outflows
(which equals the net present value) is greater than zero. The discount
rate used is the shareholder’s required rate of return. Managers should
undertake only those projects that have an NPV greater than zero. If two
projects are mutually exclusive, they should choose the one with the
higher NPV.
(See also: ADJUSTED PRESENT VALUE)
Nine-Cell Planning Grid
A planning framework developed by General Electric (GE), the ninecell planning grid to some extent, overcomes the limitations of the BCG
GROWTH-SHARE MATRIX. In the GE grid, each business is rated low, medium or high on two major dimensions — market attractiveness and
business strength. There are nine cells into which businesses can be
grouped based on these two dimensions.
Not-Invented -Here
155
Not-Invented-Here
A phrase used to describe the difficulties managers have in accepting an
idea or a concept or a product developed by another department or organization. It is a term used to describe a culture that finds it difficult to
accept that outsiders can either be better or know more.
156
Offshoring
O
Offshoring
The increasing trend towards locating non-core activities in distant locations to take advantage of lower costs and skilled manpower. This theme
has been well covered in Thomas Friedman’s much talked-about book,
The Earth is Flat. John Hagel III* and John Seely Brown† have identified four broad waves in the evolution of offshoring:




Locating operations offshore to facilitate cost arbitrage.
Locating operations offshore to gain access to distinctive skills.
Locating operations offshore to target the unique and demanding
needs of emerging markets.
Using emerging markets as a base from which innovative products
and services can be developed for the global markets.
Two strategic challenges are involved in offshoring. The company
must be able to define clearly the scope and contours of its business. The
company must also develop the capabilities and master the techniques
needed to access and leverage the expertise of partners.
(See also: NEARSHORING, OUTSOURCING)
Ohmae, Kenichi
A former Mckinsey consultant, well known for his work on strategy in
general, and globalization in particular. Ohmae’s famous books include
Mind of the Strategist, Borderless World, End of the Nation State, and
The Next Global Stage: Challenges and Opportunities in Our Borderless
World. Ohmae has also published several thought provoking articles in
leading journals, such as Harvard Business Review.
*
John Hagel III is an independent Management consultant and an author. He
has written several famous management books.
†
John Seely Brown was formerly the Chief Scientist of Xerox Corporation and the
director of its Palo Alto Research Center (PARC).
Oligopoly
157
Oligopoly
A market which is dominated by a small number of sellers. The word is
derived from the Greek for few sellers. As there are few participants,
each seller is aware of the actions of others. The decisions of one seller
influence, and are influenced by, the decisions of other sellers. Strategic
planning by oligopolists must take into account the likely responses of
the other market participants. An oligopoly can be quantified using the
four-firm concentration ratio which calculates the percentage of market
share accounted for by the four largest firms in an industry. Using this
measure, an oligopoly may be defined as a market in which the four-firm
concentration ratio is above, say, 40%. The HERFINDAL INDEX is another
useful measure.
In industrialized countries, oligopolies are found in many sectors of
the economy such as cars, consumer goods and steel. In regulated markets such as wireless communications, the state often licenses only two
or three providers of cellular phone services, effectively creating an oligopoly. The well-known marketing scholar, Jagdish Sheth* has coined
the rule of three which holds that in many industries, equilibrium is
reached when there are three main players.
Oligopolistic competition can result in various outcomes. Firms may
collude to raise prices and restrict production in the same way as a monopoly. In some industries, there may be an acknowledged market leader
who informally sets prices to which other producers respond. In other
situations, competition between sellers can be fierce, with relatively low
prices and high production. This can lead to an efficient outcome approaching perfect competition. Competition would be less if the firms
are regional and do not compete directly with each other.
Oligopsony by contrast is a type of market in which the number of
buyers are small while the number of sellers is large. A small number of
firms compete to control the inputs of production.
(See also: GAME THEORY)
*
Sheth, Jagdish and Sisodia, Rajendra, The Rule of Three: Surviving and Thriving in Competitive Markets, The Free Press, 2002.
158
Operating STRATEGIES
Operating Strategies
Day to day actions that need to be aligned with the firm’s long term objectives. These may include sales planning, production scheduling,
working capital management, inventory management, etc.
(See also: FUNCTIONAL STRATEGY)
Opportunity Cost
Cost of the opportunity foregone. Most decisions involve an opportunity
cost. When resources are committed somewhere, some other area is
starved of them. Opportunity costs must be considered while taking decisions.
Optimizing Planning
An approach which believes in achieving the best possible outcome,
using mathematical models. An optimizer tries to either minimize the
resources required for a given level of performance or to maximize the
performance given a certain level of resources, or to obtain the best balance between resources consumed and performance.
(See also: ACKOFF, RUSSELL)
Organic Growth
Expansion from within the firm, i.e. not as a result of acquisitions. Organic growth is likely to be steady, even slow, but very secure. That is
why some CEOs consider it the most “precious” form of growth. In contrast, growth by acquisitions tends to be risky and often fails to add value
for shareholders.
Organizational Behavior
Organizational behavior is the study of what people think, feel and do in
and around organizations. It explores individual emotions and behavior,
team dynamics and the systems and structures of organizations. Organizational behavior attempts to provide an understanding of the factors
necessary for managers to create an organization that is more effective
than its competitors.
(See also: ORGANIZATIONAL DEVELOPMENT)
Organizational CULTURE
159
Organizational Chart
A visual representation of an organization structure. It identifies the organizational unit and indicates each position in relation to others. Positions are usually represented by squares or rectangles (although circles
or ovals are sometimes used) that contain the position title. They may
show the name of the incumbent as well. Each position is connected by a
solid line running to the immediate supervisor and to positions supervised, if any. Broken or dotted lines may be used to show other than reporting relationships, e.g. advisory or functional.
(See also: ORGANIZATIONAL DESIGN, ORGANIZATIONAL STRUCTURE)
Organizational Culture
Accepted and important beliefs and values of people within an organization. Culture tells employees what is accepted and what is not, what is
important and what is not. Culture implicitly makes employees set priorities. Culture develops over time, as people get exposed to problems and
160
Organizational CULTURE
find ways to solve them. Leadership plays an important role in shaping
culture.
Culture is the knowledge used by people to interpret experiences, set
priorities and guide their behavior. The beliefs and values of employees
form the core of organizational culture. Culture is acquired by learning
and experience and is shaped by various organizational influences. For
example, in some companies employees are encouraged to take risk,
while playing safe is the accepted norm in others. In some companies,
the work environment may be very informal with people operating on a
first name basis, while in others it can be very formal with great importance being attached to seniority, designation, etc. Some cultures lay
a premium on getting the work done while others attach equal, if not
more, importance to how the work is done. For example, giving bribes to
government officials, something very common in a country like India to
get work done, is strictly prohibited in India’s Tata group.
Geert Hofstede, the famous Dutch scholar has identified four wellknown dimensions of culture:
1.
Power Distance:
2.
Uncertainty Avoidance:
The extent to which employees feel that power is
unevenly distributed across various levels of the organization from
the top to the bottom. Power distance tends to be less in knowledge
intensive industries such as computer software. In such industries,
individual expertise is as important as seniority and designation.
The extent to which people feel threatened by
uncertainty.
3.
Individualism:
4.
Masculinity:
The tendency of people to be self-centered as opposed
to collectivism where people care for each other. Individualism is a
typical cultural trait found in investment banks. Americans are considered to be more individualistic as compared to the Japanese.
Refers to a strong emphasis on success, money and material objects as opposed to femininity, which emphasizes caring for
others and quality of life. For example, academic institutions have a
feminine culture. Scandinavian countries in general have a feminine
culture. Japan has a masculine culture where the desire to be a high
performer in the work place often leads to burn out, or Karoshi.
Organizational DESIGN
161
Organizational Design
How individuals are grouped and their tasks structured within the organization. Designing organizations is a complex exercise. According to
Harvard Business School professor Robert Simons*, organization design
must take into account the company’s strategy, its competitive environment, stage of the lifecycle and various other factors. In short, it is a fine
balancing act.
Organizational design receives little attention in the early days of a
firm. But over time, problems emerge as the charisma of the founders
becomes insufficient to manage a larger enterprise. Systems and processes become important. This is when a functional structure is typically
chosen. When the functional structure becomes inadequate to respond to
needs of the market place because of centralized decision making, a divisional structure becomes necessary. But with time, a divisional structure leads to fiefdoms. Coordination becomes difficult, resources are
wasted, knowledge sharing does not happen effectively and profitability
declines. Often at such a juncture, headquarters may take control. But
this leads to red tape, decision making slows down and pressure builds
for simplifying the organization, divesting non-core businesses and removing red tape. In short, organizational design is a dynamic concept.
The design should change in line with the company’s circumstances.
Designing organizations that can adapt over time effectively means
learning to reconcile the tensions between:




Strategy and structure;
Accountability and adaptability;
Ladders and rings; and
Self-interest and mission success.
Managers must design organizations to implement the current strategy and also allow new ideas to flow that will feed into tomorrow’s strategies. Structure determines how information from the market is processed and acted upon. Thus structure determines strategy and strategy
determines structure in an interdependent fashion. Accountability is at
the heart of organization design. While people must be answerable for
performance on some measured dimension, they should not be discouraged from experimenting and working on new ideas. An effective organ*
Simons, Robert, “How Risky is Your Company?”, Harvard Business Review,
May-June 1999, pp. 85-94.
162
Organizational DEVELOPMENT (OD)
ization structure must not only take into account the ladders (vertical
hierarchy) but also the rings (horizontal networks). Human behavior is a
critical design variable. Organization design must promote the kind of
behavior that strikes the right balance between aspirations of employees
and organizational needs.
The basic building blocks of any organization structure are market
facing units and core operating units. Market facing units gather market
data about customers, competitors, opportunities and threats. Responsiveness must drive the design of market facing units. This responsiveness must be balanced by efficiency elsewhere. It is the job of the back
office functions to do just that. Managers of these functions are responsible for standardizing work processes, applying best practices to the
firm’s internal operations and ensuring efficiency through economies of
scale and scope. Scarce resources must be distributed optimally between
the market facing and operating core units.
Till recently, organization design essentially amounted to a trade-off
between responsiveness and efficiency. Information technology (IT) is
facilitating higher efficiency with an acceptable level of responsiveness
as IT can forge very close links with customers. Dell is a good example
of this.
(See also: ORGANIZATIONAL STRUCTURE)
Organizational Development (OD)
The field of organizational development (OD) is concerned with the performance, development, and effectiveness of human organizations. According to Warren Bennis, OD aims at changing the beliefs, attitudes,
values, and structure of organizations so that they can better adapt to
new technologies, markets, and challenges. OD involves organizational
reflection, system improvement, planning, and self-analysis. OD helps
an organization to develop its internal capacity to be the most effective
with respect to its chosen line of business and to sustain itself over the
long term.
(See also: ORGANIZATIONAL BEHAVIOR)
Organizational Inertia
Inability to change and adapt to the external business environment is
called organizational inertia. Many organizations struggle to cope with
Organizational MAPPING
163
the pace of change. They do not recognize that competition has increased, or that the company’s products are no longer as distinctive or
superior or as much in demand as in the past. Inertia is dangerous under
the following circumstances.










Competing or substitute products have come onto the market.
Technology is changing rapidly.
Customer preferences are undergoing a major change.
Substitute products are driving down prices and threatening to take
current and potential customers.
Products are maturing, resulting in reduced prices, market saturation
and risk to brand reputation.
Social upheavals are taking place.
Political developments are leading to regulatory changes, lowering
the barriers to entry.
A significant new competitor has arrived.
Rising exit barriers have resulted in intensifying competition, in the
face of falling sales.
The company is no longer strong either in product differentiation or
cost leadership.
(See also: CHANGE MANAGEMENT)
Organizational Learning
Continuous modification of behavior by an organization in line with
changes in its environment. Learning begins with observation, reflecting
on the observation and assessing the underlying factors that drive behavior. Learning is a continuous process. Reflection and action combine to
produce learning. A learning organization is good at creating and acquiring knowledge, and at modifying its behavior to reflect new knowledge
and insights. Learning organizations make conscious attempts to improve productivity, effectiveness and performance on an ongoing basis.
The greater the uncertainties in the external environment, the greater the
need for learning.
Organizational Mapping
A well-known technique for understanding how people, departments,
customers and other functions in the organization interact. Mapping allows us to examine a business process clearly. It uncovers weaknesses in
164
Organizational STRUCTURE
structure that may need to be resolved. It identifies bottlenecks, barriers
and errors and creates a map of the ideal process to put in place and implement improvement plans. Process mapping is particularly effective in
determining breakdowns in communication and information sharing.
Process mapping helps in improving existing processes and identifying
new processes that will increase efficiency and effectiveness.
(See also: BUSINESS PROCESS REENGINEERING)
Organizational Structure
The way activities are grouped in an organization. Structure promotes
specialization, defines roles more clearly, and facilitates efficient execution of day-to-day tasks. However, a rigid structure may reduce flexibility and create watertight compartments that stand in the way of
knowledge sharing and innovation. The organizational structure should
be sufficiently flexible so that people from different departments can
come together to discuss new ideas and solve complex problems. Indeed, the ability to form and dismantle cross-functional task forces at
short notice can be a key competitive advantage in a dynamic environment.
(See also: ORGANIZATIONAL DESIGN)
Outsourcing
Essentially the delegation of non-core operations or jobs to an external
entity, such as a subcontractor, that specializes in that operation. Outsourcing often aims at lowering costs or sharpening the focus on competencies. A related term, OFFSHORING, means transferring work to another
country. Outsourcing has taken off in a big way in recent times thanks to
the availability of information and communications technology that facilitates effective coordination of geographically dispersed activities.
(See also: DYNAMIC SPECIALIZATION, NEARSHORING, PROCESS NETWORKS)
Overheads
The costs incurred in addition to the direct costs of manufacturing or of
providing services. As organizations grow in size, overheads tend to
increase. Attacking overheads is usually an integral part of most corporate restructuring activities.
Overheads
(See also: ACTIVITY BASED COSTING)
165
166
Palepu, KRISHNA G.
P
Palepu, Krishna G.
A well-known faculty at the Harvard Business School, Palepu’s research
and teaching activities have focused on strategy and governance. He has
published numerous academic- and practitioner-oriented articles and
case studies on these issues. His recent focus has been on the globalization of emerging markets, particularly India and China. In the area of
corporate governance, Palepu’s work focuses on how to make corporate
boards more effective, and on improving corporate disclosure. Palepu
has been on the editorial boards of leading academic journals, and has
served as a consultant to a wide variety of businesses. Two articles
written jointly with Tarun Khanna, “The Right Way to Restructure
Conglomerates in Emerging Markets,” and “Why Focused Strategies
May be Wrong for Emerging Markets” are widely cited in the literature.
(See also: KHANNA, TARUN)
Pareto’s Principle
The Pareto principle (also known as the 80-20 rule, the law of the vital
few and the principle of factor sparsity) states that for many phenomena,
80% of the consequences stem from 20% of the causes. What Pareto’s
Principle tells us is that we must focus on the right areas to get results.
The principle is named after Italian economist Vilfredo Pareto who
observed that 80% of income in Italy was received by 20% of the Italian
population. In marketing, 20% of clients are responsible for 80% of sales
volume. In many processes, 80% of the resources are typically used by
20% of the operations. Sometimes, 80-20 may even become 90-10.
Thus, in software engineering, 90% of the execution time of a computer
program is spent executing 10% of the code.
Pareto’s Principle helps focus management attention on critical areas.
It is the basis for the Pareto chart, one of the key tools used in TOTAL
QUALITY CONTROL and SIX SIGMA. The Pareto Principle serves as a base-
Personal EFFECTIVENESS
167
line for ABC-analysis and XYZ-analysis, widely used in logistics and
procurement for the purpose of optimizing inventory and order quantity.
The principle of TIPPING POINT, coined by Malcolm Gladwell can be
considered to be an extreme version of the 80-20 principle.
Parkinson’s Law
A startlingly insightful formulation which states that “work expands so
as to fill the time available for its completion”. A more succinct phrasing
also commonly used is that “work expands to fill the time available”.
First articulated by C. Northcote Parkinson in an article published in The
Economist in 1955 and later reprinted together with other essays in his
book Parkinson’s Law: The Pursuit of Progress, it was based on the
author’s extensive experience in the British Civil Service. In many offices, work expands and fills up the time available for its completion. Thus,
people look busy even when they are not doing any useful work.
Parkinson’s Law could be even more generalized as: “The demand
upon a resource always expands to match its available supply.”
Personal Effectiveness
Not just a measure of practical knowledge or skills in a functional area
such as human relations, marketing, or information and communications
technologies. Personal effectiveness is also about soft issues such as
time management, stress management and inter personal skills. Personal
effectiveness separates the men from the boys in the workplace.
Stephen Covey’s seven habits provide a simple-easy-to-understand-anduse framework of personal effectiveness.



Be Proactive:
People are responsible for their own choices and have
the freedom to make decisions based on principles and values rather
than on moods or conditions.
Begin with the End in Mind: Individuals, families, teams and
organizations must have a clear purpose in mind. They must identify
and commit themselves to the principles, relationships and purposes
that matter most to them.
Put First Things First: Putting first things first means focusing on the
most important priorities. Whatever the circumstances, living and being driven by values and key principles is important.
168




PEST ANALYSIS
Think Win-win:
Thinking win-win is a frame of mind and heart that
seeks mutual benefit and mutual respect in all interactions. Instead of
thinking selfishly or like a loser, people should learn to think in terms
of “we”, not “me”.
Seek First to Understand, then to be Understood: Listening with the
intent to understand others is the essence of communication and relationship building. Opportunities to speak openly and to be understood
come much more naturally and easily. Seeking to understand takes
consideration; seeking to be understood takes courage. Both consideration and courage are important.
Synergize: Synergize means realizing that a third way is better than
what each party can come up with individually. It’s the fruit of respecting, valuing and even celebrating one another’s differences. It’s
about solving problems, seizing opportunities and working out differences. Synergy is also the key to any effective team or relationship.
Sharpen the Saw: Sharpening the saw means constant renewal in the
four basic areas of life: physical, social / emotional, mental and spiritual.
PEST Analysis
A framework, introduced by Steiner and Andrews, for analyzing an organization’s external environment. Various political, economic, social
and technological trends are identified to formulate and implement strategies:




Political factors include government regulations and legal issues pertaining to tax, employment, environment, trade, etc.
Economic factors include economic growth, interest rates, exchange
rates, inflation rates, etc.
Social factors include health consciousness, population growth rate,
age distribution, career attitudes, emphasis on safety, attitudes to foreign products and services and average life of human beings.
Technological factors include R&D activity, automation, rate of
technological change, etc.
(See also: ENVIRONMENTAL SCANNING)
Platform LEADERSHIP
169
Peter PrincipleAccording to Dr. Laurence J Peter*, in any hierarchy
employees tend to rise to their level of incompetence. Thus, excellent
motor mechanics after being promoted become second-rate foremen and
fine teachers become incompetent school heads. Peter pointed out that
the main criterion for gaining promotion is success. So competence is
rewarded with promotion until the individuals rise to a hierarchy level
where they can no longer cope. On arriving at this level of incompetence, the employees become frustrated, stressed and ineffective. The
key message is that promotions should not only take into account current
performance but also the potential for performance in a future role.
Platform Leadership†
A strategic concept introduced by Annabelle Gower and Michael Cusumano‡. In the initial phase of many industries, the early movers tend to
develop most of the components necessary to make the products. But
later, specialized firms typically emerge to develop different components. Along with components, evolve platforms, which consist of various components made by different companies. Some companies become
platform leaders. They ensure the integrity of the platform by working
closely with other firms to create initial applications and then new generations of complementary products.
Platform leaders create interfaces to entice other firms to use them to
build products that conform to the defined standards and therefore work
efficiently with the platform. It is in the interest of a platform leader to
stimulate innovation on complementary products. The more people who
use these complements, the more incentives there are for producers of
complements to introduce such products. This in turn motivates more
*
Laurence Peter (1919 - 1990) was an educator and “hierarchiologist”, best
known to the general public for the formulation of the Peter Principle.
†
Cusumano, Michael A. and Gawer, Annabelle, Platform Leadership: How
Intel, Microsoft, and Cisco Drive Industry Innovation, HBS Press, 2002.
‡
Michael A. Cusumano is the Sloan Management Review Distinguished Professor at the Massachusetts Institute of Technology's Sloan School of Management. He specializes in strategy, product development, and entrepreneurship in
the computer software industry, as well as automobiles and consumer electronics.
170
Platform LEADERSHIP
people to buy or use the core product, stimulating more innovation, and
so on.
Wars about standards are an integral part of platform strategies. What
matters is overall performance. The platform need not be superior to the
competition in all product features. Windows, particularly the early versions, wasn’t technically superior to the Macintosh, nor were Matsushita’s VHS video recorders superior to Sony’s Betamax. But in each case
the network as a whole delivered more.
Defining the architecture of a system product is a powerful way of
raising entry barriers for potential competitors. A potential competitor to
Intel not only has to invent a microprocessor with a better priceperformance ratio but also rally complementors and original equipment
manufacturers (OEMs) to adapt their designs to this component. This
would obviously involve huge switching costs. Platform leaders must
also be able to maintain architectural control over its platform, by making an ongoing assessment of their existing capabilities and the direction
in which the industry or technology is evolving.
Platform leaders need to pursue at least two objectives simultaneously:


First, they must try to obtain consensus among key complementors
with regard to the technical specifications and standards that make
their platforms work with other products.
Second, they must control critical design decisions at other firms that
affect how well the platform and complements continue to work together through new product generations.
A platform leader must play the role of industry enabler by encouraging innovations that improve the platform. The platform leader sometimes has to make decisions that might hurt some partners, even if they
have been complementors in the past.
To gain the trust of third parties, platform leaders must act and be
seen to act fairly. They need to establish credibility in technical areas
where they want to influence future designs or standards. They must
make potential complementors feel comfortable that the decisions are
being taken in the interest of the whole industry.
Platform leaders usually emerge through the mechanisms of the marketplace, rather than through some magical process. A high market share
Porter, MICHAEL E.
171
and a high degree of innovative capabilities alone do not suffice. A platform leader must have the vision and the organizational capabilities to
engage complementors to innovate and improve the platform. Such a
vision is grounded in the belief that the power of a system is greater than
the sum of its parts.
Poison Pill
An ANTI-TAKEOVER STRATEGY in which the threatened company does
things that would represent a long-term drain on the resources of the
bidder. As a consequence, the bidder may decide against swallowing up
the poisoned pill (company), and give up the bid. An example of a poison pill is giving staff employment contracts with a three-year notice of
termination clause. This would significantly increase the cost of taking
over and restructuring the firm for a bidder.
Policies
Rules and guidelines to supplement functional strategies. Policies guide
the thinking and decisions of managers while implementing the firm’s
strategies. Policies serve as specific guides for lower level managers in
taking operating decisions.
(See also: FUNCTIONAL STRATEGY)
Political Risk
A term typically used to describe the possibility of loss when investing
in a foreign country, because of various factors — changes in the country’s political structure or policies, such as tax laws, tariffs, expropriation
of assets, restrictions imposed on repatriation of profits, tightened foreign exchange repatriation rules, or increased credit risk due to changes
in government policies.
(See also: COUNTRY RISK)
Porter, Michael E.
Arguably the most famous contemporary strategy guru in the world.
Porter’s FIVE FORCES MODEL and GENERIC STRATEGIES, COST LEADERSHIP
DIFFERENTIATION and FOCUS have become the standard reference point
for management students, research scholars and practitioners world
wide.
172
Porter, MICHAEL E.
Porter’s approach to STRATEGIC PLANNING has been referred to as the
positioning school which holds that a firm’s performance is largely determined by how it is positioned vis-à-vis various forces in the external
environment. Porter has also written about the competitive advantage of
nations and the linkages between corporate strategy and corporate
philanthrophy. Porter’s writings carry deep insights. Though researchers
have pointed out the limitations of Porter’s work from time to time,
many of the principles developed by Porter remain as relevant as ever. In
terms of ability to put together a body of knowledge based on a conceptually elegant framework, few scholars in the area of strategy have been
able to rival Porter so far.
Porter’s five forces model addresses the question of why some industries are more attractive than others. The five forces identified by Porter
are:
1.
2.
3.
4.
5.
The bargaining power of the buyers.
Entry barriers.
Competitive rivalry.
Substitutes.
The bargaining power of the sellers.
The model guides companies in:




Prioritizing markets according to their inherent attractiveness.
Understanding the critical success factors in the market.
Providing insights for the criteria by which a company can judge itself against competitors.
Generating ideas for changing the rules of the game.
Porter has also developed the concept of value chain. The
into various components:
VALUE
CHAIN splits a company operations






In-bound logistics.
Manufacturing.
Service.
Sales and marketing.
Administration.
Out-bound logistics.
Essentially, the value chain concept explains how value is created in
a business. It draws attention to the internal choices which a company
Positioning
173
makes in determining how it is going to compete. In recent years this has
begun to be called “the business model” — to indicate that it is specific
to a particular business.
According to Porter, companies must compete on one of three
planks: differentiation, cost leadership, and focus. Porter calls these generic strategies.
DIFFERENTIATION means a company sets out to add more value to
target customers (perceived and real) than competitors do.
COST LEADERSHIP means a company achieves parity of value with
competitors, but at a lower cost.
A FOCUS strategy involves concentrating only on a small segment of
target customers and their specific needs. Such a strategy aims at leveraging the advantage of specialization, either through cost control or superior customization while serving a narrowly defined customer segment.
A company must choose one generic strategy, otherwise it will get
stuck in the middle.
(See also: COMPETITIVE ADVANTAGE, COMPETITIVE STRATEGY, VALUE
CHAIN)
Positioning
The process of creating and maintaining a distinctive place in the market
for an organization and / or its individual brands. The aim is to steal a
march on competitors by offering something different. This is also often
called unique selling proposition.
To be effective, the differences must be important, relevant, noticed
and understood by consumers. The perceptions of consumers play a key
role in the positioning process. Positioning may erode over time as competitors copy or improve upon the points of difference, or as the needs of
the target audience change. In such circumstances, an organization may
have to reposition itself. Positioning is all too often defined very narrowly, with a sole focus on distinctive product attributes that offer benefits
to consumers. What is forgotten is that many organizations and / or
brands succeed in the market place because of advantages other than
those based on product differences, such as supply chain and organizational capabilities. Repositioning can be done on these planks as well.
174
Price / EARNINGS RATIO (P / E)
Price / Earnings Ratio (P / E)
The ratio of the market price of a company’s share to its earnings per
share. It is an indication of how the market expects the company to perform in the future. A high P / E generally implies the company is expected to do well.
Process Innovation
A process can be viewed as a set of activities designed to produce a
specified output for a particular customer or market. Thus a manufacturing firm has various processes such as product development, customer
acquisition, procurement, manufacturing, logistics, after sales service,
information management, human resources management and planning.
Process innovation implies creating a significant improvement in one or
more of these processes. Process innovation begins with a good
understanding of who the customers are and what they expect from it.
Process innovation must not be confused with process improvement
which is incremental in nature. Process improvements take the existing
process as given, but process innovations question its basic assumptions.
Michael Hammer* uses the term operational innovation which for all
practical purposes refers to process innovation. As he puts it, “Operational innovation should not be confused with operational improvement
or operational excellence. These terms refer to achieving high performance via existing modes of operation ensuring that work is done as it
ought to be to reduce errors, costs and delays but without fundamentally
changing how that work gets accomplished. Operational innovation
means coming up with entirely new ways of filling orders, developing
products, providing customer service or doing any other activity that an
enterprise performs.”
Successful process innovations typically demand technological and
organizational enablers. While information technology has driven many
process innovations in recent times, there are various other drivers that
must not be ignored. For example, the concept of LEAN MANUFACTURING
pioneered by Toyota, is driven more by common sense and a new mindset than by technology.
*
Hammer, Michael. “Deep Change”, Harvard Business Review, April 2004,
pp. 84-93.
Process INNOVATION
175
Process innovation must begin with the identification of processes
that are ripe candidates for innovation. Focusing on those processes
which require immediate improvement makes sense because, as in any
other change initiative, quick results will build the momentum. If the
company is striving for incremental improvement, it is sufficient to work
with many narrowly defined processes. But when the objective is radical
process change, a process must be defined as broadly as possible. A
company like Toyota has been able to get well ahead of competitors by
ongoing improvements in all aspects of operations including procurement, manufacturing, vendor management and logistics.
According to Davenport*, four criteria can be used to guide process
selection:
1.
Centrality of the Process:
The processes that are most central to accomplishing the organization’s goals must be selected.
2. Process Health: Processes that are currently problematic and in obvious need of improvement must be chosen.
3. Process Qualification: The cultural and political climate of a target
process must be guaged. Only processes that have a committed sponsor and exhibit a pressing business need for improvement must be selected.
4. Manageable Project Scope: The process must be defined in such a
way that the project scope is manageable.
Information can play a number of supporting roles in a company’s
efforts to make processes more efficient and effective. Just the addition
of information to a process can sometimes lead to radical performance
improvements. Information can also be used to measure and monitor
process performance, integrate activities within and across processes,
customize processes for particular customers, and facilitate longer-term
planning and process optimization. Information can also be used to better integrate process activities both within a process and across multiple
processes.
Davenport has listed nine different ways of supporting process innovation with information technology (IT):
*
Devenpart, Thoms H., Process Innovation — Reengineering Work through
Information Technology, Harvard Business School Press, 1993.
176
1.
2.
3.
4.
5.
6.
7.
8.
9.
Process LIFE CYCLE
Automational:
IT can be used to automate several processes.
IT can be used within a process to capture information
about process performance and to improve it.
Analytical: In processes that involve analysis of information, IT can
make the decision-making process more efficient and effective.
Sequential: IT can enable changes in the sequence of processes or
transform a process from sequential to parallel in order to reduce process cycle-time.
Tracking: Effective execution of some process designs, notably those
employed by firms in the transportation and logistics industries, requires a high degree of monitoring and tracking. IT can play a key
role here.
Geographical: A key benefit of IT is the ability to overcome geographical barriers.
Integrative: More and more companies are finding it difficult to radically improve process performance for highly segmented tasks split
across many jobs. IT can help integrate various aspects of a product
or service delivery process.
Intellectual: Many companies are increasingly using IT to capture
and disseminate knowledge.
Disintermediating: In some industries, human intermediaries are inefficient for passing information between parties. This is particularly so
in case of transactions such as stock brokerage or parts location. IT
can play a key role here.
(See also: INNOVATION, PRODUCT INNOVATION)
Informational:
Process Life Cycle
Just like the product life cycle, there is also a process life cycle. During the
formative period of a new product, the manufacturing processes are usually crude and inefficient. Typically, such processes employ skilled labor
working with general-purpose machinery and tools. There are no specialized tools or machines. It is the product itself at this point that matters. But
processes tend to improve as the rate of product innovation decreases.
Finally, when an industry standard is determined, products are likely to
become similar in terms of functions and features. Incremental changes in
products made by competitors will tend to be copied rapidly. Under these
circumstances, processes hold the key to stealing a march on competitors.
Product INNOVATION
177
(See also: PRODUCT LIFE CYCLE)
Process Networks
A useful mechanism for facilitating knowledge transfer across organizations. According to John Hagel III and John Seely Brown*, world class
companies leverage such networks to gain more flexible access to specialized capabilities on a global scale. Process networks seek to coordinate activities across multiple tiers of enterprises within a business process. These networks attempt to ensure that resources are flexibly provided in response to specific market demand. Such networks are characterized by loose coupling and require formal orchestrators to function
effectively. Relatively independent modules of activity are designated,
with clear ownership and accountability for each module. The performance levels that each module must meet at the interfaces connecting it
with other modules are defined. Module owners can make improvements so long as they comply with the performance requirements. Process networks are not only more scalable but are also more effective in
tapping the knowledge of a large number of specialized participants in a
flexible way to provide more value to customers.
(See also: DYNAMIC CAPABILITY BUILDING, OFFSHORING, OUTSOURCING)
Product Innovation
Developing and launching new products that appeal to customers. It involves:




Finding out and anticipating what customers might need or want;
Generating ideas;
Developing and launching a product;
Providing various support services to keep customers happy.
A stream of successful product introductions can generate rapid sales
and profit growth. A good example is Sony which came out with 170
new models of the original Walkman during the period, 1981-89. Similarly, Intel’s market leadership has been facilitated by the launch of a
*
The Only Sustainable Edge: Why Business Strategy Depends on Productive
Friction and Dynamic Specialization, Harvard Business School Press, 2005.
178
Product INNOVATION
series of microprocessors, each with greater capabilities. Microsoft,
which has introduced several versions of its PC operating systems and
applications software, is another good example.
Companies which are good at product innovation have some common attributes:






An intuitive understanding of what customers need and want. They
do not depend excessively on formal market research.
The discipline, skills, methods and processes to optimize product
design and manufacturing.
Effective and optimal use of resources.
Short lead times to out-innovate competitors. They renew and expand
product lines faster.
Willingness to cannibalize their own products.
Leaving people free and encouraging creativity by eliminating bureaucratic procedures.
In short, product innovation calls for a culture that encourages individual initiative, a good understanding of the market, and disciplined
execution. Product innovation is all about generating new ideas, developing products and selling it in the market. So the biggest challenge in
product innovation is often not technology, but marketing.
According to Deschamps and Nayak*, a well-designed product development process is made up of six interlocking and mutually reinforcing sub processes:






*
Idea management;
Intelligence development;
Technology and resource development;
Product / Technology strategy development and planning;
Project and program management;
Product support.
Deschamps, Jean-Philippe and Nayak, Ranganath, Product Juggernauts:
How Companies Mobilize to Generate a Stream of Market Winners, Harvard
Business School Press, 1995.
Product INNOVATION
179
Ideas are important for any business. But they need to be tapped efficiently. High performance businesses develop a structured process for
idea management. They continually generate, collect, evaluate, screen,
and rank ideas. They also have mechanisms to explore and validate ideas
in the market and in the labs before they are commercialized and scaled
up.
The intelligence development process facilitates the collection of
relevant data and trends on customers, competitors, and technologies.
This process transforms such data into information and insights and uses
that intelligence to seed other processes. Most successful companies
cultivate intelligence development as their secret competitive weapon.
Technology and resource development facilitate the development
within the company of a range of new technologies, skills, and competencies for future product generations. Not all resources, however, have
to be internal to the corporation. Establishing strategic alliances and
close relationships with suppliers is also a part of this process.
Product and technology strategy development and planning determine where, how, and with what frequency the company intends to
launch new products. It is an integrative process, combining product
plans and technological development plans. It should lead to plans determining which new products will be introduced, and when and how the
company’s developmental capacity will meet the new demands of products.
Project and program management is where unresolved problems such
as deficiencies in market insight, know-how, strategies, and plans show
up.
Product support starts at the launch of the product and typically ends
only when the product is withdrawn. In industries that depend on technical service or applications engineering to add value to customers, this
process is vital to success. Application-intensive industries such as performance chemicals, resins and polymers devote a significant portion of
their total technical resources to supporting their products.
Product development demands major resource commitments. So resources must be managed carefully. If too few new products are being
developed, the solution is not necessarily increased spending. Companies that are committed to innovation must employ an investment portfolio approach, with the right mix of incremental improvements, and
breakthrough ideas that will deliver consistent returns in the long run.
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Product LIFE CYCLE (PLC)
They should also pursue a disciplined approach. Only products with real
potential for specific markets should make it to the launch stage. And
once they have reached that stage, they need marketing campaigns that
are aligned with their sales potential. Companies must aim at getting the
right product to the right consumer at a cost that is in line with the product’s sales potential. Keeping the breakeven point low is crucial to the
success of most innovation.
Well-managed companies have a disciplined approach to dealing
with new ideas*. Great ideas are often hard to sell early on, and premature demand for numbers and analysis can kill creativity. Nevertheless,
an explicit process of business justification is desirable. The key lies in
identifying specific points in the concept-to-launch process, where a
project that is not showing promise can be stopped. Perhaps the quickest
way to avoid the problem is to call for a “go-no-go” decision at three
specific stages in the product launch process.
The first stage must appear early on after concept development. At
this time, the target market for the product should be clearly identified,
along with a realistic marketing plan and a rough estimate of marketing
costs for different scenarios. The next stage can come after the commercialization model has been developed. The product manager must
demonstrate that the product can realistically deliver on its claim. The
company should be confident about creating sufficient excitement
among the customers. The last vetting can come at the time of largescale commercial launch, when it should be clear that there is a compelling marketing plan in place to reach targeted sub-segments, a plan for
meeting all channel requirements, and if it is a consumer product, a plan
for merchandizing the product (if it is a consumer product) so that it
stands out among competing brands in the store.
(See also: INNOVATION, PROCESS INNOVATION)
Product Life Cycle (PLC)
A theory that describes the four stages that a new product goes through
from birth to death. These four stages are:
*
Dalens Francois, Gell Jeff, Rutstein Carl and Birge, Robert, Winning The New
Product War, www.bcg.com
Product PLATFORM
1.
181
Introduction:
The slow sales growth that follows the introduction of
a new product;
2. Growth: The rapid sales growth that accompanies product acceptance;
3. Maturity: The plateauing of sales growth when the product has been
accepted by most potential buyers; and
4. Decline: The decline of sales that results as the product is
replaced (by a substitute) or becomes increasingly unappealing to
customers.
Different strategies are required at different stages of the life cycle.
An important implication of the product life cycle (PLC) theory is
that every product eventually declines and dies. So it is necessary for
firms to launch new products from time to time. Ideally, new products
should be financed from the cash flows generated by mature brands, and
should be launched before maturity turns to decline. During the development phase, there is substantial negative cash flow on account of
R&D, market research, and setting up a production line. As demand
grows, more cash must be ploughed into expanding factory capacity.
Once sales have stabilized, the firm can reap the cash rewards from their
success in the decline phase. Brands with a high market share can provide the cash for developing replacement products.
Whether products do indeed go through these stages in any systematic, predictable way is still debated. The PLC concept is primarily applicable to product forms, less to product classes, and even less to
individual brands. If the item need be bought only once then market saturation can hit demand. If the item’s sales have grown because of fashion, it is likely that they will die quite quickly for the same reason. A
product may also go out of existence quickly because of rapid technological obsolescence.
(See also: BCG GROWTH-SHARE MATRIX, PROCESS LIFE CYCLE)
Product Platform
Building blocks that form the foundation for a series of closely related
products. Product platforms generate ECONOMIES OF SCOPE by reuse of
components and knowledge. In the automobile Industry, several individual car models may share the same basic frame, suspension and trans-
182
Prospect THEORY
mission even if the shape, look and feel are important. The Sony Walkman had 160 variations and four major technical innovations between
1980 and 1990, all of which were based on the initial platform. Black &
Decker rationalized its hundreds of products into a set of product families, using a platform approach. The platform approach may not be effective when rapid changes in technology, customer needs or competitors’ offerings can demand discontinuous new products rather than incremental change.
(See also: PLATFORM LEADERSHIP, PRODUCT INNOVATION)
Prospect Theory
Developed in 1979 by Daniel Kahneman and Amos Tversky, prospect
theory helps to describe how people make choices in situations where
they have to decide between alternatives that involve risk. It is a more
realistic alternative to the well-known expected utility theory. Starting
from empirical evidence, prospect theory describes how individuals
evaluate potential losses and gains. Kahneman and Tversky found that
behavioral issues significantly influence decision making. Their research
indicates that people do not always follow the rules of rational choice.
Examples of such behavior include:
1.
The Certainty Effect:
People over-weight outcomes that are certain,
relative to outcomes that are merely probable. Thus, there is a preference for a sure gain over a larger gain that is merely probable. “A
bird in hand is worth two in the bush.”
2. The Reflection Effect: There is a risk-seeking preference for a loss
that is merely probable, compared to a smaller loss that is certain.
This can be seen in the way people buy insurance packages or in the
way they respond to product pricing and promotions.
3. The Isolation Effect: People simplify problems by disregarding the
components that are common to alternatives and focus only on the
differences. So inconsistent preferences are obtained when choices
are presented in different ways. This can be seen in the ways consumers make decisions. Functionally similar products might have the
same price, but if one brand presents the price in a distinctive way, it
may be seen very differently.
(See also: DECISION MAKING)
Pygmalion EFFECT
183
Purpose-Process-People Doctrine
A doctrine which holds that the main task of top management is to shape
the behavior of people and create an environment that enables them to
take initiative, cooperate and learn. This is unlike the traditional STRATEGY-STRUCTURE-SYSTEM doctrine in which senior managers concentrate on
allocating resources, assigning responsibilities and controlling efficient
execution.
The purpose-process-people doctrine, on the other hand, holds that
the top management must change its role from being the designer of
corporate strategy to being the shaper of a broader institutional purpose,
from being the architect of a formal structure to being the builder of organizational processes and from managing systems to developing and
molding people.
Top management must infuse the company with an energizing purpose — a sense of ambition, a set of values, an overall identity. Rather
than trying to formulate strategy, top management must attempt to shape
the organizational context. Structure is the framework within which
companies can develop the organizational processes, and management
roles and relationships that support their competitive capability. But
structure is only the organization’s anatomy. A thorough understanding
of the organization’s physiology, the processes and relationships that are
the company’s lifeblood and its psychology, the culture and values of
employees, is also vital. Instead of regularly intervening with corrective
action, top executives need to find ways to encourage self monitoring,
self correcting behavior.
According to Sumantra GHOSHAL and Christopher BARTLETT, the
strategy paradigm is shifting away from strategy-structure-systems to
purpose-process-people.
(See also: BARTLETT, CHRISTOPHER; CORPORATE PURPOSE; GHOSHAL,
SUMANTRA)
Pygmalion Effect
Postulate which holds that if people start believing in themselves, they
prove to be effective. Constant praise by the superior makes
subordinates start believing they are good. Soon they become highly
productive. On the other hand, if they are regularly reminded about their
shortcomings, they become de-motivated and ineffective.
184
Pygmalion EFFECT
(See also: MOTIVATION)
Quinn, JAMES BRIAN
185
Q
q-theory
A theory of investment behavior which suggests that firms tend to invest
so long as the value of their shares exceeds the replacement cost of the
firm’s physical. Developed by economist James Tobin, q-theory encompasses other theories of investment in a simple framework. q is the ratio
of the value of a firm to the replacement cost of the assets of the firm,
including machines, buildings, etc. If q is greater than 1, the firm should
expand. If q is less than 1, it will make sense to sell off the assets rather
than try to use them.
Quinn, James Brian
A well known scholar in the area of strategic management, Quinn has
suggested that strategic management is not primarily an analytical or
rational activity. Strategic decisions typically evolve in part random —
or erratic — and part logical way. In 1980, Quinn coined the expression
“logical incrementalism” to capture this idea. Quinn’s view is that managers tend to make strategic decisions according to perceptions of incremental opportunities which appear to add to what they already have.
(See also: STRATEGIC PLANNING)
186
Real OPTIONS
R
Real Options
Real options build on the basic theory of financial options, by putting a
value on the various options available in a new project subjected to various uncertainties. Thus, a timing option, in the form of a delayed expansion in capacity can create value in a situation of uncertain demand. Putting up a plant in an overseas market currently fed by exports may generate new growth options. An exit option in the form of a plant closure
increases the value of the investment decision. Viewing strategic decisions as options and then using information from financial markets to
value these options can greatly enhance the quality of strategic planning.
Traditional valuation tools like NET PRESENT VALUE have limited flexibility. This is a handicap in an uncertain environment in which various
outcomes which demand a range of strategic responses are possible.
Thinking of an investment in terms of options allows uncertainty to be
taken into account. Managers can identify the embedded options, evaluate the conditions under which they may be exercised, and finally judge
whether the aggregate value of the options compensates for any shortfall
in the present value of the project’s cash flows. This ensures that good
projects are not rejected because of excessive caution on the part of
managers.
Regulatory Capture
A situation where a regulator sometimes might support the interests of
the industry it is supposed to be regulating. This may be so because the
regulator recognizes that its own self-interest requires a healthy industry
to regulate, or because the social context within which the regulator operates is highly supportive of the industry. Or, because the regulator does
not want to become controversial by raising tough questions.
Resource-based THEORIES
187
Resource-based Theories
Focus on the resources of the firm, unlike Michael Porter’s positioning
school that looks at how the firm is placed vis-à-vis other players in the
industry. During the 1980s and early 1990s, numerous writers were critical of the market-based view of strategy. If a firm’s position in an industry was the key determining criterion for success, why did firms in
the same industry with similar market positions differ considerably in
their performance? The resource-based view of strategy suggests that a
firm’s competitive advantage is dependent on its ability to develop and
acquire competencies.
Assets and capabilities are the building blocks for distinctive competencies. Tangible assets include production facilities, raw materials, financial resources, real estate, and computers. Intangible assets include
brand names, company reputation, technical knowledge, patents and
trademarks and accumulated experience within an organization. Organizational capabilities are the skills needed to transform inputs into output.
Once managers identify their firm’s resources, they must examine
which of those resources represent real strengths. Resources must be
broken down into more specific competencies. Organizational processes
and combinations of resources must be considered, not only isolated
assets or capabilities. The VALUE CHAIN must be analyzed to uncover organizational capabilities, activities, and processes that are valuable, potential sources of competitive advantage. Some guidelines can be useful
here:





Does the resource help fulfill a customer’s
need better than those of the firm’s competitors?
Resource Scarcity: Is the resource in short supply?
Replication: Is the resource easily copied or acquired?
Value Capture: Who actually gets the profit created by a resource?
Durability: How rapidly will the resource depreciate?
Competitive Superiority:
Following a systematic assessment of internal resources, these resources can be deployed in an optimal way.
(See also: CORE COMPETENCE)
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Responsiveness PLANNING
Responsiveness Planning
A term coined by Russell ACKOFF to describe the designing of an organization so that deviations from the expected can be quickly detected and
suitable responses can be made. Obviously, some future events are difficult to anticipate. Examples include catastrophes and technological
breakthroughs. Here, companies can use responsiveness planning. Responsiveness planning, a conceptually elegant way of identifying and
managing risks, essentially consists of building responsiveness and flexibility into the organization.
Reverse Engineering
A process of disassembling a product of another company to find out
how it works, with the intention of replicating some or all of its functions
in another product. Some tinkering is done with the design to avoid violation of intellectual property rights. India’s leading pharma companies like
Ranbaxy and Dr. Reddy’s have been masters of reverse engineering, as
indeed were the Japanese in the 1960s. The practice for a while won them
the dubious reputation of being cheap imitators. The Japanese, however,
built on what they learnt from reverse engineering to gradually build
global leadership in consumer electronics, automobiles, etc.
Risk
Threat to a firm’s survival, stability or profitability. Risks have multiplied in today’s fast changing environment. Risks can be broadly divided
into two categories: business and financial:


Business Risk
is the uncertainty associated with the ability to sell the
company’s product(s) at an appropriate price.
Financial Risk arises from the use of debt in the capital. The higher
the debt component in the capital structure, more the risk.
The Economist Intelligence Unit divides risks into four broad
categories:
1.
Hazard Risk
is related to natural hazards, accidents, fire, etc. that can
be insured.
2.
Financial Risk
has to do with volatility in interest rates and exchange
rates, defaults on loans, asset-liability mismatch, etc.
Rivalry
3.
189
Operational Risk
is associated with systems, processes and people
and deals with succession planning, human resources, information
technology, control systems and compliance with regulations.
4. Strategic Risk stems from an inability to adjust to changes in the environment, such as changes in customer priorities, competitive conditions and geopolitical developments.
From the perspective of corporate strategy, Peter DRUCKER probably
offers the best risk management perspective. In his book, Managing for
Results, Drucker identified four types of risk at a macro level:
1. The risk that is built into the very nature of the business and which
cannot be avoided.
2. The risk one can afford to take.
3. The risk one cannot afford to take.
4. The risk one cannot afford not to take.
(See also: ENTERPRISE RISK MANAGEMENT)
Rivalry
The term refers to the intensity of competitive behavior within an industry. The degree of rivalry determines the attractiveness of the industry. In
general, the higher the rivalry, the lower the profit margins. Rivalry generally increases when there are many competitors who are more or less
equally strong. In an industry dominated by one or a few firms, rivalry
tends to be less.*
Rivalry is high when firms are continuously trying to outsmart their
rivals, especially through price cuts. Rivalry is low when firms are content with the status quo, happy with their market shares, and are unwilling to upset the balance of the industry by instigating a price war.
Various factors influence the intensity of rivalry:

*
When an industry is growing slowly, the intensity of competition
increases. On the other hand when an industry is growing fast, just
keeping up with the industry increases the sales volume. Further, in a
growing industry the focus is on exploiting growth opportunities rather than countering competitors.
From the book The Essence of Competitive Strategy by David Faulkner and
Cliff Bowman, Prentice Hall of India, 2002.
190







Rivalry
When fixed costs are high relative to value added, there is tremendous pressure to utilize capacity. This can lead to price cutting and,
consequently, intense rivalry.
When a product is perishable or difficult to store, price cutting may
be necessary to reduce stocks. This can intensify competition.
Product differentiation builds customer loyalty and tends to reduce
the intensity of competition. Where scope for differentiation is minimal, rivalry tends to be intense.
SWITCHING COSTS are costs incurred by the buyer in moving from
one supplier to another. If switching costs are low, buyers are able to
switch between suppliers without any penalty. This increases rivalry.
When capacity can be added only in large increments, there are frequent situations of overcapacity, leading to intense rivalry.
When firms consider the industry to be strategically important for
them, they may be prepared to give up profits and compete vigorously. This intensifies competition.
High exit barriers can increase rivalry.
(See also: FIVE FORCES MODEL)
Scenario PLANNING
191
S
Satisficing
Concept which holds that managers do not take optimal decisions after
considering all relevant factors. Instead, they tend to take what they consider to be the most sensible decision under the circumstances, based on
the information available.
Herbert A. SIMON coined the term “satisficing planning” to describe
efforts to attain some level of satisfaction, not necessarily the maximum
level. Satisficing means doing well enough, which may not necessarily
be the best. Satisficers argue that it is better to produce a feasible plan
than an optimal plan that is not feasible. But as ACKOFF has pointed out,
this is based on a wrong belief that consideration of feasibility cannot be
incorporated into the consideration of optimality. It is always possible to
seek the best feasible plan.
Scenario Planning
The construction of a number of scenarios, each describing a possible
future state. Scenario planning enables firms to plan for the future by
visualizing different ways in which the external environment may
evolve. It can help organizations deal with uncertainty more effectively.
Scenario building stimulates creative thinking and helps identify major
opportunities and threats in the future by taking into account various
political, social, economic and technological factors. By contemplating a
range of possible futures, better informed decisions can be taken and
linkages between apparently unrelated factors identified.
Scenarios allow discussions to be more uninhibited, help challenge
established views and enable new ideas to be tested. Seeing reality from
different perspectives reduces the risk of increasing commitment to failing strategies.
Formal scenario planning emerged during the Second World War
when it was used as a part of military strategy as countries prepared
themselves for different contingencies. Since then the use of scenario
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S-Curve
planning has become increasingly popular. One company which has
used scenario planning very effectively is Royal Dutch Shell.
The basic premise behind scenario planning is that reacting in ad hoc
fashion to external events is not desirable. Understanding long-term
trends enables companies to prepare for different future scenarios. It also
helps a company to identify the scenarios for which its strengths and
competencies are particularly suited. At the same time, by identifying
the scenarios for which it is least prepared, a company can invest in
building the required competencies. In extreme cases, it can even divest
businesses, which do not look promising in the long run.
(See also: DISCOVERY DRIVEN PLANNING, STRATEGIC PLANNING)
S-Curve
Commonly used to describe the product life cycle in technology evolution, S-curve also a useful tool for managing TECHNOLOGY RISK. Foster*
describes the S curve as the relationship between the effort put into improving a product or process, and the results one gets back for that investment. As technological limits are reached, the cost of making progress accelerates dramatically. Eventually, a point is reached beyond
which no meaningful gains in performance can be achieved by improving technology. Thereafter, other factors — such as the efficiency of
marketing, purchasing and manufacturing — begin to determine the success of the business.
(See also: TECHNOLOGY RISK)
Senge, Peter
Famous for the concept of the learning organization, which effectively
implies a shift from thinking about strategic issues as part of a formal,
bureaucratic process to its being completely infused with organizational
learning throughout the organization.
In his bestseller, The Fifth Discipline (1990), Senge explains how
organizations can achieve success by mastering five disciplines:
1.
2.
*
Personal Mastery
or self-discipline on the part of all members;
of stereotypical mental models;
Continual Challenge
Foster R., The S-Curve: A New Forecasting Tool, Innovation: The Attacker’s
Advantage, Summit Books, Simon and Schuster, 1996.
Simple STRUCTURE
193
3. The creation of a shared vision;
4. Commitment to team learning rather than conflict; and
5. Systems thinking, a holistic way of looking at problems.
Systems thinking is a philosophy which realizes it is not possible to
understand complexity by breaking the whole down into parts. The dynamic system has to be understood as a whole. Senge identifies a number of systems archetypes to illustrate this. For example, if a successful
group is given more resources at the expense of other, less successful
groups, the latter are even less likely to succeed.
(See also: INNOVATOR’S DILEMMA, ORGANIZATIONAL LEARNING)
Service Level Agreement (SLA)
Agreements that establish the dimensions of service and relationship
between two or more departments of an organization. Some organizations formalize the internal customer concept by insisting on service
level agreements (SLAs), considering these useful in establishing
boundaries of responsibility and facilitating inter departmental collaboration, especially if there have been coordination problems or inter departmental conflicts in the past.
Shareholder Value
The primary goal of any listed company is to increase the wealth of its
shareholders. For this to happen, the returns to shareholders should outperform certain benchmarks such as the cost of capital. In essence,
shareholders’ money should be used to earn a higher return than they
could earn themselves, for example by investing in risk free bonds.
Simple Structure
A structure used by organizations in their early days. When the organization is small and activities are easy to track and monitor, all functions
can report directly to the CEO or the business owner. Such a structure,
however, becomes increasingly inappropriate as the size of an organization increases.
(See also: ORGANIZATIONAL STRUCTURE)
194
Simon, HERBERT A.
Simon, Herbert A.
One of the few Nobel Prize winners till date in the field of management.
Simon’s insights about how the limitations of the human brain affect the
functioning of organizations are truly landmark. Managers are bombarded with choices and decisions but they possess only finite information
storage and processing capabilities. They tend to compensate for the
inability to consider and evaluate all the available choices by selecting
“good enough” options, rather than the “optimal” solutions.
Simon’s theory of the firm is based on four main ideas:
 First, organizations are not the abstract, one-dimensional entities often depicted by economists. They are complex entities, made up of
diverse individuals and interests, all of which are held together by a
variety of “deals” and coalitions, ranging from explicit contracts to
implicit agreements.
 Second, organizations do not have a complete list of alternatives. Nor
do they have complete knowledge about the consequences of their
decisions and actions.
 Third, rather than searching for optimal solutions, organizations distinguish between outcomes that are “good enough” and those that are
not.
 Fourth, much human behavior involves following rules, rather than
rationally evaluating the expected consequences of a given action.
(See also: DECISION MAKING, SATISFICING)
Six Sigma
A disciplined, data driven approach that eliminates waste, improves
productivity and helps to develop and deliver products and services of
high quality. The word sigma is a statistical term that measures how far a
given process deviates from perfection. The central idea behind six sigma is to measure how many defects there are in a process, and systematically figure out how to eliminate them and get as close to zero defects
as possible. A six sigma quality level means only 3.4 defects per million
opportunities. Six sigma tries to analyze the root cause of business problems and solve them. The methodology used in six sigma is popularly
called DMAIC.
Sloan, ALFRED P.
D—
M—
A—
I—
C—
195
Define the goals and customer (internal and external) requirements.
Measure the current performance.
Analyze the performance and determine the root causes of defects.
Improve the process by eliminating the root causes of defects
Control the vital factors and implement process control systems.
The six sigma concept was developed by Motorola in 1979. Within
15 years, Motorola was operating at Six Sigma in many of its manufacturing units. Motorola saved billions of dollars earlier spent correcting
defects on the production line and recalling products from the market.
Since then many other companies, such as GE, have embarked a Six
Sigma. Many of India’s leading software companies have also enthusiastically embraced six sigma.
Skimming
A strategy for pricing a new product at such a high level that it is only
purchased by a small segment consisting of trend-setters, enthusiasts, or
the very rich. High pricing helps in establishing an up-market image for
the product and ensures that the initial buyers are charged the high price
they are willing to pay. The price is later lowered to attract the mass
market. But the risk is that a high price may make it easy for a competitor to launch a successful, lower priced imitation. By failing to maximize
sales at the start, the firm may not be able to hold on to a viable market
share when competitors arrive.
(See also: STRATEGIC PRICING)
Skunk Work
A covert research project undertaken by a small, independent group,
away from the mainstream operations of an organization. Increasingly,
companies are realizing that the key to attracting and retaining the best
scientists lies in offering freedom to experiment. The idea of skunk
works is to allow initiative to blossom by shielding it from the bureaucracy of the mainstream organization.
Sloan, Alfred P.
One of the greatest management practitioners in business history. Sloan
led General Motors in its formative years, pioneered the DIVISIONAL
STRUCTURE of a business organization. He set up a number of centralized
196
Slywotzky, ADRIAN J.
functions and framed policies to help rationalize the work of the various
divisions and to achieve synergy within the corporation. Sloan attempted
to create a deliberate tension between “maximized decentralization” and
“proper control”. The new structure left the broad strategic decisions as
to the allocation of existing resources and the acquisition of new ones in
the hands of a top team of generalists. Divisional executives could run
the business, while general officers set the goals and policies and provided overall appraisal. Sloan’s book, My Years at General Motors is a
business classic, and a must read for any practicing manager.
(See also: ORGANIZATIONAL STRUCTURE)
Slywotzky, Adrian J.
Famous for the idea of value migration, which means that businesses
often need to reinvent how they add value as industries and their markets
change. This might, for example, involve:



Getting rid of activities which add little value, dilute value, or destroy
value;
Exploiting new ways of distribution; and
Rebundling or unbundling existing products or services.
In a sense, Slywotzky emphasizes the importance of business model
innovation, i.e. changing the very rules of the game by coming up with a
new way of doing business.
(See also: BUSINESS MODEL, INNOVATION)
Span of Control
The range of resources for which a manager is given decision rights and
held accountable for performance. In more simple terms, it is the number
of subordinates answerable directly to a manager.
The span of control is “wide” if the manager has many direct subordinates and “narrow” if there are few.
A wide span of control has several advantages. The boss has less
time for each subordinate and is effectively forced to delegate. Fewer
layers of hierarchy are needed, thereby improving vertical communication.
On the other hand, a narrow span of control is useful when tighter
management supervision may be necessary. There is less stress involved
Stakeholders
197
for each employee as the scope of each job is limited. Moreover, as there
are more layers of hierarchy, there are more frequent promotion opportunities, i.e. the career ladder has more rungs.
The actual span of control chosen depends on what is more important, customer responsiveness or cost control. For example, when
customers are price sensitive, the span of control must be wide for managers of internal operating functions to supply inputs to market facing
units efficiently and cost effectively. Market facing managers usually
want a wide span of control to maximize customer responsiveness.
When the basis for competing is tailoring products and services to suit
the tastes and needs of customers in particular geographic regions, a significant portion of value creation must be located close to the customer.
So regional managers have a wide span of control.
(See also: ORGANIZATIONAL DESIGN)
Spender, J. C.
Famous for his concept of “strategic recipes”, the taken-for-granted rules
of strategic decision making. Strategic recipes are founded on things that
have worked, or not worked, in the past. These recipes relate back to a
past group, or individual, strategic situations. When a new leader is appointed, particularly from the outside, these are likely to change or be
challenged.
Stakeholders
Groups including shareholders, employees, managers, creditors, suppliers, contractors, agents, distributors, customers and the local community
whose interests are directly or indirectly impacted by the company’s
activities. Different stakeholders wish to influence the decision making
within the organization to serve their own interests. For example, customers will want lower prices, suppliers will want prompt payments,
employees will want higher wages, shareholders will want a return from
their investment of capital and the society will expect the environment to
be protected. Corporations have to try and balance these different expectations.
(See also: CORPORATE SOCIAL RESPONSIBILITY)
198
Strategic ADVANTAGE
Strategic Advantage
A term popularly used in the context of globalization. Global companies
try to leverage two kinds of advantage while competing — comparative
and strategic. COMPARATIVE ADVANTAGE results when VALUE CHAIN activities are performed in cheaper locations. Beyond a point, however, an
obsession with comparative advantage may be counter productive. Strategic advantages must not be overlooked. Any advantage which will
accrue in the long run, but which cannot be easily quantified in monetary
terms immediately can be considered a strategic advantage. In other
words, if comparative advantages help in cutting costs in the short run,
strategic advantages help in adding value in the long run.
The US is a strategically important market for products such as investment banking, computer software, pharmaceuticals and automobiles.
France is an important country for cosmetics and perfumes, while Japan
is the world leader in consumer electronics. These are not the cheapest
locations in the world but a presence in these markets is important to
keep in touch with highly sophisticated customers and leverage the innovations that are going on.
In some cases, while generating strategic advantages, comparative
disadvantages such as expensive labor can be circumvented through ingenuity and meticulous planning. Nicholas Hayek*, CEO of Switzerland
based SMH which makes the world famous Swatch watches, once argued that if a company is determined to develop low cost methods of
manufacturing, it can do so no matter what the location. Hayek’s contention was that in watch manufacturing, as long as direct labor accounts
for less than 10% of the total costs, Switzerland would remain an attractive place for manufacturing.
(See also: GLOBAL LEVERAGE)
Strategic Alliance
An agreement between two or more organizations to do business together in a mutually beneficial way. Through a strategic alliance, the companies involved can gain access to each other’s resources, including markets, technologies, capital and people. Alliances can facilitate geograph*
Taylor, William, “An interview with Swatch Titan, Nicolas Hayek,” Harvard
Business Review, March-April 1993, pp. 99-110.
Strategic CHOICE
199
ic expansion, cost reduction and generation of manufacturing and other
supply chain synergies. Alliances can also accelerate learning and increase market power.
There are some general criteria that differentiate strategic alliances
from conventional alliances. An alliance can be considered strategic if it
is critical to the success of a core business goal or objective, blocks a
competitive threat, or mitigates a significant risk to the business.
Strategic alliances usually succeed when the partners involved see a
mutual benefit and trust each other. In any alliance, mechanisms must be
put in place to resolve tensions as and when they surface. Top management commitment and selection of capable executives to manage the
alliance are key success factors.
(See also: JOINT VENTURES)
Strategic Architecture
A top management action plan which indicates the new competencies
which will be needed in the coming years, how existing competencies
have to be strengthened, how business processes have to be reoriented
and relationships with external entities, especially customers have to be
reconfigured.
Strategic Business Unit (SBU)
A variation of the DIVISIONAL STRUCTURE, an SBU is an operating unit or
division of a corporate group that determines its own strategy largely
independent of the corporate center. Usually, the SBU will have its own
distinct set of products and services, either for a customer segment or a
geographical region. The terms SBU and profit center are often used
interchangeably. In general, SBUs in Indian companies are far less empowered than the term would suggest. They are heavily dependent on
headquarters for key resources and approval of important decisions.
(See also: ORGANIZATIONAL STRUCTURE)
Strategic Choice
Strategy is all about making trade offs. A company must avoid competing in some segments while strengthening its presence in others in line
with its strategic vision. The choices which the company makes must
address three questions:
200
Strategic CONTROL
1. Who are the customers?
2. What are they looking for?
3. How can these products / services be offered most efficiently?
These questions look simple but have profound implications for the
viability of a strategy.
Strategic Control
Linking operations to strategic goods. A strategic control system does so
by using appropriate financial and non-financial information. It is concerned with tracking the strategy as it is being implemented, identifying
problems or changes in underlying assumptions and making necessary
adjustments. It involves controlling and guiding efforts as the action is
taking place. To be effective, a strategic control system needs to be broken down into operational control systems which evaluate the progress
in meeting annual objectives. For example, the company can identify
key success factors like improved productivity, high employee morale,
high product quality, increased EPS, growth in market share, etc. Performance standards can be established and deviations from standards
evaluated as the strategy is implemented and the causes identified. Corrective action can then be taken.
(See also: STRATEGY IMPLEMENTATION)
Strategic Cost Management
A holistic approach to managing costs, using a cross-functional perspective. A systematic approach to understanding cost drivers can create various benefits. Companies must have a good understanding of what activities add value and what do not. Accordingly, they must cut costs in
some areas while increasing spending in others.
(See also: ACTIVITY BASED COSTING)
Strategic Fit
A term, which is commonly used in the context of diversification and
mergers and acquisitions. Strategic fit refers to the extent to which the
activities of two units of a business or two organizations complement
each other. A good strategic fit exists when there is scope for cost reduction due to rationalization of activities or economies of scale. Strategic
fit may also exist if there are cross selling opportunities, or if market
Strategic INFLECTION POINT
201
power can be increased. In general, it is easier to quantify the impact on
costs, compared to that on the bottom line.
Strategic Groups*
Groups of companies within an industry that have similar business models or similar strategies. Strategic groups is a concept that helps to bring
sharper focus into strategy formulation. Strategic groups† are essentially
companies who are aware of each other as competitors in a particular
market, and who are collectively separated from other such groups by
mobility barriers, such as scale economies, proprietary technology, possession of government licences, control over distribution, marketing
power, and so forth. Such barriers vary widely in nature from group to
group. Different companies within a group may relate to them to varying
degrees. The number of groups within an industry and their composition
depends on the dimensions used to define the groups. Strategists often
use a two dimensional grid to display the position of each company
along the two most important dimensions. The term was coined by Hunt
(1972). Michael Porter (1980) developed the concept and explained strategic groups in terms of “mobility barriers” or entry barriers.
(See also: BARRIERS TO ENTRY, INDUSTRY)
Strategic Inflection Point
A term coined by Andrew Grove, a former CEO of Intel to describe a
dramatic change in competitive forces. At such times, the leaders must
give up the past, see closely how the industry is evolving and find new
ways of competing. Such a point of dramatic change in the industry is
known as strategic inflection point.
For example, the arrival of containers marked a strategic inflection
point in the shipping industry. The introduction of the IBM PC was a
strategic inflection point in the computer industry. The emergence of
large discount store chains such as Giant and Big Bazaar may well turn
out to be a strategic inflection point in the Indian retailing industry. The
rise of virtual book stores like Amazon has also marked a point of severe
*
http://en.wikipedia.org/wiki/Strategic_group
 From the book, The Essence of Competitive Strategy by David Faulkner and
Cliff Bowman, Prentice Hall of India, 2002.
202
Strategic INFLECTION POINT
discontinuity. The entry of low cost airlines like Air Deccan represents a
strategic inflection point in the airline industry in India.
In his fascinating book, Only the Paranoid Survive, Grove calls a
very large change in one of the competitive forces in an industry, a
“10X” change, suggesting a sudden tenfold increase in the force. The
business no longer responds to the company’s actions as it used to in the
past. Put another way, a strategic inflection point marks a shift from the
old ways of doing business to new ones.
Grove offers some useful insights to cope with such situations. When
a technology break or other fundamental change comes their way, companies must grab it. Only the first mover has a true opportunity to gain
time over its competitors. Companies must also show discipline by setting a price that the market will bear and then work hard to cut costs so
that they can make money at that price. Cost plus pricing will not work
in such cases.
When is a change really a strategic inflection point? Most strategic
inflection points, instead of coming with a bang, appear slowly. They are
often not clear until we can look at the events in retrospect. So how do
we know whether a change signals a strategic inflection point? Grove
suggests managers must ask a few basic questions. Are we no longer
clear about who the key competitors are? Does the company that in past
years mattered the most to us and our business seem less important today? Does it look like another company is about to eclipse them? Are
people, who for years have been very competent, suddenly becoming
ineffective?
The best way of identifying a strategic inflection point is to engage in
a broad and intensive debate involving employees, people outside the
company, customers and partners who not only have different areas of
expertise but also have different interests. Such a debate can consume a
lot of time and intellectual energy. It also takes courage to enter a debate
the top management may lose, and which may expose weaknesses and
encounter the disapproval of people.
(See also: DISRUPTIVE TECHNOLOGY)
Strategic INNOVATION
203
Strategic Innovation
A term introduced by Vijay GOVINDARAJAN and Chris TRIMBLE* to differentiate innovation which goes beyond process or product innovation.
Strategic innovation addresses three fundamental questions:



Who is the customer?
What is the value the company offers to the customer?
How does the company deliver that value?
Strategic innovation must not be left to chance. It must be viewed as
the outcome of strategic experiments. These are deliberately planned
strategic moves, which have ten common characteristics:
1. They have high revenue growth potential.
2. Typically, they target emerging or poorly defined industries.
3. Such experiments are launched before any other competitor and before any profit making formula has been established.
4. They depart from the company’s proven business definition and its
assumptions about how the business will succeed.
5. These experiments leverage some of the corporation’s existing capabilities and assets in addition to capital.
6. They need some new knowledge and capabilities.
7. They involve discontinuous rather than incremental value creation.
8. They involve greater uncertainty across multiple functions.
9. They may remain unprofitable for several quarters or more.
10. Such experiments give no clear picture of performance early on.
Strategic innovations involve unproven business models. Companies
that are good at strategic innovation change the rules of the game and
delight investors with sustained growth. Their business models are difficult to imitate.
Govindarajan and Trimble have explained in great detail the challenges involved in implementing innovations. Typically, three stages are
involved in any innovation. Creativity dominates the beginning of the
innovation process. Efficiency is important towards the end of the innovation process. The middle involves unique challenges — a forgetting
challenge, a borrowing challenge and a learning challenge.
*
From the book, Ten Rules for Strategic Innovators: From Idea to Execution by
Vijay Govindarajan, Chris Trimble, Harvard Business School Press, 2005.
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Strategic INTENT
It is in the middle where companies often stumble. The new initiative
must forget the parent company’s business definition, assumptions,
mindsets and biases to develop new competencies in order to exploit
new business possibilities. The new initiative must learn how to borrow
assets from the parent company. These may include manufacturing capacity, expertise, sales relationships, distribution channels, etc. The new
initiative must learn and constantly improve its predictions of business
performance. It must be able to resolve various critical unknowns in its
business plan and put in place a working business model as quickly as
possible.
(See also: INNOVATION, PROCESS INNOVATION, PRODUCT INNOVATION,
VALUE INNOVATION)
Strategic Intent
An ambitious organizational goal that is disproportional to existing resources and capabilities. The top management articulates a desired leadership position and then establishes the criteria that the organization will
use to chart its progress. The management must motivate people by
communicating the value of the target, sustain enthusiasm by providing
new operational definitions as circumstances change, and make the intent the basis for resource allocations.
Strategic intent can be viewed as an animating dream that energizes a
company by setting STRETCH targets, providing a sense of direction and
conveying a sense of destiny to the company’s employees.
For example, Dabur’s intent states: “We intend to significantly accelerate profitable growth. To do this, we will*:
“Focus on growing our core brands across categories, reaching out to
new geographies, within and outside India, and improve operational efficiencies by leveraging technology.
“Be the preferred company to meet the health and personal grooming
needs of our target consumers with safe, efficacious, natural solutions by
synthesizing our deep knowledge of ayurveda and herbs with modern
science.
“Provide our consumers with innovative products within easy reach.
*
www.dabur.com
Strategic MANAGEMENT
205
“Build a platform to enable Dabur to become a global ayurvedic
leader.
“Be a professionally managed employer of choice, attracting, developing and retaining quality personnel.
“Be responsible citizens with a commitment to environmental protection.
“Provide superior returns, relative to our peer group, to our shareholders.”
(See also: BHAG)
Strategic Management
Strategic management is concerned with the formulation and implementation of strategies to achieve the objectives of an organization.
The major areas of strategic management are:
1. Articulating the corporate mission.
2. SWOT analysis.
3. Identifying various strategic options like capacity expansion, vertical
integration and diversification.
4. Selecting the desired option(s).
5. Formulation of long term objectives and strategies consistent with the
desired options.
6. Formulation of short term objectives and strategies consistent with
the long term objectives and strategies.
7. Implementation.
8. Control.
The term strategic implies heavy, irreversible resource commitments,
long term implications and organization wide consequences. But strategic management is not only about the long term. Short term strategies
and objectives must be aligned with the long term objectives to facilitate
effective implementation.
Strategic management leads to those crucial decisions which effectively determine the future of the firm. Indeed, the outcome of strategic
management can make or break a firm. Consider the examples of Metal
Box (India) Ltd, Asian Paints and Microsoft. Metal Box diversified into
bearings manufacture with disastrous consequences. Asian Paints, on the
other hand, successfully pursued a strategy of backward integration to
206
Strategic MARKET
become self sufficient in critical raw materials such as pentaerythrytol.
Today, Asian Paints is far ahead of other leading paint manufacturers in
the country including the MNCs. In the early days of the global computer industry, Microsoft decided to bet on software unlike many other
companies which emphasized hardware or a combination of hardware
and software. Microsoft also decided to focus on capturing the desktop.
By setting its targets right, Microsoft went on to become one of the most
successful companies in business history. In contrast, others like Apple
struggled.
(See also: MISSION, ENVIRONMENTAL SCANNING, STRATEGIC PLANNING,
SWOT ANALYSIS, VISION)
Strategic Market
A market, which scores high on either market potential or learning potential, or both, for a global company. By competing in such a market, a
company can gain strategic advantages. The US is a strategic market for
a wide range of goods and services, especially for information technology, pharmaceuticals and biotech. So, most European and Japanese
MNCs have a major presence there. A strategic market demands significant commitment of human and material resources. Usually, such a market calls for a long-term orientation, i.e. making necessary investments
and waiting patiently for results to come. The Japanese car makers like
Toyota have succeeded globally by targeting the strategic US market.
(See also: GLOBALIZATION, STRATEGIC ADVANTAGES)
Strategic Options*
Based on a careful analysis of the external environment and the company’s profile, various strategic options are available for a company. The
company must choose one or more of these and commit resources accordingly. A few are listed below:

Concentration:
The firm can continue to allocate resources for making more of the current products with the existing technology.
* For more detailed account refer to Strategic Management: Formulation, Implementation & Control by John A. Pearce and Richard B. Robinson, Irwin,
1995.
Strategic OPTIONS
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207
Market Development:
Existing products can be modified slightly and
sold to customers in related market areas. Alternatively, sales can be
boosted by adding new distribution channels or by changing the
promotion mix.
Product Development: Existing products can be modified significantly and new related products created. They can then be sold to current
customers through established channels.
Innovation: A firm may decide to keep launching new products.
Even if new players enter the market and increase rivalry, the firm
can stay ahead by moving on to a new product.
Horizontal Integration: The company can acquire one or more similar businesses which are operating at the same stage of production /
marketing.
Vertical Integration: The firm can enter businesses that either provide
inputs or that serve as consumers for the firm’s output.
Joint Ventures: Two or more business partners may get together if
each of them is lacking in some competencies or resources which are
necessary for the success of the project.
Concentric Diversification: Entry into a new business which is related
to the existing business in terms of technology, markets or products is
called concentric diversification.
Conglomerate Diversification: The firm can enter an unrelated business based primarily on profit or growth considerations.
Turnaround: By cutting costs, divesting assets and improving asset
utilization, the firm tries to strengthen itself and restore profitability.
Divestiture: The firm can sell the business or a major chunk of the
business. This is the last resort, often considered after the failure of a
turnaround strategy.
Liquidation: The business may be sold (in parts or as a whole) for its
tangible asset value and not as a going concern.
The above options need not be mutually exclusive. Based on the
company MISSION and the SWOT ANALYSIS, one or more of the above
options may be selected. Techniques which help in arriving at a desirable option include the BCG matrix and the GE 9 cell planning grid.
(See also: BCG GROWTH-SHARE MATRIX, NINE-CELL PLANNING GRID,
SWOT ANALYSIS)
208
Strategic PLANNING
Strategic Planning*
The determination of the basic long-term goals and objectives of an organization, the adoption of courses of action, and the allocation of resources necessary to achieve these goals.
Strategic planning involves several steps.


The first step is to establish objectives, the results expected, what is
to be done and where the primary emphasis is to be placed.
The second step is to establish planning premises, i.e. assumptions
about the anticipated environment.
These premises can be classified as external and internal, quatative
and quantitative, controllable, and non-controllable.
External premises can be classified into: general environment, (economic, technological, political, social and ethical conditions); the product market; and the factor market, (location of factory, labor, and materials, etc).
Internal premises include capital investment, sales forecast and organization structure. Some premises can be quantified while others may
be qualitative. Some premises are controllable, such as expansion into a
new market, adoption of a research program or a new site for the headquarters. Non-controllable premises include population growth, price
levels, tax rates, business cycles, etc. The semi controllable premises are
the firm’s assumptions about its share of the market, labor turnover, labor efficiency, and the company’s pricing policy.
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The third step in planning is to identify alternative courses of action.
The fourth step is to evaluate them by weighing the various factors in
the light of premises and goals.
The fifth step is adopting the plan.
The final step is to give meaning to plans by putting in numbers and
preparing budgets.
* See Mintzberg, Henry., The Rise and Fall of Strategic Planning: Reconceiving
Roles for Planning, Plans, Planners, Simon & Schuster, 1993 and Mintzberg,
Henry. “The Fall and Rise of Strategic Planning”, Harvard Business Review,
January-February 1994, pp. 107-114.
Strategic PLANNING
209
Henry MINTZBERG has identified ten schools of strategic planning*:
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The Design School:
Aims at creating a fit between internal strengths
and weaknesses and external threats and opportunities.
The Planning School: Strategic planning is viewed as an intellectual,
formal exercise using various techniques.
The Positioning School: The company selects its strategic position
after thoroughly analyzing the industry.
Entrepreneurial School: The focus here shifts to the chief executive
who largely relies on intuition to formulate strategy. The emphasis
moves away from precise designs, plans or positions to vague visions
or broad perspectives.
Cognitive School: The focus here is on cognition and cognitive biases.
Learning School: Strategies evolve as the organization learns more
about the environment and the business.
Power School: Strategy making is rooted in power.
Cultural School: Views strategy formulation as a process rooted in culture.
Environment School: The focus here is on coping with the environment.
Configuration School: Integrates the claims of other schools.
The three broad approaches to strategic planning can be summarized
as follows:
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*
Rational Planning
involves identifying and understanding gaps between previously established goals and past performance, identifying
the resources needed to close these gaps, distributing those resources,
and monitoring their use in moving the organization closer towards its
goals. This approach assumes the environment is predictable and the
organization can be effectively controlled. Clearly, such an approach is
not advisable if the business environment is complex and unpredictable.
Incrementalism means moving from one strategy to the next, depending on the unfolding of events beyond the control of managers.
From the book, Strategy Safari: A Guided Tour through The Wilds of Strategic
Management by Henry Mintzberg, Joseph Lampel, and Bruce Ahlstrand, The
Free Press, 2005.
210
Strategic PRICING
Incrementalism assumes that managers cannot forecast or enforce the
developments essential to developing a pre-ordained strategy and
therefore must continually adjust. Future developments are likely to
be random so that there is little scope to learn from past experiences.
Thus, in contrast to rational planning which emphasizes intended
strategies, incrementalism is based on emergent strategies.

Organizational Learning also emphasizes the need for making continuous adjustments. However, these adjustments need not be random.
Rather, managers must keep making incremental adjustments to rational plans as they attempt to move the organization toward its
goals. Though they may be unable to foresee the future, managers
must not allow their organization to drift aimlessly. The role of top
management is to encourage all employees to continuously challenge
the status quo, generate ideas for improving the status quo, conduct
experiments to see which of these ideas are most fruitful and then try
to disseminate knowledge gained from these experiments throughout
the organization.
(See also: DISCOVERY DRIVEN PLANNING, ENVIRONMENTAL SCANNING,
SCENARIO PLANNING, STRATEGIC MANAGEMENT)
Strategic Pricing
Aligning the pricing strategy with corporate strategy. Pricing is a key
factor in business innovation and the price must be chosen carefully after
considering various scenarios and possible implications. Is the price attractive enough to capture the mass of target buyers? Can the company
make the offering at the target cost and still earn a healthy profit margin?
Can the company profit at a price that is affordable to the target buyers?
Strategic pricing is a key component of BLUE OCEAN STRATEGY pioneered
by Chan Kim and Renee Mauborgne.
In a competitive market, cost plus pricing does not work. Costs must
be controlled so that profits can be generated at the price the market can
take. At the same time, in the process of cost cutting the company should
not reduce utility, i.e. the value customers perceive in its product or service.
To hit the cost target, companies can look at various options. They
can streamline operations and introduce cost innovations from manufacturing to distribution by addressing relevant questions such as:
Strategic PRICING
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211
Can the currently used raw materials be replaced by unconventional,
less expensive ones?
Can high-cost, low-value added activities in the value chain be reduced or outsourced?
Can the physical location of the product or service be shifted from
prime real estate locations to lower-cost locations?
Can the number of parts or steps used in production be truncated by
changing the way things are made?
Can activities be digitized or automated?
As goods become more knowledge intensive, product development
costs rather than manufacturing costs start becoming dominant. So
achieving high volumes quickly becomes the need of the hour. Moreover, to a buyer, the value of a product or service increases as more people start using it. As a result of this phenomenon, called network externalities, either millions of units are sold at once, or nothing at all. So it is
increasingly important to know from the start what price will quickly
capture the mass market. That is why STRATEGIC PLANNING is gaining in
importance.
The main challenge in strategic pricing is to understand the price sensitivity of people who will be comparing the new product or service with
a host of products which on the surface look different, but offer the same
benefits to the customers. So companies must list competing products
and services that fall into two categories: those that take different forms
but perform the same function, and those that take different forms and
functions but fulfill the broad objective. The exact price will be guided
by two principal factors — the extent of patents or copyrights protection,
and the ease of imitation.
Sometimes there may be little scope to cut costs but there could be
scope to come up with an innovative pricing model. Take telecom. In
developing countries, public call offices in rural areas, by eliminating
fixed monthly rentals, significantly reduce the price of the service. Another pricing innovation is small packs. Offering products or services in
small quantities makes them more affordable to the masses.
(See also: VALUE INNOVATION)
212
Strategy EVALUATION
Strategy Evaluation
Assessing whether the strategy is working. Since results are not usually
available for considerably long periods of time, other indicators become
necessary. The degree of consensus which exists among executives regarding corporate goals and policies, the extent to which major areas of
managerial choice are identified, and the degree to which resource requirements are anticipated well in advance, are all pointers to the workability of the strategy.
To ensure that it is workable, any strategy needs to be evaluated carefully with respect to the following:
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Internal Consistency:
A corporation may have many policies. If the
strategy is sound, the policies should mesh well with each other.
External Consistency: The strategy must make sense with respect to
events in the external environment, both current and anticipated.
Availability of Resources: It is resources taken together which represent the capacity of an organization to respond to environmental opportunities and threats. Resources include cash, competence, facilities, etc. A key issue in strategy formulation is achieving a balance
between strategic goals and available resources. The company must
decide how much resources to commit to opportunities currently
available and how much to keep in reserve to take care of unanticipated demands.
Degree of Risk Involved: The degree of risk inherent in a strategy
depends on the uncertainty about the availability of resources, the duration for which resources are committed, and the proportion of resources committed to a single venture.
Time Horizon: A viable strategy has to indicate the time frame in
which goals are to be achieved. The greater the time horizon, the
wider the range of STRATEGIC CHOICES available. The larger the organization, the longer the time horizon, since adjustment time is larger. Large organizations change slowly and need time to make significant modifications in their strategy. While it is useful to have a certain consistency of strategy over long periods of time, flexibility is
important in a rapidly changing environment.
Strategy IMPLEMENTATION
213
Strategy Implementation
The ability to execute strategy. This is often the difference between market leaders and other players in any industry is Effective strategy implementation involves getting people’s buy-in, choosing the right metrics
and tracking performance on an ongoing basis. Much of strategy implementation involves managing change. So the behavioral issues involved
can hardly be overlooked.
The following are useful guidelines for strategy implementation.

Unlearning the Past:
Often past strategies stand in the way. So un-
learning is important.
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Increasing Commitment
at lower levels: People at lower levels in an
organization are often skeptical about the practical utility of a strategic plan. Strategy implementation is difficult without taking lower
level employees along.
Avoiding over Ambitious Strategies: Functional managers are used to
a way of working. They may not be able to adjust suddenly to a new
strategy.
Identify Responsibilities and Milestones: The list of specific tasks
each function must perform, specific milestones and the names of the
individuals who accept responsibility for each major functional program, must be identified.
Communicating Downward is as Important as Communicating Upward:
It is the functional and lower level operating managers who
hold the key to the successful implementation of a strategy. Halfhearted commitment from functional managers can thwart the goals
set for the business.
ORGANIZATIONAL STRUCTURE, LEADERSHIP and culture play an important role in ensuring that strategy percolates into the day-to-day activities of the company. Structure divides tasks so that they can be performed efficiently. Leadership must send out the right signals to facilitate smooth implementation. Culture is the set of important, often unstated assumptions that influence the opinions and actions of employees.
Culture becomes a weakness when the assumptions of employees interfere with the needs of the business and its strategy.
The key to execution is shaping the attitudes and behavior of people.
A culture of trust and commitment motivates people to execute the
agreed strategy. People’s minds and hearts must align with the new
214
Stretch
strategy so that they embrace it willingly, going beyond compulsory
execution to voluntary cooperation.
To build people’s trust and commitment, Chan Kim and Renee
Mauborgne* emphasize the importance of getting people’s buy-in, building trust and creating a perception that a level playing field exists. Only
then will people cooperate voluntarily in implementing strategic decisions. This approach, called fair process, has three main components:
engagement, explanation and expectation clarity.
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Engagement
means involving individuals in strategic decisions by
asking for their inputs and encouraging them to critically examine the
merits of the ideas and assumptions of different people.
Explanation means that everyone involved and affected should understand why important decisions are made as they are. An explanation of the thinking that underlies decisions makes people confident
that managers have considered their opinions and have made objective decisions in the overall interest of the company.
Expectation clarity requires that managers state clearly the new rules
of the game. Although the expectations may be demanding, employees should know up front what standards they will be judged by as
well as the penalties for failure. When expectations are clearly defined, political jockeying and favoritism are minimized, and the focus
shifts to execution.
By organizing strategic planning around the principles of fair process, execution can be built into strategy making from the start. People
will realize that compromises and sacrifices are necessary to achieve
organizational goals. The ensuing discipline and increased collaboration
levels will facilitate strategy execution.
(See also: CHANGE MANAGEMENT, POLICIES, STRATEGIC CONTROL)
Stretch
A concept introduced by Sumantra GHOSHAL and Christopher BARTLETT
in their book, The Individualized Corporation which holds that employees must be given challenging goals to motivate them and exploit their
*
Kim, W. Chan and Mauborgne, Renée. “Fair Process: Managing in the
Knowledge Economy”, Harvard Business Review, January 2003, pp. 127-136.
Succession PLANNING
215
full potential. Stretch helps in moving people from satisfactory underperformance to high performance. Stretch encourages managers to see
themselves not in terms of the past but in terms of the future.
(See also: BHAG, PURPOSE-PROCESS-PEOPLE-DOCTRINE)
Stuck in the Middle*
A term which describes a firm that is not clear about the way it is going
to do business. Michael PORTER suggests that a firm that has not made a
choice about pursuing cost leadership or differentiation runs the risk of
being “stuck in the middle”. Such a firm tries to achieve the advantages
of low cost and differentiation but in fact achieves neither. Poor performance results because the cost leader, differentiator or focuser will be
better positioned to compete in their respective segments.
(See also: COST LEADERSHIP, DIFFERENTIATION, GENERIC STRATEGY)
Succession Planning
The process of identifying and preparing people for assuming greater
responsibility, in order to ensure that positions likely to become vacant
are filled smoothly. While the human resources department can take care
of succession planning at lower levels, succession planning at higher
levels has strategic implications, often involving the CEOs themselves.
CEO-level succession planning is a challenging task that involves active
collaboration between the Board and the incumbent CEO. In companies
like GE and Unilever, succession planning is taken very seriously and
implemented with the help of elaborate mechanisms and processes. In
India, companies like Hindustan Lever Limited (HLL) have mastered
the art of succession planning. The biggest succession planning problems in India seem to be in the case of public sector enterprises because
of political interference, and in family owned businesses due to a lack of
professionalism.
*
From the book, The Essence of Strategic Management by Clief Bowman,
Prentice Hall of India, 1990.
216
Supply CHAIN MANAGEMENT (SCM)
Supply Chain Management* (SCM)
Managing the various parties who come together to fulfill a customer
request. Manufacturers, suppliers, transporters, warehouses, distributors,
wholesalers, retailers and customers together make up the supply chain.
These entities are supported by various functions such as sales, product
development, operations, logistics, after sales service and finance. At the
heart of the supply chain lies the flow of information, products and cash
flows. Some of these flow towards and others away from the customer.
The main objective of any supply chain is to deliver value to customers
in optimal fashion. In simple terms, Value can be understood as the difference between the price the end customers are prepared to pay and the
costs incurred in meeting their needs.
Complicated outsourcing arrangements backed by information technology mean that supply chains are no longer linear but quite intricate,
taking the shape of a network. Several suppliers, factories and logistics
providers may be involved, making supply chain management (SCM) a
fairly challenging task.
SCM must be treated as an integral part of COMPETITIVE STRATEGY.
Indeed, SCM drives corporate strategy in the case of companies like
Dell. There must be a strategic fit between competitive strategy and
SCM, i.e. consistency between the customer needs that competitive
strategy focuses on and the capabilities that SCM is building.
A company must have a broad vision of how the supply chain will
function and evolve over time. Investment decisions must be made accordingly. These include manufacturing facilities, warehouses, transportation infrastructure and information technology. Supply chain design
decisions typically have long term implications, so they must be made
carefully, taking into account uncertainty and anticipated market conditions over the next few years.
These strategic design decisions must be backed by appropriate medium term planning decisions and short term operational decisions.
Planning may involve making forecasts typically for a year and breaking
it down into quarterly figures. Supply chain operations are more focused
on handling incoming customer orders in the best possible manner. The
*
From the book, Supply Chain Management: Strategy, Planning and Operations by Sunil Chopra and Peter Meindl, Prentice Hall, 2006.
Supply CHAIN MANAGEMENT (SCM)
217
design, planning and operation of a supply chain can have a major impact on a company’s overall success in many industries. The computer
manufacturer Dell, the Spanish retailer, Zara and the Hong Kong trader,
Li & Fung are good examples.
Efficiency and responsiveness make up the two conflicting demands
of a supply chain. Depending on the market realities, SCM must arrive
at a suitable trade-off. Usually costs tend to go up as investments are
made to improve responsiveness to market needs. Similarly, as efforts
are made to cut costs, responsiveness often suffers. Of course, there are
situations where intelligent supply chain configuration can simultaneously improve responsiveness and lower costs. Thus, in the computer
industry. Dell builds-to-order thereby cutting the costs associated with
inventory obsolescence. But Dell has also cut down response time and
increased the opportunities to customize so that responsiveness to customer needs has not been compromised.
The effectiveness of a supply chain depends critically on how different activities are coordinated. Coordination problems arise because of
conflicting objectives or poor information flows. These challenges have
increased in recent times on account of both multiple ownership of the
supply chain and increased product variety. One manifestation of this
problem is the bullwhip effect. Fluctuations in orders get amplified as
they move backwards along the supply chain from retailers to wholesalers to manufacturers to suppliers.
Suppose there is a random increase in customer demand at the retailer level. Interpreting this rise in demand as a growth trend, retailers may
order more than the observed increase in demand to cover anticipated
future growth. Similarly, wholesalers may, in turn, also up their orders.
This phenomenon extends right down to the suppliers. The bullwhip
effect can be minimized by greater coordination across the supply chain
by streamlining information flows, by aligning incentives, and by improving trust.
Another challenge today in SCM is mass customization, the ability to
execute small customized orders without sacrificing the cost advantages
of a mass production system. A key tool here is the principle of postponement, which holds that companies must delay the final configuration of a product till an order is received. In general, the demand for intermediate products and components is more stable than that for finished
goods. Take the example of paints. The only difference between two
218
Switching COSTS
shades of a paint could be the addition of a small quantity of pigment.
This can always be done at the retail outlet. By only keeping a few primary colors as the core inventory and generating new shades based on
actual customer demand, there is scope to simultaneously reduce inventory and improve customer responsiveness. The demand for primary
colors fluctuates less than that for individual shades.
Information technology (IT) has a key role to play in SCM. Inventory
is nothing but a hedge against uncertainty. Uncertainty arises due to poor
information flows. So by streamlining the flow of information, IT can
significantly improve the functioning of a supply chain. However, it is
wrong to equate SCM with IT as many computer software companies
do. The essence of SCM is managing relationships among the different
entities involved both within and outside the organization, including
customers, suppliers and third party logistics providers. Trust and fair
play are the key ingredients for good relationships.
(See also: VALUE CHAIN, VALUE SYSTEM)
Switching Costs
Costs incurred by buyers in changing products, services or suppliers due
to various factors. A buyer’s product specification may tie it to particular
suppliers. The buyer may have invested heavily in specialist ancillary
equipment. The new product may require new learning or its production
lines may be connected to the supplier’s manufacturing facilities. In addition, the buyer may have developed routines and procedures for dealing with a specific vendor. These routines will need to be modified if a
new relationship is established. All else being equal, a buyer will be motivated to continue existing relationships in order to minimize switching
costs.
(See also: BARGAINING POWER OF BUYERS, BARGAINING POWER OF
SELLERS, BARRIERS TO ENTRY)
SWOT Analysis
A strategic planning tool used to evaluate the strengths, weaknesses,
opportunities, and threats to a company. The technique is credited to
Albert Humphrey, who led a research project at Stanford University in
the 1960s and 1970s using data from Fortune 500 companies. Essentially, SWOT analysis is a methodology for identifying areas where an or-
SWOT ANALYSIS
219
ganization is strong, where it is weak, the major opportunities the company can explore, and the threats it faces.
SWOT analysis helps a company to know where it stands by exploring key issues:
Strengths:
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What do we do well?
How are we better than our competitors?
Weaknesses:
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What could be done better?
What is being done badly?
Opportunities:
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What are the opportunities that can be exploited?
What are the interesting trends?
Threats:
What obstacles do we face?
What is the competition doing?
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Are the specifications for our products or services changing?
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Is changing technology threatening our business?
(See also: COMPANY PROFILE, ENVIRONMENTAL ANALYSIS, STRATEGIC
PLANNING)
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220
Taylor, FREDERICK W. (1856-1915)
T
Taylor, Frederick W. (1856-1915)
An American engineer who invented work study and developed the scientific approach to management. Taylor advocated division of labor,
specialized tools, piece-rate payments and tighter management control
for improving productivity. Taylor’s management principles had considerable impact in America, the most visible being the mass production
system at Ford.
While Taylor’s system began as an attempt to develop the perfect
pay-for-performance formula, it quickly came to encompass broader
issues of “work” and “control”. Taylor realized the need for standardizing work, tools, and maintenance techniques to improve productivity.
Standardization, in turn, demanded a level of control over work that had
never been attempted before.
Taylor began by examining not just how long a particular task took to
complete but how long it should take. Taylor used a stopwatch and recorded his observations in a notebook. He broke each job and work process down into discrete parts, studying and timing the movements of
men and machines.
Taylor realized that while two machinists might be working on entirely different products, such as a railroad tire and an engine part, the
“elementary” steps in the job were the same. The secret of improving
productivity was to improve and standardize the elementary steps and
apply them to a wide range of tasks. By breaking each job down into its
component parts, Taylor determined how production machinery could
be modified and individual operations improved or eliminated.
Taylor was eager to learn from the best of skilled workmen, especially machinists, and was prepared to promote them. But those who were
left to operate on the factory floor were stripped of their individual artistry. By deskilling the foremen’s jobs, no single foreman needed to understand the entire range of supervisory work. Taylor also introduced an
elaborate planning department that was responsible for coordinating the
Technology RISK
221
work of the foreman, designing work flow and conducting costaccounting reviews.
The main limitation of Taylorism was that it failed to see a factory as
a social system. Today, Taylorism has fallen out of fashion. Knowledge
workers like to be left free and do not want to be micro managed as Taylorism would advocate.
Technology Risk
The vulnerability of a business to sudden or unanticipated changes in
technology. Technological changes can have a dramatic impact on industries. In making decisions regarding technological changes, companies err in two ways. They either commit themselves to a new technology too fast and burn their fingers — or wait and watch while another
company comes up with a new technology that puts them out of business. The issue of when and how to react to the emergence of a new
technology is a matter of judgment. However, this judgment need not be
based purely on intuition. By doing a systematic structured analysis of
developments in the technological environment and putting in place the
necessary organizational mechanisms, technology risk can be considerably reduced.
How can managers identify the emergence of a disruptive technology? Clayton Christensen’s research reveals that disruptive technologies
are often developed privately by engineers working for established
firms. When such technologies are presented to customers, they get a
lukewarm response. So established companies do not give much importance to these technologies. The frustrated engineers consequently
join start-ups, which are prepared to look for new customers. Companies
must, thus, take note when talented scientists and researchers leave them
to join start-ups. Often they do so in order to work in an environment
where their innovative ideas are taken more seriously.
Companies must also learn to assess the impact of a new technology*. The steam engine was developed for pumping water out of flooded
mines. It was years before a range of applications was developed in industries and for transportation. Marconi, the inventor of the radio, felt
*
Read Nathan Rosenberg’s insightful article, “Why Technology Forecasts Often Fail,” The Futurist, July-August, 1995.
222
Technology RISK
that it would mainly be used between two points where communication
by wire was impossible. So he targeted shipping companies, the navy and
newspapers. Marconi did not even consider the possibility of communicating to several people at the same time. It was left to David Sarnoff, an
uneducated Russian who migrated to the US to understand the technology’s potential in broadcasting news and entertainment programs. Bell
Labs did not think it necessary to apply for a patent covering the use of
laser in telecommunications. Only later did it realize what a powerful
combination laser and fiber optics made. Thomas Watson Sr. looked at the
computer as a tool for only rapid scientific and data processing calculations. Computers are today mostly used in commercial applications.
Very often new technologies tend to be primitive when first developed. The full potential of a new technology is sometimes recognized
only decades later. Even though the telephone has been around for more
than one hundred years, applications such as voice mail and data transfer
have emerged only recently. Aspirin, one of the world’s most widely
used drugs, has again been around for more than a hundred years but its
efficacy in reducing the incidence of heart attack, due to its blood thinning properties, was discovered much later. So, while evaluating new
technologies a longer time horizon must be used than in the case for existing technologies.
To better appreciate the impact of a new technology, established
companies would do well to go beyond their existing customer base and
start talking to potential users whom they have not seriously targeted till
now. Conventional planning, budgeting and investment appraisal processes can be counter-productive when applied to disruptive technologies. Creative ideas cannot be filtered through traditional financial
screens. Companies must be prepared to jump into the fray and go
through a process of learning, instead of waiting for the numbers to start
looking good, when the technology gains acceptance.
Companies must also note that technological performance often
overshoots market requirements. Consequently, today’s underperforming technology may meet the needs of customers tomorrow. On
the other hand, technologies which perform satisfactorily today may
over-perform tomorrow, but customers may not be willing to pay for this
over-performance. According to Michael PORTER, the basic aim of differentiation is to provide something extra that the customers value and
charge a premium for it. If customers do not value the additional fea-
Threat OF SUBSTITUTES
223
tures, differentiation as a competitive strategy will not be effective. So if
a new technology fares relatively low on some of the currently accepted
attributes but scores heavily on a new attribute, it has the potential to
unseat the older technology. Thus, in the disk drive industry capacity
became less important, and factors such as physical size and reliability
became the more important attributes.
To understand and work with new technologies, the critical requirement is a new mindset. Established players are not short of financial
muscle or talented manpower. But they usually have a mindset problem.
On the other hand, successful innovators often have fewer resources but
the right mindset. They worry less about what the technology can do
and, instead, look for markets which will be happy with the current performance levels.
One way to encourage a new mindset is to create small, empowered
teams outside the main organization and allow them to try new technologies. Since entrenched processes and values stand in the way of change,
a separate organization is a more practical arrangement than grandiose
attempts to change the entire company’s culture.
(See also: INNOVATOR’S DILEMMA, S-CURVE)
Threat of Substitutes
Industries are usually defined in terms of the products or services they
provide. However, if we define industries from the buyer’s point of
view, we might come up with a quite different set of firms which deal in
different products but who meet the same type of buyer needs. Substitute
products are alternative ways of meeting buyer needs. Substitutes lie
outside the traditional industry definition adopted by the firm. They can
be viewed in two ways.
Substitutes-in-kind are products that look alike and represent the
same application of a distinct technology to the provision of a distinct set
of customer functions.
Substitutes-in-use are products that have shared functionality based
on the customer’s perceptions of all the ways in which their needs can be
satisfied in a given usage or application situation. The attractiveness of a
substitute product depends on its initial price, customer switching costs,
post purchase costs of operation and the additional benefits the customer
perceives and values.
224
Tipping POINT
(See also: FIVE FORCES MODEL)
Tipping Point
A sociological term that refers to that dramatic moment when something
unique becomes common, it is a phrase coined by Morton Grodzins. In
the early 1960s, Grodzins discovered that many white families in the US
would remain in a neighborhood so long as the comparative number of
black families remained small. But beyond a point the remaining white
families would move out en masse in a process known as white flight.
He called that moment the tipping point. The idea was expanded by Nobel Prize-winner Thomas Schelling in 1972. More recently, Malcom
Gladwell has written a best selling book on this theme.
Around the principle of tipping point, management scholars W. Chan
Kim and Renee Mauborgne, have developed the concept of tipping point
leadership. In every company, there are people, acts, and activities that
exercise a disproportionate influence on performance. Launching a major strategic initiative is not about launching huge initiatives which demand heavy investments in time and resources. Rather, it is about conserving resources and cutting time by identifying and leveraging the factors of disproportionate influence.
Instead of mobilizing more resources, tipping point leaders attempt to
multiply the value of the resources they have. Instead of diffusing
change efforts widely, tipping point leaders focus on kingpins, fishbowl
management, and atomization. Kingpins are the key influencers in the
organization; well respected and persuasive leaders who have an ability
to unlock or block access to key resources. Kingpins can be motivated
into action by focusing attention on their actions in a repeated and highly
visible way. This is what Kim and Mauborgne refer to as fishbowl management, where the actions of kingpins become as transparent as fish in
a bowl of water. This way, the stakes of inaction are greatly raised. Finally, there is atomization which relates to the framing of the strategic
challenge. People must believe that the strategic challenge is attainable.
To overcome resistance to change, tipping point leaders focus on
three kinds of people:

Angels

Devils
are those who have the most to gain from the strategic shift.
are those who have the most to lose from it.
Total QUALITY MANAGEMENT (TQM)

225
A consigliere is a politically adept but highly respected insider who
knows in advance all the potential stumbling blocks, including who
will support and also who will block the new initiative.
Total Quality Management (TQM)
An integrated, cross-functional approach that attempts to facilitate continuous improvement in the quality of goods and services. TQM is a
systems approach that considers interactions between various subsystems of an organization including design, planning, production, distribution, field service and various management processes. The TQM philosophy believes that there is scope for continuous improvement in any
product, process or service. A basic notion of TQM is that quality is essential in all functions, not just manufacturing. TQM also emphasizes
satisfaction of customers, both internal and external. Implementing
TQM involves a cultural shift and change in behavior of employees.
(See also: DEMING, WILLIAM EDWARDS)
226
Utterback, JAMES
U
Utterback, James
A pioneering scholar in the area of innovation. Though not as well
known as others like Peter DRUCKER and Clayton CHRISTENSEN, Utterback’s work is highly insightful and offers a lot of ideas on how innovation takes place in different industries. Utterback has dealt with the relationship between product and process innovation, behavior of established firms when a radical innovation enters the industry, factors that
prevent successful firms from transiting from current technologies to
new ones and how firms can cope with technological change.
(See also: INNOVATION, INNOVATOR’S DILEMMA, PROCESS INNOVATION,
PRODUCT INNOVATION)
Value CHAIN
227
V
Valuation
A concept commonly used in the context of a merger. The value of the
company being acquired must be established carefully. There are various
ways to value a company — market price of shares, replacement cost of
assets, present value of the future expected cash flows, etc. Ultimately,
valuation is a subjective exercise that is as much art as science.
(See also: MERGER)
Value Chain
A framework developed by Michael PORTER for analyzing the various
activities a firm performs in order to create value for its customers. By
analyzing the value chain, a firm can understand how it is adding value,
in which activities it is strong, where it is weak, and how it can further
streamline the value addition process.
The value chain* breaks down the firm into various activities in order
to understand the behavior of costs — and the existing or potential
sources of differentiation. A firm gains competitive advantage either by
performing these activities more cheaply, or doing them better than its
rivals.
Value is the amount buyers are willing to pay for what a firm provides them. A firm is profitable if the value created exceeds the costs
incurred. Creating value for buyers that exceeds the cost of doing so, is
the goal of any generic strategy.
Value chain activities can be categorized into primary and support.
Primary Value Chain Activities

Inbound logistics:
Receiving, warehousing, and inventory control of
input materials.
*
See: The Essence of Strategic Management by Cliff Bowman, Prentice Hall of
India, 1990.
228
Value CHAIN

Operations:

Outbound Logistics:


Activities that transform the inputs into the final product.
Comprise the activities that get the finished
product to the customer, including warehousing, order fulfillment,
etc.
Marketing and Sales: Activities that try to persuade buyers to purchase the product, including channel selection, advertising, pricing,
etc.
Service: Activities such as customer support, after sales service, etc.
One or more of these primary activities may be vital in developing a
competitive advantage. For example, logistics activities are critical for a
retail chain. Marketing may be a critical activity for a company offering
branded consumer goods.
Support Activities




Procurement:
Purchasing of raw materials and other inputs used in
the value-creating activities
Technology Development: Activities such as research and development and process automation.
Human Resource Management: Activities like recruiting, development, and compensation of employees.
Firm Infrastructure: Activities such as finance, legal services, and
management information systems
Porter emphasizes that a firm’s value chain must be viewed as an
interdependent system or network of activities, connected by linkages*.
Linkages occur when the way in which one activity is performed,
affects the cost or effectiveness of other activities. Linkages often create
trade-offs in performing different activities that must be optimized. For
example, more expensive components can reduce after-sale service
costs.
Linkages also require activities to be coordinated. Coordinating
linked activities reduces transaction costs, allows better information for
control purposes, substitutes less costly operations in one activity for
more costly ones elsewhere and can also reduce cycle time. For exam-
*
Porter, Michael E., The Competitive Advantage of Nations, The Free Press,
1990.
Value CHAIN
229
ple, dramatic time savings can be achieved through such coordination in
the design and introduction of new products and in order processing and
delivery.
The value chain can help managers understand the sources of cost
advantage. Many managers view cost too narrowly and concentrate on
manufacturing. They also need to look at product development, marketing and service and draw cost advantage from throughout the value
chain. Gaining cost advantage also usually requires optimizing the linkages among activities as well as close coordination with suppliers and
channels.
The value chain also helps identify the sources of differentiation.
Differentiation results, fundamentally, from the way a firm’s product,
associated services and other activities affect its buyer’s activities. The
various points of contact between a firm and its buyers offer scope for
differentiation.
The value chain allows a deeper look not only at the types of COMPETITIVE ADVANTAGE but also at the role of COMPETITIVE SCOPE in gaining
competitive advantage. Scope shapes the nature of a firm’s activities, the
way they are performed, and how the value chain is configured. By selecting a narrow target segment, a firm can tailor each activity more precisely and effectively to the segment’s needs compared to competitors
with broader scope. On the other hand, broad scope may lead to a competitive advantage if the firm can share activities across industry segments or even when competing in related industries.
The current trend is towards smaller and more focused value chains.
The idea is to help companies focus on core competencies and leave the
remaining activities to partners with specialized expertise. What is becoming critical is excellent capability in a small section of the value
chain. Taiwanese semiconductor companies, for example, concentrate
on manufacturing. They do not generally get involved in design or marketing. Nike concentrates on brand management and outsources most of
its manufacturing. In the PC industry, we have companies like Intel (microprocessors), Samsung (monitors), HP (printers), Microsoft (operating
systems) and Mitec (modems) offering specialized products.
As value chains fragment, the ability to coordinate value chain activities performed by different entities has also become important. The
chain as a whole must perform effectively and provide value to customers in a superior way. Effective coordination depends crucially on trust
230
Value MIGRATION
and relationships between the orchestrator and the different entities involved. Information technology can facilitate coordination but cannot
take the place of trust.
(See also: PROCESS NETWORKS, SUPPLY CHAIN MANAGEMENT)
Value Migration
Shifting of forces that create value. Companies are in business to create
value for the customer. They can do this by offering a product or service
that corresponds to customer needs. In a fast changing business environment, the factors that determine value are constantly changing. As
Adrian SLYWOTZKY* put it, value migration is the shifting of valuecreating forces. Over time, value migrates from outmoded business
models to business designs that are better able to satisfy customer priorities. That is when established players find it difficult to compete and the
circumstances become ripe for challengers.
Value System
A term coined by Michael PORTER. A firm’s value chain is linked to the
value chains of upstream suppliers and downstream buyers. The result is
a larger stream of activities known as the value system. The development of sustainable competitive advantage depends not only on the
firm’s value chain, but also on the value system of which the firm is a
part. In a manner of speaking, value system is equivalent to the supply
chain.
(See also: SUPPLY CHAIN MANAGEMENT, VALUE CHAIN)
Values
The set of principles which a company regards as sacrosanct. These
principles are non-negotiable and cannot be compromised. Values may
refer to the company’s philosophy vis-à-vis its customers, suppliers, society and investors. Values define what is right, what is wrong and what
are the priorities. Values guide employees while taking decisions.
(See also: CORE IDEOLOGY)
*
In his book Value Migration: How to Think Several Moves Ahead of the Competition, Harvard Business School Press, 1995.
Vertical INTEGRATION
231
Vertical Integration
The expansion of a business by acquiring or developing businesses engaged in earlier, or later stages, of the VALUE CHAIN. For example, in
forward integration manufacturers might enter retailing; in backward
integration, on the other hand, retailers might enter manufacturing.
All firms are vertically integrated to some extent. Arriving at the optimum level of vertical integration involves examination of important
trade-offs. Outsourcing increases flexibility but vertical integration gives
the company a greater sense of control. The most important issue in outsourcing is deciding which resources or capabilities are core and strategic. If such competencies are not developed in-house, the long-term
competitive position of the firm would be threatened. For example, the
research efforts of global pharmaceutical companies involve tremendous
risk, but cannot be outsourced. This is because research forms the basis
for competition in the pharmaceuticals business.
Thus, what a company does in-house and what it outsources has significant strategic implications for the company. One of the best examples is IBM. In a bid to get its PC project going fast, the computer giant
decided to entrust the development of the operating system to Microsoft.
The rest, as they say, is history.
Michael PORTER has offered deep insights on vertical integration*.
Benefits of Vertical Integration

*
Economies of Integration:
By combining technologically distinct
operations, there are opportunities for reducing the number of steps
in the production process, handling and transportation, and, consequently, the costs of scheduling and co-ordinating. Integrated operations can reduce information gathering, marketing and purchasing
costs. Upstream and downstream stages can take a long term view
and develop specialized procedures for dealing with each other in areas such as logistics, packaging, record keeping and control. Vertical
integration also allows the upstream unit to tune its product to the exact requirements of the downstream unit and for the downstream unit
to adapt itself more fully to the characteristics of the upstream unit.
In his book, Competitive Strategy: Techniques for Analyzing Industries and
Competitors, The Free Press, 1998.
232






Vertical INTEGRATION
Technological Advantages:
A unit may integrate forward to understand the technology in the downstream business. Similarly, it may
integrate backwards to familiarize itself with the technology in the
upstream business.
Assured Supply / Demand: Vertical integration can hedge the firm
against fluctuations in supply / demand.
Offsetting Bargaining Power: Vertical integration can enable a firm to
reduce the bargaining power of powerful suppliers or customers. Further, by gaining a better understanding of costs, the firm has opportunities to improve its profitability.
Ability to Differentiate: By manufacturing proprietary items in-house
and exercising greater control on the channels of distribution, etc., a
firm can increase the scope for differentiation.
Creation of Entry Barriers: The more significant the net benefits of
integration, the greater the pressure on new entrants to integrate. As a
result, the entry barriers increase.
Entry into a High Returns Business: Integration may allow the company to enter a more profitable part of the value chain.
Costs of Vertical Integration





Exit Barriers:
Integration often increases strategic interrelationships
and emotional ties to the business. Some commitments are irreversible. As a result, exit barriers are raised.
Increased Operating Leverage: Vertical integration increases fixed
costs. When an input is produced internally, the firm has to bear the
overheads even during downturns.
Reduced Flexibility to Change Partners: Technological changes, or
changes in product design involving components, etc. can create a
situation in which the in-house supplier may be providing a high cost,
inferior or inappropriate product. It is not easy to switch to an outside
supplier at short notice.
Capital Investment Requirements: Vertical integration consumes
capital resources which have an opportunity cost.
Foreclosure of Access to Supplier / Consumer Research: By integrating, a firm may risk cutting itself off from the flow of technology
from its suppliers or customers.
Vertical INTEGRATION



233
Imbalances:
When the upstream and downstream units are not balanced, potential problems arise.
Inefficiencies: Since buying and selling occurs through a captive relationship, the incentive to perform may be less for both the upstream
and downstream businesses, resulting in inefficiencies.
Different Managerial Requirements: Businesses can differ in structure, technology and management despite having a vertical relationship. For example, manufacturing and retailing are fundamentally
different. Understanding how to manage these different activities can
be a major cost of integration.
John Hagel III and Marc Singer* offer a very useful framework for
resolving the vertical integration dilemma. They recommend examining
the coordination problems which arise when different players are involved in a value chain activity. When the interaction costs can be reduced by performing an activity internally, a company will vertically
integrate rather than outsource. Reduction in interaction costs leads to a
shakeout in the industry and changes the basis for COMPETITIVE ADVANTAGE. The emergence of information technology in general, and the
Internet in particular, has dramatically lowered interaction costs. So, the
chances are that specialized players will hold the aces.
Hagel and Singer add that there are three different core processes
which are integral to any business. These are:



Customer relationship management;
Product innovation; and
Infrastructure creation.
The competencies needed to manage each one are quite distinct.
Customer relationship management focuses on attracting and retaining customers. It involves big marketing investments that can be recovered only by achieving economies of scope. A wide product range and a
high degree of customization to suit the needs of different customers are
the critical success factors in customer relationship management.
Product innovation aims at bringing out attractive new products and
services to the market in quick succession. Speed is important because
*
Hagel III, John; Singer, Marc, “Unbundling the corporation”, Harvard Business Review, March-April 1999, pp. 133-141.
234
Value INNOVATION
early mover advantages are often critical. Small organizations with an
entrepreneurial style of management are often better at innovation than
large bureaucracies.
Infrastructure creation (e.g. an information technology backbone) is
necessary to efficiently handle high volume repetitive transactions.
Economies of scale are vital for recovering fixed costs. Standardization
and reutilization are the essence of this process.
When these three processes are combined within a single corporation, conflicts are bound to arise. Scope, speed and scale cannot be
achieved simultaneously. So many industries such as newspapers, credit
cards and pharmaceuticals are splitting along these lines.
There are alternatives to vertical integration. A firm can resort to partial integration. Independent suppliers can be used to bear the risk of
market fluctuation while in house suppliers maintain steady production
rates.
Another alternative is quasi integration. This refers to a relationship
between vertically related businesses that are somewhere in between
long term contracts and full ownership. There can be various forms of
quasi integration:





Minority equity investment.
Loans or loan guarantee.
Prepurchase credits.
Exclusive dealing agreements.
Co-operative R & D.
Quasi integration tends to reduce the costs associated with full integration. It also avoids the need to make major capital investments required for integration and eliminates the complexities involved in managing other types of businesses. On the negative side, quasi integration
may fail to achieve the full benefits of integration, such as differentiation.
(See also: BACKWARD INTEGRATION, FORWARD INTEGRATION)
Value Innovation
A strategy wherein a firm creates new space by developing products or
services with value instead of competing head-on with its rivals. Value
innovation is a term coined by Chan Kim and Renee Mauborgne. Smart
Vision
235
companies focus on new markets which Kim and Mauborgne call blue
oceans, pursuing a strategy called value innovation. Instead of fighting
competitors, these companies try to make them irrelevant by creating a
leap in value for buyers and the company, thereby opening up new and
uncontested business opportunities called blue oceans.
Value innovation places equal emphasis on value and innovation.
Value without innovation tends to be incremental and does not give the
company a competitive edge in the marketplace. INNOVATION without
value tends to be technology-driven, market pioneering, or futuristic,
often shooting beyond what buyers are ready to accept and pay for. Value innovation occurs only when companies align innovation with utility,
price and cost positions. Companies that seek to create blue oceans, often pursue differentiation and low cost simultaneously.
Buyer value comes from the utility and price that a company offers to
its buyers. The value to the company is determined by the price and the
cost structure. So value innovation is achieved only when the utility,
price and cost activities are properly aligned. Such an integrated approach holds the key to the successful implementation of a BLUE OCEAN
STRATEGY.
Vision
A guiding theme that articulates the nature of the business and its intentions for the future.
These intentions are based on how the management believes the environment will unfold and what the business can and should be in the
future. A vision has the following characteristics:
1. Informed — rooted in a deep understanding of the business and the
forces shaping the future,
2. Shared and created through collaboration,
3. Competitive — creates an obsession with winning throughout the
organization, and
4. Enabling — empowers individuals to make meaningful decisions
about strategies and tactics.
A vision must be able to inspire people by making a powerful statement in simple terms so that people at all levels can relate to it.
(See also: CORPORATE PURPOSE, MISSION)
236
Whistle BLOWER
W
Whistle Blower
An employee, former employee, or member of an organization who reports misconduct to people or entities that have the power to take corrective action. A sense of moral outrage may prompt people to expose
wrong doing within an organization. Generally the misconduct is a violation of law, rule, regulation and / or a direct threat to public interest.
Fraud, health and safety violations and corruption are just a few examples. The vast majority of cases are based on relatively minor misconduct. The most common type of whistleblowers are internal whistleblowers who report misconduct to a superior within their company. In
contrast, external whistleblowers report misconduct to outside persons or
entities such as lawyers, the media, law enforcement or watchdog agencies, or to other local, state, or federal agencies.
(See also: BUSINESS ETHICS, CODE OF ETHICS)
White Knight
An expression used to describe a company that comes to the rescue of a
firm facing a hostile take-over bid from a predator. The white knight
steps in with a counter-offer for the firm, thereby saving it from the
predator. The term comes from Lewis Carroll’s Through the Looking
Glass (1871) in which Alice is captured by a red knight but is then immediately rescued by a white knight.
(See also: ANTI-TAKEOVER STRATEGY, HOSTILE BID)
Williamson, Oliver E.
An American economist who has become closely associated with the
economics of transaction costs by building on the work of Nobel prizewinner Ronald Coase. Transactions can take place through markets or
hierarchies. The mode chosen will depend on the amount of information
available and the degree of trust between buyer and seller. Transaction
cost theory has important implications for industrial organization, com-
Winner’s CURSE
237
petition policy, corporate governance and employment relations. Transaction costs can affect make-or-buy decisions by companies.
(See also: VERTICAL INTEGRATION)
Willpower
That which enables a person to act even when beset by inertia or faced
with overwhelming odds.
Knowing is not enough. Unless managers get into action mode,
knowing is of little use. Heike Bruch and Sumantra GHOSHAL mention in
their book, A Bias for Action, that despite all their knowledge and competence, and the influence and resources at their disposal, managers do
not grab the opportunities to achieve something significant. Purposeful
action requires energy and focus. Motivation alone cannot spur people to
purposeful action. What is needed is willpower. Willpower is what enables managers to take action even when they are not inclined to do
something. Managers with willpower overcome barriers, deal with setbacks and persevere to the end. Just as defensive reasoning can block
learning, lack of will power can block action.
(See also: KNOWING-DOING GAP)
Winner’s curse
A term often used in the context of a merger or acquisition. In their enthusiasm to close an M&A deal, companies may end up bidding too
high. Though the deal is clinched, the win effectively turns out to be a
curse as the high premium paid becomes difficult to justify. The end
result is that shareholder value gets eroded.
(See also: MERGER)
238
Zero BASE BUDGETING
Z
Zero Base Budgeting
Budgeting usually tends to be an incremental exercise. The current
year’s figures are adjusted suitably to arrive at the next year’s figures.
Zero based budgeting challenges basic assumptions and tries to arrive at
budget figures for the next year from scratch. This kind of an approach
to budgeting is useful for exposing and eliminating inefficiencies which
have accumulated over a period of time.
Bibliography
239
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