STRATEGIC MANAGEMENT WHAT IS MEANT BY STRATEGY • • • • • STRATEGY IS MANAGEMENT BLUE PRINT FOR RUNNING OF BUSINESS AND CONDUCTING OPERATIONS.THIS BLUE PRINT NEEDS TO BE CONVERTED TO ACTION PLANS WHICH ARE EXECUTED IT CONSISTS OF THE COMPETITIVE MOVES AND BUSINESS APPROACHES DEPLOYED TO GROW THE BUSINESS , ATTRACT AND RETAIN CUSTOMERS , CONDUCT OPERATIONS AND ACHIEVE THE TARGETED LEVELS OF ORGANIZATIONAL PERFORMANCE DESIGN OF STRATEGY REPRESENTS A COMMITMENT TO PURSUE A PARTICULAR SET OF ACTIONS IN GROWING THE BUSINESS IT IS ALSO A DEFINED METHOD BY WHICH THE MGT STATES HOW EACH FUNCTIONAL PIECE OF THE BUSINESS (SUPPLYCHAIN,PRODUCTION,SALES,FINANCE, DISTRIBUTION,HR) WILL BE OPERATED , HOW PERFORMANCE WILL BE MONITORED AND IMPROVED IN CHOOSING A STRATEGY A COMPANY INDICATES ITS PREFERENCE FOR A PARTICULAR CO MBINATION OF COMPETITIVE AND OPERATING APPROACHES IN MOVING THE COMPANY IN THE INTENDED DIRECTION WHAT IS MEANT BY STRATEGY • COMPANIES HAVE FREEDOM IN CHOOSING STRATEGIES • SOME CHOOSE TO IMPROVE THEIR PERFORMANCE AND MARKET STANDING BY ACHIEVING LOWER COSTS THAN RIVALS WHILE OTHERS PURSUE PRODUCT SUPERIORITY OR INTIMATE CUSTOMER SERVICE OR DEVELOPMENT OF COMPETENCES AND CAPABILITIES THAT RIVALS CANNOT MATCH • TARGETTING OF MARKET SEGMENT IS ALSO A STRATEGY eg SOME TARGET THE HIGH END MARKET WHILE OTHERS ADDRESS NICHE MARKETS eg DESIGNER WEAR;SOME POSITION IN ONLY ONE PART OF SUPPLY CHAIN WHILE OTHERS HAVE INTEGRATED VALUE STREAMS (FULL OR PART). SOME CONFINE OPERATIONS TO LOCAL OR REGIONAL MARKETS WHILE OTHERS PREFER TO GO NATIONAL/GLOBAL. SOME COMPANIES PREFER TO OPERATE ONLY IN ONE INDUSTRY(RIL) WHILE OTHERS PREFER TO DIVERSIFY(BIRLA , TATA) INTO RELATED/UNRELATED(VERTICAL/HORIZONTAL) INTEGRATION VIA EXPANSIONS,JV,STRATEGIC ALLIANCES What’s Strategy? • Strategy is management’s overall plan and actions for deploying resources and skills taking into consideration opportunities and threats in the environment – to achieve it’s mission, vision and objectives – to establish a favorable competitive position. • Strategy involves: – An organization’s goals – A series of related decisions & actions – Takes into account key internal strengths & weaknesses and external opportunities threats – Analysis, communication, coordination, & action Business Strategy Strategy What Is a Strategy? • A unique value proposition versus competitors • A different, tailored value chain • Clear tradeoffs, and choosing what not to do • Activities that fit together and reinforce each other • Continuity of strategy with continual improvement in realizing the strategy What is Not a Strategy? • • • • • • • • • Best practice improvement Execution Aspirations A vision Learning Agility Flexibility Innovation The Internet (or any technology) WHAT IS STRATEGIC MGT • STRATEGIC MGT ISA PROCESS OF LONG TERM PLANNING FOR A COMPANY BASED ON ITS LONG TERM OBJECTIVES • IT IS DEFINED AS A SET OF DECISIONS AND ACTIONS RESULTING IN FORMULATION AND IMPLEMENTATION OF STRATEGIES DESIGNED TO ACHIEVE DESIRED OBJECTIVES • STRATEGIC MGT INVOLVES DESIGN IMPLEMENTATION OF VISION AND MISSION STATEMENTS WHICH SHOULD BE MONITORED AT THE ACTIVITY LEVEL TO ENSURE THE ACHIEVEMENT OF SHORT AND LONG TERM GOALS • IT ALSO INVOLVES PLANNING, PROGRAMMING ,BUDGETING • TRANSLATION OF STRATEGIES TO ACHIEVE OUTCOMES IS CALLED ACTIONS • THERE CAN BE SEVERAL STRATEGIC APPROACHES TO ACHIEVE COMPETITIVE ADVANTAGE What is Strategic Management? • Focuses on how managers formulate and implement, and evaluate strategies aimed at developing and maintaining competitive advantage: – the reason some firms enjoy higher levels of performance than their rivals or competitors. • Strategic management is therefore concerned with overall PLOC • Four aspects that set strategic management apart: – – – – Interdisciplinary External focus Internal focus Future directions “Big picture” view of an organization influenced by its external environment What is Strategic Management • Strategic management – Process of determining an organization’s basic mission and long-term objectives, and then implementing a plan of action for pursuing this mission and attaining these objectives • Growing need for strategic management is related to – Increasingly diversified operations in a continuously changing international environment. Importance of Strategic Management • Gives every employee a role to play in making the firm successful – Applies to all professional employees, not just those in management – Allows decision-making, allocation of resources and management of people to be based on a firm’s strategic plan – Success as a manager (as measured by your promotion, job security, and pay increases) is often determined by your efforts & departments contribution to overall organization’s success • Makes a difference in performance levels – Research suggest that successful companies use strategic management concepts & techniques – Success evolves from “knowing what you’re doing” and often implies having a strategic plan Importance of Strategic Management • Provides systematic approach to uncertainties that organizations face – Competitive & global environment are dynamic (changing) – Change, whether significant of minor, must be recognized and analyzed, & dealt with – Strategic management allows for the analysis of the situation (identifying the sources of change in environment) • Coordinates and focuses employees to achieve organization’s goals – Allows for team effort which is coordinated for firm success – Allows for development of a plan, communication, coordination, & cooperation among diverse depts & functions STRATEGIC APPROACHES FOR COMPETITIVE ADVANTAGES • MOST FREQUENTLY USED AND DEPENDABLE STRATEGIC APPROACHES USED TO DISTINGUISH A COMPANY FROM OTHERS INCLUDE -STRIVING TO BE INDUSTRY LOW COST PROVIDER THEREBY AIMING FOR A COST BASED ADVANTAGE OVER RIVALS eg TATA MOTORS NANO , DECCAN AIRWAYS (LAKER AIRWAYS 49BPS LHR TO JFKNY).NIRMA,ASHOK YATRI NIVAS.ALL HAVE EARNED STRONG MARKET POSITIONS BECAUSE OF LOW COST ADVANTAGES AND THEIR SUBSEQUENT ABILITY TO UNDERPRICE COMPETITORS. ACHIEVING LOWER COSTS THAN COMPETITION CAN PRODUCE A DURABLE COMPETITIVE EDGE WHICH RIVALS FIND HARD TO MATCH.(KF ACQUIRES DECCAN;JET ACQUIRES SAHARA AND CALLS IT JETLITE;ALSO HAS JET CONNECT FLIGHTS). ALSO CASE OF D-MART STRATEGIC APPROACHES FOR COMPETITIVE ADVANTAGES • MOST FREQUENTLY USED AND DEPENDABLE STRATEGIC APPROACHES USED TO DISTINGUISH A COMPANY FROM OTHERS INCLUDE -OUTCOMPETING RIVALS BASED ON DIFFERENTIATING FEATURES SUCH AS DURABILITY,RELIABILITY, FUNCTIONALITY, SERVICE AVAILABILITY, PRODUCT RANGE AVAILABILITY,PERFORMANCE,TECHNOLOGICAL SUPERIORITY(ENERGY/FUEL SAVING) OR GOOD VALUE FOR MONEY. THIS USES DIFFERENTIATION STRATEGY eg AMBULANCE SERVICES WHICH PROVIDE PROMPT SERVICES AT REASONABLE COSTS. -FOCUSING ON NICHE MARKET AND WINNING COMPETITIVE EDGE BY SERVING SPECIAL NEEDS AND TASTES OF BUYERS COMPRISING THE NICHE eg DESIGNER WEAR STRATEGIC APPROACHES FOR COMPETITIVE ADVANTAGES • • MOST FREQUENTLY USED AND DEPENDABLE STRATEGIC APPROACHES USED TO DISTINGUISH A COMPANY FROM OTHERS INCLUDE -DEVELOPING EXPERTISE THAT GIVE COMPANY COMPETITIVE CAPABILITY THAT RIVALS CANNOT MATCH OR IMITATE.SUCH EXPERTISE FETCHES PREMIUMS IN THE MARKET. FOR EXAMPLE PEOPLE PAY MORE FOR MEDICAL SERVICES AT BREACH CANDY , BOMBAY HOSPITAL, HINDUJA AND LEELAVATI HOSPITALS THAN AT MOST OTHERS BECAUSE OF SUPERIOR SERVICES RENDERED ARISING OUT OF HAVING SUPERIOR SKILLS AND PROCESSES WHICH GENERATE BRANDED PRODUCTS/SERVICES WHICH IN TURN ENHANCES MARKET VALUE.MCKINSEY CONSULTING CHARGES MUCH MORE THAN OTHER CONSULTING FIRMS AND IS ABLE TO COMMAND THE PRICE KEY TO SUCCESSFUL STRATEGY IS TO COME UP WITH ONE OR MORE DIFFERENTIATING STRATEGY ELEMENTS THAT ACT AS CONDUIT IN DRAWING CUSTOMERS AND GIVE A LASTING COMPETITIVE EDGE Industry Leadership Dominance in Market Share Product/Service Brand value Process Capability/Process Excellence Differentiating Human Capital WHAT TO LOOK FOR IN COMPANY STRATEGY • PATTERN OF ACTIONS AND BUSINESS APPROACHES THAT DEFINE A COMPANY STRATEGY • ACTIONS TO GAIN SALES AND MARKET SHARE VIA LOWER PRICES , MORE PERFORMANCE FEATURES, MORE APPEALING DESIGN, BETTER QUALITY OF CUSTOMER SERVICE,WIDER PRODUCTION SELECTION • ACTIONS TO RESPOND TO CHANGING MARKET CONDITIONS AND OTHER EXTERNAL FACTORS(HERO HONDA REDUCING PRICE THRU COST REDUCTI ON AND ACTUALLY INCREASING MKT SHARE FROM 45% TO 53% WHEN ACTUAL MARKET FELL BY 10%) • ACTIONS TO ENTER NEW MARKETS (INFOSYS - CHINA) OR EXIT EXISTING ONES(L AND T CEMENT) WHAT TO LOOK FOR IN COMPANY STRATEGY • • • • ACTIONS TO STRENGTHEN COMPETITIVENESS VIA STRATEGIC ALLIANCES AND COLLABORATIVE PARTNERSHIPS eg DELOITTE AND TOUCHE HAS GOT STRATEGIC ALLIANCES AND COLLABORATIVE PARTNERSHIPS WITH LEADING AUDITING HOUSES IN INDIA SUCH AS BATLIBOI , C C CHOKSI, etc TO PROVIDE AUDITING SERVICES IN INDIA ACTIONS AND APPROACHES USED IN MANAGING KEY ACTIVITIES SUCH AS MANUFACTURING , SALES , FINANCE etc.MFG OUTSOURCING ACTIONS TO STRENGTHEN COMPETITIVE CAPABILITIES AND CORRECT WEAKNESSES ACTIONS TO DIVERSIFY REVENUES BY ENTERING NEW BUSINESS eg MANUFACTURERS CAN GET INTO SYSTEM INTEGRATION SERVICES TO PROVIDE ONE STOP SHOP RELEVANCE OF STRATEGY • HOW WELL DOES THE STRATEGY FIT INTO THE SITUATION THE COMPANY IS AIMING FOR. -TO SUCCEED STRATEGY HAS TO BE WELL MATCHED TO INDUSTRY AND COMPETITIVE CONDITIONS. -STRATEGY ALSO HAS TO BE TAILORED TO THE COMPANY RESOURCE STRENGTHS AND COMPETENCES(WHICH MARKETS TO CONCENTRATE ON;WHAT SHOULD THE SALES MODEL BE – DIRECT OR DISTRIBUTOR?;SHOULD WE BE PROVIDING AFTER SALES SERVICE OR HAVE SERVICE REPRESENTATIVES)UNLESS STRATEGY IS SYNCHRONOUS WITH THE INTERNAL AND EXTERNAL CONDITIONS, IT IS UNLIKELY TO PRODUCE DESIRABLE RESULTS RELEVANCE OF STRATEGY • IS THE STRATEGY HELPING THE COMPANY ACHIEVE A LASTING COMPETITIVE ADVANTAGE -WINNING STRATEGIES ENABLE A COMPANY ACHIEVE DURABLE COMPETITIVE ADVANTAGE eg MARKET LEADERSHIP OF ASIAN PAINTS IN DECORATIVE SEGMENT. -MORE DURABLE THE STRATEGY THE HIGHER IS THE COMPETITIVE ADVANTAGE AND MARKET DOMINANCE • IS THE STRATEGY RESULTING IN BETTER COMPANY PERFORMANCE -STRATEGY TO LAUNCH REFRIGERATOR EXCLUSIVELY FOR RURAL MKT AT A VERY LOW PRICE HAS GIVEN GODREJ AND BOYCE A DISTINCT ADVANTAGE OVER OTHER BRANDS IN THE RURAL SEGMENT. SUCH STRATEGIES AIMED AT SPECIFIC SEGMENTS IF SUCCESSFUL WILL ENABLE THE COMPANY TO REAP NINE CRITICAL AREAS OF STRATEGY • DETERMINING THE VISION MISSION AND ITS SHORT TERM AND LONG TERM GOALS • DEVELOPING A COMPANY PROFILE OF CAPABILITIES INCLUDING PROCESSES , PEOPLE , TECHNOLOGY ETC WHICH WILL ENABLE THE ACHIEVEMENT OF THE LONG TERM GOALS. MOST IMPORTANT IS TO DETERMINE THE HUMAN CAPABILITY FACTOR (HUMAN CAPITAL)WHICH WILL BE REQUIRED TO ACHIEVE THE ABOVE GOALS • ASSESSMENT OF COMPANY CHANGING EXTERNAL ENVIRONMENT WITH RESPECT TO NEED TO PROVIDE SUCH PRODUCTS AND SERVICES WHICH MEET THE CHANGING EXPECTATIONS OF THE CUSTOMERS NINE CRITICAL AREAS OF STRATEGY • ANALYSIS OF POSSIBLE COMPANY EXPANSION OR NEW FORAYS INTO RELATED OR UNRELATED AREAS THRU INVESTMENT OR ACQUISITIONS/MERGERS • IDENTIFYING DESIRED OPTIONS IN STRATEGIC MANAGEMENT IN LIGHT OF THE COMPANY MISSION • DECIDE SET OF SHORT AND LONG TERM STRATEGIC OBJECTIVES AND STRATEGIES REQUIRED TO ACHIEVE OBJECTIVES • DEVELOPMENT OF ANNUAL OBJECTIVES LINKED TO SHORT TERM GOALS WHICH IN TURN ARE LINKED TO LONG TERM GOALS WHICH SHOULD FORM PART OF VISION STATEMENT NINE CRITICAL AREAS OF STRATEGY • • IMPLEMENTING STRATEGIC DECISIONS BASED ON BUDGETED RESOURCE ALLOCATION AND MATCHING OF TASKS TO BE PERFORMED TO ACHIEVE OBJECTIVES WITH RESOURCES AND TECHNOLOGIES REVIEW AND EVALUATE SUCCESS OF STRATEGIC PROCESS TO SERVE AS BASIS OF CONTROL AND INPUT FOR FUTURE DECISION MAKING *STRATEGIC MGT INVOLVES PLANNING DIRECTING ORGANIZING AND CONTROLLING OF STRATEGY RELATED DECISIONS AND ACTIONS OF THE BUSINESS *STRATEGY IS THE LARGE SCALE FUTURE ORIENTED PLANS FOR INTERACTION WITH COMPETITIVE ENVIRONMENT TO OPTIMIZE ACHIEVEMENT OF ORGANIZATION OBJECTIVES *STRATEGY REPRESENTS FIRMS FUTURE GAME PLAN AND PROVIDES FRAMEWORK FOR MANAGERIAL DECISIONS *STRATEGY REPRESENTS COMPANY AWARENES OF HOW TO COMPETE AGAINST WHOM WHEN WHERE AND FOR WHAT Strategic Planning …is the managerial process of developing and maintaining a strategic fit between the organization's objectives and resources and its changing market opportunities. Org Objectives Strategic Fit Resources Changing Environment What is Strategic Planning? • Process to establish priorities on what you will accomplish in the future • Forces you to make choices on what you will do and what you will not do • Pulls the entire organization together around a single game plan for execution • Broad outline on where resources will get allocated What is Strategic Planning? • A management tool/roadmap to the future used to help an organization do a better job – To set priorities – To focus its energy and resources – To ensure management and staff are working toward common goals with clear expectations and accountability – To ensure agreement with the intended outcomes/results of their efforts – To assess and adjust the organization’s direction in response to a changing environment • A disciplined effort that produces fundamental decisions and actions that shape and guide what an organization is, who it serves, what it does, and why it does it, with a focus on the future 25 Strategic Planning Strategic Planning • First Stage of Strategic Planning may involve: • Futures Thinking – Thinking about what the business might need to do 10– 20 years ahead • Strategic Intents – Thinking about key strategic themes that will inform decision making Taking time to think and reflect may be more important than many businesses allow time for! Why is Strategic Planning Critical? “In this volatile business of ours, we can ill afford to rest on our laurels, to pause in retrospect. Times and conditions change so rapidly that we must keep our aim constantly focused on the future.” - Walt Disney 28 Why do Strategic Planning? • If you fail to plan, then you plan to fail – be proactive about the future • Strategic planning improves performance • Counter excessive inward and short-term thinking • Solve major issues at a macro level • Communicate to everyone what is most important Fundamental Questions to Ask • Where are we now? (Assessment) • Where do we need to be? (Gap / Future End State) • How will we close the gap (Strategic Plan) • How will we monitor our progress (Balanced Scorecard) A Good Strategic Plan should . . . • Address critical performance issues • Create the right balance between what the organization is capable of doing vs. what the organization would like to do • Cover a sufficient time period to close the performance gap • Visionary – convey a desired future end state • Flexible – allow and accommodate change • Guide decision making at lower levels – operational, tactical, individual Pre-Requisites to Planning • Senior leadership commitment • Who will do what? • What will each group do? • How will we do it? • When is the best time? Baseline Gap Analysis Org Competencies Strategic Challenges Gap = Basis for Long-Term Strategic Plan DRILL DOWN OF PLANNING Strategic Planning VISION Tactical Planning MISSION STRATEGIES OBJECTIVES (Goals) MEASURES (KPI) Activity Execution & Control CURRENT VALUE TARGET BSC PERSPECTIVES ALARMS Operational planning INTIATIVES FEEDBACK CONTROL ROOT CAUSE AND COST OF QUALITY Strategic Planning Model ABCDE Where we are Assessment Baseline Where we want to be How we will do it Components Down to Specifics How are we doing Evaluate • Environmental Scan • Situation – Past, Present and Future • Mission & Vision • Performance Measurement • Performance Management • Background Information • Significant Issues • Values / Guiding Principles • Targets / Standards of Performance • Review Progress – Balanced Scorecard • Situational Analysis • Align / Fit with Capabilities • Major Goals • Initiatives and Projects • Take Corrective Actions • SWOT – Strength’s, Weaknesses, Opportunities, Threats • Gaps • Specific Objectives • Action Plans • Feedback upstream – revise plans Assessment Assessment Model: SWOT Internal Assessment: Organizational assets, resources, people, culture, systems, partnerships, suppliers, . . . External Assessment: Marketplace, competitor’s, social trends, technology, regulatory environment, economic cycles . SWOT Good Points • Easy to Understand • Apply at any organizational level SWOT Possible Pitfalls • Needs to be Analytical and Specific • Be honest about your weaknesses SWOT ANALYSIS • SWOT ANALYSIS OF COMPANY MANDATORY PRIOR TO DESIGN OF STRATEGIES • POTENTIAL RESOURCE STRENGTHS AND COMPETITIVE CAPABILITIES -FEASIBLE WELL DESIGNED STRATEGY -CORE COMPETENCE IN SELECTED AREAS -DISTINCTIVE COMPETENCE IN SELECTED AREAS -DIFFERENTIATED PRODUCTS/SERVICES -COMPETENCES AND CAPABILITIES WELL MATCHED TO MEET INDUSTRY KEY SUCCESS FACTORS eg AGILITY AND FLEXIBILITY OF SUPPLY CHAIN -STRONG FINANCIALS TO SUPPORT ACTIVITIES -STRONG COMPANY IMAGE (NEED PROCESSES TO MANAGE AND IMPROVE COMPANY IMAGE) SWOT ANALYSIS • POTENTIAL RESOURCE STRENGTHS AND COMPETITIVE CAPABILITIES -LOYAL CUSTOMER BASE -SUPERIOR TECHNOLOGICAL SKILLS IN TERMS OF AUTOMATION , USE OF IT (INTERNET BASED PROCESSES) -SUPERIOR INTELLECTUAL CAPITAL (HUMAN CAPITAL , PATENTS , etc) -COST ADVANTAGE OVER RIVALS (IN AN INFLATIONARY ECONOMY ,HERO HONDA REDUCED COST BY 343 RUPEES BUT ENJOYED A BRAND PRICE ADVANTAGE OF RS 5003 PER VEHICLE COMPARED TO COMPETITION -STRONG ADVERTISING INITIATIVES HERO HONDA -PRODUCT INNOVATION AND NPD(MARUTI MODELS) SWOT ANALYSIS • POTENTIAL RESOURCE STRENGTHS AND COMPETITIVE CAPABILITIES -PROVEN CAPABILITIES IN CONTINUOUSLY IMPROVING PROCESSES TO MEET STAKEHOLDER REQUIREMENTS(VOICE OF STAKEHOLDERS – SSI PRESENTATION) -PRODUCT INNOVATION CAPABILITIES -AGILE SUPPLY CHAIN MGT ABILITIES -GOOD CUSTOMER SERVICES -PRODUCT COMPETITIVE EDGE COMPARED TO COMPETITION -ALLIANCES AND JV TO HAVE BRAND VALUE THRU COLLABORATIVE PROCESS EDGE SWOT ANALYSIS • POTENTIAL RESOURCE WEAKNESSES AND COMPETITIVE DEFICIENCES -NO CLEAR STRATEGIC DIRECTION NO CLEAR VISION AND A VERY HAZY MISSION -UNMATCHED RESOURCES WRT INDUSTRY KEY SUCCESS FACTORS -UNDEVELOPED CORE COMPETENCES -HIGH DEBT EQUITY RATIO -HIGH OPERATIONAL COSTS (COGS-SOME INDUSTRIES ARE HIGH COST ORIENTED eg TWO WHEELER WHERE COGS IS IN THE REGION OF 90% COMPARED TO OTHERS)- BAJAJ AUTO(COGS 98% COMPARED TO HERO HONDA 87%) -POOR PRODUCT INNOVATION – LONG LIFE CYCLE; NARROW PRODUCT LINE -WEAKER ACCESS TO MARKETS COMPARED TO COMPETITION ie COMPANY HAVING WEAK ACCESS TO RURAL MARKETS BUT DON’T WANT TO CHANGE BUSINESS MODEL TO INCLUDE DISTRIBUTOR MODEL -INFERIOR HUMAN CAPITAL SWOT ANALYSIS • POTENTIAL MARKET OPPORTUNITIES -OPENINGS WITH CUSTOMERS OF COMPETITION -SHARP RISING BUYER VARYING DEMANDS eg MGT EDUCATION -SERVING ADDITIONAL CUSTOMER SEGMENTS eg UDIPI RESTAURANTS SERVING CHINESE! -EXPANDING INTO NEW GEOGRAPHIC MARKETS INCLUDING RURAL; WATCH TATA TEA TAKE OVER TETLEY TEA GB OR AIRTEL GO INTO SOUTH AFRICA -EXPANDING PRODUCT LINE TO MEET BROADER RANGE OF CUSTOMER NEEDS eg LUXURY HOTELS GOING INTO ECONOMY SEGMENT -USING EXISTING COMPANY SKILLS AND COMPETENCES TO ENTER NEW BUSINESS LINES eg ADAG GROUP HAVING GOT INTO TELECOM AND POWER DIVERSIFIES INTO ENTERTAINMENT – FILM PRODUCTION AND DISTRIBUTION , DTH SERVICES -ONLINE SALES -BACKWARD OR FORWARD INTEGRATION – RELIANCE INDUSTRIES STARTING FROM VIMAL , GOING TO PETROCHEMICALS(SYNTHETIC FIBRE) ,GOING INTO OIL EXPLORATION WITH CAIRN ,ERECTING REFINERY IN JAMNAGAR, GOING INTO GAS RETAILING (FAILED VENTURE) SWOT ANALYSIS • • POTENTIAL MARKET OPPORTUNITIES -ACQUISITION OF RIVAL FIRMS OR COMPANIES WITH POTENTIAL TO AUGMENT PRODUCT LINE OR SUPPLY CHAIN eg HINDUSTAN LEVER ACQUIRED LAKME ,TOMCO AND SOME OF ITS CAUSTIC SODA SUPPLIERS. -ENTER INTO ALLIANCSW OR JV TO EXPAND MARKET COVERAGE POTENTIAL EXTERNAL THREATS TO A COMPANY FUTURE PROSPECTS -INCREASING COMPETITION IN INDUSTRY -SLOWDOWN IN MARKET eg IT BECAUSE OF SUB PRIME CRISIS -ENTRY OF NEW ENTRANTS -LOSS OF SALES TO SUBSTITUTE PRODUCTS -GROWING BARGAINING POWER OF CUSTOMERS (NEGOTIATE HEFTY DISCOUNTS AND SERVICES) -SHIFT IN CUSTOMER BUYER TASTES -CHANGES IN DEMOGRAPHIC BEHAVIOUR (BUYING PATTERN OF LOWER INCOME GROUP OR EATING HABITS OF JAINS) The purpose of SWOT Analysis • It is an easy-to-use tool for developing an overview of a company’s strategic situation – It forms a basis for matching your company’s strategy to its situation Assessment Strength’s • Strength’s – Those things that you do well, the high value or performance points • Strengths can be tangible: Loyal customers, efficient distribution channels, very high quality products, excellent financial condition • Strengths can be intangible: Good leadership, strategic insights, customer intelligence, solid reputation, high skilled workforce • Often considered “Core Competencies” – Best leverage points for growth without draining your resources Strengths • A STRENGTH is something a company is good at doing or a characteristic that gives it an important capability. • Possible Strengths: – – – – – Name recognition Proprietary technology Cost advantages Skilled employees Loyal Customers Assessment Weaknesses • Weaknesses – Those things that prevent you from doing what you really need to do • Since weaknesses are internal, they are within your control • Weaknesses include: Bad leadership, unskilled workforce, insufficient resources, poor product quality, slow distribution and delivery channels, outdated technologies, lack of planning, . . . Weaknesses • A WEAKNESS is something a company lacks or does poorly (in comparison to others) or a condition that places it at a disadvantage • Possible Weaknesses: – – – – Poor market image Obsolete facilities Internal operating problems Poor marketing skills Assessment Opportunities • Opportunities – Potential areas for growth and higher performance • External in nature – marketplace, unhappy customers with competitor’s, better economic conditions, more open trading policies, . . • Internal opportunities should be classified as Strength’s • Timing may be important for capitalizing on opportunities Assessment Threats • Threats – Challenges confronting the organization, external in nature • Threats can take a wide range – bad press coverage, shifts in consumer behavior, substitute products, new regulations, . . . • May be useful to classify or assign probabilities to threats • The more accurate you are in identifying threats, the better position you are for dealing with the “sudden ripples” of change The Strategic Management Process Internal Analysis Strategy Crafting/ Analysis/choice Mission, Vision & Objectives Environ. Analysis Strategy Implementation Strategic Eval. & Control DISSIMENATION OF STRATEGIC PLANNING EXERCISE Strategic Management Process • Establishing a mission, vision and objectives • Environmental Analysis • Internal Analysis • Strategy Crafting/Analysis/Choice • Strategy Implementation • Strategic Control and Performance Evaluation VIEWING STRATEGIC MGT AS A PROCESS • A PROCESS IS AN IDENTIFIABLE FLOW OF INFO THRU INTER RELATED STAGES OF ANALYSIS , DIRECTED TOWARDS THE ACHIEVEMENT OF AN OBJECTIVE • INTERRELATED STAGES OF PROCESS ARE THES THIRTEEN COMPONENTS IN STRATEGIC MGT EXPLAINED LATER AIM OF THE PROCESS IS THE FORMULATION AND IMPLEMENTATION OF STRATEGIES THAT RESULT IN LONG TERM ACHIEVEMENT OF THE COMPANY MISSION AND SHORT TERM ACHIEVEMENT OF OBJECTIVES VIEWING STRATEGIC MGT AS A PROCESS HAS SEVERAL IMPLICATIONS. CHANGE IN ANY COMPONENT WILL AFFECT ALL OTHER COMPONENTS. STRATEGIC FORMULATION AND IMPLEMENTATION ARE SEQUENTIAL. PROCES BEGINS BY DEVELOPMENT OR REEXAMINATION OF MISSION AND FOLLOWED BY DEVELOPMENT OF PROFILE AND ASSESSMENT OF EXTERNAL ENVIRONMENT • • • VIEWING STRATEGIC MGT AS A PROCESS • • • • • THESE ACTIVITIES ARE FOLLOWED BY STRATEGIC CHOICE , DEFINITION OF LONG TERM OBJECTIVES , DESIGN OF STRATEGY , DEFINITION OF SHORT TERM OBJECTIVES, DESIGN OF OPRATING STRATEGIES , ACTIONING STRATEGY , IMPLEMENTATION REVIEW AND EVALUATON OF ACTIVITIES AND STRATEGIES SEVERAL FACTORS INCLUDING INTERNAL AND EXTERNAL CAN CAUSE THE REASSESSMENT OF STRATEGIC PLANS HOWEVER ALL STRATEGIC MGT PROCESSES BEGIN WITH THE DEFINITION AND UPDATION OF MISSION STATEMENT ALL STRATEGIC MGT PROCESSES ESSENTIALLY NEED TO HAVE A VERY STRONG FEEDBACK CONTROL SYSTEM IN ORDER TO REVIEW THE EFFICACY OF THE CURRENT STRATEGY AND PERHAPS CHANGE IT IF NEED BE BEFORE THE NEGATIVE IMPACT OF A WRONG STRATEGY IS FELT LASTLY ALL STRATEGIC MGT PROCESSES NEED TO BE AGILE AND FLEXIBLE TO CHANGE THE DELIVERABLES AS PER THE CHANGING EXPECTATIONS OF THE STAKEHOLDERS Major Components of the Strategic MGT / Down to Action Strategic Plan Mission Vision What we must achieve to be successful Objectives Measures Targets AI1 M1 M2 T1 T1 Evaluate Progress What we want to be Goals Initiatives Action Plans Why we exist O1 AI2 M3 T1 O2 AI3 Specific outcomes expressed in measurable terms (NOT activities) Planned Actions to Achieve Objectives Indicators and Monitors of success Desired level of performance and timelines VISION • COMPANY VISION – WHERE THE COMPANY WISHES TO BE IN THE FUTURE . SELECTED VISION STATEMENTS OF LEADING COMPANIES INCLUDE *BHARTI AIRTEL – TO BE GLOBALLY ADMIRED FOR TELECOM SERVICES AND DELIGHT CUSTOMERS DEVELOPING A STRATEGIC VISION • WHAT PATH THE COMPANY MUST TAKE AND WHAT CHANGES IN THE PRODUCTS/SERVICES WOULD IMPROVE ITS MARKET POSITION AND FUTURE PROSPECTS. DECISION TO COMMIT THE COMPANY TO ADOPT ONE STRATEGY OVER THE OTHER (CHOICE OF SEGMENT TO LAUNCH NEW PRODUCT) FORCES DECISION MAKERS TO DRAW CAREFUL CONCLUSIONS OVER THE CRITICAL SUCCESS FACTORS REQUIRED TO BE ACHIEVED TO SUCCEED IN THAT MARKET SEGMENT . NEED TO HAVE A VERY DELAILEDLY CRAFTED STRATEGY BASED ON CSF WRT EACH CUSTOMER • TOP MGT VIEWS ABOUT COMPANY DIRECTIONS CONSTITUTES A STRATEGIC VISION. A STRATEGIC VISION DESCRIBES MGT ASPIRATIONS FOR THE BUSINESS , PROVIDING A VIEW OF WHERE WE ARE GOING . A STRATEGIC VISION POINTS AN ORG IN A PARTICULAR DEVELOPING A STRATEGIC VISION • • A CLEARLY ARTICULATED STRATEGIC VISION COMMUNICATES MGT ASPIRATIONS TO STAKEHOLDERS . Eg TATA MOTOR VISION OF PRODUCING AN 100% INDIAN SMALL CAR UNDER 1 LAKH HAS NOW SEEN THE LIGHT OF THE DAY IN THE FORM OF THE NANO MODEL AND IS GIVING A TOUGH TIME TO THE TWO WHEELER SEGMENT. WELL CRAFTED VISION STATEMENTS ARE DISTINCTIVE AND SPECIFIC TO A COMPANY; WHICH SPELL OUT THE INTENT OF A COMPANY . THEY ALSO AVOID GENERIC MOTHERHOOD AND FEEL GOOD STATEMENTS SUCH AS THE MOST RESPECTED COMPANY IN OUR INDUSTRY,MOST INNOVATIVE,FIRST CHOICE OF EMPLOYEES OR CUSTOMERS. A STRATEGIC VISION SHOWING INTENT TO BE MKT LEADER WITH SPECIFIC MKT SHARE OR A LONG TERM GOAL WITH VERY SPECIFIC ANNUAL GROWTH RATES AND AN ULTIMATE SALES TARGETetc IS MORE MEANINGFUL. CHARACTERISTICS OF EFFECTIVELY WORDED STRATEGIC VISION • • • • DIRECTIONAL-PAINTS A PICTURE OF THE TYPE OF COMPANY MGT IS TRYING TO CREATE AND THE MKT POSITIONING THE COMPANY IS STRIVING TO ACHIEVE. FINANCIAL FIGURES RELATED TO TURNOVERS AND GROWTH RATES HELP DETAIL THE VISION STATEMENT FOCUSED-BE SPECIFIC ABOUT THE AREAS OF OPERATIONS COMPANY WISHES TO BE. IN CASE COMPANY WISHES TO BE MULTI DIMENSIONAL eg BIRLA GROUP A MENTION ABOUT AREAS OF OPERATIONS AND ITS ULTIMATE GOALS NEEDS TO BE EXPRESSED VERY UNAMBIGUOUSLY FEASIBLE-THE FUTURE OF THE COMPANY SHOULD STRICTLY BE CHARTED BASED ON THE CURRENT COMPETENCIES. Eg THE VISION OF A COMPANY SAID WE ARE IN THE BUSINESS OF MFG OF NETWORKING RACKS AND WE WISH TO GROW AT 50% AND REACH 300 CRORES BY 2010. THE FACT IS THAT WHEN THIS VISION WAS CRAFTED IN 2007 THE COMPANY WAS 100 CR AND HAD NEVER RECORDED A GROWTH OF MORE THAN 20%. IT IS NEEDLESS TO CONLUDE THAT THIS COMPANY CLOSED ITS BOOKS ON 31/3/10 AT 170CR DEFINING CHARACTERISTIC OF A GOOD STRATEGIC VISION IS WHAT IT SAYS ABOUT THE COMPANY FUTURE STRATEGIC COURSE IN TERMS OF MARKETS ,CUSTOMERS,TECHNOLOGY COMMON SHORTCOMINGS IN VISION STATEMENTS • • • • VAGUE OR INCOMPLETE – SHORT ON SPECIFICS ON WHERE COMPANY IS HEADED NOT FORWARD LOOKING – DOES NOT INDICATE HOW MGT INTENDS TO ALTER COMPANY CURRENT PRODUCT/SERVICE/CUSTOMER FOCUS TOO BROAD – NOT VERY SPECIFIC ABOUT WHAT COMPANY WISHES TO DO IN THE NEXT 3-5 YEARS NOT DISTINCTIVE – PROVIDES NO UNIQUE IDENTITY SHARED VISION • A SHARED VISION IS A VISION COINED/UPDATED BY TOP MGT AND IS A VERY WELL ARTICULATED STATEMENT OF WHERE THE COMPANY WISHES TO BE IN THE STRATEGIC PLANNING PERIOD ENVISAGED IN TERMS OF STATEMENT AS WELL AS GROWTH , MARKET SHARE AND PROFITABILITY. THIS SHARED VISION MUST BE SHARED WITH ALL STAKEHOLDERS OF THE COMPANY AND EACH STAKEHOLDER OF A COMPANY SHOULD BE VERY CLEAR OF THE ROLE HE HAS TO PLAY IN ENABLING THE COMPANY TO ACHIEVE THE SHORT TERM AND THEREFORE SUBSEQUENTLY THE LONG TERM GOAL ENUNCIATED IN THE VISION • THIS STATEMENT SHOULD ESPECIALLY BE VERY WELL UNDERSTOOD BY EACH EMPLOYEE AND HIS/HER ROLE IN ACHIEVING THIS TARGET (ELSE THE STORY OF WATER SHARED VISION • STRATEGIC VISIONS BECOME REAL ONLY WHEN THE VISION STATEMENT IS IMPRINTED IN THE MINDS OF THE EMPLOYEES AND IS THEN TRANSLATED INTO OBJECTIVES AND STRATEGIES TO ACHIEVE THESE OBJECTIVES • A STRATEGIC VISION BECOMES A REALITY ONLY WHEN THE EMPLOYEES UNDERGO A CHANGE MGT IN ATTITUDE AND ACCEPT THE VISION. THIS ESSENTIALLY POINTS TO A MOTIVATED WORKFORCE WHICH IS INVOLVED AND MOST OFTEN THRU EMPOWERMENT. Eg TATA STEEL ALL TARGETS ARE ACCEPTED BY WORK CIRCLES AND THE WORK CIRCLE GROUP LEADER ASSUMES RESPONSIBILITY FOR THE TARGET. INCIDENTALLY TATA STEEL IS THE LOWEST COST PRODUCER OF STEEL IN THE WORLD AT 33.19 RS/KG AND ALTHOUGH THEPLANT IS 105 YEARS OLD LAST YEARS PRODUCTION WAS 105% OF ITS CAPACITY. Corporate Mission • Broad purposes of the organization • General criteria for assessing the longterm organizational effectiveness • Driven by heritage & environment • Mission statements are increasingly being developed at the SBU level as well MISSION • • • • • • THE MISSION OF A COMPANY IS THE GENERAL STATEMENT OF COMPANY INTENT AND STATES WHY IT EXISTS AND THE FUNDAMENTAL UNIQUE PURPOSE THAT SETS IT APART FROM OTHER FIRMS OF ITS TYPE AND IDENTIFIES THE SCOPE OF ITS OPERATIONS IN PRODUCTS ,SERVICES AND MARKETS IT WISHES TO ADDRESS. IT DESCRIBES THE BUSINESS PHILOSOPHY OF STRATEGIC DECISION MAKERS MISSION IS A BROADLY FRAMED ENDURING STATEMENT OF COMPANY INTENT WHICH LAYS EMPHASIS ON AREAS OF OPERATIONS TO ACHIEVE LONG TERM GOALS IT IS A BRIEF OVERVIEW OF THE COMPANYS PRESENT BUSINESS PURPOSE IT SHOULD BE FORWARD LOOKING AND SHOULD STATE ANTICIPATED CHANGES IN ITS BUSINESS WHETHER DEVELOPING A NEW BUSINESS OR REFORMULATING DIRECTION FOR AN ONGOING BUSINESS , THE BASIC GOALS CHARACTERISTICS , THAT WILL SHAPE A FIRMS STRATEGIC INTENT MUST BE DETERMINED COMPANY MISSION WILL GUIDE FUTURE ACTIONS MISSION • • • SELECTED MISSION STATEMENTS INCLUDE: * BHARTI AIRTEL – MEET GLOBAL STANDARDS FOR TELECOM SERVICES THAT DELIGHT CUSTOMERS THRU -CUSTOMER SERVICE FOCUS –EMPOWERED EMPLOYEES -INNOVATIVE SERVICES -COST EFFICIENCY MISSION STATEMENTS IN ANNUAL REPORTS OR ON THE WEB SITE TYPICALLY PROVIDE A BRIEF OVERVIEW OF THE COMPANYS CURRENT BUSINESS PURPOSEAND SOMETIMES PRODUCT/SERVICE AND GEOGRAPHIC COVERAGE. BUT RARELY A MISSION STATEMENT COVER WHERE THE COMPANY IS HEADED , THE ANTICIPATED CHANGES IN BUSINESS, OR THE PROPOSED DIVERSIFICATIONS OR ALTERATIONS IN THE COMPANY STRUCTURE , CAPITAL THRU ACQUISITIONS ,JV etc. HENCE SUCH MISSIONS LACK THE FORWARD LOOK WHICH SHOULD COMPLEMENT A STRATEGIC VISION. THE FORWARD LOOK SHOULD ALSO TALK ABOUT PRODUCTS,MARKETS,CUSTOMERS AND TECHNOLOGIES KEY MISSION STATEMENTS FROM CORPORATE STATEMENTS • • • • • • CUSTOMER/MARKET – TO ANTICIPATE AND MEET MARKET NEEDS OF DECORATIVE PAINTS IN HOME SEGMENT –ASIAN PAINTS PRODUCTS/SERVICES-PROVIDE VALUE ADDED CONSULTING SERVICES IN THE AREAS OF TAXATION , ACCOUNTING AUDIT etc GEOGRAPHIC DOMAIN –WE ARE DEDICATED TO SERVE THE HIGHER MANAGEMENT EDUCATION REQUIREMENT OF INDIAN SUB CONTINENT TECHNOLOGY – WE ARE IN THE BUSINESS OF INSTALLING AND MAINTAINING PROCESS CONTROL EQUIPMENT IN CONTINUOUS INDUSTRY PHILOSOPHY – WE ARE COMMITTED TO WORLD CLASS CARDIAC HEALTH CARE PUBLIC IMAGE – WE INTEND TO BE A GOOD CORPORATE CITIZEN THRU STRONG CORPORATE GOVERNANCE PRACTICES NEED FOR A GOOD MISSION • HELPS FOCUS HUMAN EFFORT IN A COMMON DIRECTION. • SERVES AS RATIONALE FOR DEVELOPING SKILLS AND CAPABILITIES FOR CURRENT AND FUTURE REQUIREMENTS • ESTABLISHES BROAD AREAS OF JOB RESPONSIBILITIES IN ORG • ACTS AS BASIS FOR DEVELOPMENT OF ORG OBJECTIVES.MISSION STATEMENT OUTLINES GENERAL PURPOSE OF ORG AND SERVES AS FORMULATOR OF ORG OBJECTIVES .PROPERLY FORMULATED ORG OBJECTIVES ARE CONSISTENT WITH ORG MISSION. NEED FOR A GOOD MISSION • ENSURE UNANIMITY OF PURPOSE WITHIN ORG WHICH INCLUDES SBU WISE MISSIONS WHICH THOUGH SEPARATE MUST COALESCE TO ACHIEVE A UNIFIED COMMON CORPORATE VISION • PROVIDE BASIS FOR MOTIVATING USE OF ORG RESOURCES • DEVELOP BASIS FOR ALLOCATING RESOURCES • ESTABLISH CLIMATE FOR CARRYING OUT BUSINESS OPERATIONS • SERVE AS FOCAL POINT TO ENABLE IDENTIFICATION WITH PURPOSE AND DIRECTION OF ORG • FACILITATE TRANSLATION OF OBJECTIVES AND GOALS TO WORK STRUCTURE INVOLVING ASSIGNMENT OF TASKS • SPECIFY ORG PURPOSE AND TRANSLATION OF THESE PURPOSES INTO GOALS WHICH CAN BE ASSESSED AND SHORTCOMINGS OF A POORLY WORDED MISSION • EXAMPLE OF POORLY WORDED MISSION STATEMENT eg FORD MOTORS INDIA -WE ARE A GLOBAL FAMILY WITH A PROUD HERITAGE PASSIONATELY COMMITTED TO PROVIDING PERSONAL MOBILITY FOR PEOPLE.WE ANTICIPATE CONSUMER NEED (WHAT IS THE PROCESS OF KNOWING THE BUYER(THE CONSUMER?)) AND DELIVER OUTSTANDING PRODUCTS AND SERVICES(IS THERE A 3RD PARTY SERVICE SURVEY REPORT?) TO IMPROVE PEOPLES LIVES (NOT CLEAR HOW THIS HAPPENS) • MISSION SAYS NOTHING ABOUT TO WHICH SEGMENT OF PEOPLE THE CAR IS FOCUSED. • WELL CONCEIVED MISSION STATEMENT SHOULD MAKE THE COMPETITIVE EDGE OF A COMPANY SHORTCOMINGS OF A POORLY WORDED MISSION • PURPOSE OF BEING IN CURRENT BUSINESS AND CURRENT ACTIVITIES NOT EXHAUSTIVELY DESCRIBED eg WE PROVIDE WORLD CLASS A TO Z SERVICES? • CURRENT PRODUCTS/SERVICES NOT WELL DEFINED eg WE ARE IN THE BUSINESS OF PRODUCING INDUSTRIAL CHEMICALS OR WE PROVIDE VALUE ADD CONSULTING SERVICES. • BUYER NEEDS NOT SPECIFIED eg WE PROVIDE FOOD FOR OFFICE GOERS • OBSURELY WORDED MISSION STATEMENTS –WE ARE IN BUSINESS TO SERVE SOCIETY INPUTS TO DEVELOPMENT OF COMPANY MISSION INSIDERS OUTSIDERS INVESTORS, FI, SUPPLIERS, CUSTOMERS, DISTRIBUTORS, REGULATORS, SOCIETY, GOVERNMENT, COMPETITION, MEDIA BOD, SHAREHOLDERS, EMPLOYEE UNIONS MISSION STAKEHOLDER SENSITIVITY INDEX Corporate Objectives & Goals • An objective is a long-range purpose – Not quantified and not limited to a time period – E.g. increasing the return on shareholders’ equity • A goal is a measurable objective of the business – Attainable at some specific future date through planned actions – E.g. 10% growth in the next two years Components Goals • Describes a future end-state – desired outcome that is supportive of the mission and vision. • Shapes the way ahead in actionable terms. • Best applied where there are clear choices about the future. • Puts strategic focus into the organization – specific ownership of the goal should be assigned to someone within the organization. • May not work well where things are changing fast – goals tend to be long-term for environments that have limited choices about the future. COMPANY GOALS • SURVIVAL – THIS IS THE PRIMARY OBJECTIVE OF A COMPANY TO SURVIVE DESPITE INTERNAL AND EXTERNAL TURBULENCES. FOR THIS THE MGT NEEDS TO HAVE VERY STRONG CONTROL SYSTEMS IN PLACE WHICH WILL ENSURE THAT THE COMPANY REMAINS AFLOAT. IT INVOLVES REMAINING MARGINALLY PROFITABLE DESPITE MKT DECLINE • PROFITABILITY- MAIN GOAL OF ORG. PROFIT IS THE PRINCIPAL INDICATOR OF FIRMS ABILITY TO SATISFY CLAIMS AND DESIRES OF STAKEHOLDERS. IN THE LONG TERM COMPANY GOALS • GROWTH-TIED TO SURVIVAL AND PROFITABILITY. GROWTH IS MEASURED IN TERMS OF INCREASED WALLET SHARE , INCREASED MARKET SHARE . ISSUE OF GROWTH IS LINKED TO THE MISSION. WHEREIN THE COMPANY ARTICULATES THE METHOD OF GROWTH eg CONSOLIDATION OF EXISTING MARKETS ,DIVERSIFYING INTO NEW AREAS , MERGERS/ACQUISITIONS etc Components Developing Goals • Cascade from the top of the Strategic Plan – Mission, Vision, Guiding Principles. • Look at your strategic analysis – SWOT, Environmental Scan, Past Performance, Gaps . . • Limit to a critical few – such as five to eight goals. • Broad participation in the development of goals: Consensus from above – buy-in at the execution level. • Should drive higher levels of performance and close a critical performance gap. Components Examples of Goals Reorganize the entire organization for better responsiveness to customers We will partner with other businesses, industry leaders, and government agencies in order to better meet the needs of stakeholders across the entire value stream. Manage our resources with fiscal responsibility and efficiency through a single comprehensive process that is aligned to our strategic plan. Improve the quality and accuracy of service support information provided to our internal customers. Establish a means by which our decision making process is market and customer focus. Maintain and enhance the physical conditions of our public facilities. OBJECTIVES • Objectives are desired outcomes • Progress towards achievement of objective translated into measures • Causal relationship between objectives OBJECTIVES • OBJECTIVES ARE HIGH LEVEL GOALS OF THE COMPANY • THEY ARE STATEMENTS OF HOW YOU WILL DETERMINE AND MEASURE SUCCESS • THEY MUST BE STATEMENTS OF WHAT YOU ARE STRIVING TO ACHIEVE BUT THESE OBJECTIVES ARE EXPRESSED IN ENGLISH-INCREASE MKT SHARE,REDUCE MFG COSTS,INCREASE NPD,REDUCE CYCLE TIME FOR DELIVERY,IMPROVE PROFIT,IMPROVE QUALITY • OBJECTIVES LIST MUST BE SHORT 5-8 Components Objectives • Relevant - directly supports the goal • Compels the organization into action • Specific enough so we can quantify and measure the results • Simple and easy to understand • Realistic and attainable • Conveys responsibility and ownership • Acceptable to those who must execute • May need several objectives to meet a goal SETTING OBJECTIVES • PURPOSE OF SETTING OBJECTIVES IS TO CONVERT STRATEGIC VISION INTO SPECIFIC PERFORMANCE TARGETS (RESULTS AND OUTCOMES(WHAT IS THE DIFFERENCE BETWEEN RESULT AND OUTCOME)RESULT IS THE MEASURED OUTPUT OF AN ACTIVITY;OUTCOME IS THE ULTIMATE IMPACT OF THE RESULT – OPERATION SUCCESSFUL BUT PATIENT DIED!) WHICH COMPANY WISHES TO ACHIEVE • OBJECTIVES REPRESENT A COMMITMENT TO ACHIEVING PARTICULAR RESULTS AND OUTCOMES • WELL STATED OBJECTIVES ARE VALID FOR A SPECIFIC PERIOD SETTING OBJECTIVES • OBJECTIVES SERVE AS YARDSTICKS FOR TRACKING PERFORMANCE AND PROGRESS;A COMPANY THAT MEETS ITS PERFORMANCE TARGETS ALSO CONSISTENTLY ACHIEVES ITS OBJECTIVES PROVIDED PERFORMANCE PARAMETERS ARE SET CORRECTLY. EG WHILE RECORDING SALES GROWTH IT MAY BE IMPORTANT TO KEEP AN EYE ON CUSTOMER REPEAT BUY AND RETENTION. • GENERALLY TWO KINDS OF OBJECTIVES SET – FINANCIAL OBJECTIVES AND STRATEGIC OBJECTIVES STRATEGIC OBJECTIVES • WINNING MAJOR PORTION OF MARKET SHARE • REDUCED COST OF GOODS SOLD COMPARED TO COMPETITION • MINIMIZED CUSTOMER ATTRITION • INCREASED CUSTOMER WALLET SHARE • ENHANCED SALES DERIVED FROM SALE OF NEW PRODUCTS INTRODUCED DURING THE YEAR • ENHANCING COMPANY BRAND VALUE STRATEGIC OBJECTIVES • MAXIMIZE SHAREHOLDER VALUE ADD • REDUCE COSTS • INCREASE CUSTOMER SATISFACTN • MINIMIMIZE CUSTOMER ATTRITION • MAXIMIZE OPERATIONAL EFFCNCY • MINIMIZE COST OF POOR QUALITY • INCREASE HUMAN CAPABILITY FINANCIAL OBJECTIVES • • • • • • • X PERCENT INCREASE IN ANNUAL REVENUES INCREASED PERCENT OF PROFIT AFTER TAX INCREASED PERCENT OF EARNING PER SHARE INCREASED ANNUAL DIVIDEND LARGER PROFIT MARGINS X PERCENT RETURN ON CAPITAL EMPLOYED X PERCENT RETURN ON EQUITY(INCREASED SVA) LONG TERM OBJECTIVES • RESULTS ORG SEEKS OVER LONG TERM PERIOD • LONG TERM OBJECTIVES ARE A STATEMENT OF WHAT IS EXPECTED FROM THE BUSINESS eg SALES , PROFIT AND MARKET SHARE GROWTH • OBJECTIVES TYPICALLY INVOLVE PROFITABILITY , ROI, COMPETITIVE POSITION , TECHNOLOGICAL LEADERSHIP , PRODUCTIVITY , EMPLOYEE RELATIONSHIP, etc • EACH OBJECTIVE MUST BE SPECIFIC , MEASURABLE , ACHIEVABLE , • EACH OBJECTIVE SHOULD BE ASSOCIATED WITH A VERY CLEAR STRATEGY ABOUT HOW TO ACHIEVE THE DESIRED LONG TERM OUTCOME • LONG TERM OBJECTIVES WHICH ARE LINKED TO THE VISION ARE NORMALLY OVER A PERIOD OF 3-5 YEARS LONG TERM OBJECTIVES • TO ACHIEVE LONG TERM PROSPERITY LONG TERM OBJECTIVES ARE ESTABLISHED IN SEVEN AREAS -PROFITABILITY ABILITY OF ANY BUSINESS TO OPERATE IN THE LONG RUN DEPENDS ON ATTAINING AN ACCEPTABLE LEVEL OF PROFITS. PROFIT OBJECTIVES ARE NORMALLY EXPRESSED IN EARNING PER SHARE OR RETURN ON EQUITY -PRODUCTIVITY MGRS TRY TO IMPROVE THE PRODUCTIVITY OF THEIR SYSTEMS. COMPANIES THAT IMPROVE THE OUTPUT INPUT RATIO WHICH IS ENHANCED PRODUCTIVITY WILL RECORD ENHANCED PROFITS. THUS BUSINESS SHOULD ALWAYS STATE AN OBJECTIVE FOR PRODUCTIVITY ENHANCEMENT. SOMETIMES PRODUCTIVITY ENHANCEMENT ARE EXPRESSED IN TERMS OF DESIRED DECREASE IN COSTS. QUALITY ENHANCEMENT THRU REDUCED DEFECTS ALSO LEADS TO PRODUCTIVITY ENHANCEMENT LONG TERM OBJECTIVES • TO ACHIEVE LONG TERM PROSPERITY LONG TERM OBJECTIVES ARE ESTABLISHED IN SEVEN AREAS -COMPETITIVE POSITION ONE MEASURE OF SUCCESS IS RELATIVE DOMINANCE IN MARKETPLACE eg ASIAN PAINTS IN THE HOME SEGMENT. LARGE FIRMS ESTABLISH AN OBJECTIVE IN TERMS OF COMPETITIVE POSITION AND PROVIDE A PROJECTED LONG TERM GROWTH AND PROFITABILITY FACTOR TO ENABLE THE COMPANY TO REACH AN ULTIMATE INDUSTRY POSITION. MARKET SHARE OR SALES FIGURE IS OFTEN USED AS A TARGET eg GROW BY 20% IN INDUSTRIAL SEGMENT AND MAINTAIN ITS INDUSTRY LEADERSHIP; WHILE IN THE DECORATIVE SEGMENT IT IS PLANNED TO GROW BY 15% AND CONSOLIDATE ITS NUMBER 2 POSITION IN THE SEGMENT(KNP) LONG TERM OBJECTIVES • TO ACHIEVE LONG TERM PROSPERITY LONG TERM OBJECTIVES ARE ESTABLISHED IN SEVEN AREAS -EMPLOYEE DEVELOPMENT EMPLOYEE VALUE GROWTH AND CAREER OPPORTUNITIES . WITH SUCH OPPORTUNITIES PRODUCTIVITY IS ENHANCED AND EXPENSIVE TURNOVER REDUCED. THEREFORE EMPLOYEE DEVELOPMENT PLANS SHOULD BE INCLUDED IN STRATEGIC PLANNING TO ENHANCE HUMAN CAPITAL -EMPLOYEE RELATIONS NEED FOR GOOD EMPLOYEE RELATIONS AND IMPLEMENTED BY ADDRESSING THE EXPECTATIONS OF THE EMPLOYEES. Eg BARC. PRODUCTIVITY IS LINKED TO EMPLOYEE LOYALTY AND MORALE. LONG TERM OBJECTIVES • TO ACHIEVE LONG TERM PROSPERITY LONG TERM OBJECTIVES ARE ESTABLISHED IN SEVEN AREAS -TECHNOLOGICAL LEADERSHIP BUSINESS MUST DECIDE WHETHER TO LEAD OR FOLLOW IN THE MKTPLACE. EACH REQUIRES A DIFFERENT STRATEGY. MANY BUSINESSES STATE AN OBJECTIVE IN TERMS OF TECHNOLOGICAL LEADERSHIP eg BHARTI AIRTEL HAS IN MANY WAYS SET UP LEADERSHIP IN TECHNOLOGICAL INNOVATIONS IN TERMS OF CUSTOMER OFFERINGS -PUBLIC RESPONSIBILITY BUSINESS RECOGNIZES ITS RESPONSIBILITIES TO SOCIETY AT LARGE AND MANY SEEK TO ESTABLISH THEMSELVES AS RESPONSIBLE CORPORATE CITIZENS eg CHARITABLE AND EDUCATIONAL CONTRIBUTIONS (TATAS-TATA MEMORIAL , TIFR ) QUALITIES OF LONG TERM OBJECTIVES • -MEASURABLE OBJECTIVES MUST CLEARLY STATE WHAT WILL BE ACHIEVED AND WITHIN WHAT TIME FRAME AND ALONG SIDE AN AUDIT OF CAPABILITY AND RESOURCES REQUIRED NEEDS TO BE DONEMEASUREMENTS SHOULD BE STRICTLY QUANTIFIED AND MUST ULTIMATELY LEAD TO THE ACHIEVEMENT OF CORPORATE VISION • -MOTIVATING PEOPLE IS MOST PRODUCTIVE WHEN OBJECTIVES ARE SET AT A MOTIVATING LEVEL HIGH ENOUGH TO CHALLENGE BUT NOT UNACHIEVABLE OWING TO LACK OF MKT GROWTH OR RESOURCE CAPABILITIES • -SUITABLE OBJECTIVES MUST BE SUITED TO THE BROAD AIMS OF THE ORG WHICH IS EXPRESSED IN THE MISSION.EACH OBJECTIVE SHOULD BE A STEP TOWARDS ACHIEVEMENT OF OVERALL GOALS. QUALITIES OF LONG TERM OBJECTIVES • ACCEPTABLE – OBJECTIVES SHOULD BE CONSISTENT WITH EMPLOYEE PREFERENCES AND PERCEPTIONS. IF MGRS ARE OFFENDED BY AN OBJECTIVE eg PROMOTING A BEVERAGE AS A FRUIT JUICE. IN SUCH CASES MGRS MAY IGNORE OR EVEN OBSTRUCT ACHIEVEMENT. IN ADDITION LONG TERM OBJECTIVES ARE DESIGNED TO BE ACCEPTABLE TO MAJOR INTEREST GROUPS EXTERNAL TO THE FIRM eg AIR POLLUTION CONTROL EFFORTS UNDERTAKEN AT THE BEHEST OF REGULATORY BODIES • FLEXIBLE – OBJECTIVES SHOULD BE MODIFIABLE IN THE EVENT OF UNFORESEEN CHANGES IN ENVIRONMENT . FLEXIBILITY IS USUALLY INCREASED AT THE EXPENSE OF SOME KEY PARAMETER EFFECTIVENESS eg MULTI SKILLING IN OPERATIONAL PEOPLE MAY REDUCE EFFECTIVENESS AND QUALITY OF OUTPUT QUALITIES OF LONG TERM OBJECTIVES • UNDERSTANDABLE ALL MGRS SHOULD HAVE A CLEAR UNDERSTANDING OF WHAT HAS TO BE ACHIEVED. THEY MUST ALSO UNDERSTAND THE PERFORMANCE METRICS ON WHICH THEIR PERFORMANCE WILL BE GUAGED. eg HAVE MINIMUM PROFIT OF 20% a. IS THIS FIGURE ACHIEVABLE IN THE INDUSTRY ? IN THE 2 WHEELER INDUSTRY GROSS PROFIT IS NOT MORE THAN 12-13% • ACHIEVABLE OBJECTIVES MUST BE ACHIEVABLE . FOR EXAMPLE CORPORATE GROWTH IS DEPENDENT ON MARKET GROWTH , MARKET SHARE AND INNER CAPABILITY TO CLOCK GROWTH FIGURE FORMULATING LONG TERM OBJECTIVES • COMPANY MISSION ENCOMPASSES THE BROAD AIMS OF THE CORPORATION • MOST SPECIFIC STATEMENT OF WANTS APPEARS AS GOALS OF COMPANY. THESE GOALS WERE LINKED TO PROFITABILITY , GROWTH AND SURVIVAL. • LONG TERM OBJECTIVES ARE STATEMENTS OF THE RESULTS A BUSINESS SEEKS TO ACHIEVE OVER A SPECIFIED PERIOD OF TIME CLASSICALLY 5 YEARS • LONG TERM OBJECTIVES ARE LINKED TO STRATEGIES WHICH HAVE TO BE FURTHER DRILLED DOWN LONG TERM OBJECTIVES • MAXIMIZE SHAREHOLDER VALUE ADD • ACHIEVE INDUSTRY LEADERSHIP • SET WORLD CLASS STANDARDS SHORT TERM OBJECTIVES • A SHORT TERM OBJECTIVE IS RESTRICTED TO THE FINANCIAL YEAR AND IS VERY OFTEN SUBDIVIDED INTO QUARTERLY BUCKETS • EVERY YEAR THE COMPANY DOES A BUDGETING EXERCISE FOR SALES TARGETS BASED ON THE TARGETS GIVEN TO THE MGT BY THE BOARD. THE RESULTS OF THE SHORT TERM OBJECTIVES ARE TO BE DISCLOSED TO THE SHAREHOLDERS EACH YEAR DURING THE AGM • SHORT TERM STRATEGIES ARE DEVISED TO GO TO MARKET AND ACHIEVE QUARTERLY TARGETS . MANY PRODUCTS HAVE SEASONAL DEMANDS AND THESE VAGUARIES SHOULD BE FACTORED INTO THE SHORT TERM STRATEGIC PLANNING EXERCISE SHORT TERM OBJECTIVES • THE SHORT TERM STRATEGIES ARE ALSO CALLED OPERATING STRATEGIES WHICH WILL CONVERT THE ANNUAL REQUIREMENT INTO STRATEGIES WHICH WILL THEN BE CONVERTED INTO ACTION PLANS WHICH WILL ENABLE THE ACHIEVEMENT OF THE SHORT TERM OBJECTIVES • OPERATING STRATEGIES ARE DETAILED STATEMENTS OF THE MEANS THAT WILL BE USED TO ACHIEVE SHORT TERM OBJECTIVES WHICH IS SYNONYMOUS WITH THE BUDGETING EXERCISE SHORT TERM OBJECTIVES • • • • • • • • REDUCED MANUFACTURING COSTS REDUCED COSTS OF QUALITY MAXIMIZE SUPPLY CHAIN EFFECTIVENESS MAXIMIZE OVERALL EQUIPMENT EFFECTIVENESS (EG POWER PLANTS PLF) REDUCED CYCLE TIME FOR TIME TO DELIVER REDUCE SERVICE WAIT AND DELIVERY TIMES MINIMIZE COST OF GOODS SOLD ZERO ACCIDENTS AND BREAKDOWN Components Examples of Objectives Develop a customer intelligence database system to capture and analyze patterns in purchasing behavior across our product line. Launch at least three value stream pilot projects to kick-off our transformation to a leaner organization. Centralize the procurement process for improvements in enterprise-wide purchasing power. Consolidate payable processing through a P-Card System over the next two years. Monitor and address employee morale issues through an annual employee satisfaction survey across all business functions. Components Goals vs. Objectives GOALS OBJECTIVES Very short statement, few words Longer statement, more descriptive Broad in scope Narrow in scope Directly relates to the Mission Indirectly relates to the Mission Statement Statement Covers long time period (such as 10 years) Covers short time period (such 1 year budget cycle) KEY SUCCESS FACTORS • A USEFUL WAY TO EFFECT OPERATIONAL CONTROL IS TO FOCUS ON KEY SUCCESS FACTORS • KEY SUCCESS FACTORS IDENTIFY PERFORMANCE AREAS THAT MUST RECEIVE CONTINUOUS MGT ATTENTION. THESE ARE FACTORS OF GREATEST IMPORTANCE IN IMPLEMENTING STRATEGIES. EXAMPLES OF KEY SUCCESS FACTORS INCLUDE ENHANCED PRODUCTIVITY,HIGH EMPLOYEE MORALE, THESE KSF ARE LINKED TO METRICS WHICH ARE CONTROLLED SUCH AS DELIVERY CYCLE IN DAYS,NO OF CUSTOMER COMPLAINTS,% PRODUCT RETURNS,WARRANTY COST%SALES • TARGETS ARE ALSO ASSOCIATED WITH KSF AND THE ACTUAL PERFORMANCE IS COMPARED TO THE TARGET AND AREAS OF IMPROVEMENT ARE DERIVED IN LAGGING EFFECTS EG CUST RETURNS T 1% A 1.5%; Down to Specifics What are Action Plans? • • • • • The Action Plan identifies the specific steps that will be taken to achieve the initiatives and strategic objectives – where the rubber meets the road Each Initiative has a supporting Action Plan(s) attached to it Action Plans are geared toward operations, procedures, and processes They describe who does what, when it will be completed, and how the organization knows when steps are completed Like Initiatives, Action Plans require the monitoring of progress on Objectives, for which measures are needed Objectives Initiatives Action Plans ACTION PLANS • STRATEGIES NEED TO BE CONVERTED TO ACTION PLANS . • ACTION PLANS SPECIFY HOW A PARTICULAR ACTIVITY IS TO BE PERFORMED AND WHAT IS THE RESOURCE STAFFING FOR THE SAME. • ONCE ADEQUATE RESOURCE ALLOCATION IS DONE THE ACTIVITY IS READY TO COMMENCE. ACTIVITIES SHOULD BE EXECUTED AS PER BUSINESS RULES AND THESE RULES SHOULD BE VERY CLEARLY KNOWN TO ALL MEMBERS OF THE ACTIVITY • PRIOR TO CONVERSION OF ACTION PLAN TO ACTIVITY EXECUTION , THE OUTCOME SHOULD BE DECIDED • ALSO NEED TO DO A RISK ASSESSMENT OF WHAT WOULD BE THE IMPACT IF THE ACTIVITY DID NOT ACHIEVE ITS DESIRED OUTCOME Down to Specifics • • • • • • • Characteristics of Action Plans Assign responsibility for the successful completion of the Action Plan. Who is responsible? What are the roles and responsibilities? Detail all required steps to achieve the Initiative that the Action Plan is supporting. Where will the actions be taken? Establish a time frame for the completion each steps. When will we need to take these actions? Establish the resources required to complete the steps. How much will it take to execute these actions? Define the specific actions (steps) that must be taken to implement the initiative. Determine the deliverables (in measurable terms) that should result from completion of individual steps. Identify in-process measures to ensure the processes used to carry out the action are working as intended. Define the expected results and milestones of the action plan. Provide a brief status report on each step, whether completed or not. What communication process will we follow? How well are we doing in executing our action plan? Based on the above criteria, you should be able to clearly define your action plan. If you have several action plans, you may have to prioritize. Down to Specifics Action Plan Execution • Requires that you have answered the Who, What, How, Where, and When questions related to the project or initiative that drives strategic execution • Coordinate with lower level sections, administrative and operating personnel since they will execute the Action Plan in the form of specific work plans • Assign action responsibility and set timelines – Develop working plans and schedules that have specific action steps • Resource the project or initiative and document in the form of detail budgets (may require reallocation prior to execution) • Monitor progress against milestones and measurements • Correct and revise action plans per comparison of actual results against original action plan WHY MEASURE • Track current actual performance against targets and predictions • Track performance deficiencies and monitor improvements • Motivate managers and employees to achieve performance objectives • Predict future trends • Stimulate creation of new initiatives,objectives,targets MEASURES(METRICS) • Metrics are meaningful quantified measures • Metric should present data that enables action • Metrics should be tied to strategy and should indicate how well organization objectives and goals are being met through core processes • Metrics should motivate indivisuals to improve processes LEADING V/S LAGGING INDICATORS • Leading - What might be – performance drivers - inputs & outputs • Lagging - What has transpired – outcomes & impacts • Lagging/Leading indicators have cause-effect relationship Outcomes (Effects’ Lag indicator Lead Indicators Final results are the outcome of internal activity Service effectiveness Manpower efficiency Drivers (Causes) Productivity Competencies Staff Attitudes 110 “You need to measure and target the internal processes that contribute towards the achievement of ‘Core Strategic Goals’ and not just measure & target the end goals alone Managing or Monitoring??? Targeting & monitoring lag indicators alone lets you know how you have done Targeting & monitoring lead indicators enables you to manage performance, not just watch it 111 STRATEGIC LAG MEASUREMENTS • • • • • • • • ROI REVENUE GROWTH MARKET SHARE CUSTOMER RETENTION SERVICE ERROR RATE ORDER TO CASH CYCLE TIME SUPPLY CHAIN COST REVENUE PER EMPLOYEE STRATEGIC LEAD MEASUREMENTS • • • • • REVENUE MIX SATISFACTION SURVEY PRODUCT DEVELOPMENT CYCLE HOURS WITH CUSTOMER HUMAN ASSET WORTH Down to Specifics Targets • For each measurement, you should have at least one target • Targets should stretch the organization to higher levels of performance • Incremental improvements over current performance can be used to establish your targets • Targets put focus on your strategy • When you reach your targets, you have successfully executed your strategy STRATEGIC OUTCOME (CURRENT MEASURE) • Signifies current value of metric measurement of activity • If objectives have to be met some or all of the following outcomes have to mature: -Satisfied Shareholders -Delighted Customers -Effective Processes -Motivated and prepared work force INITIATIVES • Change process or activity designed to achieve one or more objectives • Initiative helps move a measure towards target value DRILL DOWN VISION TO STRATEGIES AND STRATEGIC OUTCOMES FOR ACTIVITIES To be the leading provider of management consulting services Vision We are a company, focused on providing value added services in BPR, ERM, TQM, IT Risk, TPM, TOC and lean operations Mission Long term Strategy Achieve market leadership in the above areas by provided differentiated, personalised services Tactical Strategy Build and hone competencies in above areas to build a brand and human capital in above areas and be a solution provider to the market by popular choice Operational Strategies Optimise asset utilization, maximise profitability, skills and increase customer happiness Finance Customer Internal HR Strategy Strategy Customer Delight Strategy Operational Excellence Strategy Highly Competent Workforce Revenue Growth STRATEGIC OUTCOMES - Maximised Profit - Maximised Slaes - Minimised Loss STRATEGIC OUTCOMES -Max Project Profit METRIC Profit % Sales Loss -Max Ontime proj Delivery -max Proj Qlty STRATEGIC OUTCOMES -Increased Repeat Business -Min Complaints METRIC Repeat % Reduced Complaints -Incr. Seg Share Mkt Share -Max Customer Return Return % METRIC Project Profit Delivery % Qlty % STRATEGIC OUTCOMES -Max sales/head -Max HCROI -Min Attrition -Max HCVA METRIC Sales/head count Count HCROI Attrition % HCVA Environmental Analysis • Involves the evaluation of the business environment of the organization. – All external influences that impact a company’s decision and performance. • Environment of firm classified by proximity into (1) Macro-environment; and (2) Micro-environment or task environment. Environmental Analysis • The macro-environment consists of – The international/national economy; changes in demographic structures; social and political trends; technology; and the natural environment. • The micro-environment consists of – The industry environment such as competitors, suppliers, customers; unions and employees; owners and shareholders, etc. VOICE OF CUSTOMER PROCESS GLOBAL CHANGES INFLUENCE CUSTOMER DEMOGRAPHIC S& PSYCHOGRAPH Y DICTATES INCRUST LIFETIME VALUE REPEAT BUY & INCR WALLET SHARE CHANGING CUSTOMER EXPECTATIONS CUST DELIGHT & RETENTION NEEDS & WANTS OUTOUND LOGISTICS TIME TO RE-ORDER TIME TO DELIVER TIME TO STOCK OPERATIONS & SALES TIME TO ORDER TIME TO DELIVER INBOUND LOGISTICS GAP DELIVERY COMPANY PROFILE • FIRMS INTERNAL ANALYSIS DETERMINES ITS PERFORMANCE CAPABILITIES BASED ON EXISTING AVAILABLE RESOURCES • COMPANY PROFILE GENERATED FROM ANALYSIS • COMPANY PROFILE DEPICTS THE QTY AND QLTY OF FINANCIAL , HUMAN CAPITAL , AND PHYSICAL RESOURCES AVAILABLE TO THE COMPANY • ASSESSES INHERENT STRENGTHS AND WEAKNESSES OF FIRM • ATTEMPTS TO IDENTIFY THE FUTURE CAPABILTIES REQUIRED TO RUN BUSINESS (VERY CRITICAL) 2 Analyzing the External Environment of the Firm McGraw-Hill/Irwin Strategic Management: Text and Cases, 4e Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved. Analyzing the External Environment of the Firm McGraw-Hill/Irwin Strategic Management: Text and Cases, 4e Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved. EXTERNAL ENVIRONMENT • CONSISTS OF ALL CONDITIONS AND FORCES THAT AFFECT STRATEGIC OPTIONS BUT ARE TYPICALLY BEYOND FIRMS CONTROL (RM PRICE INFLATION(STEEL PRICES IN CONTRACT MFG), RESOURCE SHORTAGES INCL POWER AND CASH,etc. • IT ALSO INCLUDES UNFORESEEN EVENTS LIKE POLITICAL SHIFTS (ADAG POWER PLANTS IN UP DUE TO CHANGE IN GOVT) OR UNFORESEEN POLITICAL OPPOSITION (SINGUR) • EXTERNAL ENVIRONMENTAL RISKS IDENTIFICATION AND ANALYSIS PLAY AN IMPORTANT PART IN FORMULATION OF STRATEGY The External Environment Environment Economic Industry Environment Threat of new entrants Power of suppliers Power of buyers Product substitutes Intensity of rivalry Competitor Environment Technological General 125 Purpose of External Environmental Analysis • Organizations are affected by conditions in the environment • Managers need to be aware of these conditions in order to –Take advantage of opportunities that can lead to higher profits –Reduce the impact of threats that can harm the organization’s future Creating the Environmentally Aware Organization Managers need information in order to know and develop an understanding about what is happening in the external environment Environmental Scanning & Monitoring • External Scanning – Surveillance of a firm’s external environment: • Predict environmental changes to come • Detect changes already under way • Proactive mode • External Monitoring – Track evolution of: • Environmental trends • Sequence of events • Streams of activities Competitive Intelligence • Define and understand a firm’s industry • Identify rivals’ strengths and weaknesses – Intelligence gathering (data) – Interpretation of intelligence data • Helps a firm avoid surprises What Competitive Intelligence Is and Is Not Competitive Intelligence Is … 1. Information that has been analyzed to the point where you can make a decision. 2. A tool to alert management to early recognition of both threats and opportunities. 3. A means to deliver reasonable assessments. 4. A way of life, a process. Competitive Intelligence Is Not … 1. Spying. Spying implies illegal or unethical activities. It is a rare activity. 2. A crystal ball. Competitive Intelligence is good approximation of reality; it does not predict the future. 3. Database search. Data by itself is not good intelligence. 4. A job for one smart person. Adapted from Exhibit 2.2 What Competitive Intelligence Is and Is Not! Environmental Forecasting • Plausible projections about – – – – Direction of environmental change Scope of environmental change Speed of environmental change Intensity of environmental change • Scenario analysis Components of the External Environment Economic Demographic Sociocultural Industry Environment Competitive Environment Political/ Legal Global Technological The General and Competitive Environment General Environment Demographics Competitive Global Environment Political/Legal Threat on new entrants Bargaining power of suppliers Bargaining power of buyers Threat of substitute products Sociocultural Competitive rivalry Macoreconomic Technological ASSESSING EXTERNAL ENVIRONMENT • HOST OF EXTERNAL AND LARGELY UNCONTROLLABLE FACTORS INFLUENCE A FIRMS CHOICE OF ACTIONS • THESE FACTORS WHICH CONSTITUTE THE EXTERNAL ENVIRONMENT CAN BE DIVIDED INTO TWO INTERRELATED CATEGORIES – OPERATING ENVIRONMENT AND REMOTE ENVIRONMENT Steps in Analyzing Environment 1. Identify Market. 2. Identify environment factor (s). / Focus on factor (s) which most impact your business 3. Classify as threat or opportunity & estimate magnitude of threat/opportunity 4. Evaluate importance of factor and its impact on product/market 1. Identify Market (Alternative Diaper Markets) • Super premium branded disposable diapers for children in California • • • • – Diaper Rash Market – Special Occasion Market Versus Hospitals Daycare Operations Private Label 2. Evaluate External Environment (forces and conditions which affect the corporation’s strategy). Components of External Environment (Disposable Diaper Market) 1. Macro environment trends – Demographic • E.g. Aging: Baby boomers – Socio cultural • E.g. Self denial vs. self fulfillment – Economic • E.g. GDP and purchasing power – Technological • E.g. Cloning, internet, velcro • • • • • 1. Stay-dry bottom barrier - keeps moisture away from your baby's skin. 2. No-leak inner cuffs and comfortable outer leg gathers for proper fit and leakage protection. 3. Soft Super-absorbent core - quickly pulls wetness into carefully positioned moisture pockets. 4. Gentle Foam Waistband - soft, comfortable and moves with baby. 5. Colorful, Easy to use fastening tapes - The diaper fastening tapes are easy to fasten and easy to release. • 6. Soft Cloth Outer Cover - makes our diaper more comfortable for you and your baby. • 7. Refastenable tabs – Physical • E.g. Global warming, shortage of raw materials, pollution – Political/legal • E.g. Taxes, copyright laws Components of External Environment 2. Competition – Rivalry among competitors (Porter) – Threat of new entrants (Porter) – Threat of substitute products (Porter) Components of External Environment 3. Market/Customers – – – – – Size/Potential Growth Rate Seasonality Bargaining power of buyers (Porter) Sensitivity to price Components of External Environment 4. Industry – – – Bargaining power of suppliers (Porter) Industry profitability Barriers to entry/exit Competitor Environment Competitor intelligence is the ethical gathering of needed information and data about competitors’ objectives, strategies, assumptions, and capabilities what drives the competitor as shown by its future objectives what the competitor is doing and can do as revealed by its current strategy What the competitor believes about itself and the industry, as shown by its assumptions What the the competitor may be able to do, as shown by its capabilities 145 Competitor Analysis Future Objectives: Future objectives How do our goals compare with our competitors’ goals? Where will the emphasis be placed in the future? What is the attitude toward risk? 146 Competitor Analysis Current Strategy: Future objectives Current strategy How are we currently competing? Does this strategy support changes in the competitive structure? 147 Competitor Analysis Assumptions: Future objectives Current strategy Assumptions Do we assume the future will be volatile? Are we operating under a status quo? What assumptions do our competitors hold about the industry and themselves? 148 Competitor Analysis Response Future objectives Response: Current strategy Assumptions Capabilities What will our competitors do in the future? Where do we hold an advantage over our competitors? How will this change our relationship with our competitors? 149 Steps in Analyzing Environment 1. Identify factor 2. Focus on factor (s) which most impact your business 3. Classify as threat or opportunity & magnitude of threat/opportunity 4. Evaluate importance of factor and its impact on product/market Evaluating Market Demand/Potential Is it threat or opportunity? • Market Demand – total volume that would be bought by a defined customer group in a defined geographical area in a defined time in a defined marketing environment under a defined marketing program. Competition Is it threat or opportunity? • Direct Competitors - Firms likely to gain or lose a substantial share of customers from each other over time because they serve the same customers and offer similar benefits. Barriers to Entry (Conditions which make it difficult to become a significant competitor in a new market) Are they threat or opportunity? • Economies of scale in production, delivery, advertising, selling • Initial financial investment requires extensive resources • Lack of access to sources of production (raw materials, technology, labor skills) • Limited access to distribution channels • Government regulations • Customer loyalty to existing sellers COMPANY PROFILE – INTERNAL ANALYSIS OF FIRM • FORMULATION OF AN EFFECTIVE STRATEGY IS BASED ON A CLEAR DEFINITION OF COMPANY MISSION , AN ACCURATE APPRAISAL OF THE EXTERNAL ENVIRONMENT AND A THOROUGH ASSESSMENT OF THE INTERNAL ANALYSIS OF THE FIRM • FOR A STRATEGY TO SUCCEED THE FOLLOWING ARE CRITICAL -STRATEGY MUST BE CONSISTENT WITH CONDITIONS IN THE ENVIRONMENT -STRATEGY MUST PLACE REALISTIC REQUIREMENTS ON THE FIRMS INTERNAL RESOURCES AND CAPABILITIES.PURSUIT OF MARKET OPPORTUNITIES SHOULD BE BASED ON INTERNAL STRENGTHS AND CAPABILITIES AND NOT ON OPPORTUNITIES AVAILABLE -STRATEGY MUST BE CAREFULLY EXECUTED Internal Analysis • Involves the evaluation of the inventory of the firm’s resources and capabilities. • Resources/Capabilities can be classified as: – Tangible resources: Financial or physical assets – Intangible resources: brand name, reputation (product & firm), organizational culture, etc. – Capabilities or competencies: managerial ability, specialized skill & knowledge base of employees, etc. Internal Analyses’ Outcomes Unique resources, capabilities, and competencies (required for sustainable competitive advantage) By studying the internal environment, firms identify what they can do 3–156 Components of Internal Analysis Leading to Competitive Advantage and Strategic Competitiveness 3–157 The Challenge of Internal Analysis • Strategic decisions in terms of the firm’s resources, capabilities, and core competencies: – Are non-routine – Significantly influence the firm’s ability to earn above-average returns. 3–158 The Challenge of Internal Analysis (cont’d) • To develop and use core competencies, managers must have: – Self-confidence – The capacity to deal with uncertainty and complexity – A willingness to hold people (and themselves) accountable for their work 3–159 Resources, Capabilities and Core Competencies • Resources Discovering Core Competencies Core Competencies Capabilities Resources •Tangible •Intangible 3–161 – Are the source of a firm’s capabilities. – Are broad in scope. – Cover a spectrum of individual, social and organizational phenomena. – Alone, do not yield a competitive advantage. Resources • Resources – Are a firm’s assets, including people and the value of its brand name. – Represent inputs into a firm’s production process, such as: 3–162 • • • • Capital equipment Skills of employees Brand names Financial resources • Types of Resources – Tangible resources • Financial resources • Physical resources • Technological resources • Organizational resources – Intangible resources • Human resources • Innovation resources • Reputation resources Resources, Capabilities and Core Competencies • Capabilities Discovering Core Competencies Core Competencies Capabilities Resources •Tangible •Intangible 3–165 – Represent the capacity to deploy resources that have been purposely integrated to achieve a desired end state – Emerge over time through complex interactions among tangible and intangible resources – Often are based on developing, carrying and exchanging information and knowledge through the firm’s human capital Resources, Capabilities and Core Competencies • Capabilities (cont’d) Discovering Core Competencies Core Competencies Capabilities Resources •Tangible •Intangible 3–166 – The foundation of many capabilities lies in: • The unique skills and knowledge of a firm’s employees • The functional expertise of those employees – Capabilities are often developed in specific functional areas or as part of a functional area. Resources, Capabilities and Core Competencies Discovering Core Competencies Core Competencies Capabilities Resources •Tangible •Intangible 3–167 • Four criteria for determining strategic capabilities: – Value – Rarity – Costly-to-imitate – Nonsubstitutability Resources, Capabilities and Core Competencies • Core Competencies Discovering Core Competencies Core Competencies Capabilities Resources •Tangible •Intangible 3–168 – Resources and capabilities that are the sources of a firm’s competitive advantage: • Distinguish a company competitively and reflect its personality. • Emerge over time through an organizational process of accumulating and learning how to deploy different resources and capabilities. Resources, Capabilities and Core Competencies • Core Competencies Discovering Core Competencies Core Competencies Capabilities Resources •Tangible •Intangible 3–169 – Activities that a firm performs especially well compared to competitors. – Activities through which the firm adds unique value to its goods or services over a long period of time. Building Core• Four Competencies Criteria of Discovering Core Competencies Four Criteria of Sustainable Advantages Sustainable Competitive Advantage – Valuable capabilities – Rare capabilities – Costly to imitate • • • • 3–170 Valuable Rare Costly to imitate Nonsubstitutable – Nonsubstituable Building Sustainable Competitive Advantage • Valuable capabilities Discovering Core Competencies Four Criteria of Sustainable Advantages • • • • 3–172 Valuable Rare Costly to imitate Nonsubstitutable – Help a firm neutralize threats or exploit opportunities. – Allows firm to use capabilities to exploit opportunities & create value for customer • Rare capabilities – Are not possessed by many others. – Capability is connected to competitive advantage Building Sustainable Competitive Advantage • Costly-to-Imitate Capabilities Discovering Core Competencies Four Criteria of Sustainable Advantages • • • • 3–173 Valuable Rare Costly to Imitate Nonsubstitutable – Differentiating capability – Other firms cannot replicate capability thereby creating brand – -Generally created by combination of technology ,systems , processes and human capital – Market customer goodwill Building Sustainable Competitive Advantage • Nonsubstitutable Discovering Core Capabilities Competencies – No strategic equivalent Four Criteria of Sustainable Advantages • • • • 3–174 Valuable Rare Costly to imitate Nonsubstitutable • Firm-specific knowledge • Increased strategic value and distinctiveness of capability • Superior execution of the chosen business model through excellence of processes driven by superior human capital Outcomes from Combinations of the Four Criteria Competitive Consequences No No No No Competitive Disadvantage Performance Implications Below Average Returns Yes No No Yes/ No Yes Yes No Yes/ No Competitive Average Returns Parity Temporary Com- Above Average to petitive AdvantageAverage Returns Yes Yes Yes Yes Sustainable Com- Above Average petitive AdvantageReturns 3–176 COMPANY PROFILE – INTERNAL ANALYSIS OF FIRM • INTERNAL ANALYSIS IS DIFFICULT • AN INTERNAL ANALYSIS LEADS TO REALISTIC COMPANY PROFILE . THIS INVOLVES VALUE JUDGEMENTS AND STANDARDISED ANALYSIS. SYSTEMATIC INTERNAL ANALYSIS LEADS TO AN OBJECTIVE COMPANY PROFILE WHICH ULTIMATELY RESULTS IN AN EFFECTIVE STRATEGY • INTERNAL ANALYSIS MUST IDENTIFY STRATEGICALLY IMPORTANT STRENGTHS AND WEAKNESSES ON WHICH A FIRM SHOULD BASE ITS STRATEGY. THIS CAN BE ACHIEVED BY IDENTIFYING KEY INTERNAL FACTORS eg DISTRIBUTION CHANNELS , CASH FLOW, LOCATIONS , TECHNOLOGY etc • PROCESS OF INTERNAL ANALYSIS IS A CRITICAL INGREDIENT IN STRATEGY DEVELOPMENT KEY INTERNAL FACTORS • • • • • MARKETING FINANCE AND ACCOUNTING OPERATIONS PERSONNEL GENERAL MANAGEMENT MARKETING • BREADTH OF PRODUCT LINE AND SERVICES • CONCENTRATION OF SALES IN A FEW PRODUCTS (SINGLE PRODUCT COMPANY) OR TO A VERY FEW SELECTED MARKETS(NICHE MARKETS) • ABILITY TO GET INFORMATION ABOUT MARKETS • MARKET POTENTIAL AND MARKET SHARE • PRODUCT MIX , PRODUCT LIFE CYCLE • DEPTH OF DISTRIBUTION CHANNELS • EFFECTIVE SALES FORCE AND KNOWLEDGE OF CUSTOMER CHANGING REQUIREMENTS • BRAND IMAGE AND REPUTATION LEADING TO LOYALTY • PRICING STRATEGY AND FLEXIBILITY • PROCESS FOR ACCEPTING AND INCORPORATING MARKET FEEDBACK(VOICE OF CUSTOMER) FINANCE AND ACCOUNTING • ABILITY TO RAISE SHORT TERM CAPITAL AND LONG TERM DEBT • COST OF CAPITAL RELATIVE TO COMPETITION • RELATIONS WITH STAKEHOLDERS COST OF ENTRY AND BARRIERS IN ENTRY (MIDDLE EAST OPERATING THRU LOCAL AGENT) • WORKING CAPITAL ADEQUACY • EFFECTIVE COST CONTROL • EFFECTIVE ACCOUNTING SYSTEMS OPERATIONS • • • • • • • • RAW MATERIAL COST AND AVAILABILITY SUPPLIER RELATIONSHIPS INVENTORY CONTROL SYSTEMS AND TURNOVER UTILIZATION OF FACILITIES AND ITS EFFICIENCY AND EFFECTIVENESS DEGREE OF VERTICAL INTEGRATION AND VALUE ADD EFFECTIVE OPERATIONS CONTROL PROCEDURES TECHNOLOGICAL AND WORKFORCE COMPETENCES PATENTS AND TRADE MARKS PERSONNEL • EMPLOYEE HUMAN CAPITAL RETENTION AND ENHANCEMENT • EMPLOYEE MORALE AND INVOLVEMENT • LABOR RELATIONS COSTS • USAGE OF INCENTIVES TO ENHANCE PRODUCTIVITY • EFFECTIVE PERSONNEL POLICIES • MANAGEEMPLOYEE TURNOVER AND ABSENTEEISM GENERAL MGT • • • • • • • • • • ORGANIZATIONAL STRUCTURE FIRM IMAGE ABILITY TO ACHIEVE OBJECTIVES ORGANIZATIONAL COMMUNICATION SYSTEM ORGANIZATIONAL CONTROL SYSTEM ORGANIZATIONAL CULTURE USE OF SYSTEMATIC PROCEDURES IN DECISION MAKING MANAGEMENT CAPABILITIES STRATEGIC PLANNING SYSTEM INTRA ORGANIZATIONAL SYNERGY Strengths and Weakness form a basis for INTERNAL analysis • By examining strengths, you can discover untapped potential or identify distinct competencies that helped you succeed in the past. • By examining weaknesses, you can identify gaps in performance, vulnerabilities, and erroneous assumptions about existing strategies. Analysis SWOT • Strengths – identifying existing organisational strengths • Weaknesses – identifying existing organisational weaknesses • Opportunities – what market opportunities might there be for the organisation to exploit? • Threats – where might the threats to the future success come from? PEST • Political: local, national and international political developments – how will they affect the organisation and in what way/s? • Economic: what are the main economic issues – both nationally and internationally – that might affect the organisation? • Social: what are the developing social trends that may impact on how the organisation operates and what will they mean for future planning? • Technological: changing technology can impact on competitive advantage very quickly! PEST • Examples: • Growth of China and India as manufacturing centres • Concern over treatment of workers and the environment in less developed countries who may be suppliers • The future direction of the interest rate, consumer spending, etc. • The changing age structure of the population • The popularity of ‘fads’ like the low calorie Diet • The move towards greater political regulation of business • The effect of more bureaucracy in the labour market Required Inputs • Changing strategy will impact on the resources needed to carry out the strategy: • Specifically the impact on: – Industry – changing regulations and markets – Labour – ease of obtaining the skilled and unskilled labour required – Capital – the type of capital and the cost of the capital needed to fulfil the strategy REMOTE ENVIRONMENT • COMPRISES OF SET OF FORCES THAT ORIGINATE BEYOND THE ORG CONTROL- POLITICAL (SINGUR ) , ECONOMIC (PINK SLIPS) , SOCIAL (RESERVATIONS), TECHNOLOGICAL (IMPACT OF AUTOMATION), AND INDUSTRY (DOWNTURN ,UPSWING) • PRESENTS OPPORTUNITIES ,THREATS, AND CONSTRAINTS FOR THE FIRM • FOR EXAMPLE HOUSING , AIRLINES AND TOURISM INDUSTRIES SUFFER MOST DURING RECESSION OPERATING ENVIRONMENT • INVOLVES FACTORS IN THE IMMEDIATE COMPETITIVE SITUATION THAT PROVIDES CHALLENGES IN ATTEMPTING TO ACHIEVE SHORT TERM GOALS • PROMINENT FACTORS ARE -COMPETITIVE POSITION -CUSTOMER PROFILE -REPUTATION WITH SUPPLIERS AND CUSTOMERS -ACCESSIBLE LABOR MARKET Competitor Analysis The follow-up to Industry Analysis is effective analysis of a firm’s Competitors Industry Environment Competitive Environment Competitor Analysis Assumptions Do we assume future will be volatile Are we operating under status quo What assumptions do competition make Current Strategy Does our current strategy support changes in the competitive environment? How are we currently competing Future Objectives How do our goals compare to our competitors’ goals? Where will emphasis be placed in future What is attitude to risk Capabilities How do our capabilities(sw) compare to our competitors? How do we fare wrt competition Response What will our competitors do in the future? Where do we have a competitive advantage? How will this change our relationship with our competition? Competitor Analysis Future Objectives How do our goals compare to our competitors’ goals? Where will emphasis be placed in the future? What is the attitude toward risk? What Drives the competitor? Competitor Analysis Future Objectives How do our goals compare to our competitors’ goals? Where Current will emphasis be Strategy placed inHow the future? are we currently What is the attitude competing? toward risk? Does this strategy support changes in the competitive structure? What is the competitor doing? What can the competitor do? Competitor Analysis Future Objectives What does the competitor believe about itself and the industry? How do our goals compare to our competitors’ goals? Where Current will emphasis be Strategy placed in the future? How are we currently What is the attitude competing? Assumptions toward risk? Does thisDo strategy we assume the future support changes in the will be volatile? competition structure? What assumptions do our competitors hold about the industry and themselves? Are we assuming stable competitive conditions? Competitor Analysis Future Objectives What are the competitor’s capabilities? How do our goals compare to our competitors’ goals? Where Current will emphasis be Strategy placed in the future? How are we currently What is the attitude competing? Assumptions toward risk? Does this Dostrategy we assume the future supportwill changes in the be volatile? competition Whatstructure? assumptions do our competitors hold about the Capabilities industry and themselves? What are my competitors’ Are we operating under strengths and weaknesses? a status quo? How do our capabilities compare to our competitors? Competitor Analysis Response Future Objectives How do our goals compare to our competitors’ goals? Where Current will emphasis be Strategy placed in the future? How are we currently What is the attitude competing? Assumptions toward risk? Does this Dostrategy we assume the future supportwill changes in the be volatile? competition Whatstructure? assumptions do our Capabilities competitors hold about the industry and themselves? What are my competitors’ Are we operating strengths under and weaknesses? a status quo? How do our capabilities compare to our competitors? What will our competitors do in the future? Where do we have a competitive advantage? How will this change our relationship with our competition? COMPETITIVE POSITION • BUSINESS IMPROVES ITS CHANCES OF DESIGNING STRATEGIES THAT OPTIMIZEENVIRONMENTAL OPPORTUNITIES • CONSTRUCTING COMPETITOR PROFILE IS DONE THRU DETERMINATION OF -MARKET SHARE -BREADTH OF PRODUCT LINE -EFFECTIVENESS OF SALES DISTRIBUTION -STRATEGIC ACCOUNT MAPPING -EXPERIENCE -PRICE COMPETITIVENESS –RAW MATERIAL COSTS -ADVERTISING AND SALES PROMOTION EFFECTIVENESS -FINANCIAL HEALTH -PRODUCT QUALITY BRAND -R AND D ADVANTAGES -HUMAN CAPITAL ADVANTAGES -MARKET IMAGE COMPETITIVE POSITION OF SUPPLIERS • DEPENDABLE RELATIONS BETWEEN FIRM AND SUPPLIERS ARE ESSENTIAL IN INTEREST OF LONG TERM GROWTH AND SURVIVAL • FIRM RELIES ON SUPPLIERS FOR SERVICES MATERIAL AND EQUIPMENT • IN ORDER TO HAVE A GOOD OPERATIVE ENVIRONMENT IT IS ESSENTIAL TO ADDRESS THE FOLLOWING ISSUES -ARE SUPPLIER PRICES COMPETITIVE AND DO THEY OFFER ATTRACTIVE QUANTITY DISCOUNTS. HOW COSTLY ARE THEIR SHIPPING CHARGES -ARE THEY QUALITATIVE , AGILE , CAPABLE AND FLEXIBLE TO MEET THE CHANGING NEEDS Strategy Crafting • Strategy crafting is concerned with the following parts of a company: – Corporate (whole company) -- Corporate strategies: Deals with businesses company wants to be in & how to manage those businesses – Businesses -- Competitive strategies: How to compete in specific business or industry – Functional areas -- Functional strategies: short goal-directed decisions & actions of an organization’s various functional departments. APPROACH TO CRAFTING STRATEGY • • A. WHAT IS THE BUSINESS DOING NOW? -1 .IDENTIFICATION WHAT IS THE CURRENT STRATEGY -2.ASSUMPTIONS – WHAT ASSUMPTIONS ABOUT COMPANY RELATIVE POSITION STRENGTHS WEAKNESSES COMPETITORS AND INDUSTRY TRENDS MUST BE MADE FOR CURRENT STRATEGY TO BE FEASIBLE B. WHAT IS HAPPENING IN THE ENVIRONMENT? -1 INDUSTRY ANALYSIS WHAT ARE THE KEY FACTORS FOR COMPETITIVE SUCCESS AND THE IMPORTANT INDUSTRY OPPORTUNITIES AND STRENGTHS -2 COMPETITOR ANALYSIS WHAT ARE THE CAPABILITIES AND LIMITATIONS OF EXISTING AND POTENTIAL COMPETITORS AND THEIR PROBABLE FUTURE MOVES -3 SOCIETAL ANALYSIS WHAT IMPORTANT GOVT SOCIAL AND POLITICAL FACTORS WILL PRESENT OPPORTUNITIES OR THREATS -4 STRENGTHS AND WEAKNESSES GIVEN AN ANALYSIS OF INDUSTRY AND COMPETITORS WHAT ARE COMPANY STRENGTHS AND WEAKNESSES RELATIVE TO PRESENT AND FUTURE COMPETITION APPROACH TO CRAFTING STRATEGY • C WHAT SHOULD THE BUSINESS BE DOING ? -1. ASSUMPTION AND STRATEGY HOW DO THE ASSUMPTIONS IN THE CURRENT STRATEGY COMPARE WITH ANALYSIS IN B. -2 STRATEGIC ALTERNATIVES WHAT ARE THE FEASIBLE STRATEGIC ALTERNATIVES ? IS THE CURRENT STRATEGY ONE OF THEM -3 STRATEGIC CHOICE WHICH ALTERNATIVES BEST RELATE THE COMPANY SITUATION TO EXTERNAL OPPORTUNITIES AND THREATS GUIDELINES FOR CRAFTING SUCCESSFUL STRATEGIES • PLACE TOP PRIORITY ON STRATEGIC MOVES THAT ENHANCE COMPANY COMPETITIVE POSTION IN THE LONG RUN . DO NOT GO FOR ONLY SHORT TERM GAINS eg FLY BY NIGHT OPERATORS. NEED TO HAVE SHORT TERM GOALS FIRMLY LINKED TO THE ACHIEVEMENT OF LONG TERM GOALS • BE PROMPT IN ADAPTING TO CHANGING MKT CONDITIONS AND UNMET CUSTOMER NEEDS AND WANTS • CREATE A SUSTAINABLE COMPETITIVE ADVANTAGE • AVOID STRATEGIES WHICH WILL SUCCEED IN ONLY THE MOST OPTIMISTIC SITUATIONS BY DOING A STRATEGY RISK ANALYSIS AND ALTERNATIVE STRATEGY FORMULATION • DISCOVER AND ATTACK COMPETITIVE WEAKNESS GUIDELINES FOR CRAFTING SUCCESSFUL STRATEGIES • BE WARY OF CUTTING PRICES WITHOUT AN ESTABLISHED COST ADVANTAGE eg CASE OF LOW COST AIRLINES DROPPING PRICE TO MUCH BELOW COST • JUDICIOUSLY EMPLOY AGGRESSIVE MOVES TO WREST MARKET SHARE FROM COMPETITION ;WHICH COULD PROVOKE RETALIATION IN THE FORM OF ESCALATING MARKETING AND SALES PROMOTION , A FURIOUS RACE TO BE FIRST TO MARKET WITH NEW VERSIONS OF THE PRODUCT OR A PRICE WAR eg AIRTEL ON MOBILE RATES CRAFTING STRATEGY • TASK OF CRAFTING STRATEGY REQUIRES ANSWERING HOW TO GROW BUSINESS;HOW TO DELIGHT CUSTOMERS(DIFFERENCE BETWEEN SATISFY AND DELIGHT?);HOW TO COUNTER COMPETITION;HOW TO RESPOND TO CHANGING MARKET CONDITIONS; HOW TO MANAGE CONTRADICTIONS IN FUNCTIONAL OBJECTIVES (FINANCE WANTS MINIMUM 15% CONTRIBUTION PER ORDER;SALES WANTS TOP LINE AT ANY COST BOTTOM LINE COMES LATER);HOW TO DEVELOP VARIOUS COMPETENCES AND CAPABILITIES TO SUCCEED IN THE MKTPLACE;HOW TO ACHIEVE STRATEGIC AND FINANCIAL OBJECTIVES; • IT MEANS LOOKING AT VARIOUS STRATEGIC ALTERNATIVES AND CHOOSING ONE OF THEM BASED ON THE LEAST RISKY ONE. CRAFTING STRATEGY • FASTER BUSINESS ENVIRONMENT CHANGES MORE CRITICAL IT IS NEED TO CHOOSE THE RIGHT STRATEGY AND ADAPT EXISTING ONE TO BE FLEXIBLE TO ENABLE THE DYNAMIC CORRECTION OF STRATEGIES WITHOUT FINANCIAL IMPACT TO THE COMPANY (eg CAN A COMPANY PREDICT CHANGES IN CUSTOMER PREFERENCES AND BE THE MARKET LEADER IN OFFERING SUCH PRODUCTS/SERVICES eg AIRTEL BEING INNOVATIVE AND INTRODUCING SEVERAL NEW SCHEMES, FEATURES FOR THE BENEFIT OF THEIR CUSTOMERS • STRATEGY MAKERS HAVE TO PAY ATTENION TO EARLY WARNINGS AND HENCE NEED TO BE VERY GOOD AT PREDICTING TRENDS AND ALSO KNOWING WHAT COMPETITION IS CURRENTLY UPTO AND NEEDS TO BE AT LEAST ONE STEP AHEAD. BE THE LEADER NOT THE STRATEGY CRAFTING CONSTRAINTS • AVAILABILITY OF FINANCIAL RESOURCES • ATTITUDE TOWARDS RISK • ORGANIZATIONAL CAPABILITES ESPECIALLY IN DIVERSIFICATION INTO UNRELATED AREAS eg L&T CEMENT AND SHIPPING • LIMITED ACCESS TO DISTRIBUTION OR SUPPLYCHANNELS CRAFTING STRATEGY FOR COMPANIES COMPETING IN VARIOUS SITUATIONS • • • • • • • • • • EMERGING INDUSTRIES(EMBRYONIC) RAPIDLY GROWING MARKETS MATURING INDUSTRIES STAGNANT OR DECLINING INDUSTRIES HIGH VELOCITY TURBULENT MARKETS FRAGMENTED INDUSTRIES STRIVING TO SUSTAIN RAPID GROWTH INDUSTRY LEADERSHIP POSITION RUNNER UP POSITION COMPETITIVELY WEAK POSITIONS OR IN CRISIS EMERGING INDUSTRY • LACK OF ESTABLISHED RULES OF THE GAME IN THE INDUSTRY GIVES PLAYERS FREEDOM TO EXPERIMENT WITH DIFFERENT STRATEGIC APPROACHES eg TELECOM SERVICES IN THE RURAL AREA. COMPETITIVE STRATEGIES LINKED TO LOW COST (GODREJ 2K FRIDGE IN RURAL AREAS) OR DIFFERENTIATION (HIGH CLASS MEDICAL SERVICES) . RECOMMENDED STRATEGIES SHOULD BE CRAFTED AROUND THESE AREAS -IMPROVE PRODUCT QUALITY AND DEVELOP ADDITIONAL PERFORMANCE FEATURES eg LONGER MTBF;MORE MILEAGE PER KM FOR 2 AND 4 WHEELERS -ACQUIRING ANOTHER COMPANY TO POOL RESOURCE STRENGTHS eg ACQUISITION BY IBM GLOBAL SERVICES OF PWC IT CONSULTING WING EMERGING INDUSTRY • RECOMMENDED STRATEGIES SHOULD BE CRAFTED AROUND THESE AREAS -EARLY ADOPTION OF DOMINANT TECHNOLOGY AND LEVERAGE THRU MAXIMIZATION OF BENEFITS ACCRUED FROM SUCH ADOPTION BEFORE THE OTHERS ADOPT eg L&T WERE ONE OF THE FIRST COMPANIES IN BOMBAY TO AUTOMATE THEIR POWAI FACTORY WAY BACK IN 1960’S .THEIR SUCCESS USHERED IN AN IT AGE-BSES,GLAXO,ESSO -ACQUIRE OR FORM ALLIANCES WITH COMPANIES THAT HAVE RELATED OR COMPLEMENTARY EXPERTISE AS A MEANS OF OUTCOMPETING RIVALS ON THE BASIS OF HUMAN CAPITAL SKILLS eg ACQUISITION OF CMC LTD BY TCS HAS ENABLED TCS TO GAIN ACCESS TO HARDWARE , NETWORKING AND SYSTEM INTEGRATION SKILLS EMERGING INDUSTRY • RECOMMENDED STRATEGIES SHOULD BE CRAFTED AROUND THESE AREAS -ENTER INTO STRATEGIC PARTNERSHIPS THRU JV TO ADDRESS NEW MARKETS AND INFUSE NEW CAPITAL WHEREVER REQUIRED (RIL WITH ENRON FOR MUKTA PANNA AND WITH CAIRN IN KG BASIN) -EVOLVE THE ADVERTISING PHASE FROM CREATING PRODUCT AWARENESS TO INCREASING FREQUENCY OF USAGE AND BUILDING BRAND LOYALTY -INTRODUCING PRICING OFFERS TO ATTRACT THE PRICE SENSITIVE BUYERS -FORM STRATEGIC ALLIANCES WITH SUPPLIERS WHO HAVE SPECIALIZED SKILLS TECHNOLOGICAL CAPABILITIES eg BG WITH HALLIBURTON FOR OIL WELL DRILLING Competitive Changes During Industry Evolution Demand Stages of the Industry Life Cycle Embryonic Time 213 Competitive Changes During Industry Evolution (Continued) Demand Stages of the Industry Life Cycle Embryonic Growth Time 214 Competitive Changes During Industry Evolution (Continued) Demand Stages of the Industry Life Cycle Embryonic Growth Shakeout Time 215 Competitive Changes During Industry Evolution (Continued) Demand Stages of the Industry Life Cycle Embryonic Growth Shakeout Time Maturity 216 Competitive Changes During Industry Evolution (Continued) Demand Stages of the Industry Life Cycle Embryonic Growth Shakeout Time Maturity Decline 217 BARRIERS IN EMERGING INDUSTRY • • • • • • • • LIMITED ACCESS TO MARKETS AND DISTRIBUTION CHANNELS DIFFICULTY IN ACCESS TO HIGH QUALITY RAW MATERIAL AT ECONOMIC PRICE AND OTHER INPUTS SUCH AS SKILLED LABOUR AND HUMAN COMPETENCES AT AFFORDABLE RATES RISK OF OPERATIONS WHICH RAISES THE EFFECTIVE OPPORTUNITY COST OF CAPITAL INABILITY TO ACCESS ADEQUATE INFRA STRUCTURE FOR SMOOTH OPERATIONS SUCH AS DISTRIBUTION CHANNELS,RETAIL OUTLETS ERRATIC AND NON REPEATABLE PRODUCT QUALITY IMAGE AND CREDIBILITY WITH FINANCIAL COMMUNITY DELAYS IN GETTING REGULATORY APPROVALS HIGH UNIT COST OF OPERATIONS RAPIDLY GROWING MARKETS • TO BE ABLE TO GROW AT A PACE EXCEEDING INDUSTRY AVERAGE THE FOLLOWING STRATEGIES SHOULD BE IN PLACE -MINIMIZE COST PER UNIT TO ATTRACT NEW CUSTOMERS. SO IS THE CASE IN DECORATIVE SEGMENTS AND ASSEMBLED PC WHERE PRODUCTS FROM GREY MARKET TEND TO CAPTURE THE MARKET. CHARGING A LOWER PRICE CAN HELP PUSH UP BUYERS DEMAND BY DRAWING NEW CUSTOMERS . HOWEVER COMPANY SHOULD BE ABLE TO REDUCE COST FASTER THAN COMPETITION TO ACHIEVE COMPETITIVE ADVANTAGE -PRODUCT DIFFERENTIATION THRU RAPID PRODUCT INNOVATION eg MARUTI,AIRTEL -ACCESS TO ADDITIONAL DISTRIBUTION CHANNELS TO ENHANCE COVERAGE AND RETAIL OUTLETS AND EXPANDING COMPANYS GEOGRAPHICAL COVERAGE -EXPANDING PRODUCT LINE TO ADD MODELS THAT APPEAL TO WIDER RANGE OF BUYERS MATURING INDUSTRIES • PRUNING MARGINAL PRODUCTS AND MODELS BY REDUCING VARIETY , REPACKAGING CERTAIN PRODUCTS BY VALUE ANALYSIS.THIS IS DONE TO MAINTAIN PROFIT MARGINS DESPITE INCREASED COMPETITION • IMPROVING VALUE CHAIN EFFICIENCY BY ACHIEVING LEANNESS HENCE LOWER COSTS (XEROX VS CANON WHERE CANON SALES PRICE WAS 60% OF XEROX COST), BETTER QUALITY , AGILITY, AND FLEXIBILITY • INCREASING WALLET SHARE OF EXISTING CUSTOMERS THRU GOOD CRM PRACTICES (HOW FAR DO LOYALTY PROGRAMS TAKE YOU? STRAGNANT/DECLINING INDUSTRIES • STRATEGIC DECISION TO REMAIN OR WITHDRAW eg WITHDRAWAL FROM TEXTILE MFG BY SEVERAL MUMBAI MILLS AND SELLING REAL ESTATE AT BOOMING PRICES • FOCUS ON FASTEST GROWING OR SLOWEST DECAYING MARKET SEGMENTS eg DIVERSIFICATION AND CONCENTRATION ON RETAILING OF READY MADE GARMENTS FROM BEING ONLY A COMPOSITE TEXTILE MILL WITH PROCESS HOUSE eg PANTALOON • STRESS DIFFERENTIATION BASED ON QUALITY IMPROVEMENT AND PRODUCT INNOVATION • BECOME QUALITY CONSCIOUS LOW COST PROVIDER • PROVIDE FOR AN EXIT STRATEGY TURBULENT HIGH VELOCITY MARKETS • • • MANY COMPANIES OPERATE IN INDUSTRIES HIGHLIGHTED BY RAPID TECHNOLOGICAL CHANGE (SOFTWARE,MOBILE TECHNOLOGY),SHORT PRODUCT LIFE CYCLES(MOBILE MODELS),ENTRY OF NEW RIVALS ,FAST EVOLVING CUSTOMER REQUIREMENTS HIGH VELOCITY CHANGE IS THE PREVAILING CONDITION IN MOST TECHNOLOGY ORIENTED BUSINESSES STRATEGIES IN DEALING WITH TURBULENT MARKET CHANGE INCLUDE -RAPID REACTION TO CHANGE . NEED TO HAVE A VERY PROACTIVE VOICE OF THE CUSTOMER AND VOICE OF THE INDUSTRY TO UNDERSTAND EMERGING REQUIREMENTS AND IMPLEMENT THEM TO ACHIEVE COMPETITIVE EDGE .NEED TO COUNTER UNEXPECTED SHIFT IN BUYER TASTES AND DEMAND BY REDESIGNING OR REPACKAGING(OLD WINE IN NEW BOTTLES) RELEASE OF OLD FILMS DIGITALLY MASTERED OR IN COLOUR.REACTION IS A DEFENSIVE STRATEGY AND THEREFORE HAS RISKS.IT IS ALSO REQUIRED TO INTRODUCE BETTER PRODUCTS IN RESPONSE TO NEW OFFERINGS OF RIVALS TURBULENT HIGH VELOCITY MARKETS • STRATEGIES IN DEALING WITH TURBULENT MARKET CHANGE INCLUDE -ANTICIPATE CHANGE. COMPANY MAKES PLANS FOR DEALING WITH EXPECTED CHANGES AND FOLLOW PLANS AS CHANGES OCCUR .THEY ALSO MONITOR NEW TECHNOLOGICAL DEVELOPMENTS CLOSELY TO PREDICT FUTURE PATH eg IT INVESTMENTS. HOWEVER THE RISK OF NOT ANTICIPATING CERTAIN CHANGE ELEMENTS IS ALWAYS A REALITY AND THE COMPANY NEEDS TO DO A RISK ASSESSMENT OF ITS STRATEGIES ESPECIALLY APPLICABLE TO UNCERTAIN MARKETS.ANTICIPATING CHANGE ENTAILS LOOKING AHEAD TO ANALYZE WHAT IS LIKELY TO OCCUR AND THEN PREPARING AND POSITIONING FOR THE FUTURE. IT ALSO INVOLVES STUDYING THE CHANGING BUYER BEHAVIOUR AND EXPECTATIONS TO GET AN INSIGHT INTO THE EMERGING MARKETS AND THEN PLANNING THE REQUISITE STRATEGIES AND ACTION PLANS TO DELIVER VALUE TURBULENT HIGH VELOCITY MARKETS • STRATEGIES IN DEALING WITH TURBULENT MARKET CHANGE INCLUDE -LEADING CHANGE. LEADING CHANGE MEANS BEING THE FIRST TO MARKET A NEW PRODUCT/SERVICE OR A PIONEER IN NEW/BETTER TECHNOLOGIES.IT RESULTS IN INTRODUCTION OF INNOVATIVE PRODUCTS THAT OPEN NEW MARKETS(ENTRY INTO TWO WHEELER SEGMENT) AND SEEKS TO SET INDUSTRY STANDARDS Eg TATA NANO SMALL CAR PROJECT MAKES THE CHEAPEST SMALL CAR IN THE WORLD. THE SUCCESS HAS SPURRED ON OTHER COMPETITORS WHO ARE ASPIRING TO INTRODUCE SIMILAR SMALL BUDGET CARS. FRAGMENTED INDUSTRIES • INDUSTRIES POPULATED BY SEVERAL SME AND SUCH INDUSTRIES WITH LARGE SME POPULATION TENDS TO BE FRAGMENTED eg DECORATIVE PAINT SEGMENT IN WHICH THE GREY/SME MARKET IS AROUND 30%. THIS IS DUE TO ECONOMICS OF MFG BY SMES OR PRICE CONSCIOUS BUYERS.LARGE COMPANIES MAY NOT BE ABLE TO MATCH THE PRICE PROFERRED BY SME THOUGH THEIR QUALITY MAY BE SUSPECT COMPARED TO THE BRANDED PLAYERS.REASONS FOR FRAGMENTATION MAY BE DUE TO -1. BUYER REQUIREMENTS ARE SO DIVERSE AND IN HUGE NUMBERS THAT LARGE NUMBER OF FIRMS CAN COEXIST TRYING TO ACCOMMODATE DIFFERENT BUYER TASTES .eg RETAILING OF READY MADE GARMENTS(BRAND,STYLES ,FABRIC,PRICE) -2.LOW ENTRY BARRIERS ALLOW SMALL FIRMS TO ENTER QUICKLY AND CHEAPLY. SALE OF UNBRANDED WEAR IN DEPT STORES FRAGMENTED INDUSTRIES • • -3.SMALLER MARKET DEMAND PERMITS SMALLER COMPANIES TO COMPETE ON BETTER COST FOOTING WITHMLARGER FIRMS. INFACT THIS PHENOMENON IS SO WELL UNDERSTOOD BY LARGE COMPANIES THAT THEY OUTSOURCE THEIR MFG TO SMALLER COMPANIES AT LESSER RATES; STAMP THEIR NAME ON THE PRODUCT AND SELL IT AT SEVERAL TIMES HIGHER PRICE eg A LEADING AUTO ANCILLARY UNIT OUTSOURCES SEVERAL OF ITS PRODUCTS TO SMALLER MFG AND THESE ARE SOLD AS SPARE PARTS FOR CARS AT SEVERAL TIMES THE PRICE THEY RECEIVE THEM STRATEGY OPTIONS INCLUDE -BEING A LOW COST PROVIDER eg ASHOK YATRI NIWAS -SPECIALISING BY PRODUCT TYPE eg SPARES FOR MARUTI VARIANTS ONLY -SPECIALIZING BY CUSTOMER TYPE MARKET NICHE eg BUDGET TOURISTS CAUSES OF FRAGMENTED INDUSTRIES • • • • • • LOW ENTRY BARRIERS ABSENCE OF ECONOMIES OF SCALE – PROCESS IN MFG OR SERVICE IS SIMPLE STRAIGHT FORWARD OPERATION eg WAREHOUSING , HAS A HIGH LABOR CONTENT(SECURITY) OR SERVICE CONTENT(BEING SERVED IN A RESTAURANT) OR IS HARD TO ROUTINIZE HIGH TRANSPORTATION COSTS eg CEMENT , MILK, CHEMICALS HIGH INVENTORY COSTS DUE TO ERRATIC SALES FLUCTUATIONS POWERFUL BUYERS MIGHT DELIBERATELY BUY FROM SME AND DEVELOP THEM TO LEVERAGE THEIR COST ADVANTAGE REQUIREMENT OF HIGHLY CUSTOMISED PRODUCTS AND SERVICES BENEFITING SMALLER COMPANIES eg ERP IMPLEMENTORS IN BLR AT 11K PER MM CAUSES OF FRAGMENTED INDUSTRIES • DIVERSE MARKET NEEDS WITH FRAGMENTED BUYER NEEDS EACH DESIRING SPECIAL VARIETY OF PRODUCT AND WILLING TO PAY PREMIUM FOR IT RATHER THAN BUY STANDARDISED VERSION eg MADE TO ORDER FURNITURE FOR MOST HOUSES APPROACH TO OVERCOMING FRAGMENTATION • DEPLOY INNOVATION IN PRODUCTS TO INCREASE MARKET SHQARE • BE FLEXIBLE TO ADDRESS DIVERSE MARKET NEEDS • RECOGNIZE INDUSTRY TRENDS EARLY • DECENTRALIZE OPERATIONS TO MINIMIZE DECISION MAKING TIME • INCREASED VALUE ADDITION • SPECIALIZATION BY PRODUCT TYPE OR PRODUCT SEGMENT eg SISL IN MEDICAL CARE IT SOLUTIONS • SPECIALIZATION BY CUSTOMER TYPE eg DEMOGRAPHIC OR PSYCHOGRAPHIC SEGMENTATION • FOCUSED GEOGRAPHIC OPERATIONS • NO FRILLS SERVICE eg LOW COST AIRLINES STEPS FOR FORMULATING STRATEGY IN FRAGMENTED INDUSTRIES • 1. WHAT IS THE STRUCTURE OF THE INDUSTRY AND THE RANKINGS OF COMPETITION • 2. WHY IS THE INDUSTRY FRAGMENTED • 3. CAN FRAGMENTATION BE OVERCOME. HOW • 4. IS OVERCOMING FRAGMENTATION PROFITABLE.WHERE SHOULD THE FIRM BE POSITIONED TO DO SO • 5. IF FRAGMENTATION IS INEVITABLE WHAT IS THE BEST ALTERNATIVE FOR COPING WITH IT SUSTAIN RAPID GROWTH • COMPANIES THAT GROW THEIR REVENUES EVERY YEAR OR AT A RATE EXCEEDING MARKET AVERAGE (TWO WHEELER MARKET GREW BY NEGATIVE MARGIN OF 6% IN 2008-2009 BUT HERO HONDA INCREASED ITS MARKET SHARE FROM 45% TO 54% DURING THE PERIOD) • THESE COMPANIES GROW FASTER THAN OTHERS BECAUSE OF POSITIVE INITIATIVES EXERCISED BY COMPANY WHICH RESULT IN REDUCED COSTS OF OPERATIONS WHICH ARE PASSED ON TO THE CUSTOMER;INCREASED QUALITY AND FUNCTIONALITIES etc • SUCH COMPANIES HAVE THREE STRATEGIES TO ENSURE SUSTAINED GROWTH SUSTAIN RAPID GROWTH • -SHORT JUMP INITIATIVES TO FORTIFY AND CONSOLIDATE POSITION IN EXISTING BUSINESS. IT INCLUDES ADDING NEW ITEMS TO PRESENT PRODUCT LINE,EXPANDING INTO NEW GEOGRAPHIC AREAS WHERE THE COMPANY DOES NOT YET HAVE A PRESENCE .IMMEDIATE GAINS IN REVENUES AND PROFITS -MEDIUM JUMP STRATEGIC INITIATIVES TO LEVERAGE EXISTING RESOURCES AND CAPABILITIES BY ENTERING NEW BUSINESSES WITH PROMISING GROWTH POTENTIAL eg ADAG DIVERSIFYING INTO FILM PRODUCTION , DISTRIBUTIONAND TV SERIAL PRODUCTION.HOWEVER THERE DOES NOT SEEM TO BE INTELLECTUAL CAPITAL WITHIN THE COMPANY BUT ACQUISITION OF ADLABS MAY DO THE NEEDFULL.MODERATE REVENUE AND PROFIT GAINS NOW BUT SIZEABLE GAINS IN 2-5 YEARS SUSTAIN RAPID GROWTH • -LONG JUMP STRATEGIC INITIATIVES TO PLAN VENTURES IN BUSINESS THAT DO NOT YET EXIST eg PUMPING FUNDS INTO LONG RANGE R&D PROJECTS FOR ELIMINATION OF DIABETES AND CANCER; OR ACQUIRING SMALL COMPANIES EXPERIMENTING WITH TECHNOLOGIES AND PRODUCT IDEAS THAT COMPLEMENT THE COMPANY CURRENT BUSINESS. HOW ABOUT PETROL CAR ENGINE MFG ACQUIRING SMALL COMPANIES WHICH MFG CAR ENGINES BUT ARE WORKING ON CNG KITS,ETHANOL ENGINES etc. AN EMERGING TREND IN THE WEST IS FOR SUCH COMPANIES TO SET UP AN INTERNAL VENTURE CAPITAL FUND TO INVEST IN PROMISING STARTUP COMPANIES ATTEMPTING TO CREATE INDUSTRIES OF THE FUTURE . MINIMAL REVENUE GAINS NOW BUT POTENTIAL FOR SIGNIFICANT CONTRIBUTION TO REVENUES AND PROFITS IN 5-10 YEARS WEAK POSITION • A FIRM IN A DECLINING COMPETITIVE POSITION HAS FOLLOWING STRATEGIC OPTIONS -REDUCING COSTS THRU DOWNSIZING OF OPERATIONS ,RETRENCHMENT -LAUNCH TURNAROUND STRATEGY LINKED TO LOW COST OR NEW DIFFERENTIATION THEMES IF THEY CAN FINANCE THE TURNAROUND eg THE CASE OF INDIAN RAILWAYS -OPT FOR EXIT STRATEGY AND GET OUT OF THE BUSINESS eg L&T CEMENT(BIRLA – ULTRATECH);TOMCO,LAKME(HLL) -LEASING BUSINESS TO OTHER PROFITABLE COMPANIES eg EARLIER WEST END (BLR) ,SAVOY (OOTY) AND CONNEMARA HOTELS WERE OWNED BY SPENCER GROUP OF COMPANIES.AS THE CHAIN WAS OPERATING AT A LOSS THE HOTELS WERE LEASED TO TAJ GROUP FOR RUNNING.EVENTUALLY THEY WERE SOLD TO THE TAJ GROUP. -CLOSING DOWN OPERATIONS IF A BUYER CANNOT BE FOUND eg SEVERAL TEXTILE MILLS IN MUMBAI AND SELLING OFF ASSETS RUNNER UP POSITION • OFFENSIVE STRATEGY TO BUILD MARKET SHARE A RUNNER UP COMPANY(KNP) IN DECORATIVE PAINTS WRT ASIAN PAINTS ,DESIROUS OF CLOSING IN ON THE LEADER HAS TO MAKE SOME POSITIVE MARKET VISIBILITY MOVES(KNP VISION IS TO RETAIN ITS LEADERSHIP IN THE INDUSTRIAL SEGMENT AND CONSOLIDATE ITS NUMBER 2 POSITION IN THE DECORATIVE PAINTS SEGMENT) IF IT WANTS TO INCREASE MARKET SHARE. IT MEANS COMING OUT WITH A DISTINCTIVE STRATEGY THAT SETS IT APART FROM RIVALS AND DRAWA BUYER ATTENTION(eg KNP OFFERS UNIQUE SERVICES THRU A NEWLY STARTED INITIATIVE WITHIN THE DECORATIVE SBU THAT OFFERS HOME PAINTING SERVICES WITH ITS SHADES AT REASONABLE PRICES RUNNER UP POSITION • 1 MARKET DIVERSIFICATION AND GROWTH THRU ACQUISITION OR FRANCHISING. KNP HAS APPOINTED AUTHORIZED SERVICE PROVIDERS WITH KNP CONTROL OF RESPONSIBILITY , TO OFFER HOME PAINTING SERVICES. GROWTH VIA ACQUISITION IS THE MOST FREQUENTLY USED STRATEGY EMPLOYED BY RUNNERS UP TO FORM AN ENTERPRISE THAT HAS HIGHER COMPETITIVE STRENGTH AND GAIN A LARGER MARKET SHARE. FOR COMPANY TO SUCCEED WITH THIS STRATEGY MGT MUST ALIGN THE STRENGTHS OF THE ACQUIRED COMPANY WITH ITS OWN AND POSITION THE TWO WITHOUT CLASH OF INTERESTS. SOMETHING WHICH HAS NOT HAPPENED AFTER IBM CONSULTING ACQUIRED THE IT CONSULTING ARM OF PWC. RUNNER UP POSITION • 2 FINDING INNOVATIVE WAYS TO DRIVE DOWN COSTS AND THEN USING ATTRACTION OF LOWER PRICES TO WIN CUSTOMERS FROM HIGHER COST HIGHER PRICED RIVALS eg HIGH ONTIME SERVICES AND BETTER GROUND AND INFLIGHT SERVICES OFFERED BY LOW COST JET AIRWAYS HAS WEANED AWAY SEVERAL CLIENTS FROM AIR INDIA AND OTHER LOW COST AIRLINES • 3 CRAFTING AN ATTRACTIVE DIFFERENTIATION STRATEGY BASED ON PREMIUM QUALITY , TECHNOLOGICAL SUPERIORITY ,OUTSTANDING CUSTOMER SERVICE ,RAPID PRODUCT INNOVATION eg KING FISHER AIRLINES THOUGH IN SOME AREAS OF LATE ESPECIALLY IN CUSOMER SERVICE IT IS PERCEIVED TO HAVE AN AREA OF IMPROVEMENT RUNNER UP POSITION • 4 BEING THE FIRST TO INTRODUCE NEW AND BETTER PRODUCTS AND BUILD REPUTATION FOR PRODUCT DIFFERENTIATION LEADING TO INDUSTRY LEADERSHIP. A STRATEGY FOR PRODUCT INNOVATION HAS APPEAL IF THE RUNNER UP COMPANY POSSESSES RESOURCES – CUTTING EDGE PROCESSCAPABILITY (eg HERO HONDA CUTTING ITS 2 WHEELER PRICE BY 500 RS IN A INFLATIONARY ECONOMY OF RAW MATERIAL DURING THE YEAR.DONE BY VALUE ENGINEERING AND VALUE STREAM MAPPING OF ITS MFG PROCESSES) AND ORGANIZATIONAL AGILITY IN SPEEDING NEW PRODUCTS (IN 2008-2009 22% OF ITS SALE WERE NEW PRODUCTS /MODELS ANNOUNCED DURING THE YEAR) OR KNP DECREASING TIME TO MARKET FROM PLACEMENT OF DEMAND FROM RO TO FACTORY FROM 38 DAYS TO 25 DAYS RUNNER UP POSITION • • • 5 OUTMANEUVERING SLOW TO CHANGE MARKET LEADERS IN ADAPTING TO EVOLVING MARKET CONDITIONS AND CUSTOMER EXPECTATIONS eg CASE OF NIRMA OUTBEATING HLL SURF 6 FORGING STRATEGIC ALLIANCES WITH KEY DISTRIBUTORS ,DEALERS OF SIMILAR PRODUCTS 7 VACANT NICHE STRATEGY -A VERSION OF FOCUSED STRATEGY THE VACANT NICHE STRATEGY INVOLVES CONCENTRATING ON SPECIFIC CUSTOMER GROUPS THAT MARKET LEADERS HAVE BYPASSED OR NEGLECTED. EG MFG OF 10K LAPTOPS FOR SCHOOLS AND COLLEGES . AN IDEAL VACANT NICHE IS OF SUFFICIENT SIZE AND SCOPE TO BE PROFITABLE;HAS GROWTH POTENTIAL eg MGT COURSES IN SPECIALIZED SEGMENTS SUCH AS TELECOM , RETAILING, HEALTHCARE ,ENTERTAINMENT etc RUNNER UP POSITION • • 8 SPECIALIST STRATEGY -A SPECIALIST FIRM TRAINS ITS COMPETITIVE EFFORT ON ONE TECHNOLOGY PRODUCT OR PRODUCT FAMILY OR SERVICES TO CONSOLIDATE ITS MARKET POSITION eg LEADING CA COMPANIES NOT IN THE PREMIER LEAGUE OFFER ONLY AUDIT SERVICES AND DO NOT FORAY INTO TAX CONSULTANCY -AIM IS TO TRAIN THE COMPANY RESOURCE STRENGTHS AND CAPABILITIES ON BUILDING COMPETITIVE ADVANTAGE THRU DOMAIN EXPERTISE IN A SPECIFIC AREA. 9 SUPERIOR OFFERING STRATEGY -APPROACH IS TO USE DIFFERENTIATING BASED FOCUSED STRATEGY LINKED TO SUPERIOR PRODUCTS AND SERVICES .SEVERAL FOUR STAR AND THREE STAR HOTELS OFFER MUCH BETTER SERVICES THAN THE FAMED FIVE STAR INDUSTRY LEADERSHIP • 1.STAY ON THE OFFENSIVE STRATEGY -WHO CONTINUOUSLY STRIVE TO RETAIN LEADERSHIP THRU ACHIEVING COMPETITIVE ADVANTAGE OVER RIVALS eg HERO HONDA AND THEN WIDENING THIS ADVANTAGE(INCREASE MARKET SHARE FROM 45% IN 2008 TO 53% IN 2009) . THIS IS ACHIEVED THRU CONTINUOUS IMPROVEMENT EXERCISES AND INNOVATION(REDUCE PRODUCT COST THOUGH INCREASE IN RAW MATERIAL COST).COULD ALSO MEAN THE FIRST TO MARKET WITH TECHNOLOGICAL IMPROVEMENTS (BETTER CAR ENGINE GIVING MORE MILEAGE THAN OTHERS);NEW BETTER PRODUCTS OR BETTER SERVICE LEVELS.IT MEANS SEEKING WAYS TO MAKE IT POSSIBLE FOR NEW CUSTOMERS TO JOIN IN AND EASY FOR COMPETITION CUSTOMERS TO SWITCH INDUSTRY LEADERSHIP • 2. FORTIFY AND DEFEND STRATEGY -RAISE THE COMPETITIVE BAR FOR COMPETITION AND NEW ENTRANTS THRU HIGHER LEVEL OF SERVICE AND PRODUCT DIFFERENTIATION eg SONY ELECTRONICS ie QUALITY -INTRODUCING MORE PRODUCT BRANDS TO MATCH CHALLENGERS BRANDS HAVE OR FILL VACANT NICHES NOT ADDRESSED TODAY -ADD PERSONALIZED SERVICES AND OTHER INCREMENTAL ITEMS TO BOOST CUSTOMER LOYALTY AND MAKE IT HARDER OR MORE COSTLY TO SWITCH TO RIVAL PRODUCTS(LOCK IN) -KEEPING PRICES REASONABLE AND QUALITY ATTRACTIVE -INVESTING AS PART OF STRATEGIC GROWTH TO REMAIN COST COMPETITIVE AND TECHNOLOGICALLY PROGRESSIVE AND NOT LIKE MANY TEXTILE MILLS IN INDIA WITH VINTAGE 1913 EQUIPMENT INDUSTRY LEADERSHIP • • 2. FORTIFY AND DEFEND STRATEGY -BUILDING NEW CAPACITY AND ENHANCING HUMAN CAPITAL AND PROCESS CAPABILITIES TO MEET THE FUTURE REQUIREMENTS -STAYING COST COMPETITIVE AND ADOPTING ALTERNATE TECHNOLOGIES WHEREVER POSSIBLE 3. ETHICAL MUSCLE FLEXING -DOMINANT PLAYER PLAYS BULLY BY RESORTING TO AGGRESSIVE PRICE CUTS , PROMOTIONAL PROGAMS AND AGGRESSIVE ADVERTISING IN RESPONSE TO MARKET OFFENIVES THAT THREATEN ITS POSITION; IN ORDERTO PREVENT SMALLER RIVALS FROM ENTERING THE MARKET eg STRATEGY DEPLOYED BY JET AIRWAYS IN MATCHING LOW COST AIRLINES WITH BETTER INFLIGHT SERVICE DISSIMENATION OF STRATEGIC PLANNING EXERCISE STRATEGIC ANALYSIS AND CHOICE • • • • SIMULTANEOUS ASSESSMENT OF EXTERNAL ENVIRONMENT AND COMPANY PROFILE ENABLES IDENTIFICATION OF POSSIBLE OPPORTUNITIES AND AVENUES FOR INVESTMENT AVENUES MUST BE SCREENED FOR FEASIBILITY WRT COMPANY CAPABILITY AND CHARTER BEFORE SUCH OPPORTUNITIES ARE INCLUDED IN THE MISSION STATEMENT AS DIVERSIFICATION EXERCISES. ABOVE PROCESS RESULTS IN THE SELECTION OF A STRATEGIC CHOICE eg SEVERAL COMPANIES DIVERSIFYING INTO FINANCIAL SERVICES eg LARSEN AND TAUBRO STRATEGIC CHOICE PROVIDES LONG TERM OBJECTIVES AND STRATEGIES WHICH WILL POSITION THE FIRM FAVORABLY IN THE EXTERNAL ENVIRONMENT AND ENABLE ACHIEVEMENT OF MISSION eg FIRM MAY CONSIDER VERTICAL OR HORIZONTAL DIVERSIFICATION TO CONSOLIDATE POSITION IN INDUSTRY STRATEGIC ANALYSIS AND CHOICE • • • • STRATEGIC ANALYSIS INVOLVES MATCHING OF EACH POSSIBLE OPPORTUNITY WITH LONG TERM OBJECTIVES AND TARGETS. IT ALSO INVOLVES A VERY ELABORATE STRATEGIC RISK ASSESSMENT EXERCISE TO MINIMIZE RISK OF INVESTING IN RISK PRONE AREAS LONG TERM OBJECTIVES ARE THEN DRILLED DOWN TO TACTICAL AND OPERATIONAL STRATEGIES FOR ACHIEVING DESIRED RESULTS. ALTERNATIVE STRATEGIES ARE WORKED OUT AND THE MOST EFFECTIVE ONE CHOSEN AND BROKEN DOWN INTO ACTIVITIES WITH DESIRED OUTCOMES WHICH ARE IN TURN LINKED TO SHORT TERM AND LONG TERM GOALS etc CHOSEN SET OF STRATEGIES IS CALLED THE STRATEGIC CHOICES CRITERIA USED IN ASSESSING ALTERNATIVES ARE RISK , FLEXIBILITY, STABILITY , GROWTH , PROFITABILITY, DIVERSIFICATION , VOLATILITY OF EXTERNAL ENVIRONMENT , LIFE CYCLE OF PRODUCT, AVAILABILITY OF RESOURCES EVALUATION OF STRATEGY • • • HOW WELL DOES THE STRATEGY FIT THE COMPANYS SITUATION -STRATEGY HAS TO BE WELL MATCHED TO INDUSTRY AND COMPETITIVE CONDITIONS AS WELL AS OTHER EXTERNAL ENVIRONMENTAL CONDITIONS -STRATEGY ALSO HAS TO BE TAILORED TO COMPANY RESOURCE STRENGHTS AND CAPABILITIES. UNLESS STRATEGY IS TIGHT FIT WITH EXTERNAL AND INTERNAL ASPECTS IT IS LIKELY TO PRODUCE LESS THAN BEST POSSIBLE BUSINESS RESULTS IS STRATEGY HELPING THE COMPANY ACHIEVE A SUSTAINABLE COMPETITIVE ADVANTAGE IS STRATEGY RESULTING IN BETTER COMPANY PERFORMANCE DIMENSIONS OF STRATEGIC DECISIONS • REQUIRE TOP MGT DECISIONS –STRATEGIC DECISIONS STRETCH ACROSS SEVERAL AREAS OF FIRMS OPERATIONS.IT STARTS FROM FUTURE DIRECTIONS IN TERMS OF EXPANSION , DIVERSIFICATION , MERGERS/ACQUISITIONS,JV etc AND GETS DRILLED DOWN TO FUNCTIONAL STRATEGIC DECISIONS SUCH AS HR COMPETENCE , MARKETS TO ENTER INTO/CONCENTRATE,NEW METHODS OF FINANCING PROJECTS AND WORKING CAPITAL , IMPLEMENTATION OF NEW TECHNOLOGIES etc. • INVOLVES ALLOCATION OF LARGE NUMBER OF RESOURCES – RESOURCES SUCH AS HUMAN CAPITAL , EQUIPMENT CAPACITY , FINANCE , etc. THESE RESOURCES SHOULD BE ALLOCATED FROM WITHIN OR SOURCED FROM OUTSIDE DIMENSIONS OF STRATEGIC DECISIONS • ISSUES LIKELY TO HAVE SIGNIFICANT IMPACT ON LONG TERM PROSPECTS OF COMPANY -STRATEGIC DECISIONS COMMIT THE COMPANY TO FOR A LONG PERIOD OF TIME . ONCE A FIRM HAS COMMITTED ITSELF TO A PARTICULAR STRATEGIC OPTION , ITS COMPETITIVE IMAGE AND ADVANTAGES ARE TIED TO THE STRATEGY. FIRMS BECOME KNOWN IN THE MARKET FOR CERTAIN PRODUCTS WITH CERTAIN DIFFERENTIATION IF ANY. TO SHIFT FROM THIS STRATEGY HAS FAR REACHING CONSEQUENCES FOR THE COMPANY GENERALLY FOR THE WORSE • ISSUES ARE FUTURE ORIENTED -STRATEGIC DECISIONS ARE BASED WHAT MGRS ANTICIPATE OR FORECAST . EMPHASIS IS ON DEVELOPING PROJECTIONS THAT ENABLE FIRM TO SELECT THE MOST DIMENSIONS OF STRATEGIC DECISIONS • • STRATEGIC ISSUES NORMALLY HAVE MAJOR MULTI FUNCTION CONSEQUENCES STRATEGIC DECISIONS HAVE MULTIPLE EFFECTS ON VARIOUS PROCESSES WHICH ARE EXECUTED IN THE OPERATIONAL DOMAIN eg DECISION TO LAUNCH A SERVICE IN AN ALREADY CROWDED MARKET WILL HAVE ADVERSE EFFECTS ON THE OPERATIONAL PROFITABILITY OF THE COMPANY. Eg DECISION TO LAUNCH A NO FRILL AIRLINES MIGHT HAVE THE LIABILITY OF HAVING TO PAY INORDINATE HIGH OPERATIONAL CHARGES WITHOUT THE ASSURANCE OF HAVING FULL LOAD STRATEGIC ISSUES SHOULD CONSIDER EXTERNAL FACTORS -STRATEGIC ISSUES SHOULD CONSIDER EXTERNAL EVENTS(RISKS) NOT IN THEIR CONTROL TO LOOK AT WAYS TO MITIGATE THESE RISKS PRIOR TO IMPLEMENTING STRATEGY STRATEGY EXECUTION PROCESS • • • THE NEXT PHASE OF STRATEGY MGT PROCESS IS MONITORING NEW EXTERNAL DEVELOPMENTS , EVALUATING PROGRESS , AND MAKING CORRECTIVE ADJUSTMENTS THIS IS TRIGGER POINT TO DECIDE WHETHER TO CONTINUE OR CHANGE VISION(AFTER JIM AKER IBM CEO WAS SACKED IN 1996 AND LOU GESTNER JR WAS APPOINTED HE SAID THAT THE LAST THING HE WANTED TO DO WAS TO CHANGE THE VISION BUT CERTAINLY HE WISHED TO REDESIGN WORK WAS DONE IN IBM AND HE WAS THE PIONEER OF THE DISTRIBUTOR(CHANNEL PARTNER) CONCEPT. IF MISSION IS TO BE CHANGED THERE NEEDS TO BE A PROCESS OF STRATEGIC DIVERSIFICATION eg RELIANCE FRESH. A RETHINKING NEEDED ON WHAT BUSINESSES THE COMPANY OUGHT TO BE IN AND WHAT COMPETENCES WOULD BE REQUIRED AND WHAT MARKES IT WILL CHOOSE TO ADDRESS AND WHAT WOULD BE THE METHOD-DIRECT,DISTRIBUTOR PROCESS OF CRAFTING AND EXECUTING STRATEGY • MANAGERIAL PROCESS OF CRAFTING AND EXECUTING A COMPANY STRATEGY CONSISTS OF SIX INTEGRATED PHASES 1.DEVELOPING A STRATEGIC VISION OF WHERE THE COMPANY NEEDS TO HEAD AND WHAT ITS FUTURE OFFERINGS, MARKETS,TECHNOLOGY FOCUS SHOULD BE 2.SETTING OBJECTIVES AND USING THEM AS YARDSTICKS FOR MEASURING COMPANY PERFORMANCE AND PROGRESS 3.CRAFTING A STRATEGY TO ACHIEVE OBJECTIVES AND MOVE THE COMPANY ALONG THE STRATEGIC COURSE WHICH IS LAID BY MGT 4.IMPLEMENTING AND EXECUTING THE CHOSEN STRATEGY EFFICIENTLY AND EFFECTIVELY 5 MONITORING DEVELOPMENTS , EVALUATING PERFORMANCE AND MAKING CORRECTIVE ADJUSTMENTS 6. REVIEW AS NEEDED ACTUAL PERFORMANCE , CHANGING CONDITIONS , NEW OPPORTUNITIES IMPLEMENTING AND EXECUTING STRATEGY • MANAGING THE IMPLEMENTATION AND EXECUTION OF STRATEGY IS OPERATIONS ORIENTED ACTIVITY AIMED AT PERFORMING CORE BUSINESS ACTIVITIES • CONVERTING STRATEGIC PLANS TO ACTION AND RESULTS NEEDS DIRECTION AND CONTROL AS WELL AS BUILDING OF COMPANY COMPETENCES AND COMPETITIVE CAPABILITIES(AGILITY ,FLEXIBILITY,PRICE SENSITIVITY) • INITIATIVES O FORMULATE STRATEGIES AND EXECUTE THEM EFFICIENTLY NEED TO BE INITIATED • CHOOSING AND EXECUTING A STRATEGY ARISES FROM WHAT COMPANY NEEDS TO DO DIFFERENTLY OR BETTER TO EXECUTE STRATEGIES COMPETENTLY AND ACHIEVE FINANCIAL AND STRATEGIC TARGETS OPERATIONALIZING STRATEGY • TASK OF OPERATIONALIZING EXECUTING AND CONTROLLING • STRATEGY FOLLOWS THE EXERCISE OF LONG TERM AND SHORT TERM OBJECTIVE SETTING THESE TASKS TRANSLATE STRATEGIC THOUGHT INTO STRATEGIC ACTION eg WHAT DOES DIFFERENTIATING STRATEGY TRANSLATE INTO? WHAT ACTIVITIES MUST BE PERFORMED TO DIFFERENTIATE OUR PRODUCT FROM THE REST OF THE MANUFACTURERS? PRICE,QUALITY,FUNCTIONALITY,SERVICE? WHAT IS THE DIFFERENTIATOR?CAN YOU CREATE A BRAND AROUND YOUR PRODUCT?WILL PEOPLE BE PREPARED TO PAY MORE BECAUSE OF YOUR DIFFERENTIATING STRATEGY OF CREATING A BRAND AROUND YOUR PRODUCT BUILT WITH SUPERIOR QUALITY OF PRODUCT eg SONY ELECTRONIC PRODUCTS WHICH FETCH A PREMIUM PRICE IN THE MARKET BEACAUSE OF ITS SUPERIOR QUALITY AND RELIABILITY OPERATIONALIZING STRATEGY • TRANSLATING STRATEGY INTO ACTIONS INVOLVES THE FOLLOWING -IDENTIFICATION OF MEASURABLE EARLIER DETERMINED ANNUAL OBJECTIVES IN TERMS OF REVENUE PROFITS MARKET SHARE CUSTOMER MARKET SHARE INCREASE etc. -DEVELOPMENT OF SPECIFIC FUNCTIONAL STRATEGIES -COMMUNICATION OF POLICIES TO GUIDE DECISIONS • ANNUAL OBJECTIVES TRANSLATE LONG RANGE ASPIRATIONS INTO TACTICAL THIS YEARS BUDGET.IF ANNUAL OBJECTIVES ARE WELL DEVELOPED THEY PROVIDE CLARITY FOR EFFECTIVE STRATEGY IMPLEMENTATION • ANNUAL OBJECTIVES MUST BE ACHIEVABLE AS PER INTERNAL CAPABILITY AND EXTERNAL MARKET CONDITIONS AND MUST BE HARD METRICS MEASURABLE PROCESS MECHANICS INPUTS • MATERIALS • PROCEDURES • METHODS • DATA • PEOPLE WITH SKILLS • KNOWLEDGE • MANAGEMENT • TRAINING • EQUIPMENT • FINANCE PROCESS INPUTS • BUSINESS RULES • CONTROLS • ACTIVITIES • DEPENDENCIES • CONSTRAINTS • CAPABILITY OUTPUTS OUTPUTS VOICE OF PROCESS • PRODUCTS • SERVICES • INFO • WASTE CUSTOMER VOICE OF THE CUSTOMER PROCESS ACTIVITIES CONTROL SYSTEM DEFINITION OF PROCESS REQUIREMENT INPUT FOR PROCESS PROCESS ACTIVITIES DELIVERABLES OUTPUT COMPARISON UNIT CORRECTIVE UNIT FEEDBACK UNIT CHANGE DELIVERABLES MANAGING THE STRATEGIC PROCESS • INCLUDES FOLLOWING ASPECTS -STAFFING THE ORG WITH NEEDED SKILLS AND RIGHT LEVEL OF HUMAN CAPITAL , CONTINUOUSLY STRENGTHENING COMPETITIVE CAPABILITIES -ALLOCATING ADEQUATE RESOURCES TO ACTIVITIES CRITICAL TO STRATEGIC SUCCESS -ENSURE POLICIES AND PROCEDURES FACILITATE RATHER THAN IMPEDE EFFECTIVE EXECUTION(POLICY-FLYING BANNED BELOW LEVEL 15 ONLY RAIL. WHEN DO YOU GET A TICKET FOR DELHI APRIL TO JUNE. PROCEDURE –TOUR REQUEST TO BE CLEARED BY MD WHO TRAVELS 15 DAYS A MTH AND NO DELEGATION OF AUTHORITY DONE) -USE BEST PRACTICES TO PERFORM CORE BUSINESS ACTIVITIES(CORE,SUPPORTIVE,OUTSOURCED,NETWRKED) AND THRU BENCHMARKING FIND OUT AREAS OF IMPROVEMENT WHICH NEED TO BE DONE ON A CONTINUOUS BASIS MANAGING THE STRATEGIC PROCESS • • INCLUDES FOLLOWING ASPECTS -MOTIVATING PEOPLE TO BE MORE INVOLVED IN THEIR PORTFOLIO AND ACHIEVE THEIR TARGETED OBJECTIVES -LINKING REWARDS AND INCENTIVES DIRECTLY TO ACHIEVEMENT OF PERFORMANCE OBJECTIVES AND GOOD STRATEGY EXECUTION -CREATING A WORK CULTURE CONDUCIVE TO SUCCESSFUL STRATEGY EXECUTION (RBI COMPUTERIZATION – LEARNING HARDSHIP ALLOWANCE OF RS 250 IN 1981) GOOD STRATEGY EXECUTION REQUIRES PURSUIT OF OPERATIONAL EXCELLENCE. HOW WELL IS THE CURRENT STRATEGY WORKING • WHETHER COMPANY SALES ARE GROWING FASTER THAN INDUSTRY GROWTH. Eg HERO HONDA IN 2008-2009 WHEN TVS ,BAJAJ AUTO AND THE INDUSTRY RECORDED A NEGATIVE GROWTH (INDUSTRY DOWN FROM 7.6 MILLION TO 6.4 MILLION ) HERO HONDA ACTUALLY INCREASED ITS MKT SHARE FROM 45% TO 54%.SIMILARLY WHEN TVS RECORDED A NEGATIVE PROFIT FROM 9.1% TO -1.2% HERO HONDA ACTUALLY INCREASED ITS PROFIT FROM 10.5% TO 13% • WHETHER PROFIT MARGINS ARE INCREASING OR DECREASING COMPARED TO COMPETTION AND WHAT ARE THE FISCAL RATIOS LIKE ROI , ROE , ROCE etc COMPARED TO COMPETITION HOW WELL IS THE CURRENT STRATEGY WORKING • • • • • WHETHER COMPANY IS ACQUIRING NEW CUSTOMERS AND HOW MANY OF ITS OLD CUSTOMERS ARE RETAINED AND OUT OF THESE RETAINED ONES HOW MANY HAVE INCREASED THEIR WALLET SHARE WHETHER COMPANY CAN DEMONSTRATE CONTINUOUS IMPROVEMENT IN OPERATIONAL MEASURES SUCH AS WIP(DYS) , RM(DYS),FG(DYS),ACR(DYS),SALES CONTR%,MATRL COST%MFG COST,MFG COST%EXP,COGS,EMPLOYEE PRODUCTIVITY, etc HOW SHAREHOLDERS VIEW THE COMPANY BASED ON TRENDS OF SHARE MARKET VALUE (CALCULATE MARKET CAPITALIZATION VALUE = TOTAL TANGIBLE ASSETS(FA + CA) + INTANGIBLE ASSETS FIRMS IMAGE AND REPUTATION (BRAND IMAGE) COMPANY ABILITY TO MATCH COMPETITION IN TECHNOLOGY , PRODUCT INNOVATION (AIRTEL), CUSTOMER SERVICE(IBM),PRODUCT QLTY(SONY),DELIVERY TIME (DOMINO PIZZA),PRICE(D-MART) etc IDENTIFYING COMPANY RESOURCE STRENGHTS • • • • • • SPECIALIZED EXPERTISE -SKILLS IN LOW COST OPERATIONS(NANO) -TECHNOLOGICAL EXPERTISE(SUPER SPECIALTY HEALTHCARE CENTRES),WORLDCLASS QLTY OPERATIONS (DABBAWALLA-SIX SIGMA),INTRODUCING INNOVATIVE PRODUCTS(AIRTEL-VIEW TELEVISION ON MOBILE),CUTTING EDGE SUPPLY CHAIN FACILITIES(ROYAL CHEMISTMARINE LINES),EXPERTISE IN INTRODUCING NEW PRODUCTS INTO THE MKT (AIRTEL) ,EXPERTISE IN PROVIDING GOOD CUSTOMER SERVICE (GENERALLY NOT PERCEIVED TO BE A STRENGTH IN INDIA eg EVEN JET AIRWAYS IS NOW A DAYS KNOWN TO FLOUNDER) VALUABLE PHYSICAL ASSETS - STATE OF THE ART PLANTS VALUABLE HUMAN ASSETS AND CAPITAL – BARC,MCKINSEYS VALUABLE ORG ASSETS PROVEN QLTY CONTROL SYSTEMS eg INFOSYS VALUABLE INTANGIBLE ASSETS eg R&D PATENTS OR BRAND INFOSYS VALUABLE ALLIANCES OR COLLABORATIVE VENTURES GIVING LEADING EDGE ASSESSING COMPETENCE • ONE OF THE MOST IMPORTANT ASPECTS OF APPRAISING A COMPANYS RESOURCE STRENGTHS HAS TO DO WITH ITS COMPETENCE LEVEL IN PERFORMING KEY PIECES OF ITS BUSINESS SUCH AS SUPPLY CHAIN,MFG,DISTRIBUTION, SALES AND MKTNG AND CUSTOMER SERVICE. • WHICH ACTIVITIES DOES IT PERFORM WELL. ARE THERE ANY ACTIVITIES IT PERFORMS BETTER THAN RIVALS • THREE FLAVOURS OF COMPANY PROFICIENCY -COMPETENCE -CORE COMPETENCE -DISTINCTIVE COMPETENCE COMPETENCE • • • • A COMPETENCE IS SOMETHING AN ORGANIZATION IS GOOD AT DOING. IT IS NEARLY ALWAYS THE PRODUCT OF THE INTELLECTUAL ASSETS OF ITS PEOPLE ESPECIALLY IN TERMS OF THEIR EXPERIENCE AND DOMAIN KNOWLEDGE COMPANY COMPETENCE BEGINS WITH EFFORTS TO DEVELOP ABILITY TO DO SOMETHING BETTER THAN OTHERS OR TO MEET THE INDUSTRY REQUIREMENTS IN EXECUTING PROCESSES WHICH WILL DELIVER VALUE AS PER CHANGING EXPECTATIONS OF THE CUSTOMER . IT CONTINUES BY WAY OF STAFFING RESOURCES BY WAY OF EQPT , MONEY,MATERIAL AND MOST IMPORTANTLY HUMAN CAPITAL(SKILLS) SOME COMPETENCES ARE COMPANY PROCESS EFFECTIVENESS RELATED SUCH AS JIT INVENTORY CONTROL,AGILE SUPPLY CHAIN etc COMPETENCE • CERTAIN COMPETENCES ARE MULTI DISCIPLINARY AND CROSS FUNCTIONAL SUCH AS PRODUCT INNOVATION CORE COMPETENCE • • • • IS A COMPETITIVELY IMPORTANT ACTIVITY THAT A COMPANY PERFORMS BETTER THAN OTHER INTERNAL ACTIVITIES AND IS KNOWN IN THE MARKET FOR THESE SKILLS. eg AMONG OTHER SKILLS MCKINSEY CONSULTING IS DEEMED TO HAVE CORE COMPETENCE BY THE MARKET IN AREAS RELATED TO STRATEGIC MANAGEMENT CORE COMPETENCE IS CENTRAL TO COMPANY STRATEGY AND INDICATES THE SKILL AREAS IN WHICH THE COMPANY PERCEIVES IT HAS COMPETITIVE EDGE OVER COMPETITION BY VIRTUE OF POSSESSION OF THIS COMPETENCE. CORE COMPETENCE COULD BE PEOPLE , TECHNOLOGY, PROCESSES , etc CORE COMPETENCE COULD RELATE TO ANY OF THE SEVERAL ASPECTS OF COMPANY BUSINESS SUCH AS QUALITY , NEW PRODUCT DEVELOPMENT,COST EFFICIENT SUPPLY CHAIN MGT,GOOD SERVICES CORE COMPETENCE MAKES THE COMPANY SUCCESS IN THE MARKETPLACE eg THE DOMINANCE ENJOYED BY MARUTI UDYOG LTD COULD BE ATTRIBUTED TO THE IMMENSE R&D COMPETENCE IT HAS WHICH HAS ENABLED THE CONTINUOUS INNOVATION AND IMPROVEMENT IN IN ITS CURRENT MODELS AND HAS ALSO BEEN ABLE TO PERIODICALLY RELEASE NEW MODELS. CORE COMPETENCE • • • A COMPANY MAY HAVE MORE THAN ONE CORE COMPETENCE.eg MARUTI MANUFACTURES QUALITATIVE FUEL EFFICIENT COST EFFECTIVE CARS RESULTING IN ITS MARKET DOMINANCE OF THE MARKET SHARE BUT IT ALSO HAS A VERY GOOD AFTER SALES SERVICE DISTRIBUTION NETWORK ALL OVER INDIA OTHER CORE COMPETENCES INCLUDE PRODUCT FLEXIBILITY eg MAGIC EYE IN KNP; SERVICE CAPABILITIES eg ASIAN HEART FOUNDATION; LOW COST CARS-TATA MOTORS NANO;TIMELY DELIVERY ASSURANCEDOMINO PIZZA; ACCURACY AND TIMELINESS OF DELIVERY-MUMBAI DABBAWALLAS;UNCONVENTIONAL COURIERS LIKE ANGADIAS WHO CARRY DIAMOND CONSIGNMENTS FROM MUMBAI TO SURAT AND VICE VERSA FOR THEIR INTEGRITY AND HONESTY CORE COMPETENCE IS KNOWLEDGE BASED RESIDING IN PEOPLE AND SHOWN IN COMPANYS INTELLECTUAL CAPITAL Competitive Advantage Discovering Core Competencies Gained through Core Competencies Strategic Competitiveness Core Competencies Discovering Core Competencies Above-Average Returns Sources of Competitive Advantage Capabilities Teams of Resources Criteria of Sustainable Advantages Value Chain Analysis Valuable Rare Costly to Imitate Nonsubstitutable * Outsource Resources * Tangible * Intangible * * * * Resources What a firm Has... What a firm has to work with: its assets, including its people and the value of its brand name Resources What a firm Has... What a firm has to work with: its assets, including its people and the value of its brand name Resources represent inputs into a firm’s production process... such as capital equipment, skills of employees, brand names, finances and talented managers Resources What a firm Has... What a firm has to work with: its assets, including its people and the value of its brand name Resources represent inputs into a firm’s production process... such as capital equipment, skills of employees, brand names, finances and talented managers Resources Tangible Resources * * * * Financial Physical Human Resources Organizational Intangible Resources * Technological * Innovation * Reputation What a firm Has... What a firm has to work with: its assets, including its people and the value of its brand name Resources represent inputs into a firm’s production process... such as capital equipment, skills of employees, brand names, finances and talented managers “Some genius invented the Oreo. We’re just living off the inheritance.” F. Ross Johnson, Former President & CEO, RJR Nabisco Capabilities What a firm Does... Capabilities represent: the firm’s capacity or ability to integrate individual firm resources to achieve a desired objective. Capabilities What a firm Does... Capabilities represent: the firm’s capacity or ability to integrate individual firm resources to achieve a desired objective. Capabilities develop over time as a result of complex interactions that take advantage of the interrelationships between a firm’s tangible and intangible resources that are based on the development, transmission and exchange or sharing of information and knowledge as carried out by the firm's employees. Capabilities What a firm Does... Capabilities represent: the firm’s capacity or ability to integrate individual firm resources to achieve a desired objective. Capabilities develop over time as a result of complex interactions that take advantage of the interrelationships between a firm’s tangible and intangible resources that are based on the development, transmission and exchange or sharing of information and knowledge as carried out by the firm's employees. Capabilities become important when they are combined in unique combinations which create core competencies which have strategic value and can lead to competitive advantage. Discovering Core Competencies Core Competencies Sources of Competitive Advantage Capabilities Teams of Resources Resources * Tangible * Intangible Discovering Core Competencies Core Competencies What a firm Does... that is Strategically Valuable “…are the essence of what makes an organization unique in its ability to provide value to customers.” McKinsey & Co. recommends identifying three to four competencies to use in framing strategic actions. Core Competencies Core Competencies must be: Valuable What a firm Does... that is Strategically Valuable Capabilities that either help a firm to exploit opportunities to create value for customers or to neutralize threats in the environment Rare Capabilities that are possessed by few, if any, current or potential competitors Costly to Imitate Capabilities that other firms cannot develop easily, usually due to unique historical conditions, causal ambiguity or social complexity Nonsubstitutable Capabilities that do not have strategic equivalents, such as firmspecific knowledge or trust-based relationships Discovering Core Competencies Core Competencies Discovering Core Competencies Sources of Competitive Advantage Capabilities Criteria of Sustainable Advantages Teams of Resources Value Chain Analysis Resources * Tangible * Intangible * * * * Valuable Rare Costly to Imitate Nonsubstitutable * Outsource BUILDING CORE COMPETENCES AND COMPETITIVE CAPABILITIES • DEVELOPING A SET OF COMPETENCES AND CAPABILITIES SUITED TO THE CURRENT STRATEGY • UPDATING AND REVISING THIS SET AS EXTERNAL CONDITIONS AND STRATEGY CHANGE • TRAINING EMPLOYEES AS REQUIRED TO MAINTAIN SKILLS BASED COMPETENCES • MANAGING THE ORGANIZATION CORE COMPETENCE BUILDING PROCESS • EVOLVING CUSTOMER CHANGES IN NEEDS OFTEN REQUIRE ADJUSTING A COMPANYS LIST OF COMPETENCES AND INTELLECTUAL CAPITAL TO KEEP CAPABILITIES HONED AND REMODELING COMPETENCES AND CAPABILITIES AS EXTERNAL CONDITIONS AND COMPANY STRATEGY CHANGE Leveraging Core Competencies • Core competencies – The glue that binds existing businesses together – Engine that fuels new business growth – Collective learning in a firm – How to coordinate diverse production skills – How to integrate multiple streams of technologies – How to market diverse products and services Three Criteria of Core Competencies • Three criteria (of core competencies) that lead to the creation of value and synergy – Core competencies must enhance competitive advantage(s) by creating superior customer value • Develop strengths relative to competitors • Build on skills and innovations • Appeal to customers Three Criteria of Core Competencies • Three criteria (of core competencies) that lead to the creation of value and synergy – Different businesses in the firm must be similar in at least one important way related to the core competence – Not essential that products or services themselves be similar – Is essential that one or more elements in the value chain require similar essential skills – Is essential that one or more elements in the value chain require similar essential skills – Brand image is an example Three Criteria of Core Competencies • Three criteria (of core competencies) that lead to the creation of value and synergy – Core competencies must be difficult for competitors to imitate or find substitutes for • Easily imitated or replicated core competencies are not a sound basis for sustainable advantages • Specialized technical skills acquired only in company work experience are an example Distinctive Competencies • Competencies Necessary to Create Value-Adding Attributes – Innovativeness – Efficiency – Quality – Customer Responsiveness 285 DISTINCTIVE COMPETENCE • COMPETITIVE ACTIVITY THAT A COMPANY PERFORMS BETTER THAN ITS RIVALS • DISTINCTIVE COMPETENCE SIGNIFIES GREATER PROFICIENCY THAN CORE COMPETENCE. CORE COMPETENCE IS THE DOMAIN KNOWLEDGE REQUIRED TO PERFORM AN ACTIVITY OR PROCESS. ALL LAWYERS NEED TO HAVE DEEP UNDERSTANDING OF THE SUBJECT IN WHICH THEY WISH TO SPECIALIZE. FOR EXAMPLE THERE ARE SEVERAL CRIMINAL LAWYERS BUT PEOPLE LIKE RAM JETHMALANI AND MAJEED MEMON HAVE DISTINGUISHED THEMSELVES IN THIS AREA. THE LATE NEETU MANDKE HAD DISTINCTIVE COMPETENCE IN CARDIAC SURGERY. THEY POSSESS /POSSESSED DISTINCTIVE COMPETENCE DISTINCTIVE COMPETENCE • DISTINCTIVE COMPETENCE REPRESENTS UNIQUELY STRONG CAPABILITY RELATIVE TO COMPETITION AND IS HENCE A SUPERIOR RESOURCE WITH COMPETITIVE ADVANTAGE POTENTIAL • TATA MOTORS HAS DEVELOPED A DISTINCTIVE COMPETENCE IN DELIVERING AN INDIGENOUSLY DEVELOPED LOW COST CAR. THOUGH THEY MAY LIKE TO ADD QUALITY TO THE LIST OF COMPETITIVE ADVANTAGE AREAS. PROCESS DEPLOYMENT MEASURES MAY ALSO BE A DISTINCTIVE COMPETENCE AS IN THE CASE OF KNP AND ASIAN PAINTS WHO HAVE A MAGIC EYE TO DELIVER DECORATIVE PAINTS IN THE COLOUR OF THE CHOICE OF THE CUSTOMER. THEY NEED TO ADD AUTOMATED AGILITY IN THEIR PROCESS THRUPUT. REASONS FOR DISTINCTIVE COMPETENCE • DISTINCTIVE COMPETENCE IS A POTENT RESOURCE STRENGTH FOR 3 REASONS -IT GIVES A COMPANY COMPETITIVELY VALUABLE CAPABILITY UNMATCHED BY RIVALS -IT HAS POTENTIAL FOR BEING THE TRIGGER OF COMPANY STRATEGY -IT CAN PRODUCE A COMPETITIVE EDGE IN THE MARKET SINCE IT HAS A LEVEL OF PROFICIENCY SUPERIOR TO RIVALS • COMPANIES HAVING DISTINCTIVE COMPETENCE FIND IT EASY TO BUILD COMPETITIVE ADVANTAGE ASSESSING HUMAN COMPETENCE • AN IMPORTANT WAY OF APPRAISING A COMPANY IS THE VALUE OF ITS HUMAN CAPITAL. FOR EXAMPLE AT INFOSYS ITS EMPLOYEE STRENGTH WENT UP FROM 98821 (2008) TO 104850(2009).BUT ITS VALUE OF HUMAN RESOURCES PER EMPLOYEE FELL FROM 1.08 IN 2008 TO 0.97 IN 2009. SINCE HUMAN CAPITAL DRIVES PROCESSES IT IS IMPORTANT TO HAVE A HIGH HUMAN CAPITAL VALUE. • HUMAN ASSET WORTH CAN BE PROGRAMMED TO ASSESS THE WORTHINESS OF ALL CAPABILITIES AND CORE COMPETETENCES REQUIRED TO SUCCEED IN THE MARKETPLACE EXECUTION CONTROL AND EVALUATION • AN IMPLEMENTED STRATEGY MUST BE MONITORED TO DETERMINE THE EXTENT TO WHICH THE OBJECTIVES ARE ACHIEVED • FOR THIS THE OUTCOME OF EACH ACTIVITY HAS TO BE MEASURED AND A TARGETTED OUTCOME HAS TO BE ASSOCIATED WITH EACH ACTIVITY. • IT MAY BE RELEVANT TO DRAW A CAUSE EFFECT ACTIVITY DIAGRAM TO UNDERSTAND THE IMPLICATION OF UNDERPERFORMANCE OR FAILURE IN A PRECEDING ACTIVITY • ACTIVITY HAS TO BE MEASURED AT REGULAR INTERVALS TO UNDERTAND THE TRENDS AND ANY NEGATIVE TRENDS SHOULD BE OBSERVED IN ADVANCE AND PRECAUTIONARY / REPAIR ACTION TAKEN IN ADVANCE TO ELIMINATE / MINIMIZE THE EFFECTS OF THIS RISK PROCESS OF STRATEGIC CONTROL • MEASURE ORGANIZATIONAL PERFORMANCE • COMPARE ORGANIZATIONAL PERFORMANCE TO GOALS AND STANDARDS eg CONTRIBUTION , PRODUCTIVITY , PROCESS EFFECTIVENESS, VOLUNTARY SEPARATION , QUALITY • TAKE NECCESARY CORRECTIVE ACTIONS WHAT IS CHANGE MANAGEMENT WHAT IS CHANGE • Change is defined as a process to have a different form from what we have currently • Change is a process of moving from the present to the future • Change is also an expression of dissatisfaction with the current system • Change can be continuous as in business processes or discontinuous as in organization structures, vision and strategic plans TYPES OF CHANGES • • • • • • • • DIRECTIONAL – OCCURS UNDER CONDITIONS OF SEVERE COMPETITION AND UNSUCCESSFUL STRATEGIES STRATEGIC-REDEFINITION OF CURRENT MISSION/VISION OPERATIONAL-IMPROVEMENT OF PROCESSES IN QUALITY,COSTS etc PLANNED-OPERATIONAL CHANGE ON CALCULATED BASIS eg DOWNSIZING UNCONTROLLED-CHANGES DICTATED BY EXTERNAL CAUSES TRANSFORMATIONAL-COMPLETE CHANGE IN THE WAY THE COMPANY DOES BUSINESS ANTICIPATORY-CHANGES CARRIED OUT IN ANTICIPATION OF AN EVENT REACTIVE-RESPONSE TO AN EVENT What is Change Management? A structured process and set of tools for leading the people side of change. What is Change Management? • A structured approach for managing change at an organizational level. It includes: – Readiness Assessments – a strategy that creates data and analytics. This includes definition of the “as is condition” and the “go to condition.” – Sponsorship - engaging senior managers as change leaders/agents – Communications - building awareness of the need for change – Education and Training - developing competencies and knowledge to support the change – Coaching by Managers - helping employees move through the transition – Measurement Systems, Rewards and Reinforcement - methods to sustain the change • An array of tools that includes continuous process improvement, benchmarking and the identification of best practices, process mapping, statistical process control, and business process reengineering. 296 Look at the whole puzzle: What is Change Management? • Process, tools and techniques to – manage people-side of change processes – achieve the required outcomes – realize the change effectively within • the individual change agent • the inner team • the wider system Blending Organizational and Individual Approach • At an organizational level – Using a structured change management approach – Engaging sponsors in the change process • At an individual level – Building change competency of managers and supervisors – Equipping employees to have the right conversations about change and how the change impacts them REQUIREMENT FOR CHANGE MANAGEMENT • PROVISION OF FINANCIAL , MATERIAL AND HUMAN RESOURCES FOR CHANGE IMPLEMENTATION • COMPETENCY DEVELOPMENT FOR IMPLEMENTATION OF CHANGES ALONGWITH CONTINUOUS TRAINING • ASSURANCE BUILDING FOR EMPLOYEES TO REMOVE FEAR OF CHANGE IMPACT • COMMITMENT FROM TOP MGT FOR IMPLEMENTATION AND PARTICIPATION OF ALL EMPLOYEES • FORMULATING CONTROLS TO ENSURE ACHIEVEMENT OF DESIRED RESULTS • CONTINUOUS ASSESSMENT AND IMPROVEMENT PROCESS STEPS IN CHANGE MANAGEMENT • IDENTIFY OPPORTUNITIES AND NEED FOR CHANGE • ASSESS ORGANIZATION NEEDS BASED ON IDENTIFICATION OF MAJOR OPPORTUNITIES AND ENVIRONMENTAL THREATS AND THEIR OWN STRENGTHS AND WEAKNESSES • DEFINE AND DESIGN THE DESIRED STATE BY CREATING A NEW VISION AND DEVELOPING A STRATEGY FOR ACHIEVING VISION • COMMUNICATE VISION AND STRATEGY TO ALL EMPLOYEES AND OBTAIN THEIR COMMITMENT STEPS IN CHANGE MANAGEMENT • ASSESS IMPACT OF CHANGE AND PLAN FOR TRANSITION • PREPARE FOR TRANSITION AND CONTINUITY DURING THE PERIOD • IDENTIFY AND RESOLVE MAJOR OBSTACLES IN THE WAY OF TRANSITION • ACHIEVE SHORT TERM AND LONG TERM GOALS THROUGH FEEDBACK CONTROL AND VISIBLE IMPROVEMENT OF PERFORMANCE • EVALUATE CHANGE MANAGEMENT PROCESS AT VARIOUS LEVELS INCLUDING INDIVISUAL,SYSTEM AND ORGANIZATION Three Phases of Change Current State Transitio n State Future State Current State • Employees generally prefer the current state Current State Transitio n State Future State Transition State • The transition state creates stress and anxiety Current State Transitio n State Future State Future State • The future state is unknown to the employee. Current State Transitio n State Future State STATES IN CHANGE PROCESS • • • • • • • THREE STATES IN CHANGE PROCESS OLD STATE IS WHAT IT WAS BEFORE CHANGE MID STATE IS WHEN IT IS IN A STATE OF TRANSITION NEW STATE IS WHEN CHANGES ARE COMPLETELY IMPLEMENTED TRANSITION STATE IS MOVING FROM PRESENT STATE TO DESIRED FUTURE STATE TRANSITION CAN CREATE CONFLICTS ARISING OUT OF PEOPLE BEING WEANED AWAY FROM THEIR COMFORT AND ESTABLISHED ZONE TO ONE OF UNCERTAINTY AND REDUCED IMPORTANCE IN THE PROCESS ASSOCIATION CHANGE IS A STRATEGIC EXERCISE AND ORGANISATION NEEDS TO PUT A STRUCTURE IN PLACE TO HANDLE CHANGE MANAGEMENT Phase 1 – Preparing for change Define your change management strategy Prepare your change management team Develop your sponsorship model Phase 2 – Managing change Develop change management plans Change Management Approach Take action and implement plans Phase 3 – Reinforcing change Collect and analyze feedback Diagnose gaps and manage readiness Implement actions and celebrate successes Phase 1 – Preparing for Change – assesses the current state and prepares for the transition. Phase 1 Preparing for change Define your change management strategy Sizing the change Assessing the organization Creating a change management strategy Acquiring resources Assessing team competencies Preparing the change management team Identifying sponsors and stakeholders Assessing sponsor competencies Developing sponsor models and enabling sponsors Prepare your change management team Develop your sponsorship model Phase 2 – Managing change Develop change management plans Take action and implement plans Phase 3 – Reinforcing change Collect and analyze feedback Diagnose gaps and manage readiness Implement actions and celebrate successes Outputs: Sizing the change profile Organizational attributes profile Change management strategy guidelines Change management team structure Sponsor structure and responsibilities Phase 1 Preparing for change Define your change management strategy Desired outcomes Prepare your change management team Awareness Managing change Develop change management plans Take action and implement plans Phase 3 Reinforcing change Collect and analyze feedback A D K A R Knowledge Ability Organizational attributes Phase 2 Desire Change characteristics Develop your sponsorship model Customized activity design Reinforcement Diagnose gaps and manage readiness Implement actions and celebrate successes Phase 2 -- Managing Change -- can be linked to the transition phase. Outputs: Communications plan Supervisory coaching plan Training plan Readiness management plan Sponsor roadmap Project team activities Master schedule Phase 1 Preparing for change Define your change management strategy Prepare your change management team Develop your sponsorship model Phase 2 – Managing change Phase 3 – Reinforcing Change -provides a framework for assessing and reinforcing progress within the future state. Develop change management plans Take action and implement plans Listening to employees and gathering feedback Assessingcompliance Auditing effectiveness with of new new processes, processes, systems and roles Analyzing change management effectiveness Phase 3 – Reinforcing change Collect and analyze feedback Diagnose gaps and manage readiness Identifying Identifying root root causes causes andto pockets of related readiness resistance Developingaction corrective Developing plans action plans Enabling sponsors and coaches to manage resistance readiness Celebrating early successes and reinforcing the change Conducting “After action reviews” and transferring ownership Implement actions and celebrate successes Implementing action corrective plans action Sizing the Change • Scope the Change (workgroup, department, division, enterprise) • Determine Number of Individuals Impacted • Define Change Type (policy, process, system, organization, job roles, etc.) • Determine Amount of Change (incremental improvement v. dramatic change) Learn how to avoid the four common mistakes made in managing change The scope of the change is misdiagnosed. Change is viewed as an event rather than a process. Leaders fail to understand their role in leading change. The human element of change is not adequately addressed. C. A. Schifman and Company, Inc. www.DevelopingPeople- REASONS FOR RESISTANCE TO CHANGE • Lack of conviction about change • Dislike of imposed change • Fear of the unknown, inadequacy and failure • Reluctance to let go current control and power KEY ISSUES IN PLANNING CHANGE • What changes are occurring in the environment and implications to company • What changes should be introduced to achieve short term and long term goals • What are the undesirable changes which need to be weeded out and watched • How much change can people absorb and how to help them cope change • Should change be introduced in stages and what should the time table be for change implementation • How to manage change REASONS FOR FAILURE IN CHANGE MANAGEMENT • • • • • • Poor communication Disagreement on objectives/results Differences on pace of change Resistance to change Fear of losing influence and power Personality and culture clashes PREREQUISITES FOR CHANGE MANAGEMENT • • • • • CLEAR VISION AND STRATEGY SHARING OF VISION TOP MANAGEMENT COMMITMENT EMPLOYEE INVOLVEMENT AND COMMITMENT COMMUNICATING EXPECTED RESULTS OF CHANGE • UNDERSTAND CONTRIBUTIONS REQUIRED FOR CHANGE • LINKING COMPANY SYSTEMS WITH MANAGEMENT OF CHANGE Four Key Strategy Levels Enterprise-Level Strategy “What is the role of the organization in society?” Corporate-Level Strategy “What business(es) are we in or should be in?” Business-Level Strategy Functional-Level Strategy “How should we compete in a given business or industry?” “How should a firm integrate subfunctional activities and relate them to its functional areas?” 317 The Hierarchy of Strategy Levels Enterprise-Level Strategy Corporate-Level Strategy Business-Level Strategy Feedback Functional-Level Strategy 318 FOUR LEVELS OF STRATEGY • • LEVEL 1 IS THE ENTERPRISE LEVEL LEVEL COMPRISING OF THE BOARD OF DIRECTORS AND THE RESPECTIVE CHIEF OFFICERS. THEY ARE RESPONSIBLE FOR THE FINANCIAL PERFORMANCE OF THE COMPANY AS A WHOLE AND ALSO FOR ACHIEVING THE NON FINANCIAL GOALS eg CUSTOMER AND EMPLOYEE RETENTION;CORPORATE IMAGE, SOCIAL RESPONSIBILITY etc. THEY ARE ALSO INVOLVED IN DECIDING THE BUSINESSES IN WHICH THE COMPANY AUGHT TO BE IN. THEY ARE ALSO RESPONSIBLE FOR FULFILING THE VARIOUS STAKEHOLDER EXPECTATIONS.. THEY ALSO SET OBJECTIVES FOR THE COMPANY AND FORMULATE STRATEGIES TO ACHIEVE THESE OBJECTIVES. LEVEL 1 CONSISTS OF INITIATIVES USED TO ESTABLISH BUSINESS POSITIONS IN INDUSTRIES AND TO ESTABLISH PERFORMANCES IN ALL THE DIVERSIFIED BUSINESSES TO GET A TOTAL CORPORATE ACHIEVEMENT FOUR LEVELS OF STRATEGY • • LEVEL 2 IS THE CORPORATE LEVEL STRATEGY COMPOSED OF CORPORATE MGRS FOR A SPECIFIC COMPANY. THESE MGRS TRANSLATE GENERAL STATEMENTS OF INTENT . CORPORATE LEVEL MGRS SHOULD DETERMINE THE BASIS ON WHICH A COMPANY CAN COMPETE IN THE RELATED MARKET.MOST IMPORTANT IN DECIDING STRATEGY IS TO SELECT THE MARKET SEGMENT AND PLACE THE PRODUCT ACCORDINGLY. Eg GODREJ LOW COST FRIDGE 2000/- SOLD ONLY IN RURAL AREAS WITH BATTERY BACKUP. NEED TO CREATE COMPETITIVE ADVANTAGE TO BE ABLE TO SUCCEED IN CONVERTING STRATEGY INTO SUCCESSFUL OUTCOMES. HOWEVER IN DIVERSIFIED BUSINESSES CORPORATE HEADS NEED TO MAKE SURE BUSINESS OBJECTIVES AND STRATEGY CONFORM TO ENTEERPRISE LEVEL OBJECTIVES AND STRATEGIES eg IF ENTERPRISE STRATEGY IS TO CONCENTRATE ON A SPECIFIC CORE COMPETENCE VERTICAL THEN A CORPORATE UNIT CANNOT HAVE A STRATEGY WHICH IS FOCUSSED TOWARDS HORIZONTAL DIVERSIFICATION UNLESS IT BECOMES A PART OF THE ENTERPRISE STRATEGY FOUR LEVELS OF STRATEGY • • LEVEL 3 IS THE BUSINESS LEVEL COMPOSED OF BUSINESS LEVEL MGRS. IT IS THEIR RESPONSIBILITY TO DEVELOP ANNUAL OBJECTIVES AND SHORT TERM STRATEGIES IN VARIOUS BUSINESS AREAS. HOWEVER THEIR GREATEST RESPONSIBILITY IS TO CONVERT STRATEGIC PLANS INTO ACTIONABLE OUTCOMES WHICH MEET THE SHORT TERM GOALS.THEY ADDRESS ISSUES RELATED TO THE EFFICIENCY AND EFFECTIVENESS OF DEPLOYMENT OF RESOURCES AND TO ENSURE INCREASED CUSTOMER SATISFACTION WHICH RESULTS IN GREATER SALES. BUSINESS LEVEL STRATEGY CONCERNS THE ACTIONS TO BE EMPLOYED IN MANAGING KEY FUNCTIONS AND ACTIVITIES . . THEY ALSO AIM AT STRENGTHENING BUSINESS UNIT COMPETENCES AND CAPABILITIES IN PERFORMING STRATEGY CRITICAL ACTIVITIES SO TO ENHANCE MKT POSITION What is business-level strategy? Business-Level Strategy •Business-level strategy: an integrated and coordinated set of commitments and actions the firm uses to gain a competitive advantage by exploiting core competencies in specific product markets •Key Issues of Business-Level Strategy – What product (good or service) to offer who (which customers) – How to manufacture or create the good or service – How to distribute the good or service in the marketplace 322 When should a narrowly-focused strategy be implemented? NARROW Business-Level Strategies A narrowly-focused strategy must exploit a targeted segment’s differences from the balance of the industry by: – isolating a particular buyer group – isolating a unique segment of a product line – concentrating on a particular geographic market – finding their “niche” 323 What is the rationale behind different types of business level strategy? Types of Business-Level Strategies • Business-level strategies are intended to create differences between the firm’s position relative to those of its rivals • To position itself, the firm must decide whether it intends to perform activities differently or to perform different activities as compared to its rivals • Different types of strategies emphasize development of different competencies 324 Factors That May Drive Narrowly-Focused Strategies • Large firms may overlook small niches • Firm may lack resources to compete in the broader market • May be able to serve a narrow market segment more effectively than can larger industry-wide competitors • Narrowing scope may allow the firm to concentrate focus --directing resources to certain targeted value chain activities to build competitive advantage 325 Five Generic Types of Business Strategy Broad target Cost Uniqueness Broad Cost Leadership Broad Differentiation Integrated Cost Leadership/ Differentiation Narrow target Competitive Scope Type of Competitive Advantage Narrow Cost Leadership Narrow Differentiation 326 Types of Strategy Evaluation MARKET SEGMENTATION • A CRUCIAL BUSINESS LEVEL STRATEGY DECISION IS THE TARGET PROSPECT BASE THE COMPANY WISHES TO FOCUS ITS PRODUCTS AND SERVICES ON • TO MAKE THIS DECISION COMPANIES DIVIDE CUSTOMERS INTO GROUPS BASED ON DIFFERENCES IN THE CUSTOMER NEEDS AND WANTS • THIS PROCESS CLUSTERS PEOPLE WITH SIMILAR NEEDS INTO IDENTIFIABLE GROUPS • AS PART OF BUSINESS LEVEL STRATEGY FIRM DEVELOPS A STRATEGY TO EFFECTIVELY SELL TO A PARTICULAR SEGMENT • BASED ON THEIR INTERNAL CORE COMPETENCES AND OPPORTUNITIES IN THE EXTERNAL ENVIRONMENT COMPANIES CHOOSE A PARTICULAR BUSINESS LEVEL STRATEGY TO DELIVER VALUE TO TARGET CUSTOMERS FOUR LEVELS OF STRATEGY • • • • LEVEL 4 IS FUNCTIONAL LEVEL STRATEGIES WHICH CONCERN THE NARROW STRATEGIC INITIATIVES AND APPROACHES FOR MANAGING KEY OPERATING UNITS(PLANTS , DC,LOCATIONS) AND SPECIFIC OPERATING ACTIVITIES SUCH AS SUPPLY CHAIN , ADVERTISING CAMPAIGNS , MANAGEMENT OF BRANDS etc PLANT MGR NEEDS STRATEGY(MIN MFG COSTS,MAX EQUIP UTILIZATION AND UPTIME,MIN COST OF POOR QLTY,MIN ENERGY CONSUMPTION) TO ACCOMPLISH PLANT OBJECTIVES(30% MFG CONTR) OPERATING UNITS NEED TO HAVE STRATEGY CRITICAL PERFORMANCE TARGETS AND NEED TO HAVE ACTION PLANS TO ACHIEVE THE SAME. IN SOME CASES FACTORY TARGETS ARE SPECIFIED IN TERMS OF RUPEES. HOWEVER IN AN INFLATIONARY ECONOMY IF THE COSTS GOES UP BY 50% A REDUCTION IN UNITS PRODUCED COULD STILL RESULT IN GETTING THE RUPEE TARGET. HENCE IT IS SUGGESTED THAT A FACTORY THRUPUT BE VALUED IN TETRMS OF ACTUAL THRUPUT WRT INSTALLED CAPACITY. Five P’s of STRATEGY • Five 'Ps' of strategy • a plan • a ploy • a pattern of behaviour • a position with respect to others • a perspective – strategy as a mix of the five Ps Five P’s OF STRATEGY • PLAN – STRATEGY IS A PLAN AND AN INTENDED COURSE OF ACTION TO DEAL WITH A PARTICULAR SCENARIO.IT IS MADE IN ADVANCE BEFORE IT IS CONVERTED INTO ACTION PLAN AND ULTIMATELY EXECUTED.STRATEGIC PLANNING IS DONE WELL BEFORE THE ACTIVITIES TAKE PLACE AND SHOULD FACTOR FOR THE ENVIRONMENTAL CHANGES WHICH MAY TAKE PACE DURING EXECUTION. STRATEGY MUST REFER TO SPECIFIC SITUATIONS AND CANNOT BE GENERIC. STRATEGIC PLANNING EXERCISE MUST IMPLEMENT THE ADLI MOST IMPORTANTLY STRATEGIC PLANNING SHOULD REVIEW THE BLIND SPOTS IN THE PLANNING EXERCISE eg GOING INTO NEW MARKETS,INTRODUCING NEW TECHNOLOGY eg IBM PS/2 PLOY • SPECIFIC MANOEUVRE INTENDED TO OUTWIT COMPETITION PATTERN • STREAM OF ACTIONS WHICH SUPPORT THE STRATEGIC PLAN AND EVIDENCE CONSISTENCY IN THE BEHAVIOUR • STRATEGY IS A PATTERN IN A STREAM OF ACTIONS POSITION • STRATEGY IS A POSITION AND A MEANS OF POSITIONING AN ORGANIZATION IN A COMMERCIAL ENVIRONMENT Business Strategy in a Global Economy • Why go global? – market size – increased profitability • • • • location economies scope for significant cost reductions using core competencies learning from experience in diverse markets – spreading risks – keeping up with rivals • The global strategy trade-off – economies of scale or higher costs of customisation? • determinants of trade-off Business Strategy in a Global Economy • Types of multinational expansion – horizontally integrated multinational – vertically integrated multinational • Going global to reduce costs – international differences in input prices – international differences in productivity • labour skills • entrepreneurial and managerial skills • learning by doing – low-cost access to local markets – economies of scale – taking advantage of government policies • Business Strategy in a Global Economy Going global to access new markets – increased demand – spreading risks – can exploit advantages over local firms • ownership of superior technology • entrepreneurial and managerial skills • R&D capacity – access to local technology – learning from experience in diverse markets International Strategies • International Business Level Strategies • International Corporate Level Strategies – Multi-domestic Strategy – Global Strategy – Transnational Strategy International Corporate-Level Strategy • Multi-domestic Strategy – Strategic & operating decisions are decentralized to the strategic business unit in each country to tailor products to the local market. • Global Strategy – Assumes more standardization of products across country markets • Transnational Strategy – The firm seeks to achieve both global efficiency and local responsiveness International Strategy Opportunities & Outcomes Identify Explore Use Core Strategic International Opportunities Resources & Capabilities International Competence Competitiveness Strategies Increased Increased Market MarketSize Return Return Size onon Investment Investmen Economies E t conomie of Scale and s of Scale Learning and Location Location Learning Advantage Outcomes Modes of Entry International Bus.-Level Strategy Exporting Multidomes tic Strategy Global Strategy Strategic Alliances Transnational Strategy Licensing Acquisition Establishment of New Sub. Management Problems, Risk, and First Steps Higher Performance Returns Innovatio n Management Problems, Risk, and First Steps Benefits of International Strategies • Increased market size. • Greater returns on major capital investments or new products or processes. • Greater economies of scale, scope or learning. • A competitive advantage through location. Choice of International Entry Mode Exporting Common way to enter new international markets. No need to establish operations in other nations. Establish distribution channels through contractual relationships. May have high transportation costs. May encounter high import tariffs. May have less control on marketing and distribution. Difficult to customize product. Choice of International Entry Mode Strategic Alliances Enable firms to shares risks and resources to expand into international ventures. Most joint ventures (JVs) involve a foreign corp. with a new product or technology & a host company with access to distribution or knowledge of local customs, norms or politics. May experience difficulties in merging disparate cultures. May not understand the strategic intent of partners or experience divergent goals. Choice of International Entry Mode Acquisitions Enable firms to make most rapid international expansion. Can be very costly. Legal and regulatory requirements may present barriers to foreign ownership. Usually require complex and costly negotiations. Potentially disparate corporate culture. . Strategic Competitiveness Outcomes International diversification facilitates innovation in the firm. Provides larger market to gain more and faster returns form investments in innovation. May generate resources necessary to sustain a largescale R&D program. Generally related to above-average returns, assuming effective implementation and management of international operations. International diversification provides greater economies of scope and learning. Major Risks of International Diversification Political Risk National government instability may create potential problems for internationally diversified firms. Potential changes in attitudes or regulations regarding foreign ownership. Legal authority obtained from previous administration may become invalid. Potential for nationalization of firms’ assets. Major Risks of International Diversification Economic Risk Econ. risks are interdependent with political risks. Differences and fluctuations in international currencies may affect value of assets & liabilities. This affects prices & thus ability to compete. Differences in inflation rates may affect internationally diversified firms’ ability to compete. Enforcing intellectual property rights on CDs, software, etc. Strategic Options • Capacity Expansion • Market Development • Product Development • Vertical Integration • Diversification • Mergers & Acquisitions • Strategic Alliances • Turnaround • Divestment Corporate Strategy Alternatives Vertical Integration Single Business Concentration Diversify into Related Businesses Diversify into Unrelated Businesses PostDiversification Strategic Alternatives • Make new acquisitions Diversify into Related & Unrelated Businesses Divest weak units Restructure portfolio Retrench Liquidate INITIATIVES IN STRATEGIC PLANNING • • • • • • • • • • EXPANSION AND GROWTH IN CURRENT AREAS MARKET SEGMENTATION AND CONSOLIDATION OF CURRENT MARKETS BRANDING WITHDRAWAL FROM MARKETS eg TOMCO R&D FOR NEW PRODUCT PLANNING DIVERSIFICATION – VERTICAL AND HORIZONTAL; VERTICAL – BACKWARD (UPSTREAM) AND FORWARD(DOWNSTREAM);HORIZONTAL(UNRELATED) MERGERS (TATA INFOTECH AND TCS ),TAKEOVERS AND ACQUISITIONS(PWC IT ARM BY IBM CONSULTING,CORES BY TATA STEEL) COLLABORATIONS ( NEROLAC AND KANSAI)(CO-OPETITION -L&T AND BHEL WITH NTPC(EPC) EXECUTED POWER PROJECT IN ALGERIA JOINT VENTURES (MGL-GAIL,BRITISH GAS , MAH GOVT),BRITISH GAS (BRITISH GAS,RELIANCE INDUSTRIES,ONGC) ALTERNATIVE RESTRUCTURING STRATEGIC ACTIVITIES OF A COMPANY Possible Growth Strategies Vertical Integration Concentration •Backward •Forward Organizational Growth Diversification •Related •Unrelated Horizontal Integration Concentration Options Product(s) Current Current Customers New Product/Ma rket Exploitation Market Developm ent New Product Developm ent Product/Ma rket Proliferatio n Concentration Strategies • Means firm concentrates on its primary business. • Is the simplest and the least ambiguous • Has four options: 1. Product/Market Exploitation – Increasing sales of current products in current markets 2. Product Development – developing new products for current customers. – New products - improved or modified Concentration Strategies 3. Market Development: – Selling current products in new markets – New markets - additional geographic areas, different market segments 4. Product/Market Proliferation: – Expanding both into new products and into new markets Concentration Strategies • Advantages: – Allows the firm to master one business – Allows top managers to specialize in one business – Allows all organization resources to be allocated to one business and put under less strain • Disadvantages: – Is risky when environments are unstable – Is vulnerable to risks of product obsolescence and industry maturity – May lead to cash flow problems CAPACITY EXPANSION • CAPACITY EXPANSION IS ONE OF THE MOST SIGNIFICANT STRATEGIC DECISIONS MEASURED BOTH IN TERMS OF AMOUNT OF CAPITAL INVOLVED AND THE COMPLEXITY OF DECISION MAKING PROBLEM ESPECIALLY IF TECHNOLOGY IS INVOLVED. Eg IF COAL FIRED THERMAL POWER PLANT WANTS TO EXPAND CAPACITY DOES IT EXPAND USING RATHER OBSOLETED COAL TECHNOLOGY BASED OR DOES IT USE MULTIPLE FUEL FIRED PROCESS LINE eg NAPTHA AND GOBAR GAS. ECONOMICS OF OPERATIONS WITH EXPANDED CAPACITY OF IDENTICAL TECHNOLOGY NEEDS TO BE STUDIED • RISK ASSESSMENT OF TECHNOLOGY AND EFFECTIVENESS OF TECHNOLOGY AND INPUTS NEED TO BE DONE PRIOR TO DECIDING IN FAVOUR OF EXPANSION WITH IDENTICAL TECHNOLOGY ELEMENTS OF CAPACITY EXPANSION DECISION • DETERMINE OPTIONS FOR SIZE AND TYPE OF CAPACITY EXPANSION • ASSESS PROBABLE FUTURE DEMAND AND COSTS OF INPUTS eg COAL FIRED THERMAL POWER PLANTS • ASSESS TECHNOLOGICAL CHANGES AND PROBABILITY OF OBSOLESCENCE eg DABHOL POWER • PREDICT CAPACITY ADDITIONS BY EACH COMPETITOR BASED ON THE COMPETITORS EXPECTATIONS OF THE INDUSTRY • ADD THESE TO DETERMINE INDUSTRY SUPPLY AND DEMAND BALANCE AND RESULTING INDUSTRY PRICES AND COSTS • DETERMINE EXPECTED CASH FLOWS FROM CAPACITY ADDITIONS RISKS IN CAPACITY EXPANSION • RISK - TECHNOLOGY OBSOLESCENCE - NON AVAILABILITY OF POWER -LACK OF DEMAND ADDRESSAL TECHNOLOGY UPGRADES eg DUAL FUEL FIRED POWER PLANTS NEED TO HAVE CAPTIVE POWER ARRANGEMENT OUTSOURCING CAPACITY TO THIRD PARTIES TO REDUCE OVERHEADS Diversification and Corporate Strategy • A company is diversified when it is in two or more lines of business • A diversified company needs a multiindustry, multi-business strategy Diversification and Corporate Strategy • A company is diversified when it is in two or more lines of business • Strategy-making in a diversified company is a bigger picture exercise than crafting a strategy for a single line-of-business – A diversified company needs a multi-industry, multibusiness strategy – A strategic action plan must be developed for several different businesses competing in diverse industry environments Diversification and Corporate Strategy • In addition to a business strategy which identifies and maintains a sustainable competitive advantage in each of the business units, a coherent corporate strategy is needed which creates value and is internally consistent. Diversification and Corporate Strategy • A coherent corporate strategy can best be thought of as how, in pursuit of a vision, the corporation aligns its goals and objectives, organizational structure, systems and processes, and choice of industries and strategies to build and leverage the unique resources to give it a corporate advantage. • It is through these actions that the corporation will create value and so justify its existence as a multibusiness entity DIVERSIFICATION • Diversification – The process of adding new businesses to the company that are distinct from its established operations • Vehicles for diversification – Internal new venturing • Starting a new business from scratch – Acquisitions – Joint ventures • Restructuring – Reducing the scope of diversified operations by exiting from business areas Copyright © Houghton Mifflin Company. All 10 - 365 Expanding Beyond a Single Industry • Advantages of staying in a single industry – Focus resources and capabilities on competing successfully in one area – Focus on what the company knows and does best • Disadvantages of being in a single industry – Danger of the industry declining – Missing the opportunity to leverage resources and capabilities to other activities – Resting not continually learning Copyright © Houghton on laurels and 10 - 366 Mifflin Company. All Increasing Profitability Through Diversification • Transferring competencies – Taking a distinctive competence developed in one industry and applying it to an existing business in another industry – The competencies transferred must involve activities that are important for establishing competitive advantage Copyright © Houghton Mifflin Company. All 10 - 367 Increasing Profitability Through Diversification (cont’d) • Leveraging competencies – Taking a distinctive competency developed by a business in one industry and using it to create a new business in a different industry • Sharing resources: economies of scope – Cost reductions associated with sharing resources across businesses Copyright © Houghton Mifflin Company. All 10 - 368 Increasing Profitability Through Diversification (cont’d) • Managing rivalry: multipoint competition – Diversifying into an industry in order to hold a competitor in check that has either entered its industry or has the potential to do so – Multipoint competition: companies competing against each other in different industries Copyright © Houghton Mifflin Company. All 10 - 369 Increasing Profitability Through Diversification (cont’d) • Exploiting general organizational competencies – Competencies that transcend individual functions or businesses and reside at the corporate level in the multi-business enterprise – Entrepreneurial capabilities – Effective organization structure and controls – Superior strategic capabilities Copyright © Houghton Mifflin Company. All 10 - 370 A Diversified Company Has Two Levels of Strategy 1. Business-Level Strategy (Competitive Strategy) How to create competitive advantage in each business in which the company competes - low cost - focused low cost - differentiation - focused differentiation - integrated low cost/differentiation 2. Corporate-Level Strategy (Companywide Strategy) How to create value for the corporation as a whole Corporate-Level Strategy: Creating Value through Diversification McGraw-Hill/Irwin Strategic Management: Text and Cases, 4e Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved. Corporate Strategy key questions: concerns 2 1. What businesses should the firm in? 2. How should the corporate office manage the array of business units? Corporate-level strategy specifies actions to be taken by the firm to gain a competitive advantage by selecting & managing a group of different businesses competing in several industries & product markets FROM SINGLE-BUSINESS TO DIVERSIFICATION STAGE 1: Most firms begin as small singlebusiness enterprises serving a local or regional market STAGE 2: Geographical expansion STAGE 3: Vertical integration STAGE 4: As growth slows, strategic options include: – Take market share from rivals – Focus on diversification WHEN TO DIVERSIFY • • • • WHEN A COMPANY SPOTS OPPORTUNITIES FOR EXPANDING INTO INDUSTRIES WHOSE TECHNOLOGIES AND PRODUCTS COMPLEMENT ITS PRESENT BUSINESS eg A TEXTILE WEAVING MILL ACQUIRES A SPINNING UNIT AND LATER ON IT ALSO ACQUIRES A PROCESS HOUSE TO COMPLETE THE VALUE CHAIN. FURTHER MORE COMPANIES LIKE RAYMONDS , MAFATLAL,VIMAL,GRASIM, PANTALOONS, ALSO HAVE DIVERSIFIED INTO RETAILING OF THEIR PRODUCTS BY OPENING RETAIL OUTLETS WHEN IT CAN LEVERAGE EXISTING COMPETENCES AND CAPABILITIES BY EXPANDING INTO BUSINESSES WHERE THESE SAME RESOURCES ARE KEY SUCCESS FACTORS AND VALUABLE COMPETITIVE ASSETS eg TATA MOTORS FLOATED THEIR FULLY OWNED SUBSIDIARY TATA TECHNOLOGIES TO PROVIDE ENGINEERING AND ERP SOLUTIONS TO TATA MOTORS. NOW IT PROVIDES THE SERVICES TO THE MARKET WHEN DIVERSIFYING INTO CLOSELY RELATED BUSINESSES OPENS NEW AVENUES FOR REDUCING COSTS eg ACQUIRING RAW MATERIAL SUPPLIER IN INDUSTRY WHERE RAW MATERIAL COST IS VERY HIGH WHEN THE BRAND NAME OF THE COMPANY CAN BE TRANSFERRED TO THE PRODUCTS/SERVICES OF THE NEW BUSINESS eg TATA MOTORS When do we diversify? • When a company runs out of growth opportunities in the core business and not before! • When diversification results in creation of value WHEN DOES DIVERSIFICATION START TO MAKE SENSE? Strong competitive position, rapid market growth -- Not a good time to diversify Weak competitive position, rapid market growth -- Not a good time to diversify Strong competitive position, slow market growth -- Diversification is top priority consideration Weak competitive position, slow market growth -- Diversification merits consideration Means to Achieve Diversification • Acquisitions or mergers • Pooling resources of other companies with a firm’s own resource base – Joint venture – Strategic alliance • Internal development – New products – New markets – New technology How to Diversify • Find ways to enter new industries • Decide whether the businesses related to each other or not? • Strengthen the performance of the businesses you’ve got – Get rid of the bad ones that can’t be fixed – Fix the bad ones that can be fixed Making Diversification Work • Diversification initiatives must create value for shareholders – – – – Mergers and acquisitions Strategic alliances Joint ventures Internal development • Diversification should create synergy Business 1 Business 2 Resources and Diversification • Besides strong incentives, firms are more likely to diversify if they have the resources to do so • Value creation is determined more by appropriate use of resources than incentives to diversify 381 Adding Value by Diversification Diversification most effectively adds value by either of two mechanisms: – Economies of scope: cost savings attributed to transferring the capabilities and competencies developed in one business to a new business – Market power: when a firm is able to sell its products above the existing competitive level or reduce the costs of its primary and support activities below the competitive level, or both 382 Incentives to Diversify Internal Incentives: Poor performance may lead some firms to diversify to attempt to achieve better returns Firms may diversify to balance uncertain future cash flows Firm may diversify into different businesses in order to reduce risk Managers often have incentives to diversify in order to increase their compensation and reduce employment risk, although effective governance mechanisms may restrict such abuses Diversification and Multidivisional Structure • Three major benefits – more accurate monitoring of the performance of each business, simplifying problems of control – facilitate comparisons between divisions, improving resource allocation process – stimulate managers of poorly performing divisions to look for ways of improving performance 384 STRATEGIES FOR ENTERING NEW BUSINESSES 1. Acquire existing firm in target industry 2. Start new company internally 3. Form joint venture Levels and Types of Diversification Low Levels of Diversification Single business > 95% of revenues from a single business unit Dominant business Between 70% and 95% of revenues from a single business unit A A B Moderate to High Levels of Diversification Related constrained Related linked (mixed) < 70% of revenues from dominant business, and only limited links exist Very High Levels of Diversification Unrelated-Diversified A < 70% of revenues from dominant business; all businesses share product, technological and distribution linkages Business units not closely related B A B C A B C C Levels and Types of Diversification Low Levels of Diversification Single Business > 95% of business from a single business unit Dominant Business Between 70 and 95% of business from a single business unit 387 Levels and Types of Diversification Moderate to High Levels of Diversification Related Linked (Mixed) < 70% of revenues from dominant business, and only limited links exist 388 Levels and Types of Diversification Moderate to High Levels of Diversification Related Constrained <70% of revenues from dominant business; all businesses share product, technological and distribution linkages 389 Levels and Types of Diversification Very High Levels of Diversification Unrelated < 70% of revenue comes from the dominant business, and there are no common links between businesses 390 Types of Diversification • Related • Unrelated Integrative Growth Strategies • Vertical Integration – Backward – Forward • Horizontal Integration Types of Related Diversification Operational Skills/ Capabilities Product Similarities Distribution Channels Related Diversification Similar Technology Customer Use Types of Strategic Fit Technology Fits Operating Fits Distribution & CustomerRelated Fits Managerial Fits Several lines of business with a strategic fit that becomes a strategic advantage RELATED DIVERSIFICATION & STRATEGIC FIT • STRATEGIC FIT can be based on – – – – – – – – – Shared technology Common labor skills Common distribution channels Common suppliers & raw materials sources Similar operating methods Similar kinds of managerial know-how Ability to share common sales force Customer overlap Any area where meaningful sharing opportunities exist in businesses’ value chains COMMON APPROACHES TO RELATED DIVERSIFICATION • Entering businesses where sales force, advertising, & distribution activities can be shared • Exploiting closely related technologies • Sharing manufacturing facilities • Transferring know-how & expertise from one business to another • Transferring firm’s brand name & reputation with customers to a new product/service • Acquiring new businesses to uniquely help firm’s position in existing businesses DIVERSIFICATION INTO RELATED BUSINESS • RELATED DIVERSIFICATION STRATEGY INVOLVES BUILDING THE COMPANY AROUND BUSINESSES WHOSE VALUE CHAINS POSSESS COMPETITIVELY VALUABLE STRATEGIC FITS. STRATEGIC FIT EXISTS WHENEVER ONE OR MORE ACTIVITIES COMPRISING THE VALUE CHAINS OF DIFFERENT BUSINESSES ARE SUFFICIENTLY SIMILAR AS TO PRESENT OPPORTUNITES FOR -TRANFERRING COMPETITIVELY VALUABLE EXPERTISE , TECHNOLOGICAL KNOW HOW OR OTHER CAPABILITIES FROM ONE BUSINESS TO ANOTHER eg IN TATA TECHNOLOGIES THERE ARE DESIGN ENGINEERS FROM TATA MOTORS WHO HAVE WRITTEN AN EXCELLENT SOFTWARE FOR DESIGN OF AUTO COMPONENTS USING CAD FACILITIES DIVERSIFICATION INTO RELATED BUSINESS • RELATED DIVERSIFICATION STRATEGY -COMBINING RELATED VALUE CHAIN ACTIVITIES OF SEPARATE BUSINESSES INTO A SINGLE OPERATION TO ACHIEVE LOWER COSTS eg DIFFERENT SBUS OF L&T USE THE SAME MFG FACILITIES AT POWAI TO LOWER OVERHEADS Related Diversification: Economies of Scope and Revenue Enhancement • Economies of scope – Cost savings from leveraging core competencies or sharing related activities among businesses in the corporation – Leverage or reuse key resources • • • • • Favorable reputation Expert staff Management skills Efficient purchasing operations Existing manufacturing facilities VERTICAL INTEGRATION • • • VERTICAL INTEGRATION IS THE COMBINATION OF TECHNOLOGICALLY DISTINCT PRODUCTION , DISTRIBUTION , SELLING, AND/OR OTHER ECONOMIC PROCESSES WITHIN A COMPANY IT REPRESENTS A STRATEGIC DECISION BY COMPANY TO UTILIZE INTERNAL TRANSACTIONS RATHER THAN MARKET TRANSACTIONS eg ACQUISITION OF LIMESTONE QUARRIES BY CEMENT MFG MANY VERTICAL INTEGRATION DECISIONS ARE MADE WITHIN THE TACTICAL STRATEGY IMPLEMENTATION TO MAKE OR BUY ;FOCUS IS ON COST SAVINGS DUE TO INTEGRATION AND ALSO THE ASSURANCE THAT THE CAPACITY & CAPABILITY OF THE UPSTREAM /DOWNSTREAM ACQUISITION IS COMMENSURATE WITH THE CAPACITIES AND CAPABILITIES REQUIRED BY THE CENTRAL COMPANY TO MEET ITS LONG TERM GOALS Vertical Integration Strategies • Vertical integration extends a firm’s competitive scope within same industry – Backward into sources of supply – Forward toward end-users of final product • Can aim at either full or partial integration Activities, Costs, & Margins of Suppliers Internally Performed Activities, Costs, & Margins Activities, Costs, & Margins of Forward Channel Allies & Strategic Partners Buyer/User Value Chains VERTICAL INTEGRATION STRATEGIES • VERTICAL INTEGRATION EXTENDS FIRMS COMPETITIVE • • AND OPERATIVE SCOPE WITHIN THE SAME INDUSTRY INVOLVES EXPANDING THE FIRMS RANGE OF ACTIVITIES BACKWARDS(UPSTREAM) INTO SOURCES OF SUPPLY eg OIL EXPLORATION AND PRODUCTION IN THE CASE OF A REFINERY OR FORWARD (DOWNSTREAM) TOWARDS THE END USER eg FUEL AND LUBRICANT RETAIL OUTLETS VERTICAL INTEGRATION STRATEGIES CAN AIM AT FULL INTEGRATION (PARTICIPATING IN ALL STAGES OF THE INDUSTRY VALUE CHAIN –BIRLA CEMENT FROM OWNING OF LIME STONE QUARIES TO CEMENT MANUFACTURE TO DISTRIBUTION TO RETAIL OUTLETS) OR PARTIAL INTEGRATION IN THE CASE OF PUBLIC SECTOR OIL COMPANIES WHO ARE INTO REFINING , PARTLY INTO RETAILING BUT NOT INTO EXPLORATION AND PRODUCTION OF CRUDE WHICH THEY BUY. When to Integrate Vertically? • Are our existing suppliers or customers meeting the final consumers’ needs? • How dynamic is the industry? • Will vertical integration enhance the business’s position? Competitive Strategy Principle A vertical integration strategy has appeal ONLY if it significantly strengthens a firm’s competitive position! Vertical Integration • In making decisions associated with vertical integration, six issues should be considered: 1. Are we satisfied with the quality of the value that our present suppliers and distributors are providing? 2. Are there activities in our industry value chain presently being outsourced or performed independently by others that are a viable source of future profits? 3. Is there a high level of stability in the demand for the organization’s products? 4. How high is the proportion of additional production capacity actually absorbed by existing products or by the prospects of new and similar products? Vertical Integration (cont.) • In making decisions associated with vertical integration, six issues should be considered: 5. Do we have the necessary competencies to execute the vertical integration strategies? 6. Will the vertical integration initiative have potential negative impacts on our stakeholders? BACKWARD INTEGRATION • • • BACKWARD INTEGRATION IS DONE TO GENERATE COST SAVINGS AND TO STRENGTHEN BRAND VALUE OF PRODUCT/SERVICE BY ASSURING ENHANCED QUALITY OF UPSTREAM PRODUCT/SERVICE FOR BACKWARD INTEGRATION TO BE A VIABLE AND PROFITABLE STRATEGY COMPANY SHOULD ACHIEVE SAME SCALE ECONOMIES AS OUTSIDE SUPPLIERS AND MATCH OR BEAT THEIR CAPABILITY INCLUDING PRICE AND QUALITY AMONG OTHER CRITICAL FACTORS POTENTIAL FOR REDUCING COSTS VIA BACKWARD INTEGRATION EXISTS IN SITUATIONS WHERE SUPPLIERS MAKE SIZEABLE PROFITS WHERE THE ITEM SUPPLIED IS A MAJOR COST COMPONENT eg CAUSTIC SODA IN SOAP HENCE HLL ACQUIRED TWO SUPPLIERS MFG CAUSTIC SODA.ALSO SUPPLIER BEING ACQUIRED HAS TECHNOLOGICAL SKILLS ,ESPECIALLY IN TERMS OF PROPRIETARY TECHNOLOGY eg COCA COLA FORMULA IT IS ADVANTAGEOUS TO HAVE BACKWARD INTEGRATION BACKWARD INTEGRATION • • • BACKWARD INTEGRATION CAN PRODUCE A DIFFERENTIATION BASED COMPETITIVE ADVANTAGE WHEN A COMPANY ENDS UP WITH A BETTER PRODUCT/SERVICE OFFERING THEREBY IMPROVING CUSTOMER SERVICE IT ALSO ENABLES THE ENHANCEMENT OF CORE COMPETENCE FINALLY IT SPARES THE COMPANY OF THE RISK OF BEING DEPENDENT ON THE VAGARIES OF THE SUPPLIER AND ELIMINATES THE THREAT POSED IF THE SUPPLIER(SOLE SUPPLIER) CLOSES DOWN OR HAS A STRIKE OR ANY OTHER LABOR RELATED ISSUE. Appeal of Backward Integration • Reduces risk of depending on suppliers of crucial raw materials / parts / components • Ensures smoother and better coordinated operations • Generates cost savings only if volume needed is big enough to capture efficiencies of suppliers • Potential to reduce costs exists when – Suppliers have sizable profit margins – Item supplied is a major cost component – Resource requirements are easily met • Can produce a differentiation-based competitive advantage when it results in a better quality part FORWARD INTEGRATION • FORWARD INTEGRATION IS TO GAIN BETTER ACCESS TO END USERS ESPECIALLY IN A MARKET WHICH IS NOT VERY LOYAL;IS VERY AGILE AND FLEXIBLE • DOWNSTREAM 3RD PARTY PLAYERS DON’T TEND TO BE VERY LOYAL AND MAY BE RESPONSIBLE FOR DENUDATION OF SALES IN A PARTICULAR AREA,THEY DO SO BECAUSE THEY ARE WEDDED TO THE3 CONCEPT OF DEALING WITH THE PRODUCT WHICH GIVES THEM MAXIMUM PROFITS (COCO PETROL PUMPS) Appeal of Forward Integration • Advantageous for a firm to establish its own distribution network if: – Undependable distribution channels undermine steady production operations • Integrating forward into distribution and retailing may: – be cheaper than going through independent distributors – help achieve stronger product differentiation, allowing escape from price competition – provide better access to users ADVANTAGES OF VERTICAL INTEGRATION • • • • • TWO REASONS FOR INVESTING IN VERTICAL INTEGRATION ARE TO STRENGTHEN FIRMS COMPETITIVE POSITION AND BOOST PROFITABILITY. VERTICAL INTEGRATION ASSURES THE FIRM THAT IT WILL RECEIVE REQUIRED SUPPLIES AT THE RIGHT TIME VERTICAL INTEGRATION HAS NO PAYOFF PROFITWISE UNLESS IT PRODUCES SUFFICIENT COST SAVINGS OR PROFIT INCREASES TO JUSTIFY THE DIVERSIFICATION IT SHOULD ALSO ADD MATERIALLY TO THE COMPANY TECHNOLOGICAL AND COMPETITIVE STRENGTHS OR HELP DIFFERENTIATE COMPANY PRODUCT OFFERING IT COULD IMPROVE THE ABILITY OF THE FIRM TO DIFFERENTIATE ITSELF FROM OTHERS BY OFFERING A WIDER SLICE OF VALUE ADDED FACILITIES AND ALSO ALLOWS BETTER CONTROL OF DISTRIBUTION CHANNELS eg SOME FILM PRODUCERS ALSO VENTURE INTO DISTRIBUTION DISADVANTAGES OF VERTICAL INTEGRATION • • INCREASES BUSINESS RISK AS IT WIDENS THE HORIZON OF ACTIVITIES AND CREATES CASCADING RISK IF ONE PART OF THE SUPPLY CHAIN SUFFERS FROM INCREASED BUSINESS RISK LEADING TO MAL EFFECTS ON THE ENTIRE VALUE CHAIN .VERTICALLY INTEGRATED COMPANIES THAT HAVE INVESTED HEAVILY IN A PARTICULAR PARTS/COMPONENT MFG ARE SLOW TO INNOVATE AND ADOPT NEWER AND MORE EFFECTIVE AND EFFICIENT TECHNOLOGIES. INTEGRATING FORWARD OR BACKWARD LOCKS A COMPANY INTO RELYING ON ITS OWN IN HOUSE SOURCES OF SUPPLY (MAY PROVE TO BE MORE EXPENSIVE THAN OUTSOURCING –eg STATUTORY MFG OF CONTROLLED CLOTH AT GOVT CONTROLLED PRICES NOT ECONOMICALLY VIABLE –MFG OUTSOURCED TO WEAVERS AT BHIWANDI WHO USED TO BY YARN FROM COTTAGE INDUSTRY AT ROCK BOTTOM PRICES) . GENERALLY TODAY THE TREND IS TOWARDS BACKWARD INTEGRATION TO ACHIEVE ECONOMICS OF INPUT RECEIPT AND IMPROVE CAPABILITY WRT LONG TERM GOALS DISADVANTAGES OF VERTICAL INTEGRATION • • • VERTICAL INTEGRATION CAN CAUSE MISMATCH IN CAPACITY AND CAPABILITY PROBLEMS IN THE LONG RUN.eg NANO LONG TERM PLANS. CAN WE ASSUME THE CAPABILITY OF ANCILLARIES IS COMMENSURATE WITH LONG TERM OBJECTIVES OF NANO SBU INTEGRATING FORWARD OR BACKWARD OFTEN CALLS FOR RADICAL CHANGES IN SKILLS AND BUSINESS CAPABILITIES eg SEVERAL TEXTILE MILLS WHO HAVE GOOD PRODUCTS AND HAVE INTEGRATED FORWARD AND OPENED RETAIL OUTLETS HAVE FAILED TO PERMEATE THE MARKET. RAYMOND ,ARVIND ARE SOME OF THE ORGANIZATIONS WHO HAVE SUCCEEDED IN RETAILING THEIR PRODUCTS THRU THEIR OWNED OUTLETS . HOWEVER IT MUST BE NOTED THAT SEVERAL OF THESE RETAIL OUTLETS ARE NOT ACTUALLY OWNED BY THE COMPANY BUT FRANCHISED TO 3RD PARTIES. SUCCESS STORIES MAY BE OF OIL COMPANIES WHO HAVE THEIR OWN RETAIL OUTLETS COCO(COMPANY OWNED COMPANY OPERATED) INTEGRATING BACKWARD MAY ALSO MEAN DOING MORE VALUE ENGINEERING WORK OR R&D WORK AND INCURRING EXTRA EXPENSE WHICH MIGHT HAVE IN NORMAL CIRCUMSTANCES HAVE BEEN BORNE BY THE SUPPLIER Horizontal Integration • Means investing in the purchase of one or more competitors. • Purpose is to gain market share, expand geographically, augment product or service lines. • Example: Reliance Fresh horizontal from Reliance Retailing readymade Unrelated Diversification • Financially driven rather than Strategically driven • Strategic fit, value chain relationships or strategic theme are not important • Profitability and size are key. • Look for a bargain – undervalued assets, financially distressed, turnarounds, bright future with limited capital Unrelated diversification • Go into any business where we can make a profit • Referred to as conglomerates • No unifying strategic theme Appeal of Unrelated Diversification • Spreading business risk over different industries • Stability of profits -- Hard times in one industry may be offset by good times in another industry • If bargain-priced firms with big profit potential are bought, shareholder wealth can be enhanced • Capital resources can be directed to those industries offering best profit prospects DIVERSIFICATION INTO UNRELATED BUSINESS • AN UNRELATED DIVERSIFICATION STRATEGY PURSUES CROSS BUSINESS STRATEGIC FITS COMPANIES INTO UNRELATED DIVERSIFICATION SEE BUSINESS POTENTIAL IN THE PROPOSED AREA AND ENTER INTO THE GAME.THEY MAY OR MAY NOT HAVE THE CORE COMPETENCE AT THE POINT OF STRATEGIC INTENT PLANNING BUT CERTAINLY THEY NEED TO BUILD DIFFERENTIATION STRATEGY OR NICHE STRATEGY IN THE PROPOSED AREAS OF OPERATIONS. CRITERIA TO DECIDE UNRELATED DIVERSIFICATION ARE -WHETHER NEW BUSINESS CAN MEET CORPORATE TARGETS FOR PROFITABILITY AND RETURN ON INVESTMENT -WHETHER THE BUSINESS IS AN INDUSTRY WITH ATTRACTIVE GROWTH POTENTIAL eg ADAG WHOSE PRIMARY FUNCTION WAS TELECOM , GOING INTO FILM AND TV BY ACQUIRING ADLABS DIVERSIFICATION INTO UNRELATED BUSINESS • CRITERIA TO DECIDE UNRELATED DIVERSIFICATION ARE -WHETHER NEW BUSINESS CAN MEET CORPORATE TARGETS FOR PROFITABILITY AND RETURN ON INVESTMENT -WHETHER THE BUSINESS IS AN INDUSTRY WITH ATTRACTIVE GROWTH POTENTIAL eg ADAG WHOSE PRIMARY FUNCTION WAS TELECOM , GOING INTO FILM AND TV BY ACQUIRING ADLABS -WHETHER BUSINESS HAS ENOUGH POTENTIAL TO CONTRIBUTE SIGNIFICANTLY TO PARENT BOTTOM LINE -AT WHAT POINT OF THE CURVE IS THE INDUSTRY IN NASCENT , EMERGING , GROWING,MATURING,DECLINING -WHETHER BUSINESS HAS REQUIREMENT OF MODERNIZING PLANTS AND PROVIDING WORKING CAPITAL -WHETHER BUSINESS IS PLAGUED WITH UNION TROUBLES (WHAT HAPPENS IF AIR INDIA IS PRIVATISED AND TATAS WISHES TO ACQUIRE?) -ARE THERE TOUGH REGULATORY AND STATUTORY OPERATIVE BARRIERS MERITS OF UNRELATED DIVERSIFICATION • BUSINESS RISK IS SCATTERED OVER A SET OF DIVERSE INDUSTRIES . MARKETS ARE LARGELY DISCONNECTED AND HENCE BUSINESS RISK IS TO THAT EXTENT REDUCED COMPARED TO RELATED DIVERSIFICATION WHERE FOR EXAMPLE HIKE IN COST OF CRUDE CAN HAVE DEVASTATING DOWNSTREAM EFFECTS • FINANCIAL RESOURCES CAN BE EMPLOYED TO MAXIMUM ADVANTAGE BY WHATEVER INDUSTRIES OFFER BEST PROFIT PROSPECTS AS OPPOSED TO INVESTING IN RELATED VALUE CHAIN ACTIVITIES(PUTTING ALL EGGS IN ONE BASKET eg RIL DECISION TO OPEN PETROL RETAIL OUTLETS V/S UNRELATED DIVERSIFICATION INTO RELIANCE FRESH.BOTH HAD RISKS BUT RETAIL OUTLETS CLOSED DOWN;FRESH IS KICKING AND ALIVE AFTER SURVIVING INITIAL SCARE) MERITS OF UNRELATED DIVERSIFICATION • COMPANY PROFITABILITY IN CERTAIN UNRELATED SEGMENTS MAY BE BETTER THAN THOSE WHO HAVE BEEN AFFECTED BY THE DOWNTURN AND CONTRIBUTE TO THE STABILIZATION OF OVERALL COMPANY PROFITS Drawbacks of Unrelated Diversification • Tends to be less profitable than related diversification. • Difficulties of competently managing many diverse businesses • Opportunities for economies of scope are much less – Consolidated performance of unrelated businesses tends to be no better than sum of individual businesses on their own (and it may be worse) Problems with Unrelated Diversification – Places significant demands on executives due to increased complexity. – Conglomerate discount: The stock of a conglomerate sells less than the total of individual stocks would sell for if each business in the corporation sold its stock separately. IDENTIFYING DIVERSIFIED COMPANY STRATEGIES • • • • • ASSESSING THE ATTRACTIVENESS OF THE INDUSTRIES THE COMPANY HAS DIVERSIFIED INTO BOTH INDIVIDUALLY AND AS A GROUP eg TATASONS. NEED TO ASSESS MARKET SIZE AND PROJECTED GROWTH RATE AS WELL AS EMERGING THREATS AND INDUSTRY RISKS ASSESSING THE COMPETITIVE STRENGTH OF THE COMPANY BUSINESS UNITS AND DETERMINE HOW MANY ARE STRONG CONTENDERS IN THEIR RESPECTIVE INDUSTRY IN TERMS OF THEIR RELATIVE MARKET SHARE AND COMPETITIVE COSTS eg L&T SELL OFF SHIPPING,LEATHER PRODUCT EXPORTS,CEMENT CHECKING COMPETITIVE ADVANTAGE OF CROSS BUSINESS STRATEGIC FITS IN VARIOUS SBU eg CAN ECC A SUBSIDIARY OF LT USE SERVICES OF INFOTECH CHECKING WHETHER FIRM HAS COMPETENCE TO MANAGE THE DIVERSE BUSINESSES IT IS INTO CRAFTING NEW STRATEGIC MOVES TO IMPROVE OVERALL CORPORATE PERFORMANCE BY BROADENING COMPANY BUSINESS SCOPE BY NEW ACQUISITIONS IN NEW INDUSTRIES GENERIC INTEGRATION DIFFICULTIES • POST ACQUISITION INTEGRATION MAY BECOME A DIFFICULT ISSUE • CHALLENGES INCLUDING FUSING 2 DISPARATE CORPORATE CULTURES eg IBM AND PWC, LINKING FINANCIAL CONTROL SYSTEMS,BUILDING EFFECTIVE WORKING RELATIONSHIPS (ESPECIALLY WHEN MGT STYLES DIFFER) AND RESOLVING PROBLEMS • WITHOUT SUCCESSFUL INTEGRATION ACQUISITION IS UNLIKELY TO PRODUCE POSITIVE RESULTS • POST ACQUISITION INTEGRATION PHASE IS SINGULARLY MOST IMPORTANT DETERMINANT OF SHAREHOLDER VALUE CREATION GENERIC INTEGRATION DIFFICULTIES • INTEGRATION IS COMPLEX AND INVOLVES LARGE NUMBER OF ACTIVITIES WHICH CAN LEAD TO SIGNIFICANT DIFFICULTIES • IMPORTANT TO MAINTAIN HUMAN CAPITAL OF TARGET COMPANY AFTER ACQUISITION. MUCH OF ORG KNOWLEDGE IS WITH PEOPLE OF TARGET COMPANY. TURNOVER OF KEY PEOPLE CAN HAVE NEGATIVE EFFECT ON PERFORMANCE OF ACQUIRED COMPANY . LOSS OF KEY PEOPLE WEAKENS CAPABILITY AND REDUCES ITS VALUE • IF IMPLEMENTED PROPERLY INTEGRATION PROCESS CAN HAVE A POSITIVE EFFECT ON TARGET COMPANY AND MINIMIZE PROBABILITY OR EFFECTS OF ATTRITION RISKS IN INTEGRATION • RISK - MISMATCHED PROCESS ADDRESSAL - ALIGNMENT OF SUPPLY CHAIN CAPABILITIES WITH DEMAND -LACK OF CORE COMPETENCE -JV’s WITH SUCH COMPANIES WHO POSSESS CORE COMPETENCE OR ACQUIRE COMPANIES -UNCERTAIN SUPPLIER CAPABILITY -TRAIN SUPPLIER AS PART OF VALUE CHAIN CAPABILITY COLLABORATIVE STRATEGIES • STRATEGIC ALLIANCES ARE FORMING AN IMPORTANT • • • STRATEGY IN SEVERAL LONG TERM PLANS OF COMPANIES WHO WISH TO CONSOLIDATE AND GROW THEIR POSITION IN THE MARKET. THE COLLABORATIVE EFFORT COMPLEMENTS THE STRATEGIC INITIATIVES OF THE COMPANY A STRATEGIC ALLIANCE IS A FORMAL AGREEMENT BETWEEN TWO COMPANIES IN WHICH THE TWO JOINTLY WORK TO ACHIEVE MUTUALLY BENEFICIAL STRATEGIC OUTCOMES (MARUTI-SUZUKI ALLIANCE) ,JOINT CONTRIBUTION OF RESOURCES(SUZUKI TECHNOLOGY) ALLIANCES INVOLVE JOINT MKTNG,JOINT PRODN,DESIGN COLLABORATION (KIRLOSKAR CUMMINS),JOINT RESEARCH (RANBAXY-ELLY LILLY) RELATION MAYBE CONTRACTUAL OR COLLABORATIVE Cooperative Strategy • Cooperative strategy is a strategy in which firms – work together – to achieve a shared objective • Cooperating with other firms is a strategy that – creates value for a customer – exceeds the cost of constructing customer value in other ways – establishes a favorable position relative to competition 431 Strategic Alliance as a Cooperative Strategy • A strategic alliance is a cooperative strategy in which – firms combine some of their resources and capabilities – to create a competitive advantage • A strategic alliance involves – exchange and sharing of resources and capabilities – co-development or distribution of goods or services 432 Strategic Alliances and Joint Ventures • Introduce successful product or service into a new market – Lacks requisite marketing expertise • Doesn’t understand customer needs • Doesn’t know how to promote the product • Doesn’t have access to proper distribution channels • Join other firms to reduce manufacturing (or other) costs in the value chain – Pool capital – Pool value-creating activities – Pool facilities Strategic Alliances and Joint Ventures • Develop or diffuse new technologies – Use expertise of two or more companies – Develop products technologically beyond the capability of the companies acting independently STRATEGIC ALLIANCES • STRATEGIC ALLIANCES ARE INCREASINGLY BEING USED BY COMPANIES TO LEVERAGE COMPETITIVE ADVANTAGE IN THE MARKETPLACE BY EXPLOITING EACH OTHERS CORE COMPETENCES AND LEVERAGING CORE COMPETENCES TO DELIVER SHAREHOLDER VALUE • STRATEGIC ALLIANCE IS A COOPERATIVE STRATEGY IN WHICH FIRMS COMBINE SOME OF THEIR RESOURCES AND CAPABILITIES TO CREATE COMPETITIVE ADVANTAGE eg STRATEGIC ALLIANCE BETWEEN MICROSOFT AND COMPAQ STRATEGIC ALLIANCES • INVOLVES SHARING OF TECHNCAL KNOW HOW AND MANAGEMENT EXPERTISE • COMPETITIVE ADVANTAGE DEVELOPED THROUGH COOPERATIVE STRATEGY IS CALLED COLLABORATIVE ADVANTAGE Strategic Alliance • A primary type of cooperative strategy in which firms combine some of their resources and capabilities to create a mutual competitive advantage. – Involves the exchange and sharing of resources and capabilities to co-develop or distribute goods and services. – Requires cooperative behavior from all partners. © 2007 Thomson/South- 9–437 Why Strategic Alliance? • • • • • • Adding value to products/services Improving market access Strengthening operations Adding technological strength Enhancing strategic growth Building financial strength Strategic Alliance Firm A Resources Capabilities Core Competencies Firm B Resources Capabilities Core Competencies Combined Resources Capabilities Core Competencies Mutual interests in designing, manufacturing, or distributing goods or services 439 Table 9.1 Reasons for Strategic Alliances by Market Type Market Reason Slow-Cycle • Gain access to a restricted market • Establish a franchise in a new market • Maintain market stability (e.g., establishing standards) Fast-Cycle • Speed up development of new goods or services • Speed up new market entry • Maintain market leadership • Form an industry technology standard • Share risky R&D expenses • Overcome uncertainty Standard-Cycle • Gain market9–440 power (reduce industry © 2007 Thomson/Southovercapacity) Reasons for Strategic Alliances Market Reason Slow Cycle • Gain access to a restricted market • Establish a franchise in a new market • Maintain market stability (e.g., establishing standards) © 2007 Thomson/South- 9–441 Reasons for Strategic Alliances Market Reason (cont’d) Fast Cycle • Speed up development of new goods or service • Speed up new market entry • Maintain market leadership • Form an industry technology standard • Share risky R&D expenses • Overcome uncertainty © 2007 Thomson/South- 9–442 Reasons for Strategic Alliances Market Reason (cont’d) Standard Cycle © 2007 Thomson/South- • Gain market power (reduce industry overcapacity) • Gain access to complementary resources • Establish economies of scale • Overcome trade barriers • Meet competitive challenges from other competitors • Pool resources for very large capital projects • Learn new business techniques 9–443 Assessment of Corporate-Level Cooperative Strategies • Compared to business-level strategies – Broader in scope More complex – More costly • Can lead to competitive advantage and value when: – Successful alliance experiences are internalized. – The firm uses such strategies to develop useful knowledge about how to succeed in the future. © 2007 Thomson/South- 9–444 Competitive Risks of Cooperative Strategies • Partners may act opportunistically. • Partners may misrepresent competencies brought to the partnership. • Partners fail to make committed resources and capabilities available to other partners. • One partner may make investments that are specific to the alliance while its partner does © 2007 9–445 not. Thomson/South- FIGURE 9.4 © 2007 Thomson/South- Managing Competitive Risks in Cooperative Strategies 9–446 Managing Risks in Cooperative Strategies • Inadequate contracts • Misrepresentation of competencies Competitive Risks • Partners fail to use their complementary resources • Holding alliance partner’s specific investments hostage Risk and Asset Management Approaches Desired Outcome © 2007 Thomson/South- • Detailed contracts and management • Developing trusting relationships • Creating value 9–447 Managing Cooperative Strategies • Cost Minimization Management Approach – Have formal contracts with partners. – Specify how strategy is to be monitored. – Specify how partner behavior is to be controlled. – Set goals that minimize costs and to prevent opportunistic behavior by partners. © 2007 Thomson/South- 9–448 Managing Cooperative Strategies (cont’d) • Opportunity Maximization Approach – Maximize partnership’s value-creation opportunities – Learn from each other – Explore additional marketplace possibilities – Maintain less formal contracts, fewer constraints © 2007 Thomson/South- 9–449 Four Types of Strategic Alliances • Joint venture: two or more firms create an independent company by combining parts of their assets • Equity strategic alliance: partners who own different percentages of equity in a new venture • Nonequity strategic alliances: contractual agreements given to a company to supply, produce, or distribute a firm’s goods or services without equity sharing • Strategic cooperative network: multiple firms agree to form partnerships to achieve shared objectives 450 Unmet Expectations: Strategic Alliances and Joint Ventures • Improper partner – Each partner must bring desired complementary strengths to partnership – Strengths contributed by each should be unique • Partners must be compatible • Partners must trust one another Types of Alliances in supply chain • • • • Third-party logistics (3PL) Fourth-party logistics (4PL) Retailer-supplier partnerships (RSP) Distributor integration (DI) Third Party Logistics • What is 3PL? – Outside firms perform materials management and logistics functions – Long term commitments and multiple functions • What are the advantages of 3PL? – Focus on core strengths – Provides technological flexibility – Provides flexibility in • • • • geography workforce size additional services resource flexibility 3PL • Use of an outside company to perform all or part of the form’s materials management and product distribution function • Relationship vs. transactional based • Single-function vs. multi-function • Long-term vs. short-term commitments 3PL • Disadvantages – Loss of control – 3PL employees may interact with customers • 3PL’s address this with uniforms, logos, etc – Sharing of confidential info • Examples – Simmons and Ryder Integrated Logistics • On site rep, all logistics managed by Ryder, JIT manufacturing – SonicAir • Rapid delivery of spare parts • 67 warehouses • Sophisticated software for inventory and rapid delivery 4PL It refers to the evolution in logistics from suppliers focused on warehousing and transportation (third-party logistics providers) to suppliers offering a more integrated solution. Among other services, fourth-party logistics providers include supply chain management and solutions, change management capabilities, and value added services in their offering. Strategic Alliance: INITIATIVES • Quick Response: – Vendors receive POS data from retailers, and use this information to synchronize production and inventory activities at the supplier. – The retailer still prepares individual orders, but the POS data is used by the supplier to improve forecasting and scheduling. – Example: Milliken and Company: The lead time from order receipt at Milliken’s textile plants to final clothing receipt at several of the department stores involved was reduced from eighteen weeks down to three weeks. Strategic Alliance: INITIATIVES • Continuous Replenishment: Vendors receive POS data and use it prepare shipments at previously agreed upon intervals to maintain agreed to levels of inventory. – Wal-Mart, Kmart • Advanced Continuous Replenishment: Suppliers may gradually decrease inventory levels at the retailer’s store or distribution center as long as service levels are met. Inventory levels are thus continuously improved in a structured way. – Kmart Important Issues • Inventory ownership: – Retailer owns inventory – Supplier owns the goods until they are sold (consignment) • Why would a firm do this? • Performance measures: Fill rate, inventory level, inventory turns Important Issues • Confidentiality • Communication and cooperation – When First Brands started partnering with Kmart, Kmart often claimed that its supplier was not living up to its agreement to keep two weeks of inventory at all times. It turned out that this was due to the fact that the two companies employed different forecasting methods. Requirements for Effective Strategic Alliance • Advanced information systems • Top management commitment – Information must be shared – Power and responsibility within an organization might change (for example, contact with customers switches from sales and marketing to logistics) • Mutual trust – Information sharing – Management of the entire supply chain – Initial loss of revenues Steps in Strategic Alliance Implementation • Contractual negotiations – – – – Ownership Credit terms Ordering decisions Performance measures • Develop or integrate information systems • Develop effective forecasting techniques • Develop a tactical decision support tool to assist in coordinating inventory management and transportation policies Main Characteristics of Strategic Alliance Criteria Decision Inventory Types Maker Ownership Quick Retailer Retailer Response Continuous Contractually Agreed Either Replenishment to Levels Party Advanced Contractually agreed Either Continuous to & Continuously Party Replenishment Improved Levels VMI Vendor Either Party New Skills Employed by vendors Forecasting Skills Forecasting & Inventory Control Forecasting & Inventory Control Retail Management Strategic Network Strategic Center Firm 464 Strategic Network • A strategic network is a grouping of organizations that has been formed to create value through participation in an array of cooperative arrangements, such as alliances and joint ventures • The strategic network seeks to develop a competitive advantage in primary or support activities • A strategic center firm often manages the network 465 Strategic Network • strategic center firm engages in four primary tasks – strategic outsourcing (outsources and partners with more firms than do other network members) – competencies (supports each member’s efforts to develop core competencies that can benefit the network) 466 Strategic Network • strategic center firm engages in four primary tasks – technology (manages the development and sharing of technology-based ideas among network members) – race to learn (guides participants in efforts to form network-specific competitive advantages) 467 Business-Level Cooperative Complementary Strategies:Strategic Alliances Complementary Alliances • complementary strategic alliances are designed to take advantage of market opportunities by combining partner firms’ assets in complementary ways to create new value – these include distribution, supplier or outsourcing alliances where firms rely on upstream or downstream partners to build competitive advantage 468 Business-Level Cooperative Complementary Strategies:Strategic Alliances Marketing & Sales Procurement Technological Development Human Resource Mgmt. Firm Infrastructure Support Activities Service Outbound Logistics Operations Inbound Logistics Primary Activities • vertical complementary strategic alliance is formed between firms that agree to use their skills and capabilities in different stages of the value chain to create value for both firms • outsourcing is one example of this type of alliance Service Marketing & Sales Procurement Technological Development Human Resource Mgmt. Firm Infrastructure Supplier Support Activities Vertical Alliance Buyer Outbound Logistics Operations Inbound Logistics Primary Activities 469 Business-Level Cooperative Complementary Strategies:Strategic Alliances Buyer Buyer Horizontal Alliance Primary Activities Service Marketing & Sales Procurement Inbound Logistics Technological Development Operations Human Resource Mgmt. Outbound Logistics Firm Infrastructure Marketing & Sales Support Activities Service Procurement Technological Development Human Resource Mgmt. Firm Infrastructure Support Activities Potential Competitors Outbound Logistics Operations Inbound Logistics Primary Activities • horizontal complementary strategic alliance is formed between partners who agree to combine their resources and skills to create value in the same stage of the value chain • focus on long-term product development and distribution opportunities • the partners may become competitors 470 • requires a great deal of trust between the partners Business-Level Cooperative Competition Response Alliances Strategies: Complementary Alliances Competition Response Alliances • competition response strategic alliances occur when firms join forces to respond to a strategic action of another competitor • because they can be difficult to reverse and expensive to operate, competition response strategic alliances are primarily formed to respond to strategic rather than tactical actions 471 Business-Level Cooperative Uncertainty Reducing Alliances Strategies: Complementary Alliances Competition Response Alliances Uncertainty Reducing Alliances • uncertainty reducing strategic alliances are used to hedge against risk and uncertainty • these alliances are most noticed in fast-cycle markets • alliance may be formed to reduce the uncertainty associated with developing new product or technology standards 472 Business-Level Cooperative Competition Reducing Alliances Strategies: Complementary Alliances Competition Response Alliances Uncertainty Reducing Alliances Competition Reducing Alliances • competition reducing strategic alliances may be created to avoid destructive or excessive competition • explicit collusion exists when firms directly negotiate production output and pricing agreements in order to reduce competition (illegal) • tacit collusion exists when several firms in an industry indirectly coordinate their production and pricing decisions by observing each other’s competitive actions and 473 responses Business-Level Cooperative Competition Reducing Alliances Strategies: Complementary Alliances Competition Response Alliances Uncertainty Reducing Alliances • mutual forbearance is a form of tacit collusion in which firms avoid competitive attacks against those rivals they meet in multiple markets • competition reducing strategic alliances may require governments to find ways to permit collaboration among rivals without violating antitrust laws Competition Reducing Alliances 474 Implementing Business-Level Cooperative Strategies • Complementary business-level strategic alliances have the greatest probability of creating a sustainable competitive advantage • Strategic alliances designed to respond to competition and reduce uncertainty can create competitive advantages that may be more temporary in nature • Competition reducing strategy has lowest probability of creating a sustainable competitive advantage 475 Corporate-Level Cooperative Strategies • Corporate-level cooperative strategies are designed to facilitate product and/or market diversification - diversifying strategic alliance - synergistic strategic alliance - franchising • Diversifying alliances and synergistic alliances allow firms - to grow and diversify their operations - through a means other than a merger or acquisition 476 Corporate-Level Cooperative Diversifying Alliances Strategies: Diversifying Alliances • diversifying strategic alliance allows a firm to expand into new product or market areas without completing a merger or an acquisition • provides some of the potential synergistic benefits of a merger or acquisition, but with less risk and greater levels of flexibility • permits a “test” of whether a future merger between the partners would benefit both parties 477 Corporate-Level Cooperative Franchising Strategies: Diversifying Alliances Synergistic Alliances Franchising • franchising spreads risks and uses resources, capabilities, and competencies without merging or acquiring another company • contractual relationship concerning the franchise that is developed between two parties, the franchisee and the franchisor • an alternative to pursuing growth through mergers and acquisitions 478 Implementing Corporate-Level Cooperative Strategies • Corporate-level cooperative strategies are broader in scope, more complex and more costly than business-level strategies • Competitive advantages and value are created when those employing the strategies can also use them to develop useful knowledge about how to succeed in the future – valuable – rare – imperfectly imitable – nonsubstitutable 479 Distributed Strategic Network Main Strategic Strategic Center Center Firm Firm = Distributed Strategic Center Firms 480 Distributed Strategic Network • International cooperative strategies often require more complex networks • Many large multinational firms form distributed strategic networks with multiple regional strategic centers to manage their array of cooperative arrangements with partner firms • Breaking large networks into multiple manageably-sized networks helps to manage the complexity of maintaining many relationships 481 Network Cooperative Strategies • A network strategy is a cooperative strategy wherein several firms agree to form multiple partnerships to achieve shared objectives – stable strategic cooperative network – dynamic strategic cooperative network • Effective social relationships and interactions among partners are keys to a successful network cooperative strategy 482 Network Cooperative Strategies: Stable Strategic Cooperative Network Stable Strategic Cooperative Network • long term relationships that often appear in mature industries where demand is relatively constant and predictable • stable networks are built for exploitation of the economies available between firms 483 Network Cooperative Strategies: Dynamic Strategic Cooperative Network Stable Strategic Cooperative Network Dynamic Strategic Cooperative Network • arrangements that evolve in industries with rapid technological change leading to short product life cycles • primarily used to stimulate rapid, value-creating product innovations and subsequent successful market entries • purpose is often exploration of new ideas 484 Distributor Integration • Parts are shared across the distributor network • Specialized service requests are steered to appropriate dealers or distributors. • What is required? – – – – Trust Pledges Guarantees from the manufacturer Advanced information systems • Disadvantages – Incentives for dealers – are they giving away competitive advantages? – Skills and responsibilities are taken from some dealers/distributors. • Examples - Caterpillar, Okuma Competitive Risks with Cooperative Strategies Competitive Risks • Partner may act opportunistically • Misrepresentation of competencies brought to the partnership • Partner fails to make committed resources and capabilities available to its partners • Firm may make investments that are specific to the alliance while its partner does not 486 Managing Competitive Risks in Cooperative Strategies Competitive Risks Risk and Asset Management Approaches • Manage the balance between learning from partners while protecting knowledge and sources of competitive advantages from excessive learning by partners • Assign managerial responsibility for a firm’s cooperative strategies to a high-level executive or team • Specify resources and capabilities that will be shared and those that will not be shared (detailed contracts and monitoring) 487 • Develop trusting relationships Approaches for Managing Cooperative Strategies • cost minimization – formal contracts specify how the cooperative strategy is to be monitored and how partner behavior is to be controlled • opportunity maximization – maximize partnership’s value-creation opportunities – partners take advantage of unexpected opportunities to learn from each other and to explore additional marketplace possibilities – fewer formal, limiting, contracts 488 Managing Competitive Risks in Cooperative Strategies Competitive Risks Risk and Asset Management Approaches Desired Outcome • Creating value • Above-average returns 489 FACTORS INVOLVED IN COLLABORATIVE PARTNERSHIP • • • • • • • IT IS CRITICAL TO COMPANYS ACHIEVEMENT OF AN IMPORTANT OBJECTIVE IT HELPS BUILD SUSTAIN OR ENHANCE A CORE COMPETENCE OR COMPETITIVE ADVANTAGE eg RELIANCE INDUSTRIES – CAIRN ENERGY IN KRISHNA BASIN IT THWARTS COMPETITIVE THREATS eg MARUTI SUZUKI IT MITIGATES OPERATIONAL RISK BY SHARING RISKS NECESSARY APPROACH IN INDUSTRIES WHERE TECHNOLOGY DEVELOPMENTS ARE TAKING PLACE AT FURIOUS PACE MARUTI ALSO HAS LONG TERM STRATEGIC PARTNERSHIPS WITH ITS ANCILLARY SUPPLIERS eg JAY BHARAT MARUTI , SONA STEERING SO DOES TATA MOTORS THIS IS DONE TO ACHIEVE LOWER COSTS ,IMPROVE QUALITY AND ALIGN THE CAPACITY AND CAPABILITY OF THESE ANCILLARIES WITH THE LONG TERM OBJECTIVES OF THE COMPANY Advantages of Strategic Alliances • • • • Decrease required inventory levels Improve service levels Decrease work duplication Improve forecasts Disadvantages of Strategic Alliances • Expensive advanced technology is required. • Supplier/retailer trust must be developed. • Supplier responsibility increases. • Expenses at the supplier often increase. – Why? How can this be addressed? RISKS IN COLLABORATIONS • RISKS -WITHDRAWAL OF COLLABORATION OR COLLABORATOR CLOSES DOWN -INACTIVE ROLE OF COLLABORATOR ADDRESSAL -ALTERNATE STRATEGIC PLANS TO BE COINED -REDUCTION OF DEPENDENCE ON COLLABORATOR -NEED TO INVOLVE COLLABORATOR IN OPERATIONAL PART OF STRATEGY EXECUTION AND CONTROL Mergers and acquisitions Why M&A? Underlying Principle for M&A Transactions 2+2≠4 Additional Value of “Synergy” 495 Why M&A? Market Intensification: • Horizontal Integration – Buying a competitor Acquisition of equity stake in IBP by IOC AT&T merger into SBC enables the latter to access the corporate customer base and exploit the predictable cash flows typical of this telephony section • Market Extensions – New markets for Present products Maersk – Pipavav : strategic objective of investing in a container terminal in the west coast Bharat Forge’s acquisition of CDP (Germany) S&P’s proposed acquisition of CRISIL 496 Why M&A? Vertical Integration : Internalization of crucial forward or backward activities • Vertical Forward Integration – Buying a customer Indian Rayon’s acquisition of Madura Garments along with brand rights. Recently sold to Birla Group • Vertical Backward Integration – Buying a supplier IBM’s acquisition of Daksh 497 Why M&A? Diversification: Overcome Barriers to Entry • Product Extension: New product in Present territory P&G acquires Gillette to expand its product offering in the household sector and smooth out fluctuations in earning • Free-form Diversification: New product & New territories Indian Rayon’s acquisition of PSI Data Systems 498 Why M&A? Advantages: • Greater Economic Clout: Proposed merger of Petroleum PSUs(BPCL and Kochi Refinery) P&G merger with Gillette expected to correct balance of power between suppliers and retailers. • Economies of scale and Sharing Overheads: Size really does matter IOC & IBP • Synthesized capabilities Proposed merger of nationalized banks 499 M&A Different Perspectives Acquirer Majority/ Strategic Partner Minority/ Private Equity Investor Target Company 500 M&A TRANSACTION ISSUES: TARGET Due Diligence – Full Disclosures Due Diligence in Enterprise Risk Management related to contractual obligations ,penalty and arbitration clauses Titles to properties and assets especially land(Adarsh society case) Statutory dues Contingency liabilities for litigation Disputed statutory payments IPR protection 501 M&A TRANSACTION ISSUES: ACQUIRER Mode of Acquisition – Pure Equity (Existing or New); Equity & Preference; Special Class (Differential voting rights, dividends or otherwise) – Leveraged Acquisitions Corporate Governance – Related Party Transactions (past & going forward) Board Representation - Quorum (Inclusive) - Fiduciary Responsibility of Board v. Shareholders 502 M&A TRANSACTION ISSUES: ACQUIRER Deadlock Resolution – Majority/ Strategic Partner – Lenders Return on Investment – Cap on dividends to preference shares – Liquidation Preference Lock - in of Promoters – Enforceability of transferability restrictions 503 M&A TRANSACTION ISSUES: ACQUIRER Non – Compete payment – Payment for Goodwill to exiting partner Exit Options – Listing (Private Equity) 504 M&A REGULATORY FRAMEWORK TRANSACTION STRUCTURE •Companies Act •Income Tax Act •Stamp Acts •Competition Act LISTED COMPANIES •SEBI Regulations •Stock Exchange – Listing Agreement TRANS-BORDER TRANSACTIONS •Foreign Exchange Management Act 505 M&A OVERVIEW Mergers Spin Offs DEMERGER Acquisitions OTHERS ASSETS SHARES CONTROL SLUMP SALE 506 Classifications Mergers and Acquisitions 1. Horizontal • • 2. Vertical • • 3. A merger in which one firm acquires a supplier or another firm that is closer to its existing customers. Often in an attempt to control supply or distribution channels. Conglomerate • • 4. A merger in which two firms in the same industry combine. Often in an attempt to achieve economies of scale and/or scope. A merger in which two firms in unrelated businesses combine. Purpose is often to ‘diversify’ the company by combining uncorrelated assets and income streams Cross-border (International) M&As • A merger or acquisition involving a Canadian and a foreign firm a either the acquiring or target company. CHAPTER 15 – Mergers and 15 - 507 Value Creation Motivations for M&As Operating Synergies Operating Synergies 1. Economies of Scale • • • 2. Economies of Scope • 3. Reducing capacity (consolidation in the number of firms in the industry) Spreading fixed costs (increase size of firm so fixed costs per unit are decreased) Geographic synergies (consolidation in regional disparate operations to operate on a national or international basis) Combination of two activities reduces costs Complementary Strengths • CHAPTER 15 – Mergers and Combining the different relative strengths of the two firms creates a firm with both strengths that are complementary to one another. 15 - 508 Value Creation Motivations for M&A Efficiency Increases and Financing Synergies Efficiency Increases – New management team will be more efficient and add more value than what the target now has. – The combined firm can make use of unused production/sales/marketing channel capacity Financing Synergy – Reduced cash flow variability – Increase in debt capacity CHAPTER 15 – 15 - 509 Mergers and – Reduction in average issuing costs Managerial Motivations for M&As Managers may have their own motivations to pursue M&As. The two most common, are not necessarily in the best interest of the firm or shareholders, but do address common needs of managers 1. Increased firm size – – Managers are often more highly rewarded financially for building a bigger business (compensation tied to assets under administration for example) Many associate power and prestige with the size of the firm. 2. Reduced firm risk through diversification • • CHAPTER 15 – Mergers and Managers have an undiversified stake in the business (unlike shareholders who hold a diversified portfolio of investments and don’t need the firm to be diversified) and so they tend to dislike risk (volatility of sales and profits) M&As can be used to diversify the company and reduce volatility (risk) that might concern managers. 15 - 510 ACQUISITIONS Acquisition • Shares • Control Acquisition of Assets 511 Mergers Mergers Spin-offs • Demergers 512 Mergers STRUCTURE 1 A = Amalgamating Company: Ceases to Exist B = Amalgamated Company B receives all of A’s assets and liabilities Shareholders of A receive shares in B and maybe other benefits like debentures, cash A Transfer assets and liabilities B 513 Mergers STRUCTURE 2 A, B and C = Amalgamating Companies: Cease to exist D = Amalgamated Company: may or may not have existed before Merger All assets and liabilities of A, B and C transferred to D Shareholders in A,B and C get shares in D. A B D C 514 Spin-Offs STRUCTURE X Transfer of undertaking Y Y Company A Y Consideration in cash Company B or issue of shares Consideration is usually shares of Company B but maybe cash. Process may or may not be Court sanctioned. Salora spinning off Panasonic to Matsushita under s. 391 Scheme. Consideration in cash. 515 Demergers STRUCTURE Demergers are one type of spin-offs: under s. 391 A = Demerging Company B = Resulting Company: may or may not have existed earlier A transfers undertaking to B B issues shares to shareholders of A X Y Company A Transfers undertaking Y Shareholders of A Y Company B Issues shares 516 STATEGIES INVOLVED IN MERGERS AND ACQUISITIONS • COMBINING THE OPERATIONS OF TWO COMPANIES VIA MERGER OR ACQUISITION IS AN ATTRACTIVE STRATEGIC OPTION FOR ACHIEVING OPERATING ECONOMICS ,STRENGTHENING THE RESULTANT COMPANY COMPETENCES AND COMPETITIVENESS (ACQUISITION OF CMC BY TCS)(MERGER OF TIL WITH TCS) AND OPENING UP AVENUES OF NEW MARKET OPPORTUNITY • OWNERSHIP TIES ARE MORE PERMANENT THAN IN PARTNERSHIPS • OPERATIONS OF ACQUIRED/MERGED COMPANY TIGHTLY INTEGRATED WITH THE PRINCIPAL STATEGIES INVOLVED IN MERGERS AND ACQUISITIONS • AN ACQUISITION IS A COMBINATION IN WHICH ONE COMPANY , THE ACQUIRER PURCHASES AND ABSORBES THE OPERATIONS OF THE ACQUIRED • ACQUISITIONS ARE DONE WHEN A COMPANY WANTS TO DIVERSIFY AND THUS FINDS IT EASIER TO ACQUIRE A COMPANY WITH RELEVANT CORE COMPETENCE AND IN THE PROCESS ENHANCES ITS VALUE CHAIN • IN SOME CASES A COMPANY MAY BE ACQUIRED TO FACILITATE OPERATIONS IN A COUNTRY eg ACQUISITION OF COMPANIES BY TCS IN US STRATEGIES INVOLVED IN MERGERS AND ACQUISITIONS • CREATE COST EFFECTIVE OPERATIONS THRU COMBINED OPERATIONS • HAVE ACCESS TO MARKETS(PRODUCT AND GEOGRAPHIC) , TECHNOLOGIES AND HUMAN CAPITAL OF THE ACQUIRED COMPANY eg IBM CONSULTING ACQUIRING PWC CONSULTING ARM ACQUIRING AN EXISTING COMPANY • Most popular approach to diversification • Advantages – Quicker entry into target market – Hurdling certain entry barriers • Technological inexperience • Gaining access to reliable suppliers • Being of a size to match rivals in terms of efficiency & costs • Getting adequate distribution access Reasons for Acquisitions . REASONS FOR ACQUISITION • EXTEND VALUE CHAIN THROUGH VERTICAL INTEGRATION UPSTREAM(HLL ACQUIRED LAKME , TOMCO,BROOKE BOND TEA) , DOWNSTREAM(RIL ACQUIRES IPCL) OR THROUGH HORIZONTAL INTEGRATION (ADAG GROUP ACQUIRES ADLABS TO DIVERSIFY HORIZONTALLY INTO ENTERTAINMENT USING COMMN TECHNOLOGY) • INCREASE MARKET POWER AND ACCESS TO MARKETS • ENHANCE CORE COMPETENCE • EXTEND GEOGRAPHICAL PRESENCE eg TATA TEA • INCREASED DIVERSIFICATION Reasons for Acquisitions Increased Market Power Acquisition intended to reduce the competitive balance of the industry Alcan’s purchase of Pechiney (Ch. 1 opening case) Overcome Barriers to Entry Acquisitions overcome costly barriers to entry which may make “start-ups” economically unattractive Best Buys purchase of Future Shop Lower Cost & Risk of New Product Development Buying established businesses reduces risk of start-up ventures Pharmaceutical firms access new products through acquisitions of other drug manufacturers 8-523 Reasons for Acquisitions Increased Speed to Market Closely related to Barriers to Entry, allows market entry in a more timely fashion British Telcom’s Acquisition of Ireland’s East Telecom Increasing Diversification and Competitive Scope Firms may use acquisitions to restrict dependence on a single or a few products or markets Toronto’s Onex Corporation Avoiding Excessive Competition Firms may acquire businesses in which competitive pressures are less intense than in their core business The Jim Pattison Group of Companies © 2006 by Nelson, a division of 8-524 Thomson Canada Limited. Reasons for Acquisitions Learn & Develop New Capabilities Acquiring firms with new capabilities helps the acquiring firm to learn new knowledge and remain agile. Angiotech: a Vancouver based research lab. Reshape the firm’s competitive scope Reducing a firm’s dependence on specific markets alters the firm’s competitive scope. The Jim Pattison Group of Companies 8-525 © 2006 by Nelson, a division of Thomson Canada Limited. Acquisition Types Horizontal Acquisition The acquisition of a company competing in the same industry in which the acquiring firm competes. Vertical Acquisition A firm acquiring a supplier of distributor of one or more of it’s goods or services. Related Acquisition The acquisition of a firm in a highly related industry. Market Power Acquisitions Horizontal Acquisitions • Acquisition of a company in the same industry in which the acquiring firm competes increases a firm’s market power by exploiting: – Cost-based synergies – Revenue-based synergies • Acquisitions with similar characteristics result in higher performance than those with dissimilar characteristics 527 Market Power Acquisitions (cont’d) Horizontal Acquisitions Vertical Acquisitions • Acquisition of a supplier or distributor of one or more of the firm’s goods or services – Increases a firm’s market power by controlling additional parts of the value chain 528 Market Power Acquisitions (cont’d) Horizontal Acquisitions Vertical Acquisitions Related Acquisitions • Acquisition of a company in a highly related industry – Because of the difficulty in implementing synergy, related acquisitions are often difficult to implement 529 Reasons for Acquisitions Increased market power Learning & developing new capabilities Overcoming entry barriers Lower risk than developing new products Increased diversification Reshaping the firm’s competitive scope Market & Organizational Scope Development Faster, lower Concerns Concerns cost new product development Acquisitions Acquisitions: Increased Diversification • Using acquisitions to diversify a firm is the quickest and easiest way to change its portfolio of businesses • Both related diversification and unrelated diversification strategies can be implemented through acquisitions • The more related the acquired firm is to the acquiring firm, the greater is the probability that the acquisition will be successful 531 Acquisitions: Reshaping the Firm’s Competitive Scope • An acquisition can: – Reduce the negative effect of an intense rivalry on a firm’s financial performance – Reduce a firm’s dependence on one or more products or markets • Reducing a company’s dependence on specific markets alters the firm’s competitive scope 532 Acquisitions: Learning and Developing New Capabilities • An acquiring firm can gain capabilities that the firm does not currently possess: – Special technological capability – Broaden a firm’s knowledge base – Reduce inertia • Firms should acquire other firms with different but related and complementary capabilities in order to build their own knowledge base 533 Attributes of friendly Acquisitions These allow for faster & more effective integration Attributes Acquired firm’s resources are complementary to acquirer’s core bus. Acquirer conducts negotiations carefully & deliberately with target Acquiring firm has financial slack (cash or favourable debt position) Merged firm maintains moderate, not high, levels of debt Has experience with change and is flexible and adaptable Sustained and consistent emphasis on R&D and innovation Results Likely synergies and competitive advantage by maintaining strengths Strongest complementarities are acquired & overpayment is avoided Financing (debt or equity) is easier and less costly to obtain Lower finance cost & risk avoidance of trade-offs associated with hi debt Faster & more effective integration facilitates achievement of synergy Maintain long-term competitive advantage in markets Friendly Acquisition The acquisition of a target company that is willing to be taken over. Usually, the target will accommodate overtures and provide access to confidential information to facilitate the scoping and due diligence processes. CHAPTER 15 – Mergers and 15 - 535 Friendly Acquisition Friendly Acquisition Information memorandum Confidentiality agreement Main due diligence Sign letter of intent Approach target CHAPTER 15 – Mergers and 15 - 536 Ratified Final sale agreement Hostile Takeovers A takeover in which the target has no desire to be acquired and actively rebuffs the acquirer and refuses to provide any confidential information. The acquirer usually has already accumulated an interest in the target (20% of the outstanding shares) and this preemptive investment indicates the strength of resolve of the acquirer. CHAPTER 15 – Mergers and 15 - 537 Hostile Takeovers The Typical Process The typical hostile takeover process: 1. 2. 3. 4. Slowly acquire a toehold (beach head) by open market purchase of shares at market prices without attracting attention. File statement with OSC at the 10% early warning stage while not trying to attract too much attention. Accumulate 20% of the outstanding shares through open market purchase over a longer period of time Make a tender offer to bring ownership percentage to the desired level (either the control (50.1%) or amalgamation level (67%)) - this offer contains a provision that it will be made only if a certain minimum percentage is obtained. During this process the acquirer will try to monitor management/board reaction and fight attempts by them to put into effect shareholder rights plans or to launch other defensive tactics. CHAPTER 15 – Mergers and 15 - 538 Hostile Takeovers Capital Market Reactions and Other Dynamics Market clues to the potential outcome of a hostile takeover attempt: 1. Market price jumps above the offer price • • 2. Market price stays close to the offer price • 3. The offer price is fair and the deal will likely go through Little trading in the shares • 4. A competing offer is likely or The bid price is too low A bad sign for the acquirer because shareholders are reluctant to sell. Great deal of trading in the shares • Large numbers of shares being sold from normal investors to arbitrageurs (arbs) who are, themselves building a position to negotiate an even bigger premium for themselves by coordinating a response to the tender offer. CHAPTER 15 – Mergers and 15 - 539 Attributes of Effective Acquisitions + Complementary Assets or Resources Buying firms with assets that meet current needs to build competitiveness + Friendly Acquisitions Friendly deals make integration go more smoothly + Careful Selection Process Deliberate evaluation and negotiations is more likely to lead to easy integration and building synergies + Maintain Financial Slack Provide enough additional financial resources so that profitable projects would not be foregone Attributes of Effective Acquisitions + Low-to-Moderate Debt Merged firm maintains financial flexibility + Flexibility Has experience at managing change and is flexible and adaptable + Emphasize Innovation Continue to invest in R&D as part of the firm’s overall strategy Problems with Acquisitions Acquisitions Integration difficulties Administrative Strategic Difficulties Difficulties Large or extraordinary debt Mgmt. over focus on acquisitions Resulting firm is too large Inadequate evaluation of target Inability to achieve synergy Too much diversification Problems in Achieving Success Reasons for Acquisitions Increased market power Integration difficulties Overcome entry barriers Inadequate evaluation of target Cost of new product development Large or extraordinary debt Increased speed to market Acquisitions Inability to achieve synergy Lower risk compared to developing new products Too much diversification Increased diversification Managers overly focused on acquisitions Avoid excessive competition Too large Problems with Acquisitions Integration Difficulties Differing financial and control systems can make integration of firms difficult Example: Intel’s acquisition of DEC’s semiconductor division Inadequate Evaluation of Target “Winners Curse” bid causes acquirer to overpay for firm Example: Marks and Spencer’s acquisition of Brooks Brothers Large or Extraordinary Debt Costly debt can create onerous burden on cash outflows Example: AgriBioTech’s acquisition of dozens of small seed firms Problems with Acquisitions Inability to Achieve Synergy Justifying acquisitions can increase estimate of expected benefits Example: Quaker Oats and Snapple Overly Diversified Acquirer doesn’t have expertise required to manage unrelated businesses Example: GE--prior to selling businesses and refocusing Managers Overly Focused on Acquisitions Managers may fail to objectively assess the value of outcomes achieved through the firm’s acquisition strategy Example: Ford and Jaguar Too Large Large bureaucracy reduces innovation and flexibility RISKS IN ACQUISITIONS • RISKS -INADEQUATE DUE DILIGENCE -EFFECTS ON EMPLOYEES DURING TAKEOVER ADDRESSAL -ASSESS REAL WORTH OF ASSETS , SYSTEMS AND HUMAN CAPITAL -EMPLOYEE CONFIDENCE BUILDING AND INVOLVEMENT REQUIRED - CULTURAL DIFFERENCES -NEED TO ADDRESS CULTURAL ISSUES ESPECIALLY IN A CASE WHERE A PUBLIC SECTOR COMPANY IS ACQUIRED BY A PRIVATE SECTOR COMPANY Types of Takeovers General Guidelines Takeover – The transfer of control from one ownership group to another. Acquisition – The purchase of one firm by another Merger – – – The combination of two firms into a new legal entity A new company is created Both sets of shareholders have to approve the transaction. Amalgamation – – A genuine merger in which both sets of shareholders must approve the transaction Requires a fairness opinion by an independent expert on the true value of the firm’s shares when a public minority exists CHAPTER 15 – Mergers and 15 - 547 The Takeover Bid Process Moving Beyond the 20% Threshold • Takeover circular sent to all shareholders. • Target has 15 days to circulate letter to shareholders with the recommendation of the board of directors to accept/reject. • Bid must be open for 35 days following public announcement. • Shareholders tender to the offer by signing authorizations. • A Competing bid automatically increases the takeover window by 10 days and shareholders during this time can with drawn authorization and accept the competing offer. CHAPTER 15 – Mergers and 15 - 548 OUTSOURCING • OUTSOURCING INVOLVES A CONSCIOUS DECISION TO FOREGO CERTAIN ACTIVITIES IN A VALUE CHAIN AND INSTEAD GET THEM TO BE PERFORMED BY 3RD PARTIES WHO ARE SPECIALISTS • DEFINITIVE DIFFERENCE BETWEEN SUB CONTRACTING AND OUTSOURCING AND STRATEGIC SOURCING • OUTSOURCING ENABLES A COMPANY TO CONCENTRATE ON ITS CORE COMPETENCES THAT ARE CRITICAL TO ITS COMPETITIVE AND FINANCIAL SUCCESS eg CORE PROCESSES (FACE CUSTOMER , REVENUE EARNING)AND SUPPORTIVE PROCESSES(NOT DIRECTLY REVENUE EARNING) • CASE OF HUL MARKETING IS THEIR CORE COMPETENCE. MFG IS OUTSOURCED.HR IS OUTSOURCED TO ACCENTURE OUTSOURCING • COLLABORATIVE PARTNERSHIPS ARE REPLACING PRICE RELATED RELATIONSHIPS WITH SUPPLIERS eg MARUTI OR TATA MOTORS RELATIONSHIP WITH THEIR ANCILLARIES • SWITCHING SUPPLIERS WAS A COMMON PRACTICE IN THE PAST • HOWEVER TODAY COMPANIES ARE ENTERING INTO LONG TERM RELATIONSHIPS WITH SUPPLIERS AND DEVELOPING THEIR CAPABILITIES TO MATCH THEIR LONG TERM OBJECTIVES Outsourcing • The purchase of a value-creating activity from an external supplier – Few organizations possess the resources and capabilities required to achieve competitive superiority in all primary and support activities. • By performing fewer capabilities: – A firm can concentrate on those areas in which it can create value. – Specialty suppliers can perform outsourced 3–551 capabilities more efficiently. Strategic Rationales for Outsourcing • Improving business focus – Helps a company focus on broader business issues by having outside experts handle various operational details. • Providing access to world-class capabilities – The specialized resources of outsourcing providers makes world-class capabilities available to firms in a wide range of applications. 3–553 Strategic Rationales for Outsourcing (cont’d) • Accelerating re-engineering benefits – Achieves re-engineering benefits more quickly by having outsiders—who have already achieved world-class standards—take over process. • Sharing risks – Reduces investment requirements and makes firm more flexible, dynamic and better able to adapt to changing opportunities. 3–554 • Freeing resources for other purposes ADVANTAGES OF OUTSOURCING • AN ACTIVITY CAN BE PERFORMED BETTER OR MORE ECONOMICALLY BY OUTSIDE SPECIALISTS • ACTIVITY IS NOT ANYMORE OR IS NOT THE CORE COMPETENCE OF THE COMPANY eg SELLING OF TOMCO AND LAKME BY TATA TO HLL. ACTIVITY IS ALSO NOT CRUCIAL TO THE FIRMS ABILITY TO ACHIEVE SUSTAINABLE COMPETITIVE ADVANTAGE .OTHER ACTIVITIES OUTSOURCED INCLUDE IT APPLICATIONS ,DISTRIBUTOR BASED SALES ,PRODUCT SERVICING etc • REDUCES COMPANY RISK EXPOSURE TO CHANGING MARKET EXPECTATIONS • IMPROVES QUALITY OF COMPANY CORE PROCESSES AND MAKES THEM AGILE AND FLEXIBLE • ENABLES CONSOLIDATION OF HUMAN CAPITAL THRU ENHANCED CORE COMPETENCE Outsourcing Issues • Seeking greatest value – Outsource only to firms possessing a core competence in terms of performing the primary or supporting the outsourced activity. • Evaluating resources and capabilities – Do not outsource activities in which the firm itself can create and capture value. • Environmental threats and ongoing tasks – Do not outsource primary and support 3–556 activities that are used to neutralize Outsourcing Issues (cont’d) • Nonstrategic team resources – Do not outsource capabilities critical to the firm’s success, even though the capabilities are not actual sources of competitive advantage. • Firm’s knowledge base – Do not outsource activities that stimulate the development of new capabilities and competencies. 3–557 RISKS IN OUTSOURCING • SUPPLIER IS LOWEST COST BUT DOES NOT HAVE CAPACITY OR CAPABILITY TO SERVE DYNAMICALLY CHANGING REQUIREMENTS • FINANCIALLY NOT SOUND • DOES NOT HAVE GOOD LABOUR RELATIONS • TECHNOLOGY OBSOLESCENCE • POOR INFRA STRUCTURE • VIOLATES REGULATORY REQUIREMENTS SUCH AS SA 8000 • RISK OF DISCLOING PATENT DESIGNS TO OTHERS DIVESTITURE & LIQUIDATION STRATEGIES • Situations arise when one or more subsidiaries have to be sold or shut down – Misfits cannot be completely avoided – Industry attractiveness changes over time – Subpar performance of some subsidiaries is bound to occur – Diversification appearing sensible based on strategic fit lacks compatibility of values essential to CULTURAL FIT Divestiture • Spin off • Sale STRATEGIC ACTIVITIES OF ADITYA BIRLA GROUP What is franchising? “A franchise operation is a contractual relationship between the franchisor and franchisee in which the franchisor offers or is obliged to maintain a continuing interest in the business of the franchisee in such areas as know-how and training; wherein the franchisee operates under a common trade name, format and/or procedure owned or controlled by the franchisor, and in which the franchisee has or will make a substantial capital investment in his business from his own resources.” - Definition by International Franchise Association What is franchising? • Legal and commercial arrangement concerning the successful business of a franchisor • Use of franchisor’s trade name, format, system and/or procedure under licence • Means to raise capital and expand quickly • Assistance to franchisee – Marketing, management, standards specifications advertising, store design, • Payment by franchisee by way of royalty, licensee fee or other means What is franchising? Franchising is more than distributorship – Extends to an entire operation or method of business – Greater assistance, control and longer duration – Distributor merely re-sells products to retailers or customers Who is a franchise? • License to use an established brand • Use is very restrictive – many rules to be followed. • Provide a proven successful business format • Entrepreneurship for people that are not particularly entrepreneurial. TYPES OF FRANCHISE • 3 main types of franchise: – Product distribution franchise; – Business format franchise; and – Management franchise. PRODUCT DISTRIBUTION FRANCHISES • A product distribution franchise model is very much like a supplier-dealer relationship. • Typically, the franchisee merely sells the franchisor’s products. However, this type of franchise will also include some form of integration of the business activities. PRODUCT DISTRIBUTION FRANCHISES Produces the syrup concentrate Sells the syrup concentrate FRANCHISEE Produces the final drink Retail Stores Restaurants & F&B Outlets Vending Machine Operators BUSINESS FORMAT FRANCHISING • In a business format franchise, the integration of the business is more complete. • The franchisee not only distributes the franchisor’s products and services under the franchisor’s trade mark, but also implements the franchisor’s format and procedure of conducting the business. MANAGEMENT FRANCHISE • A form of service agreement. • The franchisee provides the management expertise, format and/or procedure for conducting the business. WHY FRANCHISE? • Franchises offer important pre-opening support: – site selection – design and construction – financing (in some cases) – training – grand-opening program WHY FRANCHISE? • Franchises offer ongoing support – training – national and regional advertising – operating procedures and operational assistance – supervision and management support – increased spending power, access to bulk purchasing and economies of scale Common considerations of franchisors • • • • Developing franchise concept Market research Familiarity with local laws and regulations Providing training and support to franchisees Common considerations of franchisors • • • • Criteria for choosing franchisees Control over franchisees Supply of products/materials to franchisees Intellectual property rights issues, e.g. trade mark registration Common considerations of franchisees • Demand • Profitability of franchise, and length of time required to recoup investment • Track record of franchisor • Support rendered to other franchisees Common considerations of franchisees • Experience and profitability of other franchisees • Existence of competition • Capital required • Demands of franchisor, e.g. income projections, deadline to open more franchise outlets Franchisor–Franchisee relationship • • • • • • • Regulated by contract which usually covers: Initial fee Royalty fee/Management fee Capital required from franchisee Territory/Area of operation Duration of license and renewal IPRs Termination BE CAREFUL • The franchisee is not completely independent. • In addition to the initial franchise fee, franchisee must pay ongoing royalties and advertising fees. • Franchisee must be able to balance restrictions and support provided by the franchisor with their own ability to manage the business BE CAREFUL • A damaged image or franchise system can result if other franchisees perform poorly or the franchisor has financial problems. • The duration of a franchise is usually limited and the franchisee may have little or no say concerning termination Common Mistakes of Prospective Franchisees • Not reading, understanding and/or asking questions about the franchisee agreement and other legal documents • Not understanding the responsibilities of a franchisee and the rights and obligations of a franchisor • Not seeking sound legal and financial advice • Not verifying oral representations of Common Mistakes of Prospective Franchisees • Not analyzing the local market in advance • Not analyzing the competition • Not making thorough due diligence of the franchisor • Not choosing the right location Advantages of Franchising • • • • • • • • Buying a name/reputation Established markets Technical/management assistance Standardized procedures Quality standards Selection of location Facility design Quicker cash flow Disadvantages of franchising • • • • • • • • • Loss of independence High initial fees High royalties and advertising allowances Contractual restrictions Inapplicable advertising Termination clauses Not receiving promised help Unsuitable products Lack of competitive advantage The Franchisee’s Perspective Things to Look For Proven operating location Credible top management Skilled field support staff A trade identity A proprietary operations manual Effective training programs Disclosure and offering documents Plans for advertising, marketing, PR and promotion A communications system Sufficient capital © 1999 by Prentice Hall 1-15 Corporate Governance in Strategic Management 585 Corporate Governance • Corporate governance is: – A relationship among stakeholders used to determine and control the strategic direction and performance of organizations – Concerned with making strategic decisions more effectively – Used to establish order between a firm’s owners and its top-level managers whose interests may be in conflict 586 Internal Governance Mechanisms • Ownership Concentration – Relative amounts of stock owned by individual shareholders and institutional investors • Board of Directors – Individuals responsible for representing the firm’s owners by monitoring top-level managers’ strategic decisions 587 Separation of Ownership and Managerial Control • Basis of the Modern Corporation – Shareholders purchase stock, becoming residual claimants – Shareholders reduce risk by holding diversified portfolios – Professional managers are contracted to provide decision making 588 Separating Ownership and Managerial Control • Modern public corporation form leads to efficient specialization of tasks: – Risk bearing by shareholders – Strategy development and decision making by managers 589 Governance Mechanisms Ownership Concentration (a) • Large block shareholders have a strong incentive to monitor management closely: – Their large stakes make it worth their while to spend time, effort and expense to monitor closely – They may also obtain Board seats which enhances their ability to monitor effectively seats 590 Governance Mechanisms (cont’d) Ownership Concentration (b) • The increasing influence of institutional owners (stock mutual funds ) – Have the size (proxy voting power) and incentive to discipline ineffective top-level managers – Can affect the firm’s choice of strategies 591 Governance Mechanisms (cont’d) Ownership Concentration (c) • Shareholder activism: – Shareholders can convene to discuss corporation’s direction – If a consensus exists, shareholders can vote as a block to elect their candidates to the board – Proxy fights – There are limits on shareholder activism available to institutional owners in responding to activists’ tactics 592 Governance Mechanisms (cont’d) Ownership Concentration Board of Directors (a) • Board of directors – Group of elected individuals that acts in the owners’ interests to formally monitor and control the firm’s top-level executives • Board has the power to: – Direct the affairs of the organization – Punish and reward managers 593 Governance Mechanisms (cont’d) Ownership Concentration Board of Directors (b) • Composition of Boards: – Insiders: the firm’s CEO and other top-level managers – Related Outsiders: individuals uninvolved with day-to-day operations, but who have a relationship with the firm – Outsiders: individuals who are independent of the firm’s day-today operations and other relationships 594 Governance Mechanisms (cont’d) Ownership Concentration Board of Directors (c) • Criticisms of Boards of Directors include: – Too readily approve managers’ selfserving initiatives – Are exploited by managers with personal ties to board members – Are not vigilant enough in hiring and monitoring CEO behavior – Lack of agreement about the number of and most appropriate role of outside directors 595 Governance Mechanisms (cont’d) Ownership Concentration Board of Directors (d) • Enhancing the effectiveness of boards and directors: – More diversity in the backgrounds of board members – Stronger internal management and accounting control systems – More formal processes to evaluate the board’s performance – Adopting a “lead director” role – Changes in compensation of directors 596 Governance Mechanisms (cont’d) Ownership Concentration • Forms of compensation: – Salary, bonuses, long-term performance incentives, stock awards, stock options Board of Directors • Factors complicating executive compensation: Executive Compensation (a) – Strategic decisions by top-level managers are complex, non-routine and affect the firm over an extended period – Other variables affecting the firm’s performance over time 597 Governance Mechanisms (cont’d) Ownership Concentration Board of Directors Executive Compensation (b) • Limits on the effectiveness of executive compensation: – Unintended consequences of stock options – Firm performance not as important than firm size – Balance sheet not showing executive wealth – Options not expensed at the time they are awarded 598 Governance Mechanisms (cont’d) Ownership Concentration • Individuals and firms buy or take over undervalued corporations Board of Directors – Ineffective managers are usually replaced in such takeovers Executive Compensation Market for Corporate Control (a) • Threat of takeover may lead firm to operate more efficiently • Changes in regulations have made hostile takeovers difficult 599 Governance Mechanisms (cont’d) Ownership • Managerial defense tactics Concentration Board of Directors Executive Compensation Market for Corporate Control (b) increase the costs of mounting a takeover • Defense tactics may require: – Asset restructuring – Changes in the financial structure of the firm – Shareholder approval • Market for corporate control lacks the precision of internal 600 governance mechanisms Governance Mechanisms and Ethical Behavior It is important to serve the interests of the firm’s multiple stakeholder groups! Capital Market Stakeholders • Shareholders in this group are viewed as the most important stakeholder group • The focus of governance mechanisms is to control managerial decisions to assure shareholder interests • Interests of shareholders is served by the Board of Directors 601 Governance Mechanisms and Ethical Behavior (cont’d) It is important to serve the interests of the firm’s multiple stakeholder groups! Capital Market Stakeholders Product Market Stakeholders • Product market stakeholders (customers, suppliers and host communities) and organizational stakeholders may withdraw their support of the firm if their needs are not met, at least minimally 602 Governance Mechanisms and Ethical Behavior (cont’d) It is important to serve the interests of the firm’s multiple stakeholder groups! Capital Market Stakeholders Product Market Stakeholders Importance of maintaining ethical behavior is seen in the examples of Enron Organizational Stakeholders 603 The Role of Top Management • Top management is primarily responsible for the strategic management of the firm – Responsible for every decision & action of every organizational employee – Responsible for providing effective strategic leadership – Strategic leadership is the ability to anticipate, envision, maintain flexibility, think strategically, and work with others in an organization to initiate changes that will create a viable and valuable future for the organization The Role of Top Management • The CEO, must perform two functions crucial to the SM of corporations: – Provide executive leadership • Articulate a strategic vision for the firm • Present a role for other to identify with and follow (e.g., behavior, attitude, values, etc) • Communicate high performance standards & show confidence in followers’ abilities to meet these standards – Manage the strategic planning process • Evaluate division/units to make sure they fit together into an overall corporate plan The Role of Top Management • The whole top management’s strategic leadership responsibilities involves – Determining the firm’s mission, vision, and objectives – Exploiting & maintaining the firm’s resources, core competencies & capabilities – Creating & sustaining a strong organizational culture – Emphasizing ethical decision & practices – Establishing appropriately balance organizational control The Role of Other Strategic Managers and Organizational Employees • Strategic Planners – Identify & analyze company-wide strategic issues & suggest corporate strategic initiatives to top management – Work as facilitators with divisions/units to guide then through the strategic planning process The Role of Other Strategic Managers and Organizational Employees • Strategic Managers (Middle- & Lowerlevel managers) & Supervisors – Direct their workers in the strategy implementation process (i.e., putting the strategies into action at various functional areas) – Strategy evaluation • Other Employees – Strategy evaluation through open book management • Sharing of firm’s books or F/S with employees to see implications of their work Strategic Entrepreneurship • Strategic Entrepreneurship – Taking entrepreneurial actions using a strategic perspective. – Engaging in simultaneous opportunity seeking and competitive advantage seeking behaviors. – Designing and implementing entrepreneurial strategies to create wealth. • Strategic entrepreneurship actions can be taken by: – Individuals and corporations Strategic Entrepreneurship and Innovation • Entrepreneurship is concerned with: – The discovery of profitable opportunities – The exploitation of profitable opportunities • Firms that encourage entrepreneurship are: – Risk takers. – Committed to innovation. – Proactive in creating opportunities rather than waiting to respond to opportunities created by others. Entrepreneurial Opportunities • Entrepreneurial Opportunities – Conditions in which new products or services can satisfy a need in the market. • Entrepreneurs or entrepreneurial managers must be able to: – Identify opportunities not perceived by others. – Take actions to exploit the opportunities. – Establish a competitive advantage. Entrepreneurs • Entrepreneurs – Individuals acting independently or as part of an organization who create a new venture or develop an innovation, take risks entering innovations into the marketplace. – Can be any manager or employee in an organization. • Entrepreneurial capabilities include: – – – – Intellectual capital Entrepreneurial mind-set Transfer of entrepreneurial competence to others Effective human capital • International Entrepreneurship Entrepreneurship can: – Fuel economic growth – Create employment – Generate prosperity for citizens • There is a strong positive relationship between the rate of entrepreneurial activity and economic development in a nation. International Entrepreneurship (cont’d) • There must be a balance (in the culture) between – Individual initiative and – The spirit of cooperation and group ownership of innovation. • Successful entrepreneurial firms: – Provide appropriate autonomy. – Offer incentives for individual initiative. – Promote cooperation and group ownership of an innovation. MICHEAL PORTERS COMPETITIVE STRATEGIES WHAT IS COMPETITIVE STRATEGY • • • • • COMPETITION IS AT THE CORE OF A FIRM SUCCESS OR FAILURE COMPETITION DETERMINES THE APPROPRIATENESS OF FIRM ACTIVITIES THAT CAN CONTRIBUTE TO ITS PERFORMANCE SUCH AS INNOVATIONS. COMPETITIVE STRATEGY AIMS TO ESTABLISH A PROFITABLE AND SUSTAINABLE POSITION IN THE INDUSTRY COMPETITION CHOICE OF COMPETITIVE STRATEGY IS BASED ON THE ATTRACTIVENESS OF THE INDUSTRY FOR LONG TERM PROFITABILITY AND THE FACTORS THAT DETERMINE THE PROFITABILITY IN MOST INDUSTRIES SOME FIRMS ARE MORE PROFITABLE THAN OTHERS REGARDLESS OF THE AVERAGE PROFITABILITY OF THE INDUSTRY eg WHILE IN THE TWO WHEELER SEGMENT THE INDUSTRY AVERAGE HAS BEEN IN UNITARY FIGURES HERO HONDA HAD POSTED DOUBLE DIGIT PROFIT AND IN 2008-2009 WHEN MANY COMPANIES IN THE SEGMENT POSTED LOSSES OR REGRESSIVE RESULTS HERO HONDA ACTUALLY INCREASED ITS PROFITS FROM 11% TO 13% WHAT IS COMPETITIVE STRATEGY • • • • • COMPETITIVE STRATEGY IS A COMBINATION OF ENDS(GOALS) FOR WHICH THE FIRM IS STRIVING AND THE MEANS(POLICIES) BY WHICH IT SEEKS TO BE THERE STRATEGY MAY BE EXPLICITLY DEVELOPED THRU A PLANNING PROCESS OR MAY HAVE EVOLVED IMPLICITLY THRU THE ACTIVITIES OF VARIOUS FUNCTIONAL DEPTS OF THE FIRM. LEFT TO ITS OWN DEVICES EACH FUNCTIONAL DEPT WILL PURSUE ACTIVITIES DICTATED BY ITS PROFESSIONAL ORIENTATION OF THOSE IN CHARGE eg FINANCE WILL LOOK FOR BOTTOM LINE ;SALES WILL LOOK FOR TOP LINE SUM OF THESE DEPT APPROACHES RARELY EQUALS OPTIMIZED STRATEGY. NEED FOR A PROCESS OF UNIFORM AND EXPLICIT PROCESS OF STRATEGY FORMULATION TO ENSURE POLICIES AND ACTIONS OF FUNCTIONAL DEPTS ARE COORDINATED AND DIRECTED TOWARDS THE ACHIEVEMENT OF COMMON SET OF GOALS NEED TO SEEK SOLUTIONS TO ISSUES SUCH AS WHAT IS DRIVING COMPETITION IN MY INDUSTRY (MKT WORTH AND CSF) ;WHAT INDUSTRIES SHOULD I ENTER;WHAT ACTIONS ARE COMPETITORS LIKELY TO TAKE AND WHAT IS THE BEST RESPONSE; DIMENSIONS OF COMPETITIVE STRATEGY • COMPANY STRATEGY FOR COMPETING IN AN INDUSTRY CAN DIFFER THRU -SPECIALIZATION – DEGREE TO WHICH IT FOCUSES EFFORTS IN TERMS OF TARGET CUSTOMER SEGMENTS AND GEOGRAPHIC MARKETS SERVED -BRAND IDENTIFICATION -DEGREE TO WHICH IT SEEKS BRAND IDENTIFICATION RATHER THAN COMPETITION BASED ON PRICE OR OTHER VARIABLES. BRAND IDENTIFICATION CAN BE ACHIEVED THRU ADVERTISING AND OTHER MEANS -CHANNEL SELECTION –CHOICE OF DISTRIBUTION CHANNELS RANGING FROM COMPANY OWNED eg PETROL PUMPS TO DISTRIBUTOR MODEL DRIVEN DIMENSIONS OF COMPETITIVE STRATEGY • COMPANY STRATEGY FOR COMPETING IN AN INDUSTRY CAN DIFFER THRU PRODUCT QUALITY –LEVEL OF PRODUCT QUALITY ; IN TERMS OF RAW MATERIAL USED,SPECIFICATIONS,ADHERENCE TO TOLERANCES (JAPANESE DO NOT KNOW WHAT TOLERANCE IS. CASE OF MFG OF TOYOTA SPARE PART DISTRIBUTOR IN U.S. WHERE COMPANY PLACED ORDER ON TOYOTA FOR DELIVERY OF 1000 NOS OF A CERTAIN COMPONENT AND PO READ 1000 QTY 0.3% AQL. DURING DELIVERY THE JAPANESE COMPANY REPLIED THAT AS PER PO 1000 PARTS ARE DELIVERED VIDE AWB NO XYZ. BUT AQL NOT UNDERSTOOD BY THE COMPANY. IN ORDER TO COMPLY WITH PO TERMS 3 EXTRA PIECES WHICH WERE ORIGINALLY GOOD PIECES WERE HAMMERED OUT OF SHAPE TO CONORM TO DELIVERY OF 3 NON CONFORMING PARTS IN 1000 DIMENSIONS OF COMPETITIVE STRATEGY • COMPANY STRATEGY FOR COMPETING IN AN INDUSTRY CAN DIFFER THRU -TECHNOLOGICAL LEADERSHIP –ESTABLISH TECHNOLOGICAL LEADERSHIP BY BEING THE LEADER IN INTRODUCING NEW TECHNOLOGY eg SHOP FLOOR AUTOMATION -VERTICAL INTEGRATION – EXTENT OF VALUE ADD REFLECTED IN THE BACKWARD AND FORWARD INTEGRATION INCLUDING CAPTIVE DOWNSTREAM DISTRIBUTION AND RETAILING CHANNELS -DIFFERENTIATED SERVICES – EXTENT TO WHICH COMPANY PROVIDES ANCILLARY SERVICES FOR ITS PRODUCT LINES MICHEAL PORTERS COMPETITIVE STRATEGY The Competitive Environment • Segments of the competitive environment include: – Competitors – Customers – Suppliers • Sometimes called the task or industry environment • Porter’s five forces model Competitive Environment Porters Five Forces of Competition Model 2–623 Porter’s Five Forces Model The purpose of Five-Forces Analysis • The five forces are environmental forces that impact on a company’s ability to compete in a given market. • The purpose of five-forces analysis is to diagnose the principal competitive pressures in a market and assess how strong and important each one is. Threat of New Entrants: Barriers to Entry • • • • • • • • Economies of scale Product differentiation Capital requirements Switching costs Access to distribution channels Cost disadvantages independent of scale Government policy Expected retaliation2–626 Barriers to Entry (cont’d) • Product differentiation • Capital Requirements – Unique products – Physical facilities – Customer loyalty – Inventories – Products at competitive prices – Marketing activities – Availability of capital Barriers to Entry (cont’d) • Switching Costs – One-time costs customers incur when they buy from a different supplier – New equipment – Retraining employees – Psychic costs of ending a relationship 2–628 Barriers to Entry (cont’d) • Access to Distribution Channels – Stocking or shelf space – Price breaks – Cooperative advertising allowances • Cost Disadvantages Independent of Scale – Proprietary product technology – Favorable access to raw materials – Desirable locations 2–629 Barriers to Entry (cont’d) • Cost disadvantages independent of scale – Proprietary product technology – Favorable access to raw materials – Desirable locations • Government policy – Licensing and permit requirements – Deregulation of industries Barriers to Entry (cont’d) • Expected retaliation – Responses by existing competitors may depend on a firm’s present stake in the industry (available business options) BARRIERS TO NEW ENTRANTS • ECONOMIES OF SCALE –ASPIRANTS SHOULD COME IN A LARGE SCALE TO AVOID COST DISADVANTAGE (SMALL SCALE V/S LARGE). SCALE ECONOMIES IN PRODUCTION AND SERVICES ARE KEY BARRIERS TO ENTRY. IT ALSO ACTS AS HURDLES IN DISTRIBUTION , UTILIZATION OF SALES FORCE, etc • PRODUCT DIFFERENTIATION-BRAND IDENTIFICATION CREATES A BARRIER BY FORCING ENTRANTS TO SPEND HEAVILY TO BUY CUSTOMER LOYALTY.ADVERTIZING AND PRODUCT DIFFERENTIATION ARE AMONG THE FACTORS THAT CREATE BRAND IDENTIFICATION VERY COMMON IN BEVERAGES PROMOTION BARRIERS TO NEW ENTRANTS • CAPITAL REQUIREMENTS – NEED TO INVEST LARGE FINANCIAL AMOUNTS IN ORDER TO COMPETE CREATES A BARRIER TO ENTRY ESPECIALLY IF THE CAPITAL IS REQUIRED FOR NON RECOVERABLE EXPENDITURE SUCH AS ADVERTISING. CAPITAL IS ALSO REQUIRED FOR WORKING CAPITAL REQUIREMENTS WHICH ARE CURRENT ASSETS AS WELL AS FOR ABSORPTION OF START UP LOSSES • COST DISADVANTAGES – COMPANIES ALREADY IN OPERATION SOMETIMES HAVE THE COST ADVANTAGE OF HAVING OVERCOME THE STARTUP PROBLEMS AND ARE ABLE TO FOCUS ON MARKET EXPANSION. STARTUP COMPANIES NEED TO INVEST IN ESTABLISHING MARKET CREDENTIALS AS WELL AS PRODUCT AWARENESS. ALSO ECONOMY OF SCALES IS GOING TO BE A SERIOUS BARRIERS TO NEW ENTRANTS • ACCESS TO DISTRIBUTION CHANNELS –NEED TO HAVE ACCESS TO MARKETS. HENCE THE NEED FOR NEW ENTRANTS TO EITHER BUILD THEIR OWN DISTRIBUTION FACILITIES WHICH IS DIFFICULT AND EXPENSIVE AS ALSO IS RISKY; OR TO HAVE ACCESS TO EXISTING DISTRIBUTION CHANNELS. NEED TO DISPLACE OTHER PRODUCTS FROM THE SUPER MARKET SHELF (RETAIL STRATEGY). DONE THRU AGGRESSIVE PRICING , SALES PROMOTION OFFERS ETC. ENTRY TO RETAILING IS THE BIGGEST BARRIER FOR NEW ENTRANTS • GOVERNMENT POLICIES-GOVERNMENT CONTROLS CAN BE A BARRIER INTO ENTRY. CONTROLS CAN BE BY WAY OF LICENSES , OPERATIONAL CONTROLS,RETAILING REGULATIONS (LIQUOR). BARRIERS CAN ALSO BE BY WAY OF ENERGY CONSUMPTION ,POLLUTION CONTROL ETC BARRIERS TO NEW ENTRANTS • SWITCHING COSTS – COSTS INCURRED BY CUSTOMER WHEN HE SWITHCES A PRODUCT/SERVICE, eg SWITHOVER FROM ONE MOBILE CARRIER TO ANOTHER INCURS MUCH INCONVENIENCE BY WAY OF INTIMATING NEW NUMBER. TRAI WORKING ON RETENTION OF NUMBER WHILE SWITCHING WITH ONE TIME SWITCHING COSTS OR SWITCHOVER FROM ONE ERP SOFTWARE TO ANOTHER OR EVEN WITHIN THE SAME SOFTWARE WITH A HIGHER VERSION WHICH USES A DIFFERENT TECHNOLOGY eg ALL ERPs WHICH MIGRATED FROM CLIENT SERVER TO THIN CLIENT.EVRY THING EVEN THE LOOK AN FEEL WAS DIFFERENT AND OF COURSE THE DATABASE TABLES WERE QUITE DIFFERENT TO THE EARLIER ONE.ANOTHER COST WAS THE CUSTOMIZATION COST THREAT OF NEW ENTRY • NEW ENTRANTS BRING NEW DESIRES TO GAIN MKT SHARE • COMPANIES DIVERSIFYING THRU ACQUISITION OFTEN LEVERAGE RESOURCES TO CREATE A DENT IN THE MARKET AS DID HLL WITH ACQUISITION OF LAKME ,BBL AND TOMCO • THREAT OF NEW ENTRANTS IS BASED ON THE SERIOUSNESS OF THE SEVEN BARRIERS TO NEW ENTRANTS ENTRY THREATS WEAKER WHEN • • • • • • MARKET IS STAGNANT OR ON THE DECLINE eg TWO WHEELER SEGMENT . NOT TOO MANY NEW PLAYERS ENTERING THE FIELD AND BAJAJ AUTO THINKING OF EXITING THE TWO WHEELER BUSINESS EXISTING BUSINESS IS A LOW PROFIT HIGH VOLUME BUSINESS LIKE THE TWO WHEELER BUSINESS SEVERAL STRATEGIC (TECHNOLOGY, FUEL )AND OPERATIONAL RISKS (RAW MATERIAL INFLATION ,ENERGY COST INCREASE, OVERHEAD INCREASE-RISING COST OF FUEL;) INVESTMENT REQUIRED TO CREATE INFRASTRUCTURE HIGH AND ROI EXPECTED AFTER A LONG PERIOD eg INVESTMENT IN POWER PLANTS NEW ENTRANT NOT ABLE TO ENJOY ECONOMY OF SCALE IN AREAS OF OPERATIONS ie OWING TO LACK OF MKT VISIBILITY INITIALLY SUFFER FROM LACK OF CUSTOMER PATRONAGE.OWING TO LACK OF ECONOMY OF SCALE COST OF OPERATIONS HIGH AND UNPROFITABLE UNABLE TO HAVE EFFECTIVE DISTRIBUTION AND RETAILING FACILITY ENTRY THREATS STRONGER WHEN • • • • NEW ENTRANTS HAVE RESOURCES WHICH WOULD MAKE THEM FORMIDABLE MARKET CONTENDERS eg WHEN NIRMA ENTERED THE DETERGENT MARKET-COST AND EXPENSES BENEFITS ENTRY BARRIERS ARE LOW AND CAN BE OVERCOME BY THE NEW ENTRANTS eg RISKS OF ENTERING NEW MARKETS IS LOW. ENOUGH DEMAND FOR PRODUCT/SERVICE AS BUYER DEMAND IS GROWING RAPIDLY CREATING SPACE FOR NEW ENTRANTS eg MMS 33 IN 2002 OVER 150 IN 2010 EXISTING INDUSTRY MEMBERS SEEK TO EXPAND MARKET REACH BY ENTERING NEW PRODUCT SEGMENTS OR NEW GEOGRAPHIC AREAS WHERE THEY DON’T HAVE A PRESENCE eg EXISTING COMPANIES SEEK TO DIVERSIFY NEW COMERS EXPLOIT THEIR NOVELTY OF PRODUCT AND TEMPORARILY EARN HIGHER PROFITS BECAUSE OF THE NOVELTY FACTOR Threat of Substitute Products • The threat of substitute products increase when – Buyers face few switching costs – The substitute product’s price is lower – Substitute product’s quality and performance are equal to or greater than the existing product • Differentiated industry products that are valued by customers reduce this threat SUBSTITUTE PRODUCTS • BY PLACING A CEILING ON PRICES IT CAN CHARGE , SUBSTITUTE PRODUCTS LIMIT THE POTENTIAL OF AN INDUSTRY (LOW COST AIRLINES IMPACT) • NEED TO DIFFERENTIATE PRODUCTS BY WAY OF QUALITY , FEATURES etc TO RETAIN EXISTING MARKET SHARE eg LOW PRICED LAPTOPS WITH MINIMUM REQD FUNCTIONS OR SCHOOL PC AT 11K • NEED TO OFFER A BETTER VALUE FOR MONEY WITH RESPECT TO SUBSTITUTE PRODUCTS TO PREVENT THEM FROM ENTERING THE MARKET (CASE OF NIRMA) • SUBSTITUTES LIMIT PROFITS A COMPANY CAN MAKE BECAUSE SUBSTITUTES INVARIABLY ARE LAUNCHED WITH LOWER PRICE eg PRICE OF SURF AND ARIEL FORCED TO BE REDUCED COMPETITIVE PRESSURES FROM SELLERS OF SUBSTITUTE PRODUCTS • COMPANIES IN AN INDUSTRY COME UNDER COMPETITIVE PRESSURE FROM ACTIONS OF COMPANIES IN SIMILAR PRODUCT /SERVICE BASED COMPANIES. Eg ALL PAINT MANUFACTURERS ADDRESSING THE HOME SECTOR (DECORATIVE PAINTS SEGMENT) FACE SEVERE COMPETITION FROM THE GREY MARKET COMPETITIVE PRESSURES FROM SELLERS OF SUBSTITUTE PRODUCTS • DEGREE OF COMPETITIVE PRESSURE DEPENDS ON -WHETHER SUBSTITUTES ARE READILY AVAILABLE AND ATTRACTIVELY PRICED eg INDIGENOUS JUICE PACKS AT 65-75 V/S IMPORTED PACKS 2 AT 100/80 .ALSO PERSONAL CARE PRODUCTS WHERE LOYALTY IS NOT SO HIGH HAVE A WIDE VARIETY DISPLAYED ON THE RACK IN AND AROUND THE SAME PRICE RANGE -WHETHER BUYERS VIEW SUBSTITUTES AS BEING COMPARABLE TO OR BETTER IN TERMS OF QUALITY , PERFORMANCE , etc -WHETHER BUYERS INCUR A SWITHING COST IN SWITHING OVER TO THE SUBSTITUTE eg TECHNOLOGICAL SUBSTITUTES LIKE IN THE CASE OF DATABASES(ORACLE TO SQLSERVER) ,ERP ORACLE TO SAP Bargaining Power of Buyers • Buyer power increase when: – Buyers are large and few in number – Buyers purchase a large portion of an industry’s total output – Buyers’ purchases are a significant portion of a supplier’s annual revenues – Buyers can switch to another product without incurring high switching costs – Buyers pose threat to integrate backward into BARGAINING POWER OF BUYERS • BUYERS COMPETE WITH THE INDUSTRY BY FORCING DOWN PRICES , BARGAINING FOR HIGHER QUALITY OR MORE SERVICES AND PLAY COMPETITORS AGAINST EACH OTHER eg BY PLAYING COMPETITION AGAINST EACH OTHER BOMBAY STOCK EXCHANGE WAS ABLE TO SQEEZE OUT A FORTY PERCENT DISCOUNT FROM TANDEM COMPUTERS OVER STRATUS COMPUTERS WHICH OFFERED LESSER DISCOUNT • BUYERS POSE A CREDIBLE THREAT OF BACKWARD INTEGRATION eg HLL , MARUTI, RIL AS BUYERS BARGAINING POWER OF BUYERS • • • • BUYER GROUP PURCHASES LARGE VOLUMES RELATIVE TO SELLER SALES. THIS DOMINANCE RAISES THE IMPORTANCE OF THE BUYER BUSINESS IN POSTING RESULTS eg RELIANCE INDUSTRY THOUGH A PROMINENT BUYER OF NAPTHA FOR ITS PETROCHEMICAL UNITS WAS BEING CHARGED A HIGH AMOUNT BY THE PSU OIL COMPANIES. RELIANCE RETALIATED BY HAVING ITS OWN REFINERY AT JAMNAGAR PRODUCT PURCHASED BY BUYER REPRESENTS HIGH PROPORTION OF MFG COSTS PRODUCTS IT PURCHASES ARE STANDARD AND UNDIFFERENTIATED eg POWER TARIFFS BY BSES AND TATAPOWER IT FACES FEW SWITCHING COSTS eg PERSONAL CARE PRODUCTS HAVE A VERY LOW LEVEL DIFFERENTIATION AND ENABLE EASY SWITCH OVER Bargaining Power of Suppliers • Supplier power increases when: – Suppliers are large and few in number – Suitable substitute products are not available – Individual buyers are not large customers of suppliers and there are many of them – Suppliers’ goods are critical to buyers’ marketplace success – Suppliers’ products create high switching costs. – Suppliers pose a threat to integrate forward into 2–646 buyers’ industry POWERFUL SUPPLIERS • • • • SUPPLIERS CAN EXERT BARGAINING POWER IN AN INFLATIONARY ECONOMY BY RAISING PRICES eg ESCALATING PRICES OF STEEL WHICH IN PARTICULAR AFFECTS THE AUTOMOTIVE AND SEET METAL INDUSTRIES OR BY REDUCING THE QUANTITY/QUALITY OF GOODS/SERVICES eg THALIS POWEFUL SUPPLIERS CAN DICTATE PROFITABILITY OUT OF AN INDUSTRY WHICH IS UNABLE TO RECOVER COST INCREASES IN ITS OWN PRICES. CUSTOMERS CAN LIKEWISE FORCE DOWN PRICES , DEMAND HIGHER QUALITY OR MORE SERVICE AND PLAY COMPETITION AGAINST EACH OTHER – ALL AT THE EXPENSE OF INDUSTRY PROFIT POWER OF EACH IMPORTANT SUPPLIER OR BUYER GROUP DEPENDS ON MARKET SITUATION AND RELATIVE IMPORTANCE OF SALES/PURCHASE TO THE INDUSTRY COMPARED TO OVERALL BUSINESS POWERFUL SUPPLIER GROUP • SUPPLIER GROUP IS POWERFUL IF -IT IS DOMINATED BY A FEW COMPANIES -ITS PRODUCT IS UNIQUE AND DIFFERENTIATED AND HAS BUILT IN A LOCK IN STRATEGY (PROPRIETARY TECHNOLOGY) -DOES NOT CONTEND WITH OTHER SUPPLIERS OF SIMILAR PRODUCT TYPES (SOME SORT OF MONOPOLY) -INDUSTRY IS NOT THE ONLY SOURCE OF INCOME AND SOME OTHER MARKETS CONTRIBUTE TO MORE SIZEABLE REVENUES HAN THE CURRENT ONE BARGAINING POWER OF SUPPLIERS • SUPPLIERS CAN EXERT BARGAINING POWER OVER BUYERS IN AN INDUSTRY WHERE RAW MATERIAL PRICES ARE ESCALATING NORMALLY OR THRU ARTIFICIAL SHORTAGES CREATED eg STEEL PRICES OR ARTIFICIALLY CREATED CEMENT SHORTAGE • THEY CAN ALSO THREATEN TO REDUCE QUALITY OF PRODUCTS • POWERFUL SUPPLIERS CAN SQUEEZE PROFITABILITY OUT OF AN INDUSTRY UNABLE TO RECOVER COST INCREASES IN ITS OWN PRICE BARGAINING POWER OF SUPPLIERS • A SUPPLIER GROUP IS POWERFUL IF -IT IS DOMINATED BY A FEW COMPANIES AND IS MORE CONCENTRATED THAN THE INDUSTRY IT SELLS TO -IT IS NOT OBLIGED TO CONTEND WITH OTHER SUBSTITUTE PRODUCTS FOR SALE TO THE INDUSTRY -THE INDUSTRY CONCERNED IS NOT A CRITICAL CUSTOMER OF THE SUPPLIER GROUP -THE SUPPLIER PRODUCT IS A VITAL INPUT TO THE BUYER BUSINESS eg CRUDE OIL -THE SUPPLIER HAS BUILT IN LOCK IN COSTS OR SWITCHING COSTS AND HIS PRODUCTS ARE DIFFERENTIATED (WITHOUT DIFFERENTIATION AUTO AND TAXI DRIVERS IN MUMBAI REFUSE FARES WANTONLY!DEMAND SPPLY PROBLEM) -SUPPLIER GROUP POSES A CREDIBLE THREAT OF FORWARD INTEGRATION eg PANTALOON ORIGINALLY ONLY A READY MADE GARMENT MFG HAS VERY SUCCESSFULLY GONE INTO RETAILING OF READY MADE GARMENTS Intensity of Rivalry Among competition • Industry rivalry increases when: – There are numerous or equally balanced competitors – Industry growth slows or declines – There are high fixed costs or high costs storage – There is a lack of differentiation opportunities or low switching costs – When the strategic stakes are high – When high exit barriers prevent competitors from leaving the industry Rivalry Among Existing Competitors Intense rivalry often plays out in the following ways: Jockeying for strategic position Using price competition Staging advertising battles Increasing consumer warranties or service Making new product introductions Occurs when a firm is pressured or sees an opportunity Price competition often leaves the entire industry worse off Advertising battles may increase total industry demand, but may be costly to smaller competitors Determinants of Rivalry Industry Growth. Fixed Costs/Value Added. Intermittent Overcapacity. Product Differences. Brand Identity. Switching Costs. Concentration and Balance. Informational Complexity. Diversity of Competitors. Corporate Stakes. Exit Barriers. 92 Rivalry Among Existing Competitors Cutthroat competition is more likely to occur when: Numerous or equally balanced competitors Slow growth industry High fixed costs High storage costs Lack of differentiation or switching costs Capacity added in large increments Diverse competitors High strategic stakes High exit barriers Strategic Implications of the Five Competitive Forces • Competitive environment is unattractive from the standpoint of earning good profits when: – Rivalry is strong – Entry barriers are low and entry is likely – Competition from substitutes is strong – Suppliers and customers have considerable bargaining power Strategic Implications of the Five Competitive Forces • Competitive environment is ideal from a profit-making standpoint when: – Rivalry is moderate – Entry barriers are high and no firm is likely to enter – Good substitutes do not exist – Suppliers and customers are in a weak bargaining position Strategic Groups • Companies do not compete against all companies in an industry • Companies compete against several other companies that follow similar strategies • A strategic group consists of those rivals with similar competitive approaches in an industry • Examples ways of competing: – Price -- Range of products A Model of Competitive Rivalry • Firms are mutually interdependent – A firm’s competitive actions have noticeable effects on its competitors. – A firm’s competitive actions elicit competitive responses from its competitors. – Competitors feel each other’s actions and responses. • Marketplace success is a function of both 5–661 individual strategies and the consequences A Model of Competitive Rivalry Competitive Analysis • Market commonality • Resource similarity Drivers of Competitive Behavior • Awareness • Motivation • Ability Feedback Outcomes • Market position • Financial performance 5–662 Interfirm Rivalry • Likelihood of Attack • First-mover incentives • Organizational size • Quality • Likelihood of Response • Type of competitive action • Reputation • Market dependence Drivers of Competitive Behavior Awareness • Awareness is – the extent to which competitors recognize the degree of their mutual interdependence that results from: • Market commonality • Resource similarity 5–664 Drivers of Competitive Behavior (cont’d) Awareness • Motivation concerns Motivation 5–665 – the firm’s incentive to take action – or to respond to a competitor’s attack – and relates to perceived gains and losses Drivers of Competitive Behavior (cont’d) • Ability relates to Awareness Motivation Ability 5–666 – each firm’s resources – the flexibility these resources provide • Without available resources the firm lacks the ability to – attack a competitor – respond to the competitor’s actions Drivers of Competitive Behavior (cont’d) • A firm is more likely to attack the Awareness Motivation Ability Market Commonality 5–667 rival with whom it has low market commonality than the one with whom it competes in multiple markets. • Given the strong competition under market commonality, it is likely that the attacked firm will respond to its competitor’s action in an effort to protect its position in one or more markets. Drivers of Competitive Behavior (cont’d) Awareness Motivation Ability Market Commonality Resource Dissimilarity 5–668 • The greater the resource imbalance between the acting firm and competitors or potential responders, the greater will be the delay in response by the firm with a resource disadvantage. • When facing competitors with greater resources or more attractive market positions, firms should eventually respond, no matter how challenging the response. Factors Affecting Likelihood of Attack • First movers allocate funds for: First-Mover Incentives – Product innovation and development – Aggressive advertising First Mover A firm that takes an initial competitive action in order to build or defend its competitive advantages or to improve its market position. 5–670 – Advanced research and development • First movers can gain: – The loyalty of customers who may become committed to the firm’s goods or services. – Market share that can be difficult for competitors to take during future competitive rivalry. Factors Affecting Likelihood of Attack (cont’d) • Second mover responds to the first First Mover Second Mover Incentives mover’s competitive action, typically through imitation: – Studies customers’ reactions to product innovations. – Tries to find any mistakes the first mover made, and avoid them. – Can avoid both the mistakes and the huge spending of the first-movers. – May develop more efficient processes and technologies. 5–671 Factors Affecting Likelihood of Attack (cont’d) • Late mover responds to a competitive First Mover Second Mover Late Mover 5–672 action only after considerable time has elapsed. • Any success achieved will be slow in coming and much less than that achieved by first and second movers. • Late mover’s competitive action allows it to earn only average returns and delays its understanding of how to create value for customers. Factors Affecting Likelihood of Attack (cont’d) • Small firms are more likely: First Mover – To launch competitive actions. Second Mover – To be quicker in doing so. • Small firms are perceived as: – Nimble and flexible competitors Late Mover Organizational Size- Small 5–673 – Relying on speed and surprise to defend competitive advantages or develop new ones while engaged in competitive rivalry. – Having the flexibility needed to launch a greater variety of competitive actions. Factors Affecting Likelihood of Attack (cont’d) First Mover • Large firms are likely to initiate more Second Mover Late Mover Organizational Size -Large competitive actions as well as strategic actions during a given time period • Large organizations commonly have the slack resources required to launch a larger number of total competitive actions • Think and act big and we’ll get smaller. Think and act small and we’ll get bigger. Herb Kelleher Former CEO, Southwest Airlines 5–674 Factors Affecting Likelihood of Attack (cont’d) First Mover Second Mover Late Mover Organizational Size Quality (Product) 5–675 • Quality exists when the firm’s goods or services meet or exceed customers’ expectations • Product quality dimensions include: Performance Conformance Features Serviceability Flexibility Aesthetics Durability Perceived quality Factors Affecting Likelihood of Attack (cont’d) First Mover Second Mover • Service quality dimensions include: Late Mover – Timeliness Organizational Size – Consistency Quality (Service) 5–677 – Courtesy – Convenience – Completeness – Accuracy Factors Affecting Strategic Response Type of • Strategic actions receive strategic Competitive Action responses – Strategic actions elicit fewer total competitive responses. – The time needed to implement and assess a strategic action delays competitor’s responses. • Tactical responses are taken to counter the effects of tactical actions – A competitor likely will respond quickly to a tactical actions 5–681 Factors Affecting Strategic (cont’d) Type of Response • An actor is the firm taking an Competitive Action Actor’s Reputation action or response • Reputation is the positive or negative attribute ascribed by one rival to another based on past competitive behavior. • The firm studies responses that a competitor has taken previously when attacked to predict likely responses. 5–682 Factors Affecting Strategic (cont’d) Type of Response • Market dependence is the extent to Competitive Action Actor’s Reputation Dependence on the market 5–683 which a firm’s revenues or profits are derived from a particular market. • In general, firms can predict that competitors with high market dependence are likely to respond strongly to attacks threatening their market position. Competitive Dynamics versus Rivalry • Competitive Rivalry (Individual firms) – Market commonality and resource similarity – Awareness, motivation and ability – First mover incentives, size and quality 5–685 • Competitive Dynamics (All firms) – Market speed (slowcycle, fast-cycle, and standard-cycle – Effects of market speed on actions and responses of all competitors in the market Competitive Dynamics Slow-Cycle Markets • Competitive advantages are shielded from imitation for long periods of time and imitation is costly. • Competitive advantages are sustainable in slow-cycle markets. • All firms concentrate on competitive actions and responses to protect, maintain and extend proprietary competitive advantage. 5–686 Competitive Dynamics Slow-Cycle Markets • Competitive advantages are shielded from imitation for long periods of time and imitation is costly. • Competitive advantages are sustainable in slow-cycle markets. • All firms concentrate on competitive actions and responses to protect, maintain and extend proprietary competitive advantage. 5–687 Competitive Dynamics (cont’d) Slow-Cycle Markets Fast-Cycle Markets • The firm’s competitive advantages aren’t shielded from imitation. • Imitation happens quickly and somewhat expensively • Competitive advantages aren’t sustainable. – Competitors use reverse engineering to quickly imitate or improve on the firm’s products • Non-proprietary technology is diffused rapidly 5–688 Competitive Dynamics (cont’d) Slow-Cycle Markets • Moderate cost of imitation may shield competitive advantages. Fast-Cycle Markets • Competitive advantages are partially sustainable if their quality is continuously upgraded. • Firms Standard-Cycle Markets – Seek large market shares – Gain customer loyalty through brand names – Carefully control operations 5–689 Interpreting Industry Analyses Low entry barriers Suppliers and buyers have strong positions Strong threats from substitute products Intense rivalry among competitors Unattractive Industry Low profit potential Interpreting Industry Analyses High entry barriers Suppliers and buyers have weak positions Attractive Industry Few threats from substitute products Moderate rivalry among competitors High profit potential 2–691 GENERIC STRATEGIES • IN COPING WITH THE FIVE COMPETITIVE FORCES THERE ARE THREE POTENTIALLY SUCCESSFUL STRATEGIC APPROACHES TO OUTPERFORMING OTHER FIRMS THRU -1 COST LEADERSHIP -2 DIFFERENTIATION -3 FOCUS • -4 FOCUSED DIFFERENTIATION • SOMETIMES FIRM CAN PURSUE MORE THAN ONE APPROACH AS ITS PRIMARY TARGET • THESE STRATEGIES ARE APPROACHES TO OUTPERFORM COMPETITORS Choice of a generic strategy Sustainable competitive advantage has two aspects as reference points 1. Productivity (cost advantage) 2. Market power (advantage in terms of maximum acceptable price) Sustainable competitive advantage requires an analysis of the competitive structure and answers to the questions 1. What are the key success factors in a given product or market segment? 2. What are the firm’s strengths and weaknesses with regard to these factors? 3. What are the strengths and weaknesses of the firm’s direct rival's) with regard to the same KSFs •Expand the market •Protect the current share Leaders •Expand share challengers •Discount or cut prices •Cheap goods •Innovate •Promote heavily •Proliferate the range •Reduce costs •Segment carefully Nichers Get started followers •Use R&D •Challenge commercial wisdoms Market leadership Expansion of the overall market •Target groups – currently non-users •Identifying new uses for the offering •Increasing usage rates Guarding the existing market share Expansion of the current market share •Strong market positioning •Developing competitive advantage •Product / process innovation •Heavy advertising •CRM •Strong distribution relations •Heavy advertising •Improved distribution •Price incentives •New product development •Mergers •Takeovers •Geographic expansion •Distributor expansion Strategies for market leaders •Position defense •Mobile defense •Flanking defense •Contraction defense •Pre-emptive defense •Counter offensive defense Challenger strategies Challenger faces two key questions 1. Choice of battle ground to mount the attack 2. Evaluation of leader’s reactive and defensive abilities Frontal attack •Balance of power •Balance normally 3:1 Choice of battle ground Lateral attacks •Confronting over one or more strategic dimensions Outflaning, encircling,guerilla tactics, mobile defence Mounting the attack Before the attack it is essential to asses correctly a dominant firm’s ability to react and defend using the following criteria 1. Vulnerability :to what strategic moves and governmental macroeconomic or industry events would the competitor most vulnerable. 2. Provocation : what moves or events will provoke a retaliation from the competitors, even if retaliation is costly and leads to marginal financial performance 3. Effectiveness of retaliation : identify moves /events to which competitor may not react quickly given its goals, strategy, existing capabilities and assumptions. Market follower strategies • • Policy of peaceful coexistence Behavior observed mainly in Oligopolistic markets where differentiation are minimal and cross price elasticity's are very high • Four main features of strategies to be adopted are 1. Creative market segmentation. 2. Efficient use of R&D 3. Think small 4. Ubiquitous chief executive Market nicher A nicher is interested in one or few market segments, and not in the whole market. the objective is to be a large fish in a small pond rather than being a small fish in a large pond. This competitive strategy is based on “focus” The key to a focus strategy is specialization in a niche. For a niche to be profitable and sustainable five characteristics are essential. 1. Sufficient profit potential 2. Growth potential 3. Unattractive to rivals. 4. The market corresponds to the firm’s distinctive competence. 5. A sustainable entry barrier. Market leadership and customer focus Customer’s awareness of their needs Hig h Low Current markets Under exploited areas Areas of greatest opportunity Under exploited areas Areas of greatest opportunity Unexploited areas Areas of highest risk / return existing Not yet served Company’s customer Contribution of process improvement to competitiveness Quality being RIGHT being FAST Dependability Flexibility Cost being ON TIME being ABLE TO CHANGE being PRODUCTIVE COMPETITIVENESS Speed Generic Business-Level Strategies Competitive Advantage Low-cost Differentiation Broad Target Competitive Scope Narrow Target 5-703 Cost leadership Cost Focus Differentiati on Differentiation Focus Cost Leadership Cost leaders establish a cost structure that allows them to provide goods and services at lower unit costs than competitors. Strategic Choices • Not try to be the industry innovator. • To appeal to the “average” or typical customer. • To increase efficiency and lower its costs. 5-704 COST LEADERSHIP • VERY POWERFUL COMPETITIVE APPROACH IN MARKET WITH PRICE SENSITIVE BUYERS. eg DECCAN AIR STARTED A NEW REVOLUTION IN INDIA WHEN THEY INTRODUCED THE NO FRILLS LOW COST AIRLINES THEREBY ADDRESSING A HITHERTO RAILTRAVELLING SEGMENT. • COMPANY ACHIEVES LOW COST LEADERSHIP WHEN IT BECOMES INDUSTRY LOWEST COST PROVIDER RATHER THAN JUST BEING ONE OF THE FEW WITH LOWER COSTS. COST LEADERSHIP • IN PROVIDING LOW COST SERVICES/PRODUCTS HOWEVER THE PROVIDER MUST PROVIDE ESSENTIAL SERVICES WHICH FORM A PART OF THE PRODUCT/SERVICE. Eg PRODUCTS IN SALE MAY NOT HAVE A FULL WARRANTY OF 1 YEAR(3 MONTHS MEDIA WARRANTY AS IN THE CASE OF S/W) OR WARRANTY OF ONLY CERTAIN PARTS (EXCLUDE COMPRESSOR etc OF REFRIGERATORS) OR IN FLYING WITH DISCOUNTED FARES THE AIRLINES WILL NOT OFFER INFLIGHT SERVICES WHICH NEED TO BE PURCHASED OR NOT OFFERED AT ALL INCLUDING WATER ON GO AIR AT 15RS.HOWEVER THERE IS A MAJOR ISSUE WITH LOW COST AIRLINES WHEN A FLIGHT IS CANCELLED ;THEY DO NOT OFFER ALTERNATIVES INCL HOTEL ACCOMODATION .IN SOME CASES EVEN REFUNDS ARE NOT OFFERED EASILY. SKILLS REQUIRED IN COST LEADERSHIP • SUBSTANTIAL CAPITAL INVESTMENT AND ACCESS TO CAPITAL • PROCESS ENGINEERING SKILLS • HIGH DEGREE OF HUMAN CAPITAL • LOW COST DISTRIBUTION SYSTEM ORGANIZATIONAL REQUIREMENTS IN COST LEADERSHIP • TIGHT COST CONTROL • FREQUENT DETAILED CONTROL REPORTS • MEETING QUANTITATIVE TARGETS Advantages of Cost Leadership Strategies 5-709 Protected from industry competitors Less affected by increased prices of inputs Less affected by a fall in price of inputs Increase bargaining power over suppliers Ability to reduce price to compete with substitute products Low costs and prices as a barrier to entry ADVANTAGES OF COST LEADERSHIP • PRICE COMPETITION AMONG RIVALS IS VIGOUROUS. eg DECCAN AIR WAS FOLLOWED BY SPICE JET. JET AIRWAYS WAS A LATE ENTRANT BUT LATER TOOK OVER AN AILING SAHARA AIRLINES, CALLED IT JETLITE AND CONVERTED IT INTO A LOW COST NO FRILLS AIRLINES. LATER SOME OF ITS REGULAR JET AIR FLIGHTS WERE RECHRISTENED AS JET CONNECT AND OPERATE AS NO FRILLS AIRLINES AT LOW COST. AIR INDIA ALSO OFFERS DISCOUNTED FLIGHTS IN ITS INDIA OPERATIONS AND HAS A SEPARATE AIR INDIA EXPRESS WHICH OPERATES PROMINENTLY FROM GULF TO SOUTH DESTINATIONS ADVANTAGES OF COST LEADERSHIP • DIFFERENTIATIONTHAT HAVE VALUE TO BUYERS THE CASE OF LOW COST AIRLINES THERE IS A DEARTH OF CRM ACTIVITIES .IF A LOW COST AIRLINES SHARPENED THIS ASPECT OF ITS OPERATIONS IT COULD BE A MAJOR DIFFERENTIATOR. IN THE EARLY 90 UB FLOATED UB AIR.FLEW FROM BLR TO MAA AND MUM IN THE MORNINGS AND EVENINGS. THE CONDITION THEY IMPOSED ON THEMSELVES WAS THAT IF THE FLIGHT LANDED MORE THAN 15MIN LATE FOR WHATEVER REASONS ANY FARE REFUNDS ASKED FOR WERE GIVEN WITH NO QUESTIONS ASKED. IN WINTERS OWING TO FOG AT BLR THEY HAD A MAJOR OPERATIONAL PROBLEM AND ULTIMATELY HAD TO WIND UP. Disadvantages of Cost Leadership Strategies Competitors may lower their cost structures. Competitors may imitate the cost leader’s methods. Cost reductions may affect demand. 5-712 DISADVANTAGES OF COST LEADERSHIP • • • • PRODUCTS SERVICES COME WITH A LOT OF LOCK IN CLAUSES EG IN CASE OF LOW COST AIRLINES TICKET CANNOT BE CANCELLED OR PREPONED/POSTPONED. IT IS ALSO NON TRANSFERABLE AND NON REROUTABLE. MOREOVER IN CASE OF CANCELLATIONS SUCH FLIGHTS BRING IN UNTOLD HARDSHIPS TO FLYERS. SEVERAL COMPETITORS IN THE MARKET WITH LOW COST STRATEGIES AND THERE IS NO DIFFERENTIATOR. ARE THERE DIFFERENTIATORS IN MUNICIPAL /GOVT HOSPITALS LOW SWITCHING COSTS FROM ONE SELLER TO ANOTHER (SUBSTITUTE PRODUCTS)eg MOBILE SUBSCRIBERS. CHURN ANALYSIS DONE TO MINIMIZE AND FORECAST CHURNS. IN THE CASE OF PERSONAL CARE PRODUCTS BRAND LOYALTY IS PROVEN TO BE VERY LOW AND ALSO BECAUSE OF THE LOW SWITCHING COSTS , PEOPLE CHANGE BRANDS. THERE IS VERY LESS BRAND LOYALTY ADVENT OF NEWCOMERS WHO USE INTRODUCTORY LOW PRICES TO BREAK INTO THE MARKET RISKS IN COST LEADERSHIP • TECHNOLOGICAL CHANGES THAT NULLIFIES PAST INVESTMENT OR LEARNING eg MAINFRAME CULTURE TO UNIX/NT AND WINDOWS • INABILITY TO SEE MARKETING AND CHANGES IN CUSTOMER WANTS DUE TO ATTENTION PLACED ON COST Examples of Value-Creating Activities Associated with the Cost Leadership Strategy 5-715 Differentiation Companies with a differentiation strategy create a product that is different or distinct from its competitors in an important way. 5-716 Differentiation Strategic Choices • Differentiate itself on as many dimensions as possible. • Focuses on quality, innovation, and customer responsiveness. • May segment the market in many niches. • Concentrates on the organizational functions that provide a source of distinct 5-717 advantages. DIFFERENTIATION • CREATE SOMETHING THAT IS PERCEIVED TO BE UNIQUE • APPROACHES TO DIFFERENTIATION CAN BE BY WAY OF DESIGN , FEATURES , QUALITY , SERVICE, TECHNOLOGY, DEALER NETWORK , RETAIL AVAILABILITY, RELIABILITY etc. • DIFFERENTIATION IS A VIABLE STRATEGY FOR EARNING ABOVE AVERAGE RETURNS AND ENABLES THE COPING WITH THE FIVE COMPETITIVE FORCES • DIFFERENTIATION CAN CREATE BRAND LOYALTY AND CAN ENHANCE PRODUCT AND SERVICE MARGINS. IT ALSO LEADS TO INCREASED MARKET SHARE AND ULTIMATELY BRAND LEADERSHIP • IT CREATES LOWER SENSITIVITY TO PRICE DIFFERENTIATION • • • • DIFFERENTIATION STRATEGIES WORK WELL WHEN BUYER NEEDS ARE DIVERSE AND KEEP CHANGING.REMEMBER HOW SAVINGS BANK ACCOUNT MANAGEMENT CHANGED FROM STANDARDIZED PROCEDURES TO PERSONAL BANKING SYSTEMS? COMPANY WANTING TO SUCCEED THRU DIFFERENTIATION SHOULD UNDERSTAND THE CHANGING EXPECTATIONS OF THE CUSTOMERS AND ADDRESS THESE WANTS EFFECTIVELY AND DYNAMICALLY.THEY MUST STUDY CHANGING BUYER NEEDS FROM DEMOGRAPHIC TO PSYCHOGRAPHIC AND PROVIDE VALUE FOR MONEY. COMPANY NEEDS TO TAKE THESE FACTORS INTO ACCOUNT WHILE FORMULATING THEIR DIFFERENTIATING STRATEGY eg MAGIC EYE OF KANSAI NEROLAC AND ASIAN PAINTS RAPID PRODUCT INNOVATION AND FREQUENTLY INTRODUCED NEW PRODUCTS/SERVICES eg AIRTEL PROVIDES PURSUIT OF DIFFERENTIATION PATHS AND KEEP USER INTEREST ALIVE DIFFERENTIATION • • • • • RAPID PRODUCT INNOVATION AND FREQUENTLY INTRODUCED NEW PRODUCTS/SERVICES eg AIRTEL PROVIDES PURSUIT OF DIFFERENTIATION PATHS AND KEEP USER INTEREST ALIVE AN IMPORTANT STRATEGIC DIFFERENTIATOR THAT COMPANIES ARE BUILING AND HARNESSING TODAY IS THE WORTH AND DIFFERENTIATION OF ITS HUMAN CAPITAL;THE SKILLS AND THE CAPABILITIES OF ITS PEOPLE. MCKINSEY CONSULTING FOR EXAMPLE COMMANDS A PREMIUM FOR ITS CONSULTING SERVICES BECAUSE OF THE DOMAIN EXPERTISE OF ITS PEOPLE AS WELL AS THEIR HUMAN CAPITAL WHICH IS MORE THAN THE EMPLOYEES OF COMPETITION HUMAN CAPITAL DRIVES ALL OTHER FACTORS. HUMAN CAPITAL DRIVES CAPABLE PROCESSES WHICH PRODUCE BRANDED DIFFERENTIATED PRODUCTS/SERVICES (BRANDED HOSPITALS) WHICH ENABLE THE COMPANY ACHIEVE MARKET LEADERSHIP OR CUSTOMER PATRONAGE Differentiation • Objective: Incorporate differentiating features that cause buyers to prefer firm’s product or service over the brands of rivals • Uniqueness through: unique product features quality of inputs performance after sale service speed and flexibility image - organizational reputation and brand name STEPS IN DIFFERENTIATION • • • • • • • • DETERMINE WHO THE REAL BUYER IS IDENTIFY THE BUYER VALUE CHAIN AND FIRM IMPACT ON IT DETERMINE BUYERS PURCHASING CRITERIA ASSESS THE EXISTING AND POTENTIAL SOURCES OF UNIQUENESS IN FIRMS VALUE CHAIN IDENTIFY COST OF EXISTING AND POTENTIAL SOURCES OF DIFFERENTIATION CHOOSE STRATEGY FOR VALUE ACTIVITES THAT CREATES MOST VALUABLE DIFFERENTIATION FOR THE BUYER RELATIVE TO COST OF DIFFERENTIATING ENSURE SUSTAINABILITY OF DIFFERENTIATING STRATEGY REDUCE COST IN ACTIVITIES THAT DO NOT AFFECT THE CHOSEN FORMS OF DIFFERENTIATION SKILLS REQUIRED IN DIFFERENTIATION • • • • STRONG MARKETING ABILITIES PRODUCT ENGINEERING STRONG BASIC RESEARCH REPUTATION FOR QUALITY AND TECHNOLOGY LEADERSHIP • STRONG ALLEGIANCE OF CHANNELS ORGANIZATIONAL REQUIREMENTS IN DIFFERENTIATION • STRONG COORDINATION BETWEEN R&D,PRODUCT DEVELOPMENT,AND MKTNG • RECRUITMENT AND RETENTION OF HIGHLY SKILLED PEOPLE AVENUES OF ACHIEVING DIFFERENTIATING STRATEGY • BUYER NEEDS AND USES OF PRODUCT ARE DIFFERENT AND COMPANY IS AGILE AND FLEXIBLE TO MEET THESE VARIED DEMANDS. Eg IN WESTERN INDIA WOMEN USE COCONUT OIL FOR COOKING BUT IN EAST INDIA COCONUT OIL IS GENERALLY USED AS HAIR OIL ONLY AND MUSTARD OIL IS USED FOR COOKING. LIQUOR IS MEDICINAL AS WELL AS ADDICTION ,SOCIAL HABIT. THIS LEADS TO UNDERSTANDING OF CHANGING CUSTOMER PREFERENCES. NEED TO CREATE A DIFFERENTIATED PRODUCT/SERVICE POLICY eg SERVE JAIN FOOD ,FASTING FOOD • DIFFERENTIATE PRODUCT/SERVICE FROM COMPETITION SO AS TO ENABLE POTENTIAL CUSTOMERS TO SEE VALUE IN YOUR PROPOSITION The Appeal of Differentiation Strategies • A powerful competitive approach when uniqueness can be achieved in ways that – Buyers perceive as valuable – Rivals find hard to copy – Can be incorporated at a cost well below the price premium that buyers will pay Effective Differentiators can MITIGATE the Five Forces to Earn Above Average Profits. Can mitigate Supplier Power by: Absorbing price increases due to higher margins Passing on higher supplier prices because buyers are brand loyal Bargaining Power of Suppliers Well positioned relative to Substitutes because: Brand loyalty tends to reduce new product trial and brand switching Threat of New Entrants Can fend off New Entrants because: New products must surpass proven products, or Be equal to performance but offer a lower price Rivalry Among Competing Firms in Industry Bargaining Power of Buyers Can mitigate Buyer Power because: Threat of Substitute Products Well differentiated products reduce customer sensitivity to price increases 727 Effective Differentiators can also succeed IN SPITE of unattractive Five Forces Powerful Suppliers can: Raise their Prices Lower their Quality DIFF can absorb these COST increases better than others. Bargaining Power of Suppliers Threat of New Entrants Rivals Can’t absorb costs of price wars or marketing blitzes as well as the Diff. Substitutes Place a Price Ceiling on the Industry. Diff can profit better than others even as this ceiling is lowered due to more plentiful substitutes as long as the basis for Diff survives. New Entrants cannot make a profit compared to Diff as long as the basis for differentiation remains. Threat of Substitute Products Bargaining Power of Buyers Powerful Buyers can: Demand Lower Prices Demand Higher Quality Diff can absorb these COST 728 increases better than others. BENEFITSOF SUCCESSFUL DIFFERENTIATING STRATEGY • COMMAND A PREMIUM PRICE FOR PRODUCT eg SONY ELECTRONICS IS A BRAND. BRAND WAS ACHIEVED BECAUSE OF SUPERIOR QUALITY WHICH WAS THE DIFFERENTIATOR AND THEIR PRODUCTS FETCH A PREMIUM IN THE MARKET COMPARED TO COMPETITION • ADDITIONAL MARKET SHARE DUE TO DIFFERENTIATION eg WHEN JET AIR STARTED THE DIFFERENTIATED SERVICE LEVEL GOT THEM A HIGH MARKET SHARE AND CREATED A BRAND FOR GOOD INFLIGHT SERVICES • GAIN BUYER LOYALTY TO THE BRAND eg JETAIR LOYAL CUSTOMERS.MANY STILL FLY WITH JET ALTHOUGH NOW WITH THE ECONOMIC CRISIS MAYBE IN CHEAPER CLASSES Benefits of Differentiation Strategies 5-730 Brand loyalty Powerful suppliers are not a problem Pass price increases on to customers. Powerful buyers are not a problem Differentiation and brand loyalty are barriers to entry. The threat of substitute products depends on competitors’ ability to meet customer needs. What does it take to be a differentiator? • Customers should be willing to pay a premium price • attributes that make the product unique should be valued by the customer • attributes should appeal to large percentage of the market (broad differentiator) • Company should be able to communicate its uniqueness • Costs of differentiation should not be too high. Examples of Value-Creating Activities Associated with the Differentiation Strategy 5-732 PITFALLS OF DIFFERENTIATION STRATEGIES • • • • • COMPETITION IS ABLE TO COPY ATTRIBUTES OF NEW PRODUCT/SERVICE AT A LOWER PRICE AND END THE NOVELTY PERIOD AND CREATE COMPETITION COMPANYS DIFFERENTIATION STRATEGY IS NOT ATTRACTIVE TO THE BUYERS BECAUSE THEY DO NOT SEE VALUE IN THE SO CALLED UNIQUE ATTRIBUTES OF THE NEW PRODUCT . CASE OF OLD WINE IN NEW BOTTLES eg ANY NEW OFFER MADE BY MTNL MAYBE VIEWED WITH LOT OF SCEPTICISM BY THE MARKET DIFFERENTIATING STRATEGY ERODES COMPANY PROFITS eg LOW COST AIRLINES RAN AT SUCH LOSSES A FEW YEARS AGO THAT MINISTRY OF CIVIL AVIATION WAS FORCED TO REGULATE PRICES. OVERDIFFERENTIATING SO THAT PRODUCT SERVICE FEATURES EXCEED BUYER NEEDS TRYING TO CHARGE TOO HIGH A BRAND PREMIUM Disadvantages of Differentiation Strategies Difficulty maintaining long-term distinctiveness in customers’ eyes. Difficulty maintaining premium price. 5-734 RISKS IN DIFFERENTIATION • BUYERS DO NOT PERCEIVE THE DIFFERENTIATION TO BE A COMPETITIVE ADVANTAGE eg EXCESS CHARGES FOR AVERAGE FOOD AND INDIFFERENTSERVICE IN FIVE STAR RESTAURANTS MAY NOT ENABLE RETENTION OF CUSTOMERS WHO LOOK FOR PRODUCT DIFFERENTIATION eg GREAT DINING EXPERIENCE • BUYER NEED FOR DIFFERENTIATION FACTOR FALLS AS BUYERS BECOME MORE SOPHISTICATED • IMITATION NARROWS PERCEIVED DIFFERENTIATION eg GREY MARKET GOODS IN PAINTS AND PC Focus The focuser strives to serve the need of a targeted niche market segment where it has either a low-cost or differentiated competitive advantage. 5-736 Focus Strategic Choices • The focuser selects a specific market niche that may be based on: Geography Type of customer Segment of product line • Focused company positions itself as either: Low-Cost Differentiator 5-737 FOCUS • FOCUS ON A PARTICULAR BUYER GROUP , SEGMENT OF PRODUCT LINE,OR GEOGRAPHIC MARKET • FOCUS STRATEGY IS BUILT AROUND SERVING A PARTICULAR SEGMENT WELL AND A FUNCTIONAL ACTION PLAN IS DEVELOPED TO WARDS ACHIEVEMENT OF THIS OBJECTIVE • BY THIS FIRM ACHIEVES DIFFERENTIATION BY SERVING A SPECIFIC SEGMENT BETTER THAN OTHERS eg LUXURY HOTELS WITH CUSTOMIZED FACILITIES • FOCUS STRATEGY COULD ALSO ACHIEVE LOW COST DIFFERENTIATION eg NANO • FOCUSED STRATEGY IS AIMED AT SERVING A NICHE MARKET AND ENHANCING PROFITABILITY BY REDUCING THE BANDWIDTH OF THE TYPE OF CUSTOMERS IT DEALS WITH SKILLS REQUIRED AS WELL AS ORG REQMNT IN FOCUS • COMBINATION OF COST LEADERSHIP AND DIFFERENTIATION Advantages of Focus Strategies The focuser is protected from rivals to the extent it can provide a product or service they cannot. The focuser has power over buyers because they cannot get the same thing from anyone else. The threat of new entrants is limited by customer loyalty to the focuser. Customer loyalty lessens the threat from substitutes. The focuser stays close to its customers and their changing needs. 5-740 Disadvantages of Focus Strategies The focuser is at a disadvantage with regard to powerful suppliers because it buys in small volume (but it may be able to pass costs along to loyal customers). Because of low volume, a focuser may have higher costs than a low-cost company. The focuser’s niche may disappear because of technological change or changes in customers’ tastes. Differentiators will compete for a focuser’s niche. 5-741 RISKS IN FOCUS • • • COMPETITORS THRUST INTO NICHE/FOCUS MARKET MAKING NEED FOR DIFFERENTIATION VERY CRITICAL OR MAKING NEED FOR ENHANCED DIFFERENTIATION A NECCESITY COMPETITION CREATE A NEWER NICHE IN THE SAME SEGMENT THEREBY DENUDING THE DIFFERENTIATION eg KIOSKS WHICH WERE EARLIER LAUNCHED BY SYSTIME AS A DIFFERENTIATOR NOW HAS SEVERAL CLOSE COMPETITORS TO CONTEND WITH.ALSO THEIR NICHE MARKETS HAVE BEEN PERMEATED BY COMPETITION AND THERE DOES NOT SEEM TO BE ANY PERCEIVABLE DIFERENTIATION IN THE PRODUCTS.MAYBE ONE OF THESE COMPANIES COULD BRING ABOUT DIFFERENTIATION BY PROVIDING SOLUTIONS TO THE BOOK VENDOR SECTOR AND THEREBY CREATE DIFFEENTIATION AND FOCUS LOT OF IMITATORS ESPECIALLY IN NON INTELLIGENT PRODUCTS. REMEMBER HOW CANON BROKE INTO XEROXS MARKET BY REVERSE ENGG AND THE SELLING THEIR COPIER AT A PRICE WHICH WAS 30% LESS THAN THE COST TO XEROX Why Focus Strategies Are Different 5-743 Focused Differentiation Focus Differentiation Strategy Cost Cray Is appropriate for business units that produce highly differentiated, needfulfilling products or services for the speialized needs of a narrow range of customers in a market niche. Differentiat ion Ways Organizations Can Simultaneously Differentiate Their Products and Lower Their Costs • Dedication to Quality – Quality is defined as “the totality of features and characteritics of a product or service that bear on its ability to satisfy needs or implied needs.” • Process Innovation – A business unit’s activities that increase the efficiency of operations and distribution. • Product Innovation – A business unit’s activities that enhance the differentiation of its products and services. Best-Cost Strategy • Hybrid strategy: – Firm pursues low cost and differentiation simultaneously. • High differentiation and low costs can be complementary: – Total Quality Management (TQM) – High levels of advertising and promotional expenditure (differentiation) --> increased market share --> economies of scale (low costs). – Profits generated from pursuit of low costs allow investments in differentiating features. Best Cost Provider Strategies • Combine a strategic emphasis on low-cost with a strategic emphasis on differentiation – Make an upscale product at a lower cost – Give customers more value for the money • Deliver superior value by meeting or exceeding buyer expectations on product attributes and beating their price expectations • Be the low-cost provider of a product with goodto-excellent product attributes, then use cost advantage to underprice comparable brands How a Best-Cost Strategy Differs from a Low-Cost Strategy • Aim of a low-cost strategy--Achieve lower costs than any other competitor in the industry • Intent of a best-cost strategy--Make a more upscale product at lower costs than the makers of other brands with comparable features and attributes – A best-cost provider cannot be the industry’s absolute lowcost leader because of the added costs of incorporating the additional upscale features and attributes that the low-cost leader’s product doesn’t have MICHEAL PORTERS COMPETITIVE ADVANTAGE CONCEPT OF COMPETITIVE ADVANTAGE • COMPETITIVE ADVANTAGE DESCRIBES THE WAY IN WHICH FIRM CAN CHOOSE AND IMPLEMENT A GENERIC STRATEGY TO ACHIEVE AND SUSTAIN COMPETITIVE ADVANTAGE • COMPETITIVE ADVANTAGE GROWS FUNDAMENTALLY OUT OF VALUE A FIRM IS ABLE TO CREATE FOR ITS BUYERS THAT EXCEEDS THE COST OF CREATING VALUE • VALUE IS WHAT BUYERS ARE WILLING TO PAY AND SUPERIOR VALUE COMES FROM OFFERING LOWER PRICES THAN COMPETITION FOR EQUIVALENT BENEFITS OR PROVIDING UNIQUE BENEFITS THAT MORE THAN OFFSETS A HIGHER PRICE • TWO BASIC TYPES OF COMPETITIVE ADVANTAGE -COST LEADERSHIP -DIFFERENTIATION What are the key differences between the two types of business-level strategy? Two Types of Competitive Advantage Cost Leadership Cost Leadership Benefits Spend so much less money than anyone else giving most people most of what they want that we can charge way less and still make a ton of money & Fatal “Stuck in Middle” Zone Differentiation Differentiation Benefits Make people believe we have something they need and that they can only get from us, so we can charge a premium price and make a 751 751 ton of money On what does a cost-leadership strategy focus? Cost-Leadership Strategy An integrated set of actions designed to produce or deliver goods or services at the lowest cost structure, relative to competitors with features that are acceptable to customers – relatively standardized products – features acceptable to many customers – lowest competitive price 752 Cost-Leadership Strategy Cost saving actions required by this strategy: – building efficient scale facilities – tightly controlling production costs and overhead – Continuously improving production efficiency – monitoring costs of activities provided by outsiders – simplifying production processes – minimizing costs of sales, R&D and service – Seeking most efficient marketing mechanisms 753 What are the risks of pursuing cost leadership? Risks of Cost Leadership Strategy • Competitors may learn how to successfully imitate the cost leader’s strategy • Processes used by the cost leader to produce and distribute its good or service could become obsolete because of competitors’ innovations • Loss of customer focus – Too much focus by the cost leader on cost reductions may occur at the expense of trying to understand customers’ perceptions of “competitive levels of differentiation 754 On what does a differentiation strategy focus? Differentiation Strategy An integrated set of actions designed by a firm to produce or deliver goods or services (at an acceptable cost) that customers perceive as being different in ways that are important to them •Nonstandardized products --Value provided by unique features and value characteristics that command premium price – – – – High customer service Superior performance quality Prestige or exclusivity Rapid innovation (product styles, features) •Assumes – customers value differentiated features more than they value low price – price for product does not exceed what the firm’s target customers are willing to pay 755 Differentiation Strategy Differentiation actions required by this strategy: – – – – – quality & continuous innovation focus capability in R&D developing new systems and processes shaping perceptions through advertising maximize human resource value-added contributions through development, low turnover and high motivation 756 What are the major risks of pursuing differentiation? Risks of Differentiation Strategy • Poor value proposition --Customers may decide that the price differential between the differentiated product and the cost leader’s product is too large • Customer tastes may shift – Means of differentiation may cease to provide value for which customers are willing to pay • Experience may narrow customer’s perceptions of the value of differentiated features of the firm’s products • Makers of counterfeit goods may attempt to replicate differentiated features of the firm’s products 757 CONCEPT OF COMPETITIVE ADVANTAGE • • • • BASIC TOOL FOR DIAGNOSING COMPETITIVE ADVANTAGE AND FINDING WAYS TO ENHANCE IT ;IS THE VALUE CHAIN WHICH DIVIDES A FIRM INTO THE MAIN FUNCTIONS IT PERFORMS WHILE TRANSFORMING THE CUSTOMER REQUEST FROM REQUIREMENT TO DELIVERY . VARIOUS ACTIVITIES IT PERFORMS INCLUDES DESIGNING , PRODUCING , MARKETING , DELIVERING AND SERVICES EACH OF THESE ACTIVITIES CAN CONTRIBUTE TO A FIRMS COST ADVANTAGE AND ALSO CREATE A BASIS FOR DIFFERENTIATION COST ADVANTAGE STEMS FROM HIGHLY PRODUCTIVE AND EFFECTIVE BUSINESS PROCESSES LEADING TO MINIMIZATION OF COSTS AND COST OF GOODS SOLD DIFFERENTIATION CAN COME FROM HIGH QUALITY PRODUCTS AND SERVICES WHICH ARE DELIVERED BY HIGHLY EFFECTIVE PROCESSES AND MANAGED BY PEOPLE WITH GREAT HUMAN CAPITAL Industry Leadership Dominance in Market Share Product/Service Brand value Process Capability/Process Excellence Differentiating Human Capital CONCEPT OF COMPETITIVE ADVANTAGE • • • • • VALUE CHAIN DIVIDES A FIRM INTO ITS STRATEGICALLY RELEVANT ACTIVITIES IN ORDER TO UNDERSTAND THE COST BEHAVIOUR AND EXISTING AND POTENTIAL SOURCES OF DIFFERENTIATION FIRM GAINS COMPETITIVE ADVANTAGE BY PERFORMING THESE STRATEGICALLY IMPORTANT ACTIVITIES MORE ECONOMICALLY OR BETTER THAN COMPETITION VALUE CHAIN EMBEDDED IN A LARGER STREAM OF ACTIVITES THAT CREATE AND DELIVER THE PURCHASED PRODUCTS OF A VALUE CHAIN. SUPPLIERS FORM UPSTREAM VALUE CHAINS AND INFLUENCE THE OUTCOME OF COMPANY PRODUCTS. SIMILARLY MANY PRODUCTS PASS THRU THE VALUE CHAIN OF DOWNSTREAM DISTRIBUTION CHANNELS ON THEIR WAY TO THE CONSUMER ULTIMATE BASIS FOR DIFFERENTIATION IS PRODUCT ROLE IN CUSTOMER VALUE CHAIN WHICH DETERMINES BUYER NEEDS GAINING AND SUSTAINING COMPETITIVE ADVANTAGE DEPENDS ON UNDERSTANDING HOW A COMPANY VALUE CHAIN FITS INTO THE OVERALL VALUE SYSTEM CONCEPT OF COMPETITIVE ADVANTAGE • • VALUE CHAIN OF EACH FIRM MAY DELIVER DIFFERENT VALUE BASED ON WHETHER ITS STRATEGIC THEME IS BASED ON LOWER COSTS OR DIFFERENTIATION EXTENT OF INTEGRATION INTO ACTIVITIES PLAYS A KEY ROLE IN COMPETITIVE ADVANTAGE Strategic Positioning • Firms within the same industry can position themselves in different ways • Not all positions will be equally profitable or lead to the same odds of survival • A firm’s ability to create value and enjoy a competitive advantage over other firms depends on how it positions itself within its industry Strategic Positioning • There are two broad approaches to strategic positioning in order to achieve competitive advantage – Attain a lower cost while matching the benefit provided by the competitor (cost advantage) – Offer a higher benefit while keeping the cost the same the competitors’ (benefit advantage) Perfect Competition and Competitive Advantage • In a perfectly competitive industry where firms are price takers, competitive advantage does not exist • Even when the product is not homogenous (and varies on a cost-quality continuum), dynamics of perfect competition can work Exploiting a Competitive Advantage Through Pricing • When the product differentiation is weak the firm should follow a market share strategy • With a cost advantage, the firm should underprice its rivals and build share • With a benefit advantage, the firm should maintain price parity and let the benefit build the share Exploiting a Competitive Advantage Through Pricing • When the product differentiation is strong the firm should follow a profit margin strategy • With a cost advantage, the firm should maintain price parity with its rivals • With a benefit advantage, the firm should charge a price premium over the competitors Competitive Advantage and Value Creation • A firms is said to have a competitive advantage in a market if it earns a higher rate of economic profit compared to the average economic profit in the industry • Economic profit earned by a firm depends on the market conditions as well as the economic value created by the firm • A firm can achieve competitive advantage only if it can create more economic value than its competitors • A firm’s ability to create value depends on its cost position as well as its benefit position relative to its competitors Value Created and Competitive Advantage • To achieve competitive advantage, a firm must produce more value than its rivals • Consumers will demand the same consumer surplus from the firm as from its rivals • With superior value creation, the firm can offer as much consumer surplus as the rivals and still make an economic profit Framework for Competitive Advantage Value Creation and Profitability • Value created = consumer surplus + producer’s profit Components of Consumer Surplus A firm can increase consumer surplus by increasing the perceived benefit or by selling at a lower price The firm can also increase consumer surplus by reducing the cost of using the product and the transactions costs that the consumer incurs Porters’ Generic Value Chain Inbound logistics Operations Outbound logistics Marketing & Sales Service The Value Chain • The value chain or the vertical chain is the representation of the firm as a set of value creating activities • Activities in the value chain include primary activities like production and marketing as well as support activities such as human resource management and finance Value Chain and Competitive Advantage • Analysis of competitive advantage should not be limited to the firm’s value chain • The entire vertical chain of production (including activities that are performed outside the firm) should be looked at • Search for competitive advantage involves a reevaluation of the organization of the vertical chain Evaluating the Organization of the Vertical Chain • Make or buy decisions made in the past may have to be revisited because market conditions and technology may have changed • Vertical integration that once made sense may be inefficient today because transactions costs have been declining Value Creation and Resources and Capabilities If a firm does not possess resources and capabilities that the rivals lack, rivals can create its strategies for value creation Resources are firm specific assets like patents and trademarks Capabilities are things that the firm does better than its rivals: They are typically valuable across multiple markets and products They are embedded in organizational routines that survive when individuals are replaced They represent tacit knowledge in the organization The Value Chain Support activities Primary activities Inbound logistics Operations Outbound logistics Marketing and Sales Service Corporate infrastructure Human resources management Technology Development 776 Procurement Materials receiving, storing, and distribution to manufacturing premises Transforming inputs into finished products. Storing and distributing products Promotions and sales force Service to maintain or enhance product value Support of entire value chain, e.g. general management planning, financing, accounting, legal services, government affairs, and QM Recruiting, hiring, training, and development Improving product and manufacturing process Purchasing input CONCEPT OF VALUE CHAIN • • EVERY FIRM IS A COLLECTION OF ACTIVITIES THAT ARE PERFORMED TO DESIGN PRODUCE MARKET DELIVER AND SUPPORT ITS PRODUCT. ALL THESE ACTIVITIES CAN BE SHOWN IN A VALUE CHAIN. INTENT IS TO CREATE VALUE FOR THE CUSTOMER. THOUGH COMPANIES MAY COMPETE IN THE SAME SPACE THEIR VALUE CHAINS COULD BE DIFFERENT ie DIFFERENCE IN BUSINESS MODEL.SUPERIORITY IN VALUE CHAIN BRINGS COMPETITIVE ADVANTAGE TIO THE COMPANY AS IT IS ABLE TO SATISFY THE END USER BETTER THAN COMPETITION VALUE CHAIN BREAKS UP FIRMS OPERATIONS INTO STRATEGICALLY RELEVANT ACTIVITIES IN ORDER TO UNDERSTAND THE BEHAVIOUR OF COSTS AND SOURCES OF DIFFERENTIATION.FIRM GAINS COMPETITIVE ADVANTAGE BY PERFORMING THESE ACTIVITIES CHEAPER OR BETTER THAN COMPETITION CONCEPT OF VALUE CHAIN • • • ALL ACTIVITIES A COMPANY PERFORMS INTERNALLY COMBINE TO FORM A VALUE CHAIN BECAUSE INTENT IS TO CREATE VALUE FOR THE CUSTOMER VALUE CHAIN BREAKS UP FIRMS OPERATIONS INTO STRATEGICALLY RELEVANT ACTIVITIES IN ORDER TO UNDERSTAND THE BEHAVIOUR OF COSTS AND SOURCES OF DIFFERENTIATION.FIRM GAINS COMPETITIVE ADVANTAGE BY PERFORMING THESE ACTIVITIES CHEAPER OR BETTER THAN COMPETITION CUSTOMER VALUE CHAIN INCLUDES A MARKUP ON COSTS INCURRED IN PERFORMING VALUE CREATING PROCESSES AND THIS MARKUP IS AT TIMES BORNE BY THE CUSTOMER IF IT MEANS VALUE TO HIM. CUSTOMERS WILL NOT PAY A MARKUP FOR ACTIVITIES WHICH DO NOT CREATE VALUE TO HIM eg THREE LEVELS OF CHECK TO ENSURE INVOICE DETAILS ARE CORRECT LEADING TO AN ENTRY IN THE INVOICE CALLED ACCURACY LEVY! CONCEPT OF VALUE CHAIN • FIRMS VALUE CHAIN HAS 3 COMPONENTS – UPSTREAM SUPPLIER VALUE CHAIN ;MIDSTREAM ITS OWN VALUE CHAIN ; DOWNSTREAM DISTRIBUTOR VALUE CHAIN THRU WHICH PASS THE CUSTOMER VALUE PROPOSITION • SUPPLIERS HAVE VALUE CHAINS (UPSTREAM VALUE CHAINS) WHICH CREATE AND DELIVER THE PURCHASED INPUTS USED IN FIRMS CHAIN. • VALUE IS THE AMOUNT BUYERS ARE WILLING TO PAY FOR WHAT A FIRM PROVIDES THEM. VALUE IS MEASURED BY TOTAL REVENUE , A REFLECTION OF THE PRICE A FIRMS PRODUCT COMMANDS AND THE QUANTITIES IT CAN SELL. A FIRM IS PROFITABLE IF VALUE IT COMMANDS EXCEEDS THE COSTS INVOLVED IN CREATING THE PRODUCT • CREATING VALUE FOR BUYERS THAT EXCEED THE COST OF DOING SO IS THE STRATEGY EVERY COMPANY WANTS CONCEPT OF VALUE CHAIN • VALUE CHAIN CONSISTS OF VALUE ACTIVITIES AND MARGINS. IT CONSISTS OF BUILDING BLOCKS BY WHICH A FIRM CREATES A PRODUCT VALUABLE TO ITS BUYERS • MARGIN IS THE DIFFERENCE BETWEEN TOTAL VALUE AND COLLECTIVE COSTS OF PERFORMING THE VALUE CHAIN ACTIVITIES • EVERY VALUE ACTIVITY EMPLOYS PURCHASED INPUTS , HUMAN RESOURCES, AND TECHNOLOGY TO PERFORM ITS FUNCTIONS. EACH VALUE ACTIVITY ALSO USES AND CREATES INFORMATION SUCH AS ORDER ENTRY etc. CONCEPT OF VALUE CHAIN • • • • UNLESS A COMPANY CREATES VALUE TO ITS CUSTOMER WHO THEN PAYS A PREMIUM OVER THE COSTS , IT WILL NOT MAKE PROFITS ON THE SALE AND EVENTUALLY RUN INTO LOSS BECAUSE OF REDUCED MARGINS AND ESCALATING COSTS OF DOING BUSINESS VALUE CHAIN CONSISTS OF TWO BROAD CATEGORIES OF ACTIVITIES –PRIMARY ACTIVITIES AND SUPPORT ACTIVITIES PRIMARY ACTIVITIES ARE THOSE WHICH DIRECTLY INTERACT WITH CUSTOMER AND ARE SUPPOSED TO CREATE VALUE FOR THE CUSTOMER.THEY ARE ALSO THE REVENUE EARNERS FOR THE COMPANY.FIVE CATEGORIES OF PRIMARY ACTIVITIES SUPPORT ACTIVITIES FACILITATE AND ENHANCE THE PERFORMANCE OF PRIMARY ACTIVITIES. THEY GENERALLY DO NOT DIRECTLY EARN REVENUES THOUGH THEY MAY INDIRECTLY EARN REVENUE FROM OTHER SOURCES eg FINANCE INVESTING OR LENDING MONEY AND GETTING INTEREST(OTHER INCOME) CONCEPT OF VALUE CHAIN • SUPPORT ACTIVITIES CAN BE OUTSOURCED eg HUL OUTSOURCES ITS HR ACTIVITIES TO ACCENTURE. GENERALLY THEY DO NOT FACE CUSTOMERS DIRECTLY THOUGH SUPPORT ACTIVITIES OUTSOURCED eg CALL CENTRE RELATED CUSTOMER SERVICE ACTIVITIES DO • PRIMARY ACTIVITIES CANNOT BE OUTSOURCED AND GENERALLY FORM THE CORE COMPETENCE OF THE COMPANY. THEY ARE ALSO ACTIVITIES WHICH HAVE A DIRECT INTERFACE WITH THE CUSTOMERS. DEFINING THE VALUE CHAIN • MANDATORY TO DEFINE A FIRM VALUE CHAIN FOR ACHIEVING SUCCESS IN MARKETPLACE • STARTING WITH GENERIC VALUE CHAIN INDIVIDUAL FUNCTIONS SUCH AS MFG MARKETING etc ARE SUB DIVIDED INTO ACTIVITIES . LEVEL OF GRANULARITY DEPENDS ON THE COMPLEXITY OF THE VALUE CHAIN Value Chain System Value Chain Analysis • Allows the firm to understand the parts of its operations that create value and those that do not. • A template that firms use to: – Understand their cost position. 3–785 – Identify multiple means that might be used to facilitate implementation of a chosen businesslevel strategy. Value Chain Analysis (cont’d) • Value Chain – Shows how a product moves from the rawmaterial stage to the final customer. • To be a source of competitive advantage, a resource or capability must allow the firm: – To perform an activity in a manner that is superior to the way competitors perform it, or – To perform a value-creating activity that 3–786 competitors cannot complete Value Chain Analysis (cont’d) • Primary activities involved with: – A product’s physical creation – A product’s sale and distribution to buyers – The product’s service after the sale • Support Activities – Provide the assistance necessary for the primary activities to take place. 3–787 FIGURE 3.3 The Basic Value Chain 3–788 PRIMARY ACTIVITIES • • • SUPPLY CHAIN MANAGEMENT(INBOUND LOGISTICS)- ACTIVITIES ASSOCIATED WITH RECEIVING STORING INPUTS TO THE PRODUCT SUCH AS MATERIAL HANDLING,WAREHOUSING, INVENTORY CONTROL,AND RETURNS TO SUPPLIER OPERATIONS-ACTIVITIES,COSTS, AND ASSETS ASSOCIATED WITH CONVERTING INPUTS INTO FINAL PRODUCT FROM PRODUCTION,ASSEMBLY,PACKAGING,EQUIPMENT MAINTENANCE,FACILITIES,OPERATIONS,QUALITY ASSURANCE DISTRIBUTION(OUTBOUND LOGISTICS)-ACTIVITIES,COSTS,AND ASSETS DEALING WITH PHYSICALLY DISTRIBUTING THE PRODUCT TO BUYERS(FG WAREHOUSING,ORDER PROCESSING,ORDER PACKING, SHIPPING INCL DELIVERY AND MAINTENANCE OF NETWORK OF DISTRIBUTORS AND RETAILERS PRIMARY ACTIVITIES • • • SALES AND MARKETING – ACTIVITIES, COSTS AND ASSETS RELATED TO SALES FORCE EFFORTS, ADVERTISING AND PROMOTION,MARKET RESEARCH AND PLANNING,AND DEALER /DISTRIBUTOR SUPPORT SERVICE – ACTIVITIES,COSTS AND ASSETS ASSOCIATED WITH PROVIDING ASSISTANCE TO BUYERS, SUCH AS INSTALLATION,SPARES DELIVERY,MAINTENANCE AND REPAIR,TECHNICAL ASSISTANCE,POST SALES COMPLAINT MANAGEMENT AND RESOLUTION INCLUDNG WARRANTY MANAGEMENT EACH OF THESE CATEGORIES ARE VITAL TO COMPETITIVE ADVANTAGE DEPENDING ON THE INDUSTRY eg FOR A DISTRIBUTOR INBOUND AND OUTBOUND LOGISTICS ARE VITAL;FOR A RETAILER OUTBOUND LOGISTICS DOES NOT EXIST;FOR A SERVICE PROVIDER SERVICE LEVEL IS THE DIFFERENTIATOR SUPPORT ACTIVITIES • PRODUCT R&D , TECHNOLOGY AND SYSTEMS DEVELOPMENT-ACTIVITIES ,COSTS,AND ASSETS RELATING TO PRODUCT AND PROCESS R&D, PROCESS DESIGN IMPROVEMENT, EQUIPMENT DESIGN,COMPUTER SOFTWARE DEVELOPMENT, TELECOMMUNICATION SYSTEMS,COMPUTER ASSISTED DESIGN AND ENGINEERING DATABASE CAPABILITIES AND DEVELOPMENT OF COMPUTERISED SUPPORT SYSTEMS SUPPORT ACTIVITIES • • • PROCUREMENT WHICH INCLUDES PURCHASED INPUTS USED IN THE COMPANY VALUE CHAIN .SUCH INPUTS INCLUDE RAW MATERIAL,SUPPLIES,CONSUMABLES AND ASSETS SUCH AS MACHINERY. HUMAN RESOURCES MANAGEMENT –ACTIVITIES,COSTS AD ASSETS ASSOCIATED WITH RECRUITMENT,HIRING,TRAINING,DEVELOPMENT, AND COMPENSATION OF ALL TYPES ;LABOUR RELATIONS ACTIVITIESAND DEVELOPMENT OF KNOWLEDGE BASED SKILLS AND CORE COMPETENCES GENERAL ADMINISTRATION-ACTIVITIES,COSTS AND ASSETS RELATING TO GENERAL MGT,ACCOUNTING AND FINANCE,LEGAL AND REGULATORY AFFAIRS,SAFETY AND SECURITY MGT, INFORMATION SYSTEMS AND OTHER OVERHEAD FUNCTIONS Typical Value Chain Analysis • Analysis of own value chain – which costs are related to what activities • Analysis of Customer value chain • Identification of cost advantage • Identification of potential “value” added for the customer—lower cost/high performance-where does customer see “value” Outsourcing Strategic Choice to Purchase Some Activities From Outside Suppliers Firm Infrastructure Human Resource Management Technological Development Primary Activities Service Marketing & Sales Outbound Logistics Operations Procurement Inbound Logistics Support Activities Outsourcing Strategic Choice to Purchase Some Activities From Outside Suppliers Firm Infrastructure Human Resource Management Human Resource Management Firms often purchase a portion Technological Development Inbound Logistics Operations Outbound Logistics Primary Activities Marketing & Sales Service Operations Procurement Marketing & Sales Procurement of their value-creating activities from specialty external suppliers Development who can perform these functions more efficiently Outbound Logistics Technological Inbound Logistics Support Activities Service Strategic Rationales for Outsourcing Improve Business Focus Lets company focus on broader business issues by having outside experts handle various operational details Provide Access to World-Class Capabilities The specialized resources of outsourcing providers makes worldclass capabilities available to firms in a wide range of applications Accelerate Business Re-Engineering Benefits Achieves re-engineering benefits more quickly by having outsiders-who have already achieved world-class standards--take over process Share Risks Reduces investment requirements and makes firm more flexible, dynamic and better able to adapt to changing opportunities Free Resources for Other Purposes Permits firm to redirect efforts from non-core activities toward those that serve customers more effectively LINKAGES WITHIN VALUE CHAIN • VALUE CHAIN IS A SET OF INTERDEPENDENT ACTIVITIES RELATED BY LINKAGES WITHIN THE VALUE CHAIN • • • LINKAGES ARE RELATIONSHIPS BETWEEN THE WAY ONE VALUE ACTIVITY IS PERFORMED AND COST/PERFORMANCE OF ANOTHER LINKAGES CAN LEAD TO COMPETITIVE ADVANTAGE BY OPTIMIZATION OF RESOURCE UTILIZATION LINKAGE MAY CALL FOR NEED TO COORDINATE ACTIVITIES IN OPERATIONS .ONTIME DELIVERY REQUIRES COORDINATION OF ACTIVITIES IN OPERATIONS,OUTBOUND LOGISTICS AND SERVICES.COORDINATION OF LINKAGES OFTEN REDUCES COSTS OR ENHANCES DIFFERENTIATION. INTER STREAM LINKAGES • LINKAGES EXIST NOT ONLY WITHIN A FIRM VALUE CHAIN BUT BETWEEN VALUE CHAINS OF COMPANY AND SUPPLIER OR DISTRIBUTOR;WAY SUPPLIER OR DISTRIBUTOR ACTIVITIES ARE PERFORMED AFFECTS THE COST OR PERFORMANCE OF COMPANY ACTIVITIES.FIRMS INBOUND LOGISTICS ACTIVITIES INTERACT WITH SUPPLIER ORDER ENTRY SYSTEM .SUPPLIERS VALUE CHAIN CAN SIGNIFICANTLY AFFECT COMPANY COST AND DIFFERENTIATION.LINKAGES BETWEEN SUPPLIER AND COMPANY VALUE CHAIN PROVIDE OPPORTUNITIES FOR FIRM TO ENHANCE ITS COMPETITIVE ADVANTAGE eg SUPPLIER BEING LOW COST QUALITY PROVIDER. DISTRIBUTOR LINKS ARE SAME AS SUPPLIER.DISTRIBUTORS ALSO HAVE VALUE CHAINS THRU WHICH FIRM PRODUCTS PASS Porter Value Chain Manufacturing Industry Value Chain Research and Development Production Engineering and Manufacturing Sales Marketing and Distribution Service Retail Industry Value Chain Partnering with Vendor Managing Buying Inventory Distributing Operating Inventory Stores Marketing and Selling AVENUES OF ACHIEVING COST ADVANTAGE • DO A BETTER JOB THAN RIVALS OF PERFORMING VALUE CHAIN ACTIVITIES MORE COST EFFECTIVELY eg CERTAIN RETAIL OUTLETS WHO ALSO SELL GREEN GROCERY HAVE THEIR PWN FARMS AND LOGISTICS SUPPORT BY WHICH THEY ARE ABLE TO ELIMINATE THE MIDDLE MEN COST. Eg AP DAIRY WAS ABLE TO SAVE 42% ITS COSTS BY BUYING DIRECTLY FROM THE FARMERS • REORGANIZE STORAGE LOCATIONS AND MAKE PROCESSES AGILE TO MINIMIZE COSTS OF STORAGE AVENUES OF ACHIEVING COST ADVANTAGE • • • • STRIVING TO CAPTURE ECONOMIES OF SCALE IS ABILITY TO LOWER UNIT COSTS BY INCREASING SCALE OF OPERATION.INCREASING SCALE OF OPERATIONS ALSO INCLUDES CONTRACT MFG AS A STRATEGIC ACTIVITY TO HAVE A BETTER ASSET UTILIZATION. ALSO STRATEGICALLY EARLIER COMPANIES WHICH HAD AN EXERCISE IN CORE COMPETENCE AND SOURCED RAW MATERIAL FROM SUPPLIERS ARE TODAY RELOOKING AT THEIR STRATEGY AND ARE ACQUIRING THE SUPPLIERS AS A PART OF THEIR BACKWARD INTEGRATON STRATEGY eg HUL ACQUIRES SWASTIK IND WHICH USED TO SUPPLY CAUSTIC SODA. ACHIEVING COST ADVANTAGE BY INCREASED PLANT EFFECTIVENESS (OPE) THRU MAXIMIZED UPTIMES , MAXIMIZED THRUPUTS AND MAXIMIZED QUALITY eg UPTIME 100% EFFICIENCY OF THRUPUT ALMOST EQUAL TO RATED CAPACITY AND QUALITY ALMOST 100% eg RELIANCE POWER UPTIME 100% THRUPUT 506MWH ON RATED 500 MW WHEREAS MSEB ONLY 1100 MWH ON 2300 MWH MAXIMIZE SUPPLY CHAIN EFFECTIVENES BY MAXIMIZING PURCHASE , PLANT AND DISTRIBUTION EFFECTIVENESS eg MINIMIZE LOSSES IN EACH COMPONENT eg PURCHASE , PLANT , DISTRIBUTION . HAVING SUPPLIERS (ANCILLARY UNITS) CLOSE TO PLANT TO SAVE TRANSPORT COSTS AND ALSO ENABLE IMPLEMENTATION OF JIT SYSTEMS MINIMIZE OPERATIONAL LOSSES ESPECIALLY INSPECTION , REJECTS ,REWORK , SCRAP ,AND OTHER BUSINESS PROCESS WASTES SUCH AS WAITING ,WORKFLOWS ,LIMITING AUTHORITIES, INSPECTIONS etc AVENUES OF ACHIEVING COST ADVANTAGE • • • • • BOOST SALES VOLUMES AND THUS SPREAD CERTAIN OVERHADS SUCH AS R&D ADVERTISING OVER LARGER VOLUMES MINIMIZING INVENTORY IN SUPPLY CHAIN BUT AT THE SAME TIME BEING AN AGILE AND FLEXIBLE SUPPLY CHAIN eg PAINT INDUSTRY DECORATIVE PAINTS . NEED TO ADDRESS THE CHANGING DEMAND PATTERNS THOUGH LEAD TIME TO RECEIVE GOODS FROM FACTORY TO RETAIL OUTLET IS ABOUT 27 DAYS.FLEXIBILITY IS ADDRESSED THRU MAGIC EYE. WHAT ABOUT THE BHELWALLA WHO ALSO NEEDS TO BE AGILE AND FLEXIBLE IN HIS CORE COMPETENCE? CONTINUOUS VALUE ANALYSIS EXERCISES TO REDUCE COSTS OF RAW MATERIAL WITHOUT COMPROMISING ON THE SPECIFICATIONS OF THE PRODUCT eg REPLACING COPPER WIRING AT HOME BY ALUMINIUM WIRING EFFECTIVE PROCESS CONTROL MANAGEMENT AND FEEDBACK CONTROL SYSTEMS TO TIGHTLY MONITOR PROGRESS OF ACTIVITIES AND ENSURE THAT THEY ARE EXECUTED EFFECTIVELY AND EFFICIENTLY ABILITY OF COMPANY TO BARGAIN PROCUREMENT PRICES WITH SUPPLIER eg TOYOTA NEW PURCHASE MGR AND DELY PRICES OF EXISTING SUPPLIERS FOR ANCILLARIES AVENUES OF ACHIEVING COST ADVANTAGE • • • • TAKING BENEFITS OF COST ADVANTAGES OF SOURCING AND OUTSOURCING ENABLING COST ADVANTAGES OF VERTICAL INTEGRATION eg RELIANCE INDUSTRIES HAS TWO PETROCHEMICAL PLANTS AT HAZIRA AND PATALGANGA;IT ALSO HAS TWO OTHER UNITS(IPCL) AT BARODA AND NAGOTHANE. TO SERVICE THEIR NEED THEY HAD A BACKWARD INTEGRATION AND BUILT A REFINERY AT JUNAGADH. REFINERY SUPPLIES NAPHTA TO THESE THREE UNITS.THEY HAD ALSO DONE A FORWARD INTEGRATION AND HAD CONSTRUCTED RETAIL PETROL OUTLETS TO SELL THEIR REFINERY PRODUCTS BUT OWING TO WITHDRAWAL OF GOVT CONCESSIONS THEY HAVE DISCONTINUED RETAIL OPERATIONS IN THIS AREA. ALSO CASE OF HUL ACQUIRING CAUSTIC SODA SUPPLIERS OFFER FRILL FREE PRODUCTS TO CUSTOMERS AT CHEAPEST COST AND PRICE OTHER REQUIREMENTS AS ADDON. INDIAN LAPTOP OF RS 11000 OR MINI LAPTOP SOLD BY CROMA FOR 19995. OFFERING A LIMITED PRODUCT LINE AT ROCK BOTTOM PRICE. Sustaining Competitive Advantage In a perfectly competitive market, price competition will ensure that competitive advantage will not be sustained Even without perfect competition, sustaining competitive advantage is not easy Rivals can imitate a successful firm’s products or neutralize the firm’s advantage through new technologies, products and business practices Sustaining Competitive Advantage Competitive advantage is sustainable if it persists despite competitors’ efforts to duplicate it or neutralize it Sustainability can occur in two ways ◦ Firms may differ with respect to resources and capabilities and the differences persist ◦ Isolating mechanisms (analogous to barriers to entry) may work to protect the competitive advantage of firms WORLD CLASS QUALITY ASSESSMENT FRAMEWORK FOR STRATEGY STRATEGIC DEVELOPMENT AND DEPLOYMENT CATEGORY 2 • 2.1 STRATEGY DEVELOPMENT Describes how organization determines its strategic challenges and advantages and how company establishes its strategy and strategic objectives to address these challenges and enhance its advantages • 2.2 STRATEGIC DEPLOYMENT Describes how the organization converts its strategic objectives into action plans and identifies key performance indicators required to measure progress. It also projects future performances relative to market requirements. AREAS TO ADDRESS IN 2.1 STRATEGY DEVELOPMENT • 2.1.a STRATEGY DEVELOPMENT PROCESS • 2.1.a.1-How does org conduct strategic planning and what are the key process steps; who are the key participants -How does the process identify potential blind spots -How do you determine strategies challenges and advantages with respect to competition -What are your long term and short term planning time horizons and how are they set -How does the strategic planning process address these time horizons AREAS TO ADDRESS IN 2.1 STRATEGY DEVELOPMENT 40PTS • 2.1.a STRATEGY DEVELOPMENT PROCESS • 2.1.a.2-How to ensure strategic planning addresses key issues such as SWOT analysis ,early indications of major shifts in technology, markets , customer preferences, competition or regulatory requirement; long term org sustainability; ability to execute strategic plans -How do you collect and analyze relevant data and information pertaining top factors related to strategic planning AREAS TO ADDRESS IN 2.1 STRATEGY DEVELOPMENT 40PTS • 2.1.b STRATEGIC OBJECTIVES • 2.1.b.1-What are your strategic objectives and timetable for achievement -What are the most important goals for these strategic objectives • 2.1.b.2-How do strategic objectives address organizational challenges and strategic advantages; how do your strategic objectives address your opportunities for innovation in products and services , operations and the business model; how do you ensure that strategic objectives balance short term and long term challenges and opportunities -How do you ensure that strategic objectives balance the needs of all key stakeholders DETAILS OF STRENGTHS AND OPPORTUNITIES IN CATEGORY 2 2.1 STRATEGY DEVELOPMENT • STRENGTHS -Implementation of Balanced scorecard to measure performance against short term and long term goals -Organizational objectives drilled down to functional units and personal key result areas - Strategic plans revisited and reviewed annually • OPPORTUNITIES -Strategy Map is not provided in the application -Mechanism to convert customer requirement into product specifications in the produce to sell segment not evident - Stocking policy for produce to sell segment to meet agile requirement not evident -How inputs from collaborator are used in strategic planning is not clear AREAS TO ADDRESS IN 2.2 STRATEGY DEPLOYMENT • 2.2.a ACTION DEVELOPMENT AND DEPLOYMENT • 2.2.a.1-How do you develop and deploy action plans across the company to achieve strategic objectives. How do you ensure that key outcomes of action plans can be sustained • 2.2.a.2-How do you ensure that adequate financial and other resources are available to support the accomplishment of action plans. How do you balance resources to ensure adequate resources to meet current obligations STRATEGIC DEPLOYMENT • 2.2.a ACTION DEVELOPMENT AND DEPLOYMENT • 2.2.a.3-How do you establish and deploy modified action plans if circumstances require a shift in plans and rapid execution of new plans. 2.2.a.4-What are your key short and long term action plans and what are the key planned changes to your products/services and your customers/markets and how will you operate • 2.2.a.5-What are your key HR plans to accomplish your short term and long term strategic objectives and action plans -How do the plans address potential impacts on workforce and any potential impact on workforce and any changes to workforce capability and capacity needs • 2.2.a.6-What are key performance measurement for tracking progress in action plans. How do you ensure that overall action plan measurement system reinforces org alignment -How do you ensure that measurement system covers all key deployment areas and stakeholders AREAS TO ADDRESS IN 2.2 STRATEGY DEPLOYMENT • 2.2.b PERFORMANCE PROJECTION -What are your performance projections for the key performance measures -What are performance projections for short term and long term planning horizons -How do your projections determined and how do projections compare with projections of competition or comparable companies -How does it compare with key benchmark goals and past performance -How do you ensure progress so that you will meet projections -If there are gaps in performance against competition how will you address them AREAS TO ADDRESS IN 2.2 STRATEGY DEPLOYMENT • 2.2.a ACTION DEVELOPMENT AND DEPLOYMENT • 2.2.a.3-What are your key short and long term action plans and what are the key changes to your products/services and your customers/markets and how will you operate • 2.2.a.4-What are your key HR plans that derive from your short term and long term strategic objectives and action plans -What are key performance measurement for tracking progress in action plans -How do you ensure that action plan measurement system reinforces org alignment -How do you ensure that measurement system covers all key deployment areas and stakeholders AREAS TO ADDRESS IN 2.2 STRATEGY DEPLOYMENT • 2.2.b PERFORMANCE PROJECTION -What are your performance projections for measures in 2.2.b.5 -What are performance projections for short term and long term planning horizons -How do your projections compare with competition or comparable companies -How does it compare with key benchmark goals and past performance -If there are gaps in performance against competition how will you address them DETAILS OF STRENGTHS AND OPPORTUNITIES IN CATEGORY 2 2.2 STRATEGY DEPLOYMENT • STRENGTHS -Strategic objectives drilled down to key action points in short term/long term plans -Resource allocation and budgets aligned with business plans • OPPORTUNITIES -Strategic planning for competencies required to fulfill strategic objectives is not detailed -Contingency planning in action plans not clear • SHOW PRESENTATION OF STRATBSC • SHOW PRESENTATION OF MCKINSEY 7S