STRATEGIC MANAGEMENT
WHAT IS MEANT BY
STRATEGY
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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?
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A unique value proposition versus
competitors
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A different, tailored value chain
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Clear tradeoffs, and choosing what
not to do
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Activities that fit together and
reinforce each other
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Continuity of strategy with continual
improvement in realizing the strategy
What is Not a Strategy?
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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:
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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
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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
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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
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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
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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
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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
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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
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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
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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:
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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
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VIEWING STRATEGIC MGT
AS A PROCESS
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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
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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
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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
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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
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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
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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
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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
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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
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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
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© 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
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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