Strategic ManagementThe Competitive Edge Prof. R.Srinivasan Dept of Management Studies Indian Institute of Science Bangalore
Topics 1.Introduction to Strategic Management Concept of Corporate Strategy Strategic Management Process
Sessions* 1-5
The 7-S Framework Corporate Policy and Planning in India 2.Board of Directors-Role and Functions Top Management-Role and skills Board Functioning-Indian Context
6-8
3.Environment Scanning Industry Analysis Synthesis of External Factors External factors Analysis Summary (EFAS)
9-14
Internal Scanning Value Chain Analysis Synthesis of Internal Factors External factors Analysis Summary (IFAS) Case Study 1
15
CONTINUED… 4.Strategy Formulation Strategic factors Analysis Summary (SF (SFAS) AS) Business Strategy Corporate Strategy
16-19
Functional Strategy Strategic Choice Case Study 2
20
5.Strategy Implementation Organization Structure Corporate Culture
16-19
Diversification Mergers and Acquisition Case Study 3 6.Evaluation and Control Strategic Information Systems
24 25-26
CONTINUED… 7.Other Strategic Issues Small and Medium Enterprises Non-Profit Organizations
* Each session is approximately for 1.5 hours
27-28
Books and References References • R.Srinivasan, Strategic Management -The Indian Context, 4th Edition, Prentice Hall of India, 2012 • R.Srinivasan, Case Studies in Marketing – The Indian Context,5th Edition, Prentice Hall of India, 2012
STRATEGIC MANAGEMENT LONG RANGE PLG / STRATEGIC PLANNING:
:
STRATEGY:
MGT PROCESSES IN ORGNS THRO WHICH THE FUTURE IMPACT OF CHANGE IS DETD AND CURRENT DECISIONS TO REACH A DESIGNED FUTURE ARE MADE
INCLUDE ENTIRE PROCESS OF MAJ OUTSIDE INTEREST GRPS AND THEIR STAKES; EXPECTATIONS OF DOMINANT INSIDE STOCK HOLDERS INFN - PAST, PRESENT & PROJD PERF; EVALN OF CO. STRENGTHS & WEAKNESSES; FORMLN OF ORGNL PURPOSE, MISSION, OBJS, POLICIES AND STRATEGIES LONG - TERM DECISIONS - INCLUDES OBJS, GOALS & COURSES OF ACTION Ex: (ANSOFF: CORP. STRATEGY…., 65) OBJS: ROI: THRESHOLD 10%, GOALS 15% SALES GROWTH : THRESHOLD 5%, GOALS 10% RATE
STRATEGY: COURSES OF ACTION
PROD-MKT: BASIC CHEMICALS & SCOPE PHARMACEUTICALS GROWTH : PROD DEVPT & CONCENTRIC DIVSFN VECTOR COMPETITIVE: PATENT PROTECTN, SUPERIOR ADVANTAGE RES COMPETENCE SYNERGY
PURPOSE & MISSION:
USED INTERCHANGEABLY
: USE OF FIRM S RES CAPABILITIES & PRODN TECHNOLOGY
Mission statement !
A strategically revealing mission statement incorporates three elements !
!
!
What customer need is being satisfied Who is being satisfied How value is created and delivered to customers satisfying their needs
Mission statement to strategic vision !
Questions that must be answered !
!
!
!
!
!
What changes are occurring in markets and what are the implications for the direction we need to move What new or different customer needs should we move satisfy What new or different buyer segments should we concentrate o n What new geographic or product markets should we be pursuing What should the company’s business makeup look like in five years What kind of company should we b e trying to become
GOALS: LEGITIMISE ORGN; IDENTIFY INTER ORGNL RELNSHIPS; HAVE PR VALUE;IMAGE BLDG WITH SUPPLIERS, CUST, PUBLIC POLICY MAKERS AND THE GOVT; COORDN OF MULTIPLICITY OF TASKS, MANAGING OF CONFLICTS; STDS OF PERF; MOTIVATORS GOALS: OFFICIAL (DESCRIBED IN MOA, CHARTER, ANN. REPORT) OPERATIVE - WHAT ORGN IS REALLY ATTEMPTING TO DO CAN BE INFERRED FROM ORGNL POLICIES; HELP FOCUS ATTN, REDUCE UNCERTAINTY, CHOOSE ORGNL DESIGN ALTVES OPERATIONAL - USED BY SUP. PERSONNEL OR MGRS TO INFLUENCE THE BEHVR OF SUBORDINATES AND MEASURE THEIR PERFORMANCE OFFICIAL - ABSTRACT, IDEALISTIC; OPERATIVE ACTUAL GOALS BUT NOT ARTICULATED; OPERATIONAL - DETAILED, MEASURABLE POLICIES: GUIDE TO ACTION MAJ POLICY (LINE OF BUS) (CODE OF ETHICS) SECY POLICIES (GEOGR. AREA, MAJ COST, PROD) FNL POLICIES (MKTG,PRODN,RES,FIN,..) PROCEDURES & STD OPTG PLANS (CUST ORDERS, SERVICING,….) RULES (DELAY OF PAYMENT OF CHEQUES, SECURITY,….) PYRAMID OF BUSINESS POLICIES (FROM STEINER, TOP MGT PLG, P.268)
STRATEGIES:
GROWTH STRATEGIES I. HOLD RELATIVE POSN IN HIGH GROWTH PROD/MKT AREA II. MKT SHARE IN HIGH GROWTH MKT III. MKT SHARE IN MATURE MKTS IV. HOLD STRONG RELATIVE POSITION IN MATURE MKT, USE EXCESS CASH FLOW, FUNDS,… TO EFFECT PENTN WITH EXISTING PRODUCT LINE - MULTI NATL MKT V. AS IN (IV) -WRT NEW PROD/MKTS DOMESTICALLY VI. HOLD STRONG RELATIVE POSN IN DIVERSIFIED PROD. LINE DOMESTICALLY, AND USE EXCESS CASH FLOW, FUNDS CAPABILITY AND OTHER RESOURCES TO DIVERSIFY MKTS
DEPENDANCY REDN STRATEGIES I. MAINTAINING ALTERNATIVES II. BLDG POSITIVE IMAGE III. DIRECT CONFRONTATION IV. CONTRACTING - TO REDUCE UNCERTAINTIES V. CO-OPTATION - TO INVOLVE REPS OF OTHER ORGNS INTO POLICYMAKING POSITIONS TO ACHIEVE CERTAINTY OF FUTURE VI. COALITIONS - TO ACHIEVE COMMON GOALS LIKE OPPOSING A COMMON ENEMY
VERTL. INTEGN. STRATEGIES - BACKWARD; FORWARD RISK: LOSS OF FLEXIBILITY GENERIC: I. OVERALL COST LEADERSHIP II. DIFFERENTIATION III. FOCUS MERGERS AND JOINT VENTURES TURNAROUND STRATEGIES - ENTREPRENEURIAL AND EFFICIENCY BUS. UNIT STRATEGY AND CORP. STRATEGY
Tests of a winning strategy !
Goodness of fit test !
Match to industry and
competitive condition,
opportunities and threat Tailored to company’s strengths and weakness, competencies, and capabilities !
!
Competitive advantage test Leads to sustainable competitive advantage !
!
Performance test Boosts profitability and competitive strength and long term position !
MGT. DECISIONS
STRATEGIC - INTERFACE BETWEEN OPEN & EXTL. ENVNT OPERATING ALLOCATION OF TOT. RES- INFREQUENT. - RES. CONVN ADMNVE - FACILITATIVE
ORGN S SUCCESS OR FAILURE IN THE LONG-RUN DEPENDS UPON STRATEGIC DECISION MAKING i.e. UPON DOING THE RIGHT THINGS THAN UPON DOING THINGS RIGHT
Table 1.1: Comparison Of Operating and Strategic Decisions
How O P E R A T I N G D E C I S I O N S
What E f f e c t i v e I n e f f e c t i v e
STRATEGIC DECISIONS Unclear
Clear I
II
Clear strategy and effective operations have contributed to success in the past and will contribute to success in the future.
Unclear strategy but effective operations have contributed to success in the past but success in the future is doubtful.
III
IV
Clear strategy but ineffective operations have sometimes worked in the past in the short-run, but increasing competition makes success doubtful in the future.
Unclear strategy and ineffective operations have meant failure in the past and will be so in the future.
Source: Tragoe B. and J Zimmerman ,1980, Top Management Strategy, John Martin: London, pp.20
Important Definitions Strategic Management Process The full set of commitments, decisions, and actions required for a firm to achieve strategic competitiveness and earn above-average returns
Strategic Competitiveness Achieved when a firm successfully formulates and implements a value-creating strategy
Above-Average Returns Occurs when a firm develops a strategy that competitors are not simultaneously implementing Provides benefits which current and potential competitors are unable to duplicate
Important Definitions Risk An investor’s uncertainty about the economic gains or losses that will result from a particular investment
Average Returns Returns that are equal to those an investor expects to earn from other investments with a similar amount of risk
Strategic Flexibility A set of capabilities used to respond to various demands and opportunities existing in a dynamic and uncertain competitive environment It involves coping with uncertainty and the accompanying risks
Strategic Management – Decision Making Process 3 ORGANISATIONAL ANALYSIS (STRENGTHS & WEAKNESSES)
1 DETERMINATION OF MISSION OR PURPOSE
2 ENVIRONMENTAL ASSESSMENT (THREATS & OPPORTUNITIES)
REDETERMINE AS NEEDED
REDEFINE & REVISE AS NEEDED
4 SPECIFICATION OF OBJECTIVES
REFORMULATE AS NEEDED
5 FORMULATION OF STRATEGY OR STRATEGIC PLAN (TO ACHIEVE OBJECTIVES AND GOALS)
REWORK AS NEEDED
6 IMPLEMENTATION OR EXECUTION OF STRATEGIC PLAN
RECYCLE TO PHASES 1,4,5 & 6 AS NEEDED
7 MONITORING, REVIEWING & EVALUATION
FIG.2
Strategic Management Process Environmental Analysis EXTERNAL Social Environment Task Environment
Strategy Formulation
Implementation of Strategy
Evaluation & Control
Mission
Objectives Strategies
(Opportunities & Threats)
Policies INTERNAL
Programs Structure
Budgets
Culture Resources
Procedures (Strengths & Weaknesses)
Performance Feedback & Control
LEARNING ORGANISATION – FOUR MAIN ACTIVITIES
• Solving Problems Systematically • Experimenting with New Approaches • Learning from their own past experiences and past history as well as from the experiences of others
• Transferring knowledge quickly and efficiently throughout the Organisation
Mintzberg s Modes of Strategic Decision Making * Entrepreneurial Mode: by one powerful individual. Focus is on Opportunities ; problems are secondary; guided by founder s own vision of direction; exemplified by large, bold decisions. Ex. AOL (founder STEVE CASE) (though clear growth strategy is an advantage of the entrepreneurial mode, tendency to mkt products before being able to support them is certainly a disadvantage) * Adaptive Mode: Muddling through ; characterised by reactive solutions to existing problems - Much bargaining goes on concerning priorities of objectives - Strategy is fragmented and is developed to move the company forward incrementally. Ex. Typical of our Universities, Edn System, Govt agencies (Encyclopedia Britannica Inc. has moved away from this approach to Telvn Advtg & Internet mktg from 1996 after acquisition by the dual career couples)
* Planning Mode: Systematic gathering of appropriate information for situation analysis, generation of feasible alternative strategies and rational selection of the most appropriate strategy - includes proactive search for new opportunities and relative solutions of existing problems. Ex. J.C. Penny Co. - after careful study of shopping trends in 1980 s moved out of hardware, appliances, automotive items & electronics to apparel and home furnishings . Lower personal incomes in 1990 s led J.C. Penny to emphasise private brands; could offer high quality of goods at lower prices in dept stores. * Logical Incrementalization- syntheses of planning, adaptive and to a lesser extent entrepreneurial mode of decision making. – Organisation learns through an interactive process of probing into the future, experimenting and learning from a series of incremental commitments rather than through global formulations of total strategies. Useful when the environment is changing rapidly and it is important to build consensus and develop needed resources before committing the organisation to a specific strategy.
CORP. PLAN-
CHANGES IN THE OVERALL SHAPE OF AN ORGN - TAKES YRS TO FRUCTIFY i.e. LONG-RANGE HOWEVER CORP. PLAN & LRP DO NOT MEAN THE SAME. LRP ASSUMES CURRENT ENVNT TO REMAIN INFUTURE AS WELL - BUILT FROM LOWER LEVELS IN ORGN. STRATEGY MAKING STARTS AT THE TOP MGT - DENOTES PLG. FOR FUTURE OF THE ORGN AS A WHOLE; CONSIDERS ALL ASPECTS OF ORGN ACTIVITIES - INTEGRATES STRATEGIC PLG WITH SHORT RANGE OPNL PLANS
CORP PLG & SYSTEMS APPROACH - COMPUTER MODELS CAN BE USED AS AN ADJUNCT OF SYSTEMS APPROACH; USEFUL FOR LARGE ENTERPRISES FOR FINL EVALN - HOWEVER, SH. NOT CREATE MGRL PBLMS; DATA HAS TO BE REGULARLY UPDATED BENEFITS OF C.P. - ANTICIPATE TECHGL. CHANGES & ACHIEVE STRATEGIC OBJS & GOALS RATIONAL RES. ALLOCATION IMPROVED COORDINATION EMPHASIS ON MANPOWER DEVPT NEW PROD. DEVPT & LONG TERM NVESTMENTS NEW SENSE OF DIRECTION STUDIES IN US -
38 TO 40% IN SALES 64% IN EPS 56% IN SHARE PRICES WITH C.P.
Figure 3.1A Conceptual Model of Corporate Planning STRATEGIC PLANNING
INFORMATION FLOWS
EXPECTATIONS OF MAJOR OUTSIDE INTERESTS Society Community (local) Stockholders TECHNICAL PLANNING
Customers Suppliers Creditors
EXPECTATIONS OF MAJOR INSIDE INTERESTS
THE PLAN TO PLAN
Top Managers
MASTER STRATEGIES
Other Managers
Mission
Workers/Staff
Purposes Objectives
THE DATA BASE
Policies
Past Performance
PROGRAM STRATEGIES
Current situation
MEDIUM-RANGE PROGRAMMING & PROGRAMS
SHORTRANGE PLANNING & PLANS
IMPLEMENTATION OF PLANS
REVIEW & EVALUATION OF PLANS
Forecasts
EVALUATIONS O F Environment: Opportunities Threats Company: Strengths Weakness
DECISION & EVALUATION RULES
Source: 1. George A. Steiner, et. Al:, Management Policy and Strategy: Text, Readings and Cases, p.18 2. John D.C. Roach and Michael G. Allen, Strengthening the Strategic Planning Process in The Strategic Management Handbook , Kenneth J. Albert (ed.), pp.7-10
ORGNL CHANGE - COMPLEX RELATIONSHIP BETWEEN STRATEGY, STRUCTURE, SYSTEMS, STYLE, SKILL, STAFF AND SUPER ORDINATE GOALS - SHOWN BY McKINSEY 7S FRAMEWORK IN FIG. 3
STRUCTURE
SYSTEMS STRATEGY
SUPER ORDINATE GOALS
FIG. 3
STYLE
SKILLS
STAFF
SUPER ORDINATE GOALS: SET OF VALUES AND ASPIRATIONS THAT GOES BEYOND THE THE CONVENTIONAL FORMAL STATEMENT OF CORP. OBJECTIVES; ARE FUNDAMENTAL IDEAS AROUND WHICH A BUSINESS IS BUILT - ITS MAIN VALUES E.g.: IBM's MKTG: CUSTOMER SERVICE GE's: PROGRESS IS OUR MOST IMPORTANT MOTTO HEWLETT - PACKARD: INNOVATIVE PEOPLE AT ALL LEVELS IN ORGN ASCI: WE TRAIN OUR MANAGERS MAY NOT MEAN MUCH TO OUTSIDERS BUT HAVE TREMENDOUS SIGNIFICANCE FOR THOSE INSIDE
STRUCTURE:
PRESCRIBES FORMAL RELNSHIPS AMONG VARIOUS POSITIONS AND ACTIVITIES - REDUCES EXTERNAL UNCERTAINTY THRO FORECASTING, RES & PLG IN THE ORGN - REDUCES INTL UNCERTAINTY ARISING OUT OF VARIABLE, UNPREDICTABLE, RANDOM HUM. BEHAVR WITHIN THE ORGN. THRO CONTROL MECHANISM - UNDERTAKES WIDE VARIETY OF ACTIVITIES THRO DEVICES SUCH AS DEPARTMENTALISATION, SPECLN, DIVN. OF LABR, AND DELEGATION OF AUTHORITY - ENABLES COORDN OF ORGN S ACTIVITIES & TO HAVE FOCUS
ACCING TO McKINSEY (7S FRAMEWORK) - RELNSHIP BETWEEN STRATEGY AND STRUCTURE RARELY PROVIDES UNIQUE STRUCTURAL SOLNS - EXECUTION PROBLEMS
SYSTEMS-
STYLE-
RULES, REGLNS AND PROCEDURES - FORMAL & INFORMAL THAT COMPLEMENT THE ORGN STRUCTURE (INFRASTRUCTURE) LEVER TO BRING ABOUT ORGNL CHANGE - PATTERN OF ACTION TAKEN BY TOP MGT TEAM OVER A PERIOD OF TIME
STAFFING-
SELECTION, PLACEMENT, TRG & DEVPT OF APPROPRIATELY QUALIFIED EMPLOYEES EG: HIND. LEVER
SKILLS-
ONE OF THE MOST CRUCIAL ATTRIBUTES OR CAPABILITIES OF AN ORGN - DISTINCTIVE COMPETENCE EG: HIND. LEVER - MKTG SKILLS TELCO - ENGG. SKILLS
7-S FRAMEWORK-
THE REAL TASK OF IMPLEMENTING STRATEGY IS ONE OF BRINGING ALL 7-Ss INTO HARMONY - HELPS BY PROVIDING A CHECKLIST FOR JUDGING WHETHER ORGN IS RIPE FOR IMPLEMENTING STRATEGY POWERFUL EXPOSITORY TOOL
*
*
* *
*
Global Issues for the 21st Century Nations are forming Trading Associations - makes trading within regions easy but between regions difficult Ex. EU, NAFTA, Mercosur (Argentina, Brazil, Paraguay, Uruguay), ASEAN. Firms have to decide if they will do better as a regional or a global competitor. World: 3 dominant trading blocks : Europe, Asia, Americas - firms will need to have meaningful manufacturing and trading activities in every trading block. Globalisaton: Creates opportunities but also threats to Cos. not able to adapt quickly More people at all levels in an organisation are involved in Strategic Decision making - greater need for more access to info, but greater difficulty in dealing with it Increasing pressure on organisations for quick response to changing conditions may make it difficult to engage in planning mode; even with its faults, may have to go in for entrepreneurial mode.
BOD
- Oversees the running of the enterprise by C.E.
DIRECTORS
- Individually have no power; collective body of directors has superior total power over C.E.
BODs
- Make calls on shareholders in respect of money unpaid on their shares
(powers-Sec.292)
- Issue debentures - Borrow money otherwise than Thro debentures - Invest funds of the Co. - To make loans
BODs
- Ex pected to meet once in a quarter; (Quorum 1/3 of total strength or 2 directors whichever is higher)
BODs
- Marginally derived expectations - To remain effective on technology - Market growth - Divestment and diversification on sound lines - Long-term productivity & quality not sacrificed for short-term profitability - Judicious earnings retention policy - Sound human values and exalted corporate culture
Strategic Management
- Role of BODs - To initiate and determine - To evaluate and influence - To Monitor
BODs
- 2 or 3 in small private companies to 20 in large public companies - Structure
: Ratio of WTDs to TDs is high in multinational companies like Hindusthan Lever, ITC, IEL : When PTDs Proportion of WTDs to TDs; in case of L&T & TISCO ratio is 1:1 : One MD, few WTDs, besides PTDs – MD managed company : WTDs & PTDs have complementary roles to play
- Two tier BDs (Policy BD and Executive BD) – not favoured by Sachar Committee (1978)
- Japanese Cos: Most directors are whole time employees
- Part-time outside Chairman Plus WT MD; whole time-inside Chairman, plus whole time inside MD; WT inside C-cum-MD
Remuneration:
<=5% of net profits if onlyh on WTD 10% ofnet profits for all (more than 1)
Top Management
- CEO (Responsible to BOD for overall management of organisation)
CEO
- Strategist, organisation builder & leader – Flag Flying & Transmitting to and receives signals from external environment
Top Management
- Providing direction Setting vision Setting standards
Behavioural Roles
- Interpersonal
: Figurehead (for ceremonial duties) Leader (to provide direction) Liaison agent (for outside contracts)
- Informational
: Monitor (of information) Disseminator (within the organisation) Spokesman (to external organisation)
- Decisional
: Entrepreneur Disturbance handler Resource allocator Negotiator
Planning for succession encouraging creative thinking Skills required
- Dynamism Decisiveness Humane approach Conscientiousness Ability to understand worker s needs Appealing personality Objectivity Communication ability
Corporate Values- Reflect values of managers, especially at the top
Strategic management styles
Degree of involvement by top management
High
Entrepreneurship management
Partnership management
Low
Chaos management
Stipendiary management
Low
High
Degree of involvement by BODs
Enhancing BODs effectiveness: - Corporate shareholding should be dispersed - Part-time non-exec. Chairman should not be ornamental - Role of Director should be internalised – different from heading profit centre - BODs should be for two days - Outside director fees should be not less than Rs.2500- No. of directorships by a person should be not too many - should refrain from actual operations and policy implementation
Beer s 5 step system model for organisation s viability
System Sys tem 1
: Vari Various ous ope operat ration ional al unit unitss or div divisi ision on of of firm firm
System Syste m2
: Variou Variouss common common service service depart department mentss to co-ordin co-ordinate ate and and create create orderli orderliness ness in in operation operational al units units functioning – accounting, purchase, …
System Syste m3
: Variou Variouss specialist specialist dire director ctorss for syner synergy gy of operati operational onal units units – market marketing, ing, product production, ion, financ finance, e, cutting across operational divisions (inside & now of firm s operations)
System 4
: Outside & then for the firm – corporate, planning, R&D, management development (development directorate)
Syst Sy stem em 5
: Mon Monit itor or in inte tegr grat atee Syst System em 3 an and d Sys Syste tem m4
FOUR RESPONSIBILITIES OF BUSINESS !Economic
- Must do
Legall !Lega
- Have to do
!Ethical
- Should do
Disc scre reti tion onar ary y !Di
- Mig Might ht do do
Social Responsibility – includes Ethical & Discretionary
Ethical Responsibility: !Utility: does it optimise the satisfaction of the stake holders? (Should behave in such a
a way that it produces the greatest benefit to the society and least harm the lowest cost) !Rights: does it respect the rights of the individuals involved? !Justice: is it consistent with the cannons of justice (decision makers should be
equitable, fair and impartial in the distribution of costs and benefits to individuals and society
Social Audit
IPCL – Dec 1987
Focus Groups for Social Audit (Weightage of 25 for each group) (weightage measured in percentage)
Employees Customers Government Society
Employees – factors and sub factors Hygiene, 50
Hygiene Satisfaction 60
Satisfact ion, 50
Salary and other benefits
50
organisational policies
40
working conditions
30 growth 20 job satisfaction 10
0 Hygi Hy gien ene e
Sati Sa tisf sfac acti tion on
employeeemployer relationship
Customers
Promotion, 20
Product Deve lopment, 30
Product Development Product attributes Service Attributes Promotion
Service
Attributes, 20
Product attributes, 30
Government
Tax Payments and Dividends, 30
Tax Payments and Dividends
Adherence to rules and regulation
Other conditions to economy, 50
Other conditions to economy Adherence to rules and regulation, 20
Society
1st Qtr, 40
Charities and relief mea sures, 20
1st Qtr Community welfare Rural development
Rural development, 20
Community welfare, 20
Charities and relief measures
Overall Corporate responsibility of IPCL
Group
Weight
Score
Product
Employees
.25
5.1
1.275
Customers
.25
5.8
1.45
Govt
.25
7.0
1.750
Society
.25
6.6
1.650
1.00
6.125
ETHICS AND CORPORATE GOVERNANCE • Business Ethics is primarily concerned with the Relationship of Business Goals and Techniques to specifically Human ends. It studies the impact of Acts {Decisions} on the good of the Individual, the Business Community and Society as a whole. • Corporate Governance relates to the set of Incentives, Safeguards and Dispute Resolution process that is used to control and coordinate the actions of the agents on behalf of Shareholders by Board of Directors
Reports on Corporate Governance • Cadbury Committee Report • CII Committee Report • Kumara Mangalam Birla Report • Narayana Murthy Committee Report
Cadbury Committee Report • The Committee was set up in 1991 by the Financial Reporting Council of London Stock Exchange. • It was set up to address the Financial Aspects of Corporate Performance Some of the Major Recommendations are: " A single Person should not be vested with the decision
making power i.e., the roles of Chairman and Chief Executive should be separated clearly. " A majority of Directors should be independent Non-
Executive directors, they should act independently and should not have any Financial Interests in the company.
CII Committee Report The Confederation of Indian Industry (CII) drafted some codes of Corporate Governance in 1996. Growing International Competition, Growth in the Economy as well as Scams and Frauds brought forth the Importance Of Corporate Governance and the CII Report. Some of the Major Recommendations are: "
Listed Companies with a turnover of at least 100 Crores and a paid up capital of at least Rs 20 Crores must appoint Audit Committees of the board within 2 years. " Non-Executive Directors should actively participate in Board Affairs and they should be adequately compensated through Commissions and Stock options " No person should hold Directorships in more than 10 Companies
Kumara Mangalam Birla Report The Committee on Corporate Governance was set up in 1999, by the Securities and Exchange Board of India (SEBI). It was set up to address the Safeguards which are to be instituted within the Company to deal with Insider Information and Insider Trading. Some of the Major Recommendations are: " The Board should have an optimum combination of Executive and
Non-Executive Directors and at least 50% should be NonExecutive Directors. " Board should set up a Remuneration Committee to determine the Remuneration Packages for the Executives. " Management should assist the Board in its decision-making process in respect of Company s Strategy, Policy, Code of Conduct and Performance Targets.
Narayana Murthy Committee Report SEBI instituted a Committee under Mr. Narayana Murthy which submitted its final report in the year 2003. It was established to raise the Ethical Standards for Good Corporate Governance. Some of the Major Recommendations are: " Board Members should be informed about Risk Assessment and
Minimization Procedures. " All Audit Committee should be Financially Literate and at least one Member should have Accounting or related Financial Management Expertise. " Mere Explanation as to why a Company has followed a different Accounting Standards from the Prescribed standards will not be sufficient.
Global Issues for the 21st Century
As firms become increasingly global
•BoD s may need to become more international
•BoD s may have to consider the interests of all key stake holders and not just who own stock while taking strategic decisions
•Ability to articulate a strategic vision and motivate people to achieve it may become the most important characteristics required of a CEO
Environmental analysis
Environmental Threat: Challenge by unfavorable trend
Environmental opportunity
Attractive arena for Company s action where it would enjoy a competitive advantage
Environment: Taxonomy
- Mega environment - Micro environment - Relevant environment
Mega environment:
Technological advances - Transportation Capability - Mastery over energy - Ability to extend and control life and serviceability - Ability to alter characteristic of materials - Extension of Man s sensory capabilities - Growing mechanisation of physical activities - Growing mechanisation of intellectual processes
Exhibit 6.1: A Taxonomy of the Firm s Environment
Mega Environment Relevant Environment Micro Environment Internal Environment
Exhibit 6.2: Constituents of the Mega Environment
Regulatory
Political
Economic
Technological
Social
The Mega Environment Exhibit 6.3: Constituents of the Micro Environment Suppliers
Marketing Intermediaries
Market Types
Market Demand
Competition
THE MICRO ENVIRONMENT
Financial Institutions
Regulatory Provisions
Industrial Relations Climate
Availability of Skilled Manpower
Some Important Variable in Societal Environment Economic
Technological
Political-Legal
Socio-Cultural
GDP Trends
Total Government spending for R&D
Antitrust regulations
Lifestyle Change
Interest rates
Total Industry spending for R&D
Environmental protection laws
Career Expectations
Money Supply
Focus of technological efforts
Tax laws
Consumer activism
Inflation rates
Patent protection
Special incentives
Rate of family formation
Unemployment levels
New Products
Foreign Trade Regulations
Growth rate of population
Wage/price controls
New developments in technology transfer from lab to marketplace
Attitude towards foreign companies
Age distribution of population
Devaluation/ Revaluation
Productivity improvementsautomation
Laws on hiring and promotion
Regional shifts in population
Stability of Government
Live expectancies
Energy availability and cost Disposable and discretionary income
Birth rates
Competitive Landscape Dynamics of strategic maneuvering among global and innovative combatants Price-quality positioning, new knowhow, first mover Hypercompetitive environments Fundamental nature of competition is changing
Protect or invade established product or geographic markets
Competitive Landscape Emergence of global economy
Goods, services, people, skills, and ideas move freely across geographic borders. Spread of economic innovations around the world.
Hypercompetitive environments Fundamental nature of competition is changing
Political and cultural adjustments are required.
Competitive Landscape Emergence of global economy Rapid technological change
Increasing rate of technological change and diffusion The information age Increasing knowledge intensity
Hypercompetitive environments Fundamental nature of competition is changing
India s Technology Missions
Providing Drinking Water Promoting Literacy Stepping up Child Immunisation Hiking up Production of Oil Seeds Linking Remote Areas (Rural) with Country s Telecommunication N/W
Industry Response
Entrepreneurial - Future Form of Product Group - Future Processing Technology - Future Form of Raw Materials - Technological Developments in Related Areas - Technological Development Stages – Invention, Innovation & Diffusion Assessing Impact of Opportunities Threat Matrix
s s e n s u o i r e S
High
Low
1
2
Major Threat
Moderate
3
4
Moderate
Minor
High
Low Probability of Occurrences Opportunity Matrix
s s e n e v t i c a r tt A
High
Very Attractive
Moderately Attractive
Low
Moderately Attractive
Least Attractive
High
Low
External Factor Analysis Summary (EFAS): Maytag as Example External Factors 1
Weigh t 2
Rating 3
Weighted Scorer 4
Comments
0.20 0.10 0.05 0.10 0.10
4 5 1 2 2
0.80 0.50 0.05 0.10 0.20
Acquisition of Hoover Maytag quality Low Maytag presence Will take time Maytag weak in this channel
0.10 0.10 0.15 0.05 0.10 1.00
4 4 3 1 2
0.40 0.40 0.45 0.05 0.20 3.15
Well positioned Well positioned Hoover weak globally Questionable Only Asian presence in Australia
Opportunities Economic Integration of European Community Demographics favor quality appliances Economic development of Asia Opening of Eastern Europe Trend to Super Stores Threats Increasing government regulations Strong US competition Whirlpool and Electrolux strong globally New product advances Japanese appliance companies Total Score Notes: 1.
List opportunities and threats (5-10 each) in column 1
2.
Weight each factor from 1.0 (most important) to 0.0 (not important) in column 2 based on that factor s probable impact on the company s strategic position. The total weights must sum to 1.00
3.
Rate each factor from 5 (outstanding) to 1 (poor) in column 3 based o n the company s response to that factor.
4.
Multiply each factor s weight times its rating to obtain each factors weighted score in Column 4.
5.
Use Column 5 (comments) for rationale used for each factor.
6.
Add the weighted scores to obtain the total weighted score for the company in Column 4. this tell how well the company is responding to the strategic factors in its external environment.
Source: T.L. Wheelen and J.D. Hunger, External Strategic Factors Analysis Summary (EFAS) , Copyright © 1991 by Wheelen and Hunger Associates.
Global Issues for the 21st Century !Increasing
environmental uncertainty: environmental scanning will become important. To remain competitive companies will have to develop better methods of gathering, evaluating and disseminating intelligence to those who need it. !To
manage strategically, organisations have to become more attuned to the many stakeholders who are affected by the company s actions. Shareholders will form only one part of the equation !Distinction
between developed and developing nations will begin to fade as the developing nations take on a greater proportion of the world trade. !As
more industries become hyper competitive, strategy will become increasingly short term in orientation, thus creating a paradox. Can Strategic Management exist with only a short time horizon?
Internal Corporate Analysis
(Organisational Audit)
Corporate Strength
Competitive & other distinct competencies in market place
Corporate Weakness
Constraints or obstacles which check movement in desired direction and may also inhibit organisation in gaining a distinctive competitive advantage
Criteria for Determination Historic
Past performance – Sales, Prof after Tax, Cap. Utilization, … Before coming to conclusions should check replicability of PAST in future
Normative
Judgement (What ought to be on level of performance (Expert opinion)
Competitive parity
Firm must at min. meet the actions of competitors – should Identify dimensions of uniqueness
Critical factor for success
KFS; EG: TV Manufacturer: advertising is a must – can t afford- may be considered as a weakness
One criterion seldom sufficient to evaluate a firm Measurement:
Attribute Measures Effectiveness Measures Efficiency Measures
Impact Matrix
Trends
Probability of Occurrences
Impact on Strategies S1
S2
S3
S4
T1 T2 T3 T4
Impact Scale
+2
+1
0
-1
-2
Extremely Favorable
Moderately favorable
No impact
Moderately unfavorable
Extremely unfavorable
Competitive Analysis Need to study competition - What is driving competition in specific industry? - What actions competitors are likely to take in the wake of increased competition? Types of Industry Structures Factor
Perf. Competition
Monopolistic Competition
Oligopoly
Monopoly
No. of Factors
Many
Many
Few
One
Prod Diffn
No
Yes
Yes
Unknown
Entry or Exit
Open
Open
Restricted
Blocked
Competitor Analysis
- Current Strategy - Current Performance - S&W - Actions (Expected) in the near Future
Routes to Competitive Advantage - Intensify function diffn. (key factors of success) - Exploit competitor s weakness (relative superiority) - Ask Why\Whys (aggressive initiatives) - Maximize user benefit (strategic degree of freedom) Three Generic Strategies
(Accelerating to Porter)
Strategic Advantage Industry Wide Differentiation Strategic Target
Overall cost Leadership Focus
Particular Segment Only Uniqueness Perceived
Low cost Position
by Customer
Competition
Marketing warfare viewpoint - Defensive warfare for Market leaders - Offensive warfare for No. 2s-attack Leader s weak point - Flanking warfare for firms with limited resources eg., Promise - Guerilla warfare for smaller Companies eg., Deccan Herald
FIRM S VALUE CHAIN Firm Infrastructure (general management, accounting, finance, planning) Support Activities
Human Resource Management (recruitment, training, development)
Profit Margin
Technology Development (R&D, process & product development) Procurement (purchasing of raw materials, machines, supplies) Inbound Logistics (raw materials)
Operations (machining, assembly, testing)
Out bound Logistics (distribution)
Marketing Services & Sales (Installation, (advertisement, repair) promo)
Primary Activities Source:Michael E Porter: Competitive Advantage: Creating and Sustaining Superior Performance, Freeman Press, 1985, p. 37
Risks of Generic Competitive Strategies Risks of Cost Leadership
Risks of Differentiation
Risks of Focus
Cost Leadership is not sustained:
Differentiation is not sustained:
•Competitors imitate •Techn Technology ology changes •Other bases for the cost leadership erode
•Competitors imitate •Bases for differentiation become less important to buyers
The focus strategy is imitated: The largest segment becomes structurally unattractive:
Proximity in differentiation is lost
Cost proximity is lost
•Structure erodes •Demand disappears
Broadly targeted competitors overwhelm the segment: •The segment s differences from other segments narrow •The advantages of a broad line increase
Cost focusers achieve even lower cost in segments
Differentiation focusers achieve even greater differentiation in segments
New focusers sub-segment the industry
Source: Michael E. Porter, Competitive Advantage: Creating and Sustaining Superior Performance, The Free Press, p.21.
The Eight Dimensions of Quality 1
Performance
Primary operating characteristics, such as a washing machine s cleaning ability
2
Features
3
Reliability
4
Conformance
5
Durability
6
Service ability
Number of years of service a consumer can expect from a product before it significantly deteriorates. Differs from reliability reliability in that a product can be durable, but still need a lot of maintenance Product s ease of repair
7
Aesthetics
How a product looks, feels, sounds, tastes, or smells
8
Perceive d Quality
Product s overall reputation. Especially important if there are no objective, easily used measures of quality
Bells and whistles , like cruise control in a car, that supplement the basic functions Probability that the product will continue functioning without any significant maintenance Degree to which a product meets standards. When a customer buys a product out of the warehouse, it will perform identically to that viewed on the showroom floor
Source: D.A. Garvin, Managing Quality: The Strategic and Competitive Edge,, Free Edge Press, New York, 1988.
Key Factors for Success A key Success Factor is a competitive skill or asset that is particularly relevant to the industry. industr y. To To PLAY IN THE GAME a competitor will usually need to have some minimum level of skill or asset ass et with respect to each of the industry s Key Success Factors. If a firm has strategic weakness in a Key Success Factor and it is not neutralized by a well conceived strategy, the firm s ability to compete will be weak. Conversely sustainable competitive advantages usually will be based on Key Success Factors. In general the successful firm will have strengths in the Key Success Areas and unsuccessful competitor will lack one or more of them
Key Success Factors
To Increase Profits
To Gain Market Share
Raw-Material Raw-Mater ial Procurement
Gold-mining, Gold-minin g, Wine-making
Sugar-indus try, Petroleum Sugar-industry, industry
Raw-material Processing
Steel & Paper Industry
Steel & Paper Industry
Production Fabrication
Integrated Circuits, Tire Industry
Integrated Circuits, Tire Industry
Assembly
Apparel Industry Industry,, Instrumentation
Instrumentation
Design
Heavy Engineering Industry
Heavy Engineering Industry
Distribution
Bottled water water,, Metal cans
Home Appliances, Cement Industry
Marketing
Branded Cosmetics, Liquor
Branded Cosmetics, Liquor
Service
Automobiles
Hotel Industry
Alternativ Alter nativee Format Formatss for for Anal Analysis ysis
Check Lists Check Lists (Ref: X8) Conceptual Approach
– By Bates & Eldredge - Management, Operations & Finance
Strengths & Weakness profile
Dimension.
Basis of Comparison
Ranking
7S
Grid Approach (by Ansoff): F/W
Ref: x9 FNS
Dimension
Marketing
Finance
Existing
S or W
Human Resource
Production
Management Financial Operations
1.
Strategy
2.
Structure
3.
Systems
4.
Shared Values
5.
Skills
6.
Style
7.
Staff Corp Audit
1) Ask questions – within & outside 2) Observation 3) Examine Records
Match S&W for competitive advantage; concept of synergy could be helpful
Exhibit 7.3: Porter s Model of Industry Competition Potential Entrants (2) Economies of Scale Absolute Cost Advantage Brand Identity Access to Distribution Switching Costs Government Policy
•
• •
• • •
Threat of
Suppliers (4) Supplier Concentration Number of Buyers Switching Costs Substitute Raw Materials Threat of Forward Integration •
Bargaining Power of Suppliers
New Entrants
The Industry Competitors (1) Degree of Rivalry Number of Competitors Industry Growth Asset Intensity Product Differentiation Exit Barrier
•
•
•
•
•
•
•
• •
Threat of Substitute
Bargaining Power of Customers
Buyers (5) Buyer Concentration Number of Suppliers Switching Costs Substitute Products Threat of Backward Integration •
• •
• •
Products or Services
Substitutes (3) Functional Similarity Price/Performance Trend Product Identity
•
• •
Source: The Free Press, A Division of Macmillan, Inc. from Competitive Strategy by Michael E. Porter Porter,, p.4
Exhibit 7.4: Areas of Strength and Weakness Functions
Facilities & Equipment
Personnel Skills
Organisational Capabilities
Management Capabilities
•Warehousing
•Direct Sales
•Industrial Marketing
•Retail Outlets
•Door to Door Selling
•After Sales
•Household Marketing
•Sales Offices
•Retail Selling
•Service Network
•Large Customer Base
•Training Facilities for Sales Staff
•Advertising
•Customer Loyalty
1. General Management 2. Finance
3. R&D
4. Operations
5. Marketing (examples)
•After Sales Service
ORGANISATIONAL ANALYSIS - VRIO FRAMEWORK
1. Value: Does It provide Competitive Advantage? 2. Rarity: Do other competitors possess it? 3. Imitability: Is it costly for others to imitate? 4. Organisation: Is the firm organised to exploit the resource?
Using resources to gain Competitive Advantage
Identify and classify the firm s resources in terms of strengths and weaknesses
Combine the firm s strengths to specific capabilities: Corporate capabilities (often called core competencies) should move to distinctive competencies
Profit potential & capabilities : for sustainable Competitive Advantage Select the best Strategy. Identify resource gaps and invest in upgrading weaknesses
Determining The Sustainability of an Advantage
Durability: Rate at which a firm s resources and capabilities become obsolete
Imitability: Rate at which a firm s resources and capabilities can be duplicated by others. A core competency can be imitated to the extent it is transparent, transferable & replicable.
* Transparency - Speed with which other firms can understand the relationship of resources and capabilities supporting a successful firm s strategy e.g.. Gillette, Sensor, Mach 3. * Transferability - ability of competitor to gather resources and capabilities to support a competitive challenge * Replicability - ability of a competitor to use duplicated resources and capabilities to imitate the firm s success
Internal Factor Analysis Summary Internal Strategic Factors
Weight
Rating
Weighted Score
Comments
Strengths S1 Quality Maytag Culture
0.15
5
0.75
Quality key to success
S2 Experienced top Management
0.05
4
0.20
Know appliances
S3 Vertical Integration
0.10
4
0.40
Dedicated Factories
S4 Employee relations
0.05
3
0.15
Good but deteriorating
S5 Hoover s International Orientation
0.15
3
0.45
Hoover s name in cleaners
W1 Process-oriented R&D
0.05
2
0.10
Slow on new products
W2 Distribution Channels
0.05
2
0.10
Superstores replacing small dealers
W3 Financial Position
0.15
2
0.30
High debt load
W4 Global position
0.20
2
0.40
Hover weak outside UK & Australia
W5 Manufacturing facilities
0.05
4
0.20
Investing now
Total
1.00
3.05
Weaknesses
Global Issues for the 21 Century *As more & more Cos become hyper-competitive, it will become harder to maintain competitive advantage, unless a Co. has a distinctive competency which is not only hard to imitate but also durable. Durability has however little value during technical discontinuity.
* Subcontracting by firms to reduce costs and become globally competitive * Primary activities to increase in importance in hyper-competitive global industries. * Autonomous work-teams may lead to greater efficiency and reduction in supervision. Work-teams should have better training to handle conflict management.
Strategic Factor Analysis Summary (SFAS) Matrix 1
2
3
4
Duration 5
Key Strategic Factors
(Select the most important opportunities/threats from EFAS, Table 3.4 and the most important strengths and weakness from IFAS,
S h o r t
In t e r m e d I a t e
6
Lo n g
Weight
Rating
Weighted Score
S1 Quality Maytag culture (S)
0.10
5
0.50
S3 Hoover s international orientation (S)
0.10
3
0.30
X
Name recognition
W3 Financial Position (W)
0.10
2
0.20
X
High debt
W4 Global Positioning (W)
0.15
2
0.30
Table 4.2)
X
Comments Quality key to success
Only in NA, UK, and Australia
O1 Economic integration of
X
European Community (O)
0.10
4
0.40
X
O2 Demographics favor quality (O)
0.10
5
0.50
O5 Trend to super stores (O+T)
0.10
2
0.20
X
T3 Whirlpool and Electrolux (T)
0.15
3
0.45
X
T5 Japanese appliance companies (T)
0.10
2
0.20
Total Score
1.00
X
Acquisition of Hoover Maytag quality Weak in this channel Dominate industry
X
Asian presence
3.05
Notes: 1. List each of your key strategic features developed in your IFAS and EFAS tables in Column 1 2. Weight each factor from 1.0 (most important) to 0.0 (not important) in column 2 based on that factor s probable impact on the company s strategic position. The total weights must sum to 1.00 3. Rate each factor from 5 (outstanding) to 1 (poor) in column 3 based on the company s response to that factor. 4. Multiply each factor s weight times its rating to obtain each factors weighted score in Column 4. 5. For duration of Column 5, check appropriate column (short term –less than 1 year; intermediate – 1-3 years; long term-over3 years). 6. Use Column 6 (comments) for rationale used for each factor. Source: T.L. Wheelen and J.D. Hunger, External Strategic Factors Analysis Summary (EFAS) , Copyright © 1991 by Wheelen and Hunger Associates.
Introduction to Case Analysis
Prof R Srinivasan, IISc
1
Case Analysis !
!
!
!
Performance of an organization over a period of time. Information on organizations history and operations environment. Contains data related to functional areas like Marketing, Finance, Operation and Human Resources. Presents to students a realistic situation by which they are exposed to decision making practices Prof R Srinivasan, IISc
2
Objectives of the Case Method !
!
!
!
To acquire skills to apply theoretical knowledge to practice. To get into the habit of diagnosing the problem, analysis and evaluation of alternatives and formulation of an action plan. To learn to independently find the answers to practical problems To gain exposure to a variety of organizational and managerial situations. Prof R Srinivasan, IISc
3
Benefits of the case method Clear thinking in complex situations ! Devising consistent, rational and creative action plans ! Application of quantitative knowledge ! Recognizing the value of information ! Group communication ! Better written communication ! Applying personal values to the decision making process !
Prof R Srinivasan, IISc
4
Developing a case study Should have the following aspects Origin/History and growth of company over time ! Organizational analysis ! Nature of external environment ! Strength Weakness Opportunities Threats (SWOT) Analysis ! Present corporate strategy ! Present business strategy ! Organizational structure and control systems ! Recommendations !
Prof R Srinivasan, IISc
5
Key Financial Ratios Profitability ratios 1. 2. 3. 4. 5.
6.
7.
Leverage Ratios
Gross profit margin Operating profit margin Net profit margin Return on total assets Return on stock holders equity Return on common equity Earnings per share
1. 2. 3.
4. 5.
Debts to assets Debt to equity Long-term debt to equity ratio Times interest earned Fixed charge coverage
Prof R Srinivasan, IISc
6
Key Financial Ratios (cont d) Activity Ratios 1. 2. 3. 4.
5.
Liquidity ratios
Inventory turnover Fixed assets turnover Total assets turnover Accounts receivable turnover Average collection period
1. 2. 3.
Current ratio Quick ratio Inventory to net working capital
Other Ratios 1.
2. 3. 4.
Dividend yield on common stock Price earnings ratio Dividend payout ratio Cash flow per share
Prof R Srinivasan, IISc
7
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YES
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NO
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NO
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•
Business Strategy A company can make use of its business strategy to improve the competitive position of its business units and products/services within the specific market segment or industry •
The generic strategies suggested by Porter i.e., cost leadership, differentiation and focus, could help the company in drawing up the business strategy •
Whereas the corporate strategy asks what industry/industries, should the company be in, the business strategy asks how the company should compete or co-operate in each industry •
Cost Dynamics Cost Levels in India: Textiles
For comparable pre-tax RET. On invest, a typical Indian Plant with cap of 6,000 tons/yr polyester production has 84% higher selling price than a typical polyester plant with 30,000 tons/yr cap in USA. Even with same cap, India: 24% higher selling prices
Similar trends are obtained in tyre and tube, Al, Steel Causes
Excise, Customs, Sales Tax Levies, Etc, Uneco, Production levels, Obsolete technology, high B/E points, excess dependence on import of semi=finished goods
High costs narrowed Dom. Cons. Markets & competition in International markets Larger size plants not only save on initial invest. Cost but also on operational costs (cost v/s size of production) Cost v/s Market
Sellers Market
Product s Price
= Intl. Cost + desired profit margin
Profit Margin
Buyers market = Permissible price – intl. Cost
Tolerable Cost
= Permissible price – acceptable profit
OR
Experience Curve: Unit Manufacturing Cost
When Production Quantity
When Production Quantity
of time of Dir. Lab components for each item
80%
Experience
Accumulated Production 2 4 (100*0.80) = 8 (80*0.80) = 16(64*0.80) =
Curve
Cost/Unit (RS) 100 80 64 51
Plot give 80% Exp. Curve – Hyperbola Causes: Improved Lab. Productivity Incre4ased specialisation Innovation in production methods Value engineering & fine tuning Line balancing Rationalisation of methods & systems Exp. Curves
- Simple approximations of extremely complex real-time relationships; extreme care is to be exercised to get rreliable results – distinguish time from exp; unit exp; consider influence of time
Sensitivity Analysis:
Can be w.r.t., FC, VC, and/or price decrease in FC results in decrease in B-E-P. Profitability at a particular volume of production improves with lower FC in VC has marked effect on B-E-P & eats up profits in VC improves profitability in permissible price, B-E-P and vice-versa. At a particular volume of production profitability improves. Price-most sensitive instrument followed by VC & FC
Non-Linear B/E Analysis
When prices may be consciously reduced to gain additional sales vol. & market share or in response to computer s action
Assumptions
FC Fixed for all production volumes
(often unrealistic)
VC do not fall with increasing level of production TC && TR vary in linear relationship with output Maximise profit BEF int. & tax is the desirable BUS. objective
Experience curve relationship
- Good framework for marginal considerations for predicting industrial scenario w.r.t., future costs, profit margins and corresponding cash flows for own & competitor s opns - Has done very well in segments such as PC mkt; implications – a few large plants with standardised productions would be able to supply global market marketing efforts SH. Be fully coordinated with manufacturing plans; lowering prices SH. Not be inferior quality; more applicable when dem is elastic - Limitations: detn. of cost; data reg. competitors; a late market entrants has to operate at lower initial prices to survive
B/E Analysis TC = FC + VC * Q
(VC-Unit Var. Cost-R/M, electricity, fuel, packing etc)
TR = P * Q At B/E point TR = TC p * QB = FC + VC * QB [P – VC = Unit Contribution]
QB = FC/(P-VC)
Doom Loops !Self
reinforcing processes.
!Drive
an organization into cyclical situations from which an organization finds it difficult to extract itself.
!To
avoid getting into a doom loop, it is required to constantly upgrade the products, services and efficiency of distribution channels.
!To
get out of a doom loop – refocus on the small business units and a change has to be brought about in the firm s culture.
Doom loop - Example Competitors innovate & develop better Pdt. at lower cost.
Competitor matches price & yet is profitable.
Competitor gains mkt. Share at firms expense.
Firm cuts price to hold onto the market share.
Employees become demoralized.
Firm has inadequate margins to reinvest.
Quality of Pdt. & services becomes poor.
Corporate Strategy
The important issues involved in Corporate Strategy are: !
The company s orientation towards growth, stability or retrenchment. This is referred to as directional strategy.
!
The markets in which the company competes through its products or business units. This is referred to as Portfolio strategy.
!Activity
co-ordination and transfer of resources for achieving capabilities among product lines and business units. This is referred to As parenting strategy.
Relative Cost advantage & Competitive Strategy Examples
Modi Tyres
- Initially entered largest product segment i.e., truck with latest technology & lower prices (good value for money). Subsequently matched market leader s price and displaced him by capturing higher market share
Hero Cycles
- Dropped irrelevant product attributes; subcontracted production of parts
Portfolio Analysis and Display Matrices Portfolio Analysis Balancing
- Corp. investments in different products or industries (SBUs) - w.r.t. net cash flow Stake of development Risk
Display Matrices: BCG Matrix McKinsey Matrix Strategic Planning Institute s Matrix (Profit impact of Market Strategy – PIMs) Arthur D.Little Co s Matrix Hofer s Product/Market evaluations Matrix
The Boston Consulting Group s Growth-Share Matrix SBU Objectives: Stars
Build (For Question Marks)
Question Marks
22%
Hold (for strong Cash Cows)
20%
4
e 18% t a R 14% h t 12% w o r 10% G t e 8% k r a 6% M
1 3
Divest (for Question Marks and Dogs which are a drag on company profits)
2 5
Cash Cow
Dogs
Strategic Planning Planning: Viable fit between organization s objectives and its changing market opportunities
6
4%
7
2% 0
Harvest (for weak Cash Cows; can also be used with Question Marks and Dogs)
8
10x
4x
2x
1.5x 1x 0.5x 0.4x 0.3x 0.2x 0.1x
Key: investment portfolio, future profit potential, strategy
Relative Market Share
Source: B. Heldey, Strategy and the Business Portfolio , Long Range Planning , February 1977, p.12 Reprinted with permission from Long Range Planning , © 1977, Pergamon Press Ltd.
BCG Matrix (New) !2*2
Matrix
!
Size of competitive advantage Vs. No. of approaches to competitive advantage. Size of the comp. Adv.
Fragmented
Specialization
Many
No. of approaches to achieve comp. Adv.
Stalemate
Volume
Few
BCG Matrix (Contd.)
Fragmented !Small
and Regionalized.
!Profitability !Advantage ! No
not related to size.
gained by focus.
premium on growth.
Specialization !Focused segments. !Steep
learning curves.
!Ex.
Cray research in field of Super computers.
!Ex.
Specialty restaurants or designer labels.
Stalemate
Volume
!Where
!Where
!CA
!Constrained
it is difficult to gain advantage.
often is the sheer sustaining power.
!Ex.
Kellogg's in India.
there are economies of scale and IRS operates. by market segmentation and differentiation.
!Ex.
The car industry.
GE Matrix
High M A R K E T A T T R A C T I V E Medium N E S S
Low
Protect Position
Invest to build
Build selectively
•Invest to grow at maximum digestible rate
•Challenge for leadership
•Specialize around limited strengths
•Concentrate effort on maintaining strength
•Reinforce vulnerable areas
•Build selectively on strengths
•Seek ways to overcome weaknesses •Withdraw if indications of sustainable growth are lacking
Build Selectively
Selectivity/ manage for earnings
Limited expansion or harvest
•Protect existing program •Concentrate investments in segments where profitability is good And risk is relatively low
•Look for ways to expand without high risk; otherwise, minimize investment and rationalize operations
Protect and refocus
Manage for earnings
Divest
•Manage for current earnings
•Protect position in most profitable segments
•Sell at time that will maximize cash value
•Upgrade product line
•Cut fixed costs and avoid investment meanwhile
•Invest heavily in most attractive segments •Build up ability to counter competition •Emphasize profitability by raising productivity
•Concentrate on attractive segments •Defend strengths Strong
•Minimize investment Medium
BUSINESS STRENGTH
(b) Strategies
Weak
Table 2-2 Factors underlying market attractiveness and competitive position in GE Multifactor Portfolio Model: Hydraulic Pumps Market Weight Market Attractiveness
Value
Overall market size
0.20
4.00
0.80
Annual market growth rate
0.20
5.00
1.00
Historical profit margin
0.15
4.00
0.60
Competitive intensity
0.15
2.00
0.30
Technological requirements
0.15
4.00
0.60
Inflationary vulnerability
0.05
3.00
0.15
Energy requirements
0.05
2.00
0.10
0.05
3.00
0.15
Environmental impact Social/political/legal
Competitive Position
Rating (1-5)
Must be acceptable
.
1.00
3.70
Market share
0.10
4.00
0.40
Share growth
0.15
2.00
0.30
Product quality
0.10
4.00
0.40
Brand reputation
0.10
5.00
0.50
Distribution network
0.05
4.00
0.20
Promotional effectiveness
0.05
3.00
0.15
Productive effectiveness
0.05
3.00
0.15
Productive efficiency
0.05
2.00
0.10
Unit costs
0.15
3.00
0.45
Material supplies
0.05
5.00
0.25
R&D performance
0.10
3.00
0.30
Managerial personnel
0.05
4.00
0.20
1.00
3.40
Source: La Rue T. Hormer, Strategic Management, Englewood Cliffs, N.J.: Prentice Hall, 1982, p.310
McKinsey Matrix Used for GE: Factors determining industry (Market) attractiveness 1. 2. 3. 4. 5. 6.
Weightage (typical) Size of the market 10% Growth rate (sales) 15% Nature of Competition 15% Technology Requirements 10% Entry conditions & Social factors 10% Profitability 40%
SBUs rated on a scale of 1-10
100% Factors Determining Competitive Position 1. 2. 3. 4. 5. 6. 7.
Market Share Growth rate Location & Distribution Mgt. Skills Work force harmony Technical excellence Company image
Weightage 20% 10% 10% 15% 20% 20% 5% 100%
Rating (1-10) 7 7 5 6 7 8 8
Score 1.4 0.7 0.5 0.9 1.4 1.6 0.4 6.9
Shall Matrix :
Similar to GE approach – identifies different strategies for each grid sector
PIMS Model:
Profit impact of market strategy (PIMS) started at GE – used later by strategic planning institute – develops industry CH/C, bus avg. profitability using crosssectional regrn. Of more than 2000 industries
Shell s Directional Policy Matrix
Attractive SECTORAL PROSPECTS
Average Unattractive
Leader
Try Harder
Double or quit
Custodial
Phased withdrawal
Cash Generation
Phased Withdrawal
Disinvest
Strong
Average
Weak
Leader Growth
UNIT S COMPETITIVE POSITION Strategy
Business Prospects
Competitive Capability
Recommended Strategy
1. Leader
High
Strong
High priority with all necessary resources to hold high market position
2. Try Harder
High
Medium
Allocate more resources to move to leader position
3. Double or Quit
High
Weak
Pick products likely to be future high flyers for doubling and abandon others
4. Growth
Average
Avg. strong
May have some strong competition with no one company as leader. Allocate enough resources to grow with market
5. Custodial
Average
Average
May have many competitors, so maximise cash generation with minimal new resources
6. Phase withdrawal
Low
Average
Slowly withdraw to recover most of investment
7. Cash generation
Low
Strong
Spend little cash for further expansion, and use this as a cash source for faster growing businesses
8. Disinvest
Low
Weak
Assets should be liquidated as soon as possible and invested elsewhere.
sr o c t a F ss cce u S l ac ti r i C een ew t b tfi s i M
Low
sc s t i r i e t c ar a c h g n i t ne r a P d n a
Heartland Ballast Edge of Heartland
Alien Territory
Value trap
High Low
High
Fit between Parenting Opportunities and Parenting characteristics
Arthur D Little Company s Matrix
• The Matrix considers the different stages of the PLC with the business strength. • The businesses are classified according to business strength as weak, tenable, favorable, strong or dominant. • The Horizontal axis has the four stages of the PLC: Embryonic, Growth, Mature and Decline.
B U
Dominant
Harvest
S I N E
Hold Strong
Build
S S
Favorable S T R
Tenable
E N G T H
Weak
Unacceptable
• The Strategy recommended in the growth and embryonic stage is to build the business except when the business strength is weak. • For Businesses in the mature stage, with dominant to favorable business strength, hold strategy is recommended. • For Businesses with strong and dominant position in the declining stage, harvest strategy is recommended. • For Businesses which are weak and in the mature/decline stage, the return-on-investment is unacceptable.
Hofer s Product/Market Evolution Matrix
• It is a 3x5 matrix, where businesses are plotted in terms of the product/market evolution and competitive position. • The circles show the relative size of the industry, and the shaded portion depicts the market share.
According to the matrix, • Businesses in the Development or the Growth stage have the Potential to become Stars. !
If the market share is large, additional resources must be invested, to develop competitive position. ! If the market share is low, a strategy to improve should be developed.
• Businesses in Shake out/Maturity stages can be Cash Cows. These may require some Investments. • Businesses in the Decline stage with a low Market share are in the category of Dogs and should be considered for Divestment or Liquidation.
Intenational Portfolio Analysis • Portfolio analysis can be applied to international markets to help in the international strategic planning. • The matrix makes use of country s attractiveness, which comprises market size, market growth rate, extent and type of government regulation, economic and political factors. • It also makes use of the product s competitive strength, which consists of Market share, product fit, contribution margin and market support. Depending on how the product fits in the matrix, funding or harvesting can be decided upon.
HIGH
MEDIUM
LOW
C H I G H
O
DOMINANT/DIVEST
U
JOINT VENTURE
N T R Y
M
A
E
T
D I U M
T R
INVEST/GROW SELECTIVE STRATEGIES
A C T I
HARVEST/DIVEST
V E N E L
S
O
S
W
COMBINE/LICENSE
Functional Strategy The approach followed by a functional area to achieve the objectives set by the corporate and business strategy by maximizing resource productivity is called FUNCTIONAL STRATEGY. • It is concerned with the nurturing and development of distinctive competitiveness. • Orientation of Functional Strategy is dictated by the Parent s strategy.
Utility of Display Matrices: Correlate industry growth or profitability with market share either as direct single variable or as an index based on multiple variables
Facilitate graphic display of diversity of orgn; help raise critical questions; not provide precise answer; not applicable where mkt. share is not critical or capital cannot be easily withdrawn; if value added is low or cost can be decreased without experience, rapid technology transfer, seasonal/cyclic business, patent restrictions. Low economies of scale complicate their outcome Indian Situation: - Industrial development much behind Japan or USA - Huge dom. Potl. Mkt still untapped - Manager s will & systematic approach with top management support can help make use of these matrices for developing competitive strength and corp. growth
A distinctive Competency must meet the following three tests: 1. Customer Value 2. Competitor Unique 3. Extendability For a Functional Strategy to be successful, it should be built on a distinctive competency within a Functional Area, else should consider outsourcing.
Outsourcing • Outsourcing refers to purchasing a product or service which the company was previously producing. • The key to Outsourcing lies in the purchasing from outside only those activities that are not key to company s distinctive competencies.
Marketing Strategy • Marketing strategy deals with the pricing, selling and distribution of a product. • Using this strategy, a business unit can improve its market share for current products through market saturation and penetration, or develop new products for existing markets.
Financial Strategy • Financial strategy examines the financial implications at corporate and business levels to identify the best financial course of action. • This can provide competitive advantage through lower cost of funds and flexibility to raise capital. This strategy normally helps in maximizing the financial value.
R&D Strategy • The R&D strategy determines the R&D mix that a company has to follow. • It determines the mix of basic research, product development and process R&D. • This strategy also influences the decisions in the areas of development of new technologies, acquisition of technology from external sources, strategic alliances, product/process innovation and improvement.
Operations Strategy • Operations strategy answers vital questions of manufacturing, concerning where to produce, vertical integration, deployment of resources, relationship with suppliers, technology to be used and levels of quality to be acheieved.
Purchasing Strategy • Decisions regarding raw materials, parts and suppliers for the manufacturing function are influenced by the purchasing strategy. • The company has the options of single, multiple or parallel sourcing. Single sourcing- It helps in reduction of both cost and time and in controlling quality. Parallel sourcing- It provides two suppliers for two different parts, with each of them backing up the other s parts. Multiple Sourcing-It has an advantage in that it forces suppliers to compete, leading to reduction in costs and improvement in quality for the company.
Logistics Strategy • Logistics strategy deals with the flow of the product into and out of the manufacturing function. • This requires synergies across business units and expertise in transportation modes. Two Important decisions on logistics strategy !
Centralization
!Outsourcing
Human Resource Management Strategy • This strategy deals with the recruitment of skilled employees and their training to participate in self managed work teams.
Information Systems Strategy • Information systems make use of information technology to provide companies with competitive advantage
Strategic Choice and Development of Policies • .Strategic choice represents the evaluation of alternative strategies and selection of the best alternative.
Assignment 4 • What are the different types of Environments that a firm faces? For a Firm you are acquainted with, chart the relevant Environment. • According to Porter s Model, what determines the Competition Intensity in an Industry? With respect to a Firm that you know, identify the key Strategic factors in its External Environment.
• For the above Firm, develop the Industry Matrix and an EFAS. • For the same Firm, compare and contrast different scenarios by using Trend Extrapolation.
Assignment 5 • What are the criteria used to determine the Corporate Strengths and Weaknesses? Use these criteria for a company you are familiar with to identify its Strengths and Weaknesses. Suggest Corrective Actions. • How can Value Chain Analysis be used to Identify Corporate Strengths and Weaknesses? • How can a Company make use of its Structure and Culture in Internal Corporate Analysis? • What is VRIO Framework? How can this be used for gaining Sustainable Competitive Advantage? • List the Strategic Marketing, Financial, R&D, Operational and HRM issues for a Company you are familiar with. • How has Information Systems affected Strategic Decisionmaking? What are the issues that have surfaced in the light of rapid changes in Information Technology.
Assignment 6 • What is a Propitious niche? Which Industry forces can make it to disappear? • When the Industry becomes Hypercompetitive, is it possible to have a sustainable Competitive Advantage? Give reasons. • Strategic Alliances are temporary. Do you Agree? Justify. • What is Doom Loop? Why do Industries find it difficult to get out of it? • Discuss how Corporate Parenting is different from Portfolio Analysis. In what aspects are they similar? How could this be useful in Global Marketing? • When should a company Outsource a Function or Activity? • How does Policy relate to Strategy? Explain
Strategy Implementation
Strategy implementation refers to the sum total of the activities and choices required for execution of a strategic plan. The implementation process has to answer these questions: Who will carry out the strategic plan?
•
What should be done to align the company s operations in the new direction? •
When and how everyone concerned, should respond? •
Factors Differentiating Stage I, II and III Companies Function
Stage I
Stage II
Stage III
1. Sizing up: Major problems
Survival and growth dealing with short-term operating problems
Growth, rationalization, and expansion of resources, providing for adequate attentio n to product problems
Trusteeship in management and investment and control of large, increasing and diversified resources. Also, important to diagonise and take action on problems at division level
2. Objectives
Personal and subjective
Profits and meeting functionally oriented budgets and performance targets
ROI, profits EPS
3. Strategy
Implici t and persona l; exploration of immediate opportunities seen by owner-manager
Functionally oriented moves to one product scope; exploitation of one basic product or service field
Growth and product diversification; exploitation of general business opportunities
4. Organisation: Major characteristic of structure
One unit, show
One unit functionally specialized group
Multiunit general staff office and decentralised operating divisions
5. (a) Measurement and control
Personal criteria, relationships with owner, operating efficiency ability to solve operating problems
Functional and internal criteria such as sales, performance compared to budget, size of empire, status in group, personal relationships, etc
More interpersonal application of comparisons such as profits, ROI, P/E ratio, sales, market share, productivity, product leadership, personal development, employee attitudes, public responsibility
6. Reward punishment system
Informal, personal, subjective; used to maintain control and divide small pool of resources to provide personal incentives for performers
More structured; usually based to a greater extent on agreed policies as opposed to personal opinion and relationships
Allotment by due process of a wide variety of different rewards and punishments on a formal and systematic basis. Companywide policies usually apply to many different classes of managers and workers with few major exceptions for individual cases
one-man
Source: O.H. Thain, Stages of Corporate Development, Business Quarterly, p.37, Winter 1969.
Board of Directors
Chairman & Managing Directors
R&D
Operating Companies (India)
Corporate Staff
Operating Companies (SAARC Countries)
Operating Companies (Africa)
Operating Companies (Europe)
Product Group
Product Group
Product Group
Product Group
Product Group
A
B
C
D
E
Geographical Area Structure of an MNC
Classification According to Risk :
Low Moderate High
Courses of Action
: Niche Vertical Integration – Backward and Forward Horizontal expansion Diversification
According to desired rate of growth: Alternatives are - Internal Expansion. (adding more capacity) - Internal Stability (by augmenting resources - Internal retrenchment or turnaround (eg: Hind. Photo-Films) - External Retrenchment or Divestiture (ITDC- decided to close Hotel Akbar some years ago) - External expansion through mergers - Combination of the above strategies Selection of Strategy
: Based on growth objects, resources, S&W, government policy & best method to close the gap between projected performance and desired performance; PL-C of product/SBU could also be helpful; marginal factors (attitudes towards risk) also influence selection.
Matrix and Network Structure Top Management
Manufacturing
Marketing
Finance
Human Resource
Manager: Project A
Manufacturing Unit
Marketing Unit
Finance Unit
Human Resource Unit
Manager: Project B
Manufacturing Unit
Marketing Unit
Finance Unit
Human Resource Unit
(a) Matrix Structure
Packers
Designers
Suppliers Corporate Headquarters (Broker)
Manufacturers
Distributors Promotion/ Advertising Agencies
(b) Network Structure
Diversification
Related: Eg. JK- from textiles to synthetic fibres unrelated
Related: Constrained or Controlled Linked - Closely related to main product line - Weak link as well as to teach other - Bus reln. Eg: Nirlon – from nylon filament yarn for Eg: India to nylon tyre cord for industrial Shaving products. applications to conveyor belts, V-belts,…. all based on industrial grade nylon yarn (Blades to toiletries and writing products)
Qns. Co. SH. Ask: Do the common skills & Res. Really exist? Will the economies/benefits resulting from sharing of skills and res. be substantial? Will the related diversification improve overall results? Will the related diversification lead to any difficulties or problems and does the Co. have cap. To overcome these? • • • •
Unrelated diversification
By setting up new projects, Through mergers, take overs off-running business. Eg: Hyderabad Allwun: Bus body Building to refrigerators to deep freezeders, water coolers, Acs, Watches,….
Planned diversification Options to Management
- Status Quo - Sail with the wind - Go on moving in the direction - Move in new direction in a planned manner
Diversification in an ongoing process - Define your bus - SWOT analysis - GAP Analysis - Competition & Risk analysis Corporate diversification in India – Now actively pursued due to - Liberalisation - Indian Entrepreneur willing to think big and grow big - higher risk bearing attitude by financial institutions - Middle class confidence in equity market - shrinking demand for Indian consumables abroad; so joint ventures in India; NRI scheme for technology & finance flow - Massive market expansion (largely middle class domestic market
Integration
Horizontal – Owning (or controlling) a number of similar but separate activities in the same industry of business Vertical – Backward – Diversifying into R/M & other supplies for the company s products – may enable a co. to improve the quality of final product Eg: Vimal Forward – Div ersification further down the line to final consumer – direct control on distribution and logistic channel Eg: Nirlon
Diversification & Synergy Production Synergy: Co. mfg coolers, refrigerator,s ACs, getting into room heaters, ovens Marketing Synergy: Cricket balls & bats; tennis balls and rackets Financial Synergy: Fan manufacturers offering discount in winter Organisation Synergy: Manufacturing organisation starting consulting services Diversification V/s Expansion: Before diversifying company can & SH. Consider expansion in existing product line
Mergers and Acquisitions: Merger - Takes place when two or more Cos roughly of equal size or strength formally submerge their corporate identities into a single one in a friendly atmosphere; a holding Co. may be formed and its shares are exchanged for shares held by the share-holders of the merging Cos
Acquisition – When a Co. offers cash or securities in exchange for the or take over the majority shares of another co. – happens when merger is not agreed upon – when the battle is severe, tgt price may be 100% above market price
Merger - Improving Economies of scale, gaining managerial expertise, motivations market supremacy, acquiring a new product or brand name, diversifying the portfolio, reducing risk and borrowing costs taxation or investment incentives
Screening Process: - Identify industries – Medium scale investment/large scale investment - Select sectors: based on data w.r.t., sales T/O, ROI, market shares, competition, asset turn over, etc - Choose Cos – by sales turnover & asset level- determines acqn. Cost - Cost of acquisition & returns: Compare candidates - Ranking: Concept of Fit - Identifying good ones: High market share Growing market Good management system Diversified portfolio ROI above bench mark level Assembling suitability of a proposal - Funds availability - Likely positive synergies - Negative synergies & Weaknesses - Is timing appropriate - Is required management style available Valuation for mergers and acquisitions: Market price per share P/E Ratio:-------------------------------------------Net earnings after tax per share
-P/E Ratio & EPS (Market price of Share / P/E ratio) SH. Be compared with balance sheet & P&L A/C Acquirer should - Divest loss making opns - Use ratio analysis (to compare with ind. Avg) - current ratio (reduce C.L.) Stocks - Stock Level = (reduced stock level)
* 12 months Cost of Goods sold
Debtors - Avg. Age of debtors (in days) =-----------(Reduce ave age of Debtors) Sales
* 365
- Revise B/S & P&L A/c - Incorporate growth & expectation rates age of assets - Calculate replacement value of assets = 1 - ----------------Tot. Eco. Life of asset
* current cost of asset
Managing after merger: Indian scene
- NRI status is helping in mergers (to get out of FERA) - Likely to become more dominant in future
Evaluation and Control Process can be viewed as a five-step model:
To determine what to measure – this means that the processes and results must be capable of being measured in an objective and consistent manner. •
To establish performance standards = these specify the measures & acceptable results i.e., provide a tolerance range. •
Actual performance measurement
•
Comparison of actual with standard
•
Taking corrective action – this becomes necessary when the actual results are outside tolerance range. Before acting, the manager has to ensure whether the deviation is due to chance fluctuation and whether the process is correct and appropriate. •
Problems in Measurement of Performance Short–term orientation (high ROI in short-term) Goal displacement – refers to the confusion of means with end. It occurs when activities intended to help managers achieve corporate objectives become ends in themselves or are adapted to meet ends other than those for which they are intended. •
Goal displacement can be of two types – Behaviour Substitution and Sub-optimisation. Behaviour Substitution: refers to a phenomenon where activities that do not lead to goal accomplishment are substituted for activities that do lead to goal accomplishment. In other words, the wrong activities and people who focused on these activities are being rewarded.
Sub-optimisation: is a situation where optimisation occurs for a unit or a functional area to the detriment of an organisation as a whole.
Strategy Audit The idea of strategy audit is to develop benchmarks. This process involves the following steps: Identification of area or process to be examined – usually an activity which can give competitive advantage to a business unit. •
Determination of measures of performance of the area or process. •
Competitors against whom the company has to benchmark – these have to be generally the best among the industry. •
Difference in performance measurement of the company and the best in class. •
To develop tactical program for bridging performance gap.
•
Implementation of programs and comparing the results of new measures with those of best-in-class. •
The following guidelines can be made use of for proper control of strategic planning implementation exercise: Focus should be on critical success factors i.e., 20% that determine 80% of the results. •
Control should be directed towards monitoring meaningful activities and results and should be timely. Controls can be both long term and short term. •
Controls should help in pinpointing exceptions.
•
There should be emphasis on rewards on meeting or exceeding standards of performance.
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IT and Strategy • Traditional and Alternative views of IT vary in four dimensions – ! Nature ! Evaluation ! Use ! Returns.
• There is a growing feeling in organizations, as per the alternative view, that the returns on IT investments, may not, at the expected levels, be making the investment decisions look suboptimal. This is due to the fact that IT is viewed as providing strategic inputs.
IT Strategy Components Sound strategic plans contain at least six components or elements, they include ! Application system components ! Application development components ! Infrastructure component ! Maintenance component ! Operations component ! Security component
Viewing IT as Strategy • Investments should be made in those IT based applications and services that are likely to yield the best returns. • Information systems for competitive advantage are those that reflect the fundamental objectives of the firm and that may have a significant impact on its success.
Influence of IT on pricing strategies • Increased availability of information – Increased information gathering, handling, and analysis capabilities enhance price customization, bundling and unbundling, revenue management and automated pricing strategies • Enhanced reach – Enhanced reach catalyses various pricing strategies, in particular the internet provides companies, access to an extended universe of customers, more demand and new markets • Expanding interactivity - IT may increase efficiency through electronic transactions and online customer interactions, which can affect pricing by creating exchanges, such as maintenance, repairs and operations hubs, through which buyers and sellers group together.
Emphasis on Strategy for IT
• Organizations with more experience in automation, realize that IT can not only improve the efficiency and effectiveness, but also play a decisive role in the companies success thus acquiring a strategic quality.
Strategic Contributions of IT Nolan Growth Curve and the Growth of Management
Looking ahead • The nature of the linkage between IT investment and corporate strategy needs to be put on firmer grounds • The nature of IT in organizations is undergoing continuous change. There is need to quantify the benefits arising out of the shift towards IT in organizations.
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Balanced Score Card. !
Strategy Evaluation - 4 Parameters: a) The Financial perspective. b) The Customer perspective. c) The Internal business perspective. d) Learning and Growth.
!
Managing the Strategy – 4 processes: a) Translating the Vision. b) Communicating and Linking. c) Business Planning. d) Feedback and Learning.
Balanced Score Card (Contd.) !
BS as a tool:
Using BS companiesa) Clarify and update Strategy. b) Communicate throughout the company. c) Align unit and individual goals throughout the company. d) Identify and align Strategic initiatives. e) Conduct periodic performance reviews.
BCG Matrix (New) !
2*2 Matrix
!
Size of competitive advantage Vs. No. of approaches to competitive advantage. Size of the comp. Adv.
Fragmented
Specialization
Many
No. of approaches to achieve comp. Adv.
Stalemate
Volume
Few
BCG Matrix (Contd.)
Fragmented !Small
and Regionalized.
!Profitability !Advantage ! No
not related to size.
gained by focus.
premium on growth.
Specialization !Focused segments. !Steep
learning curves.
!Ex.
Cray research in field of Super computers.
!Ex.
Specialty restaurants or designer labels.
Volume
Stalemate !Where
!Where
!CA
!Constrained
it is difficult to gain advantage.
often is the sheer sustaining power.
!Ex.
Kellogg's in India.
there are economies of scale and IRS operates. by market segmentation and differentiation.
!Ex.
The car industry.
Competitive Advantage of Nations. !
Porter – Differences - 4 Decisive elements: a) Availability of strengths in certain narrow, technical fields. b) High demand in the home country. c) Related and supporting industries in the home country. d) Strong domestic rivals, Local rivalry. Porter also refers to this as the NATIONAL DIAMOND .
Competitive Adv. Of Nations (Contd.) !Generalizations
for Strategic management:
a)Devaluation is bad for competitiveness. b)Relaxing antitrust is bad. c)Relaxing product safety and environmental regulation is bad. d)Deregulation is good. e)Promoting inter-firm cooperation is bad. f)Orderly marketing agreements are bad. g)Increasing defence contracts are bad.
Competitive Convergence.
!Firms
compete on the basis of similar strategies as in Strategic
groups. !Cannot
be the basis for sustained Competitive advantage.
!Firms
to compete for unique positioning – different Strategies (Competitive divergence). !Also
loosely related to Prahlad s concept of Dominant Managerial Logic.
Grand Strategy Matrix (Dimensions: Competitive position and Market growth). Rapid Mkt. growth
Mkt Development, Mkt Penetration, Pdt. Development, Horizontal Integration, Divestiture, Liquidation.
Weak Comp. Posn. Retrenchment, Concentric Diversification, Horizontal Diversification, Conglomerate Diversification, Divestiture, Liquidation.
Mkt Development, Mkt Penetration, Fwd Integration, Bwd Integration,Horizontal Integration, Divestiture, Liquidation.
Q2
Q1
Q4
Q3
Strong Comp. Posn.
Concentric Diversification, Horizontal Diversification, Conglomerate Diversification, Divestiture, Joint Ventures.
Slow Mkt. growth
Doom Loops. !Self
reinforcing processes.
!Drive
an organization into cyclical situations from which an organization finds it difficult to extract itself. !To
avoid getting into a doom loop, it is required to constantly upgrade the products, services and efficiency of distribution channels. !To
get out of a doom loop – refocus on the small business units and a change has to be brought about in the firm s culture.
Doom loop - Example Competitors innovate & develop better Pdt. at lower cost.
Competitor matches price & yet is profitable.
Competitor gains mkt. Share at firms expense. Firm cuts price to hold onto the market share.
Employees become demoralized.
Firm has inadequate margins to reinvest.
Quality of Pdt. & services becomes poor.
J Curve, Floating
!First
noticed by Jack Welch.
!Future
predictions – Things would get worse before it got better.
!Welch
– J curve would shift to right as time came closer.
!Myopic
pessimism becomes clear here.
J Curve, Floating.
Performance
Time
Cobweb Theorem. !Equilibrium
need not necessarily be established in an iterative process. !Originally
Convergence
conceived to explain why inflation may arise through a mismatch of expectations. !Has
widespread applicability in pricing strategies. !Diagrams
– Denoting demand supply imbalances, one process guarantees converging, the other, diverging [dis] equilibrium. Divergence
End Game Strategies. Enhance the productivity of declining businesses till they collapse absolutely. The decline phase, according to Harrigan and Porter becomes volatile because – !Uncertain
demands due to changing technology, preferences, rising uncertainty. !Exit
barriers.
!Strategic
considerations.
!Management !Asset
resistance.
Disposition.
End Game Strategies.(Contd.) Harrigan and Porter s four strategic options
Fav. Industry structure for decline.
Has competitive strengths for remaining demand pockets.
Lacks competitive strengths for remaining demand pockets.
Leadership
Harvest
Or
Or
Niche
Divest
Harvest
Unfav. Industry structure for decline.
Or Niche
Divest Quickly.
4 Strategies: Leadership, Niche, Harvesting, Divest.
Economic Value Added (EVA). !EVA =
The after tax cash flow generated by a business - cost of capital it has deployed to generate that cash flow. !Can
be employed to evaluate the performance of a company.
!Important !EVA
role is Strategy formulation.
– 4Ms in Implementation: •Measurement •Management system •Motivation •Mindset
National Diamond. !
Porter s way of looking at a nation s competitive advantage.
!
National Diamond – why? Because it s valuable, adds value.
!
Four parts : a) Factor conditions (Land, Labor, Capital, Entrepreneurship). b) Demand conditions. c) Role of Supporting Industries. d) Firms Structure Rivalry and Strategy.
Space Matrix. ! !
!
Strategic Position and ACtion Evaluation Matrix. For determining an organization s overall strategic performance.
FS
4 Quadrant framework – a) Aggressive. b) Conservative. c) Defensive. d) Competitive.
Aggressive
Conservative CA
IS Competitive
Defensive ES
Space Matrix(contd.) 2 internal dimensions – !Financial
Strengths (FS) – Cash flows, liquidity, ROI, ease of exit from market etc. !Competitive
Advantage(CA) – Mkt. Share, Product life cycle, customer loyalty etc. 2 External dimensions – !Environmental
Stability(ES) – Technological changes, Rate of inflation, Demand variability etc. !Industry
Strength – Growth potential, Profit potential, Technological know-how etc.
Strategic Control Grid. !
To measure the power that a firm is able to establish in its working environment.
!
Mapping of this control grid w.r.t competitors can give the strategist useful ideas of the appropriateness of the strategy.
!
5 elements to the manifestation of this power – a) Position. b) Profits. c) Process. d) Product. e) Perception.
Web Structure. !
Definition: A set of companies that use a common architecture to deliver independent elements of overall value propositions that grows stronger as more companies join.
!
2 conditions:
!
A common platform, either technology or geography etc.
!
Increasing returns to scale.
!
3 types of webs (Hagel): a) Market web : Shopping Malls. b) Consumer web : Readers digest. c) Technology web : Tech. Platforms – windows etc.
X Efficiency. !The
measure of a firm s management in minimizing the cost of producing a given output or maximizing the output given a set of inputs.
!Supposed
to capture the discrepancy between the efficient behavior of firms as implied by economic theory and their observed behavior in practice. !Libenstein
introduced this theory of inefficiency generated due to lack of competition.
Organisational Agency 3. 10. 11.
Awareness Confidence Strategy
1. 2. 5. 7. 8. 9.
Image Disposition Resource – in – kind Resource Monetary Top Management Self - interest
External 4. 6.
NPO
External Social Comparison
Parameters of NPO Choice Responsiveness Credibility Capability Confidence Communication Channel Tangibility Top Management
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•
•
•
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A Theoretical Model for Corporate Philanthropy (Note: Numbers denote factor rankings)
CP Policy and Programs
Non Profit Organizations Important factors for an NPO choice in the Indian context are –
Responsiveness
Channel
Credibility
Tangibility
Capability
Top management
Confidence
Communication
Small and Medium Enterprise (SME)
Small and Medium Enterprise (SME) employs less than two hundred People with an annual turnover of Rs.5 crores. •
SMEs in India have to develop entrepreneurial characteristics in order to survive in the changing market scenario. Four important characteristics which are key to the success of the firm are: Ability to identify potential opportunities better.
•
A sense of urgency making them action oriented.
•
Knowledge of key to success in the industry.
•
Supplementing through outside help skills, knowledge and ability •
