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SESSION V & VI FORMULATING LONG TERM OBJECTIVES & GRAND STRATEGY – •Long term objectives are results which a firm seeks to achieve in 3 –5 yrs •Grand Strategies are comprehensive policies & action plans to achieve long term objectives Long term objectives are established in following seven areas •Profitability - generally measured as return on equity or profit per share •Productivity of resources- 6 M’s – Men, Machine, Material, Money, Methods & Marketing •Competitive Position – Product range & Quality, Sales & market share growth •Employees Development – Training, Improvement of skill, Organizational efficiency •Employee Relation – Working environment, Safety Programs, Employees Participation & Industrial Relations •Technology Status – positioning yourself in the market based on product, quality & supply, product USP’s •Public Responsibility – towards share holders, society, customers & employees – this parameter is gaining importance day by day 1

Balanced ScoreCard Developed by Prof Kaplan & Norton of Harvard Business School USA •It links a company’s long term strategy with tangible goals & actions •It helps Managers to evaluate co’s performance from following four perspectives * Financial performance

* Customer knowledge

* Business processes

* Learning & growth

• Score Card is a balance between short term & long term measures, financial & non financial measures, internal & external performance criteria Financial- to succeed financially for satisfaction of share holders Objectives Measures Targets Customers- to satisfy customer as per co’s vision Objectives

Measures

Targets

Action Plan

Action Plan

VISION & STRATEGY

Internal business processes-to excel so as to satisfy share holders / customers Objectives

Measures

Targets

Action Plan

Learning & Growth- to change & improve as vision Objectives

Measures

Target

Action Plan

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GENERIC STRENGTH •It means that long term grand Strategies of a co must be based on its core strength so as to help the co to compete best in market place – this core strength is called Generic Strategy •Prof Michael Porter, famous Harvard School scholar states that a firm can derive competitive advantage based on any / combination of following 3 generic strategies • Striving for overall low cost leadership in industry eg Deccan, Spice Jet Airlines, Sahara Mall •To create & market unique products thru’ differentiation thereby build customer loyalty & charge premium thru’ brand building eg Mercedes, BMW, Rolls Royce cars. Parker & Cross Pen, Rolex & Omega Swiss watches. •To create special appeal to one or more industrial buyers focusing on their cost or differentiation concern like meeting typical customer needs, focus on somewhat unique demands of small & medium size customers eg creation of consumer stores, Super Bazaars for middle class working people, tiffin service for office goers, pavement & roadside bazaars GRAND STRATEGY •Also called master / business strategy provide the firms basic direction for strategic actions directed towards achieving long term business objectives •Grand strategies indicate time periods over which long range objectives are achieved 3

•Principal grand strategies normally used in business are •Concentrated growth •Market development •Product development •Innovation •Horizontal integration •Vertical integration •Concentric diversification •Conglomerate diversification •Turn around •Divestiture •Liquidation •Bankruptcy •Joint ventures •Strategic alliances •Consortiums

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Concentrated Growth It is a strategy of a firm that concentrates on profit growth of a single product in a single market with single dominating technologies, this approach is also called market penetration & is used in a market where demand is continuous & competition is limited. Risks in this strategy are the demand may go down or may shift to other & better alternatives & therefore requires lot of vigilance to remain healthy & profitable Eg are Bajaj Motors & Hero Honda who till 2002 were making only scooters & motor bikes respectively, there was change in the business environments with Honda co of Japan coming in India & other players like TVS, Kinetic modernizing their products to become equally fuel efficient there was also shift in market demand of motor bikes market growing 3 times that of scooter. Bajaj who enjoyed no 1 position in 2 wheeler industry in volume started sliding down & Hero Honda did not want to stay on single product. Keeping in mind the environmental changes Bajaj entered the motor bike & Hero Honda the scooter market recently. In fast food industry Mc Donald's & Barista adding lot of cheaper / items of Indian taste to meet the local taste Market development Consist of looking for new applications / new customers, it is often achieved by making cosmetic changes, new / additional channels of distribution to reach new markets, new customers or by altering advertisement & promotion strategy to reach other geographical markets eg are Polaroid instant cameras to digital cameras, use of Aspirin to lower heart attacks, Gati Transport to handle time bound parcel service by road

Product Development Involves modification of existing products or creation of new ones related to original product that can be marketed to current customers thru’ established channels, this is normally done to prolong life cycle of current products or to take advantage of its brand image. The idea is to attract, satisfy customers as a result of positive experience of initial offerings Eg are Diet Coke, family pack drinks, on tap supply of cold drinks in restaurants & bars, revised addition of a text book, new look of a old model car Innovations Consumer & industrial markets expect changes & improvements in existing products. Co’s reap high profits associated with customer acceptance & as the competition picks up & prices fall they look for new ideas to create a new product lifecycle by making existing product obsolete classic eg are from electronic industry, Intel a leader in semi conductor industry brought Pentium I, II, III & IV in their micro processors to continue capturing the market thru’ better processing capabilities. Gillette brings in 40% new innovations every year in their shaving products to keep skimming the market thru’ innovations, mobile phones bring in new features every few weeks Horizontal Integration This strategy is based on expansion or growth thru’ acquisition of one or more similar firms operating in the same production- marketing chain Eg are in Petroleum industry, Indian Oil taking over IBP, again a joint venture Sri Lankan Oil Co in Sri Lanka & similar venture in Malaysia 6

Vertical Integration To acquire a business which supplies the parent co with raw material or inputs Eg are in petroleum industry Indian Oil getting into exploration & ONGC getting into refining / marketing operations, the idea is to get better control of business / profit / market share. Arvind Mill of Ahmedabad known for making cotton & denim textile has got into export of shirts & jeans for US market Concentric Diversification Growth related fields – this type of growth has common business thread or synergy to make more profit by combining activities eg Indian Oil moving to oil & gas exploration & ONGC into refining & marketing. Some of the common reasons besides synergy could be, increased rate of growth & profitability, tax savings on new investments, extended life cycle etc Conglomerate Diversification It is diversification in unrelated business lines, usually done by large co’s who have surplus cash / profit & where existing business lines become less profitable or more competitive, diversification may be undertaken in unrelated fields. Reliance moved from Petroleum to telecom to power, Bhartiya from telecom to agro industries, UB group from liquor to air travel. Turn Around This is used to cope up with fast changing business environment, specially increased

continuous losses. As a turn around strategy drastic steps are taken to revamp the organizational structure, manufacturing processes, marketing strategy to cut down costs drastically, improve productivity & make the business viable / profitable Classic eg in the case study of Maruti discussed in the class, the co ran into losses in 2001 – 2002 when Japanese took over control & took several drastic steps to cut down costs 30 – 35% like VRS scheme, value engg, inventory & supply chain management, vendor rating & make & buy analysis. On marketing front several new models were introduced increasing the offering by almost double, re pricing & repositioning the products the co came back to no 1 position on most of the parameters in less than 3 yrs Divestiture It means subjecting the entire project range to a critical analysis of profitability & shedding off such product lines which have nil or marginal contribution & retaining only those lines which are profitable & good market potential Eg Crompton Greaves Ltd, the biggest electrical co in the pvt sector had 58 products in their kitty, gathered over a period of 50 yrs of their existence with the result they had to spend lot of resources to market such products as a result of intense competition on account of globalization the co which was always profitable during the previous 40 yrs ran into losses in 2000- 01. The co was restructured & the product lines were analyzed from profitability angle as a result 30% of the products were found unviable & sold off to smaller businesses, generating sufficient cash to revitalize the other product lines, over the last 4 yrs the co once again has become a profitable unit of blue chip category. 8

Liquidation / Bankruptcy This is generally the last option available in any business strategy & is opted when co’s get into the worst situation of having wiped out the entire capital base & are unable to pay to the banks & other creditors. In such cases the co applies to BIFR (Board of Industrial Finance & Reconstruction ) a Govt body set up to approve liquidation / bankruptcy for genuine business losses, their approval gives amenities to co’s against litigations & other criminal cases. After BIFR’s approval the co’s assets / realization of assets are distributed amongst creditors in the ratio of their outstanding. In India on an average about 100 co’s go for liquidation. Joint Ventures JV’s are commercial co’s set up jointly by 2 separate co’s to do business together by pooling their resources together, mostly this is done by domestic co’s to join hands with foreign co’s to do business together in case of large projects, generally power plants, refineries, oil exploration, large infrastructure facilities like ports, express highways & transportation system.Each partner contributes their special skills / core strengths to make the project successful. In most of the foreign JV’s. foreign partner generally contributes technical know how, supply of imported equipment, process know how & foreign currency.Whereas domestic partner does execution, project infrastructure co ordination with State & Central Govt, man management & domestic currency & timely completion of the project.Also collection of money if the project is being done on behalf of a third party, could be State / Central Govt or large undertaking Eg in India lot of co’s of USA; UK & Russian co’s have joined hands with Indian Oil co’s for oil exploration, recently airport modernization of metro towns is being done by a joint venture,

Strategic Alliances It is differentiated from joint ventures where generally co’s involved, do not take take equity participation in each other. Strategic alliance exists for a defined period during which partners contribute their skills to make the project work – one may give technical know how, plant & equipment specs & process details & control & second may do the execution, running the plant & marketing activities Eg in India these alliances are more known for foreign know how / licensing agreements with Indian partners to manufacture or market a product in India as per international brands.With globalization & opening of economy there are hundreds of foreign co’s in all the sectors manufacturing, marketing & service industry operating in India under licensing agreements in most of the cases the Indian partner pays a lump some fee initially & there after certain % on sales revenue as royalty for a specific period – eg Hero Honda, Lucas TVS, Maruti Suzuki, Munjal Showa, Sona Koyo Steering are examples of manufacturing units. Pepsi, Coca cola, Mc Donald’s, Bosch & laumb, Dominoes are some of the marketing licensing examples, & Hilton, Hyatt, Holiday Inn are examples of service industries. In IT industry numerous call centers / BPO’s are operating in India under strategic alliance system, with Indian partners. Even GE in India have handed over management & control of their BPO / call centers to a team of Indian partners who were earlier GE employees. Major advantages of strategic alliances are specialized focus world class technology, benefits of R & D use of established Brand to give international standards 10

Consortium / Cooperative agreements This is a much bigger form of strategic alliance & is generally entered between 2 countries or continents for improving R & D, Scientific research, higher level of education & learning. Broad scope, terms & conditions are laid down in between the two bodies, could be scientific associations, relevant ministries of the Govt & private bodies like NGO’s for exchange of information, training, knowledge & execution of projects including sharing of financial resources eg are •Recently concluded agreement between USA & India, whereby USA would assist in putting up Nuclear power plants in India, including enrichment of uranium which is a highly guarded process know how (which can also be used in development of nuclear bomb / weapons) •Top most management schools of USA like Harvard, Kellogg's, Wharton & many others establishing management education centers in India jointly with reputed Indian business houses. Indian School of Business Hyderabad (ISB) is an example, on the same lines IIM Ahmedabad, Ban galore are planning to put up management institutes in Middle East Countries •In oil exploration ONGC, Indian Oil & Reliance forming consortium with the Russian, USA & UK based petroleum MNC’s for joint exploration of oil & gas in India on agreed cost & revenue sharing basis •ONGC & Indian Oil forming consortium with local co’s in African countries & doing exploration for oil & gas, on agreement of profit sharing after oil & gas is found on risk sharing basis 11