Business Strategy 1

BUSINESS STRATEGY

I

Introduction To Business Strategy Strategic Management The set of decisions and actions resulting in formulation and implementation of strategies to achieve the goals and objectives of the organization. The decisions could be about products, prices, customers, markets, processes, technologies, materials, location, or the organization’s structure- or about anything that affects the organization’s achievement of objectives and goals.

What is Strategy? It is the means used to achieve the objectives and goals. Defined as “a unified, comprehensive and integrated plan to assure that the objectives and goals of the enterprise are achieved”. Unified- because it ties all the parts of the enterprise together Comprehensive-because it covers all major parts of the enterprise Integrated-because all parts of the plan are compatible with each other and fit together well

Why needed? 1.The conditions of businesses change so fast that they are forced to perform SP to anticipate future threats & opportunities. It allows anticipation of change & hence provide directions and control for the enterprise. 2.It provides employees with clear goals and directions. They are aware of the enterprise’s destinations and hence know their roles in the plan. This helps to reduce conflicts. 3.Businesses which perform SP have been found more effective compared with those which do not. This is because SP have helped them to systematize the decision making and refrain from making gambling decisions

Aphorisms on SM “One must either anticipate change or be its victim” J.K.Galbraith “Tomorrow always arrives. It is always different and then even the mightiest company is in trouble if it has not worked on the future” P.F.Drucker

“Strategy is not about continuing the past.It’s about creating the future” Jim Underwood in What Is Your Corporate IQ?

The Indian scene Became a formal discipline: Early 1980 Some had formal, full-fledged depts: Tatas, ITC,HLL,L&T etc. Examples. RIL was an exception but the process was well established. Prof. S.K.Bhattacharya had written in 1984:”The distinction between RIL & others is that it creates the future for itself rather than waste time on sobbing over governmental controls and insensitivity of govt. policies. It identifies the opportunities offered by the market place and the environment…….”

Evolution of Strategic Management -Current form after lot of transformations Stage#1-Financial planning-limited to capital investment decisions Stage#2-Long range planning-trying to forecast & mastermind the future-attempt was to eliminate riskDrucker’s views Stage#3Corporate planning-function seen from the overall view of the corporation and not necessarily LTobjective to identify new areas of investment, new courses of action and evaluating against set targets. Stage#4Strategic planning/Strategic managementprocess of formulation of an effective strategy to achieve the set goals-goals normally lies outside the firm-planning involves formulation & management is the effective management of the chosen strategy

• • • • • • •

Strategy Stalwarts/Gurus Igor Ansoff Peter Drucker Henry Mintzberg Michael Porter Gary Hamel & C.K.Prahalad Kenichi Ohmae Sumantra Ghoshal

The Nature of Strategic Decisions Strategic decisions are different from other types of decisions because they 1.Require top management decisions 2.Involve allocation of large amounts of company resources 3.Are likely to have a significant impact on the LT prosperity of the firm. 4.Are future oriented. 5.Have major multifunctional or multibusiness consequences. 6.Necessitate considering factors in the firm’s external environment.

Diversification-Concentric & Conglomerate Concentric are related ones-while the products and markets may be different, the new products /services may have relationships to the existing through technology or basic product framework or even markets. The diversification of RIL can be said to be said to be concentric whereas the diversification of Grasim can be said to be conglomerate.

Integration Horizontal Integration -firm acquires similar businesses operating at the same stage of the productionmarketing chain-firm may get access to new markets and lessen or eliminate competition Eg: ICICI Bank acquisition o Bank of Madura HLL acquisition of TOMCO Vertical Integration -Forward & Backward Forward-enter into areas which will use the current products as inputs Backward- enter into areas which will produce inputs for the current products Tapered Integration-combination of vertical integration & exchanges (buying from others) in the market

Characteristics of Strategic Management Decisions: These vary with the level of strategic activity considered. (Ref: Handout)

Levels of Strategy Planning Three levels

-Corporate Level- attempt to exploit the firm’s

distinctive competencies and reflect the concerns of the stakeholders and the society at large, concerned with overall goal or purpose -Business level- doing what is best for the business unit to achieve its goals, more concerned about the competitive advantages of the business from a product-market point of view and contribution to the corporate level plan -Functional level- strategies w r t the functional areas like marketing, finance, HR, R&D, production/operations; mostly concerned about improving efficiency and effectiveness in the areas • (like market share, quality of service etc); usually for a period of one year

Levels of Strategy Corporate Strategy

Business 1

Operations

L1

Business 2

Financial/ Accounting Strategies

Business 3

Marketing Strategies

L3

HR Strategies

L3

Top Management Perspective & Strategy formulation( Major vocabularies relating to strategy) Strategic planning-is the set of decisions and actions which result in the development of an effective strategy to achieve goal or purpose Goal/Purpose- is what the orgn. wants to achieve in the long run; it is the definition of org. purpose- the fundamental reason for the organization to exist. The goal could be ‘to sustain and develop the wealth of the family owners’ or to ‘create health for this region’ or ‘to create shareholder value’. A statement can be as short as MS’s ‘a PC on every desk in every house’ to as long as IBM’s ‘We shall increase the pace of change. Market driven quality is our aim. It means listening and responding more sensitively to our customers. It means eliminating

defects and errors, speeding up all our processes, measuring everything we do against a common standard, and involving employees totally in our aims’. A statement of purpose is the bedrock of the organization. Vision- is a picture of how the organization could be far into the future, if the organization is to achieve its purpose. It is a picture to inspire people inside and outside the organization to strive for their purpose. It energizes people long-term. Vision tells one how they will achieve the purpose-by doing what , our specific roles and results in what benefits to us.

Mission is a more easily achievable target or objective, usually achievable within short to medium-term time-frames. A mission has measurable outcomes, like increase in market share, growth in volumes or profitability given a limited amount of resources; Mission tells about what the organization wants to achieve through its business activities. Mission statements vary from orgn. to orgn. Can be explicitly defined or vaguely defined. But it tells you how or by doing what the organization plans to achieve its goal.

A mission statement should contain enough details to provide answers to the following questions: 1.What is the basic purpose? 2.What is unique about? 3.What is likely to be different in say 5/10 years down the road? 4.What is it that will make the orgn. stand out in a crowd? 5.Who are, and who should be the principal customers? 6.What are and what should be the principal economic concerns? 7.What are the basic beliefs, values and philosophical priorities ?

Characteristics of a Mission Statement- It should 1. be feasible-should aim high but realistic and achievable 2. be precise-not too narrow to be restrictive and not too broad to be meaningless 3. be clear enough to lead to action (Eg. “Leadership through excellence”-Asian Paints) 4. be distinctive-able to create distinction in public mind 5. be motivating-members of the orgn & society at large must feel proud working/associating with the orgn. 6. indicate major components of strategy 7. indicate how objectives are to be accomplished

Eg: of a mission statement: “Generations stand well with us”-Dalmia Cement Bharat Ltd Through which DCB defines its role in the society by producing good quality cement at reasonable cost, satisfying the customer ie the society and hence attract people for generation.

The Medtronic Mission • To contribute to human welfare by application of biomedical engineering in the research, design, manufacture and sale of instruments or appliances that alleviate pain, restore health, and extend life. • To direct our growth in the areas of bio-medical engineering where we display maximum strength and ability; to gather people and facilities that tend to augment these areas; to continuously build on these areas through education and knowledge assimilation; to avoid participation in areas where we cannot make unique and worthy contributions. • To strive without reserve for the greatest possible reliability and quality in our products; to be the unsurpassed • standard of comparison and to be recognized as a

a company of dedication, honesty, integrity and service. • To make a fair profit on current operations to meet our obligations, sustain our growth, and reach our goals. • To recognize the personal worth of employees by providing an employment framework that allows personal satisfaction in work accomplished, security, advancement opportunity and means to share in the company’s success. • To maintain good citizenship as a company According to Bill George, former Chair & CEO of Medtronic & currently professor with HBS, in missiondriven companies, employee motivation comes from believing in the purpose of the work and being a part of creating something worthwhile.

Objectives

are the basic economic & social purpose for which an organization exists. Eg: Market Leadership Maximizing shareholders’ wealth Serving the public by offering excellent service

Organizational Direction Top management to provide necessary direction to the organization –for the achievement of the goals and objectives-the entire organization should be aware of the purpose for which the orgn exists.

Drucker’s 8 Key Areas in which objectives have to be set # Market Standing #Innovation #Productivity #Phys & Fin Resources #Profitability #Mgr Performance & Dvpt #Worker Perf & Attitude #Pub. Resp First 5-Tangible Last 3-Less Tangible

Contrary to business school doctrine, ”maximizing shareholder wealth “ or “profit maximization” has not been the dominant driving force or primary objective through the history of visionary companies. Visionary companies pursue a cluster of objectives, of which making money is only one- and not necessarily the primary one. Yes, they seek profits, but they are guided by a core ideology, values and a sense of purpose beyond just making money. Yet, paradoxically, the visionary companies make more money than the more purely profit – driving comparison companies Jim Collins & Jerry Porras in Built To Last, Random House, 1995

Objectives Two categories:1. External Institutional objectives or primary objectives 2.Internal or secondary objectives External are those which define the impact of the organization in its environment Internal are those which define how much is expected to be achieved with resources that is available within the organization Some objectives are classified as strategic objectivesare those which rationalizes what the organization does; they define the organization in its environment. Objectives of DCBL-External-Customer satisfaction Internal-Market leadership, low cost energy efficient operation, consistent quality & conformance to specifications, maintaining ecological balance

The choice of objectives affected by: 1.The realities of ext. envt. and ext. power relationships (Govt., Taxes, Competition laws, environmental laws etc) 2.The realities of the firm’s resources and internal power relationships 3.The value system of the top management (based on education, experience, information received etc)

Other important aspects of strategy related to mission, goal & objectives: The Philosophy -the wisdom that every company tries to seek to deal with the ultimate reality of existence The Ethos-values that will be adhered to (usually given in the form of a value list) The Creed- set of beliefs that the organization has-usually a reflection of the beliefs of the promoters or the current top management

Understanding Strategy Development

The Strategy Development Process Environmental analysis Why? 1.To determine what factors in the environment present threats to the company’s present strategy and objectives accomplishment and 2.To determine what factors in the environment present opportunities for greater accomplishment of objectives. Env. Factors- 3 Categories 1.General- changes in govt., changes in eco. Policies & regulatory framework, political or community pressures affecting co. or industry, consumer groups exerting pressures on the co. or industry, changes in distribution of wealth in the society, changes in demographic aspects, changes in ethical values or social environment

2.Supplier factors: Major changes in the availability of RM & sub-assemblies, changes in the prices of RM, entry of addl. Suppliers, or potential suppliers of RM & Sub-assemblies, exit of major suppliers of RM and sub-assemblies, technological breakthrough in the RM or sub-assemblies affecting the equipments or process used by the co. 3.Market factors: Competitive structure-how many firms & respective market shares, major new products/services or substitutes introduced, shifts in the pricing structure of products (due to tech. changes etc), shifts in demand for products/services, shifts in consumer preferences, entry of new competitors, changes in the PLC for the industry

Categorization of Environment by Prof. John W. Sutherland (Ref: Reading Material)

Types of Env. Analysis @Macro @Micro & @Internal Two Steps:1.Appraisal-monitoring to determine threats& opportunities 2.Analysis-decisions made to react to anticipate or ignore the env. cues. Techniques of Env. Search #Information gathering-verbal or written and sources #Spying-ethical issues involved #Forecasting- qualitative techniques, historical comparison & projection #Causal models

E-TOP (Env. Threats & Opportunities Profile)- analyses the O&T in the Ext.Envt.( 3 categories of factors)

Internal Environment Analysis SAP (Strategic Advantage Profile)- an internal resource audit in areas like(1) Marketing (market share, strength in submarkets, quality of products, channels of distributors, pricing etc) (2)Operations (RM, production facilities, MIS, inv. Control, cost of production)(3) Finance & Accounting (COC, cap. structure) barriers to entry, fin. plg & mgt. etc), (4)Personnel & management (employee and manager quality, lab. cost, ind. relations, personnel policies, str. Planning system, track record of achieving objectives, commitment of top management etc)

Value Chain Analysis (VCA) by M.E. Porter Helps to analyze str. relevant internal activities in the comp. advantage A systematic way to examine all activities a company performs and how they interact among themselves to identify sources of competitive advantage Every co’s value chain is composed of nine categories of activities (value addition steps) which can be classified under two major headings: Primary activities: connected with the physical creation of the firm’s product or services, its marketing , delivery & after sales service Support activities: which provide inputs for infrastructure for primary activities

Primary activities: #Inbound logistics #Operations #Outbound logistics #Marketing & sales #Service

Support activities #Firm infrastructure #HRM #Technology Development #Procurement

Importance Provides two pieces of competitive intelligence: 1.where in the chain is (which activities) the greatest value added 2.in which segments of the chain do the competitors have a competitive edge?

Management concerns of such analysis: To take advantage of the distinctive competencies of the firm by way of @following a course of action that is different from rivals @developing a strategy which will provide different & better outcomes than those of competitors @adopt a strategy that is distinct and difficult to duplicate and exploit the opportunity by suitably adapting the chosen strategy.

Strategy formulation steps Step 1: Analysis of ext. envt. (threats& opportunities) and internal resources (str. advantages of the firm viz competitors) provide the necessary information to the strategists. Resp: Specialists who gather information Step 2:Evolve possible alternative strategies or str. options, evaluation of merits & demerits of various alternatives and the final selection of the most appropriate alternative Resp: BOD /Top management

The Choice phase: Step 1:generation of alternate strategies to fill the gap or take advantage of opportunities. Step 2: the choice of the best alternative to fill the gap or exploit the opportunity Choice influenced by:@ whether to pursue active or offensive or passive or defensive strategies @ whether to pursue flexible or programmed str. Alternatives @business definitions

No firm rule regarding adoption of active or passive. Can have active strategy w.r.t some parts of the envt. & passive w.r.t other parts Programmed is one planned in such a detailed manner as to make it difficult to change once begun to be implemented-suitable for stable environments with people preferring welldefined roles. Flexible allows shifts in the thrust when conditions warrant it. Contingency approach requires the planner to choose the preferred strategy when unexpected happenings occur-preferred for unstable envts with people preferring variety & stimulation

Business Definition “We don’t sell flowers, we sell beauty” says Edward Goeppner of Podesta Baldocchi chain of flower shops. According to him “customers of a florist do exchange money for a dozen roses, but what they’re really buying is something more than that: they want to beautify their homes, or express their love for others, or brighten the day. It doesn’t take a vision to sell flower on a street corner, but it takes a vision to sell beauty”

Grand Strategies Questions strategists have to answer while adopting a strategy 1.Should we stay in the same business? 2.Should we get out of this business entirely or some parts of it by merging, liquidating or selling off? 3.Should we do a more efficient or effective job in the business we are in in a slimmed down way? 4.Should we try to grow in this business by a. increasing our present business? b. acquiring similar businesses? 5.Should we try to grow in other businesses? 6.Should we do alternatives 2 & 4a?

If question 1 is answered “YES”, the choice is STABILITY strategy If 1 is answered “NO” and alternatives 2 or 3 accepted, the choice is RETRENCHMENT. “YES” to 4 & 5 result in GROWTH strategy. “YES” to alternative 6 is a COMBINATION strategy These are called “Grand Strategies”

Stability strategy: ”Maintain the present course: steady as it goes” Why? 1.The firm is doing well or perceives itself as doing well & management may not be very sure of the reasons for this. 2.It is less risky. A lot of changes result in failures. 3.Managers prefer action to thought. Executives never get around to consider any other alternatives 4.It is easier and more comfortable to do something which they are familiar with. 5.The firm is growing so fast that it should stabilize for some time

Retrenchment :”Slow down and catch your breath: we have got to do better” Used when enterprises decide to improve the performance in achieving the objectives by : 1.Focusing on functional improvement especially reduction of costs. 2.Reducing the number of functions it performs by becoming a captive company 3.Reducing the number of products/ markets it serves upto and including liquidation of the business.

Why? 1.The firm is not doing well or perceives itself as doing poorly 2.The firm has not met its objectives by following one of the other three grand strategies and hence there is pressure from the lenders, stockholders, customers & others to improve performance Four sub strategies: 1.Cutback & turn-around 2.Divestment 3.Captive company 4.Liquidation

Cutback & Turnaround: trying to make more efficient in everything the co. does; reduce admin. costs, increase production & sales efficiency, make better use of cash & other fin. resources, improving R&D; reduction of personnel in certain areas, more emphasis on high margin products, trim consumer list to save transportation & sales costs, close control of inventory etc.

Divestment: Firm tries to get out certain lines of business & sell off units, division etc Eg: BHL sold cement to Century, Coromandel fertilizers selling Cement division to India cements, McDowell selling Kissan to BBLIL (Group divestment)

Reasons for divestment: # Inadequate market share or sales growth # Low profits than other divisions # Tech. changes requiring more resources than the company is willing to commit # Regulations like Competition Laws # To concentrate on core competence; the co feels that it should concentrate on areas where its competences are better (Glaxo selling food division to Heinz)

Captive Co. Strategy: To become captive co. of your present or potentially largest customer. When becomes captive, many of the decisions for the company is made by the captor-like product design, production control, quality control etc, Captor will be able to negotiate the prices to their advantage while a ready market is available for the captive company and small cos can eliminate high costs in advertising & marketing. A co. may become captive intentionally or unintentionally but captive’s performance will be linked to the performance of the captor and hence may become less risky

Liquidation or Sell-out: The ultimate in retrenchment. But reasons for liquidating may be different from that of normal retrenchment.

Reasons @Someone is ready to buy the business at a price which managers think as more than real worth @Managers feel that business is at its peak and the only direction it can move now is down @Managers are not able to run the show because they are old or they are inefficient and has wisdom to acknowledge the same @The firm is not able to wither the changes due to changes in the economy, technology, market etc due to paucity of resources Eg:TOMCO, Sumitra Pharma, Boriinger Manheim

Growth: when the firm increases its level of objectives upward in a significant increment, much higher than an extrapolation of its past achievement levels; usually indicated by raising market share/ sales objectives upward significantly

Why? 1. In volatile industries, stability strategy can mean only short run success, and may lead to long term death. 2.A belief that society benefits from growth strategies 3.Managerial motivation since growth results in financial & other rewards to managers; managers would like to be remembered for their deeds& contributions; a growth company also becomes better known and may attract better management talent

Characteristics: Used in highly competitive & volatile industries where firms which do not plan for growth will not survive Growth Can be thru (1)Internal growth (2)External growth Internal (a) increase in sales, profits and market share of the current products/services than in the past. (b) expansion by adding new products or product lines which are different from present ones

The first achieved by(1) increasing primary demand, encouraging new uses for the present products, (with the same customers, price, and org. arrangement-Kotler calls this intensive or integrative growth strategy & feels more suited for small firms with limited resources) (2) Expanding sales of products into additional geographical areas (3) Expanding sales into additional sectors of the economy (4)Expanding sales by introducing new pricing strategies- Like Akai & exchange schemes from TV mfrers.

Contd…. (5)Expanding sales by introducing minor modification s in the product to new segments of the market- may be in new sizes, brand labeling & other methods (Eg.) The second is achieved by diversification strategy Three ways to diversify: @joint development with a company already in the line @internal development of a product or product line @merger or acquisition

Why do firms diversify? According to Drucker, two reasons: Internal Pressures -psychologically people get tired of doing the same thing again & again. Also, they believe that diversification will help them avoid danger of overspecialization -it is seen as a way to balance vulnerabilities due to one’s own wrong size -it is seen as a way to convert present internal cost centres into revenue producers

External Pressures -the economy (or the market) the firm is operating in appears too small and confined to allow growth -the firm’s technology( R&D( turn out products which appear to have promise -tax laws encourage investments in R&D instead of distribution of dividends and this leads to new products often as a base for diversification Diversification generally divided into two @Horizontal @Vertical “Grow-to-sell-out Strategy”

Key/Critical Success Factors Factors identifying performance areas that must receive continuous management attention, like @high employee morale @improvements in productivity @improved product/service quality @improvements in ITR/ATR etc @growth in market share @growth in gross/net margins @growth in EPS/ROE/ROI @growth in EVA Demands establishment of performance standards.

Ansoff ’s Product-Market Matrix (Growth Vector) Product Present

New

Market penetration

Product development

Market

Present

New

Market Diversification Development

Diversification-Concentric & Conglomerate Concentric are related ones-while the products and markets may be different, the new products /services may have relationships to the existing through technology or basic product framework or even markets. The diversification of RIL can be said to be said to be concentric whereas the diversification of Grasim can be said to be conglomerate.

Integration Horizontal Integration -firm acquires similar businesses operating at the same stage of the productionmarketing chain-firm may get access to new markets and lessen or eliminate competition Eg: ICICI Bank acquisition o Bank of Madura HLL acquisition of TOMCO Vertical Integration -Forward & Backward Forward-enter into areas which will use the current products as inputs Backward- enter into areas which will produce inputs for the current products Tapered Integration-combination of vertical integration & exchanges (buying from others) in the market

Quasi Integration-establishing relationships between vertically related businesses-the relations can vary from long term contracts to full ownership. May be in the form of minority equity investment, loans or loan guarantees, exclusive deal agreements, co-operative R&D etc.

Institutionalizing Strategy Three organizational elements provide the means for this: 1.Sructure 2.Leadership and 3.Culture The structure ties key activities and resources and hence it must be aligned with the needs/demands of the firm’s strategy or structure is a function of strategy. While structure provides the framework for strategy implementation, it does not ensure successful execution. For this , individuals, groups and units have to be aligned properly towards the common goal, which is facilitated by leadership & culture.

Under leadership, two issues are important: 1.The role of the CEO and 2.The assignment of key managers. The CEO is ultimately accountable for a firm’s and hence the strategy’s success. Hence the CEO needs to spend a large amount of time in developing and guiding strategy. Since CEO can’t handle every aspect of strategy, he needs the assistance of right managers in right positions. Organizational culture is the set of important assumptions (often unstated) that members of an organization share in common.

It can be likened to the personality of the individual-intangible but provides meaning, direction and the basis for action. These shared assumptions (beliefs and values) among members of an organization set a pattern for activities, opinions and actions within it. The culture may be imbibed from three sources: the environment in general, the values and beliefs of the founders or leaders, and the actual experience of the people in finding solutions to the problems the organization encounters.

Organizational Politics: It has been observed that power/political factors influence strategic choice more than analytical maximization procedures. The use of power or politics to further individual or group interests is common in org. life. Org. politics must be viewed as an inevitable dimension of org. decision making and hence must be accommodated.

The PESTEL Framework : A Tool for Environment Analysis Categorises environmental influences into six main types: 1.Political 2.Economic 3.Social 4.Technological 5.Environmental and 6.Legal

Portfolio Analysis BCG Matrix MG

20 QUESTION MARKS

a r r o

STARS

k w e t t h Rate

DOGS

0 CASH COW 10x 1x Relative Market Share

0.1x

Limitations of BCG Growth Matrix Approach 1. Clearly defining a market and accurate measurement of share and growth rate are often difficult 2.Division into 4 cells on low/high classification is simplistic in nature. Markets with av. Growth rates or businesses with average market shares usually neglected 3. Assumes that profitability will be proportional to market share; it may vary across industries & market segments; there need not be any direct relation between market share & profitability. 4.Not helpful in relative investment opportunities across different business units in the corp. portfolio.

Contd… 5.Str. Evaluation of a set of businesses requires examination of more than relative market share & mkt. growth. Attractiveness may increase based on tech., seasonal, competitive or other considerations. 6. It doesn’t reflect the diversity of options available since the classification is very simplistic

GE Nine-Cell Planning Grid/GE Business Screen Industry Attractiveness High

100

Strong

Business Strength Factors

Average

Weak

Legend: Invest/Grow Selectivity/earning Harvest/divest

0

Medium

Low

Bus. Strength factors: Market share, profit margin, ability to compete, customer & market knowledge, competitive position, technology & management calibre etc Industry Attractiveness factors: Market growth, size & industry profitability, competition, seasonality & cyclical qualities, economies of scale, technology &social/environmental/ legal/human factors A business’s position within the grid is calculated by subjectively quantifying the two dimensions of the grid by assigning weights for various factors under the industry attractiveness and business strength factors.

Ind. Attr. Factor

Wt(%)

Market size Proj. Mt Gr. Rate Tech. Reqmt. Competition (Concentration- few large competitors) Political ®u. factors

20 35 15 30

Rating Score Wt*Rating 0.50 10.00 1.00 35.00 0.50 7.50 0.00 0.00

--

-----

-----

100 52.50 Rating: indicate favourable / unfavourable future conditions for the factors on 0-1 scale H:1.0,M:0.5,L:0.00

Bus. Str.Factor Rel.MKt.Share Production Capacity Efficiency Location Tech. Capacity Marketing Sales Org Promo & Ad

Wt(%) Rating 20

0.50

Score Wt*Rating 10.00

10 10 20 20

1.00 1.00 0.00 0.50

10.00 10.00 ------10.00

15 5 100

1.00 0.00

15.00 -------55.00

Shell Matrix( for portfolio analysis)-a variant of the GE matrix Industry attractiveness Unattractive

Co mp et it Ive Po si ti on

W e a k Av er ag e

St ro ng

Average

Divest Phased Withdrawal Invest selectively to maximise cash generation

Attractive

Invest for Market share Or withdraw

Invest to retain market share as industry grows Priority products & services

Arthur D. Little Life Cycle Approach Business Environment Vs. Business Strength Business environment indicates the 4 stages of the life cycle of the industry namely embryonic, growing, mature and aging. Business strength measures the competitive position of a firm’s business units, namely dominant, strong, favourable, weak or nonviable

Life Cycle Approach Life Cycle Stage Embryonic Position Dominant

Strong

Favourable

Tenable

Weak

Growth

Mature

Aging

Legends Natural Development Selective Development Prove Viability Out

6 steps in the approach • Identify each line of business based on commonalities like common rivals, customers, sustainability, prices, quality/style, divestments, liquidation etc • Assessing the life cycle stage of each business based on market share, investments, profitability, or cash flow. • Identifying competitive position of the firm as dominant, strong, favourable, tenable or weak. • Identifying strategy for the business based on its lifecycle stage and competition

•

Assigning a natural thrust to the natural strategy detailing the set of specific actions that’ support the general direction defined in step 4(For eg. the actions can be start-up for a business with strong competitive potential or growth with industry for a strong or dominant business in a mature industry seeking to maintain its position or gain position gradually by increasing market share incrementally or defend in the early stages of industry maturity or harvest in the aging stage enabling freeing of resources and reallocation to strong businesses

• Selection of one of the twenty four generic strategies keeping the strategic thrust of step 5 in mind.

24 Generic Strategies 1.Backward Integration 13.Mkt rationalization 2.Develop Business Overseas 14.Method/functions 3.Develop overseas Facilities efficiency 15.New products/new mkts 4.Distribution Rationalization 16.New prdcts/ same mkts 5.Excess Capacity 17.Production rationalization 6.Export same product 18.Product line rationalization 7.Forward integration 19.Pure survival 8.Hesitation 20.Same products/new markets 9.Initial Mkt. Devpt 21.Same Products/same markets 10.Liscensing abroad 22.Technological Efficiency 11.Complete rationalization 23.Traditional Cost Cutting 12.Mkt penetration 24.Unit Abandonment

Core Competence Theory (Hamel & Prahalad( Ref: Reading Material) Competitive Strategy Involves in developing a broad idea reg how business is going to compete, what its goals should be, and what policies will be needed to carry out those goals.

The Wheel of Competitive Strategy Product Line Finance & control

Target Markets Marketing

GOALS

Definition of how the business is going to R&D Compete Objectives of profitability, Growth, market share, Social responsi Purchasi -veness etc ng

Labour

Manufactu ring

Sales

Distribution

The hub of the wheel defines the goals and objectives-economic as well as non-economic. Spokes are the key operating policies the execution ways with which the firm is seeking to achieve its goals. Hence the spokes (policies) must emanate from the hub (goals). Also, the spokes must be connected with each other or the wheel may fail to roll

Context in which Competitive Strategy Is Formulated Industry Opportunities & Threats

Company Strengths & Weaknesses

Factors Internal to the Company

Personal Values of the Key Implementers

Competitive Strategy

Factors External to the Company

Broader Societal Expectations

Internal Factors 1. Strengths & Weaknesses -the profile of assets and skills incl financial resources, technological capabilities, brand equity etc 2. Personal values of Key Implementers - the motivations and needs of the key executives and other people who must execute the strategy

External Factors 1. Industry opportunities and threats - define the competitive environment, with the associated risks and potential rewards. 2. Societal expectations – reflect the impact on the company of things such as govt. policy, social concerns, evolving mores etc

Competitive Analysis (Structural Analysis of Industry) by M. E. Porter A framework on which one can identify the attractiveness of an industry. According to Porter, 5 forces determine the ultimate profit potential of the industry. The impact of these forces may vary from intense, where no firm can expect to earn spectacular returns, to relatively mild, in which case returns are quite high. Forces driving industry competition @Threat of entry @Intensity of rivalry among existing competitors @Pressure from substitute products @Bargaining power of buyers @Bargaining power of suppliers

Force I. Threat of entry- depends on b. Barriers to entry and c. Reaction from existing competitors a. Major sources of barriers: 5. Economies of Scale – can be present or help in many functions 6. Product Differentiation- established firms have brand identification and customer loyalties arising from many factors 7. Capital needs –requirements of large investments in order to compete 8. Switching costs – one time costs facing the buyer for switching from one supplier’s products to another 9. Access to distribution channels -

6. Cost Disadvantages independent of scale – proprietary product technology- thro’ patents or secrecy 7.Access to raw materials 8.Favourable locations – 9.Government subsidies –preferential subsidies to established firms Learning or experience curve – lesser unit costs as the firm gains experience- methods improvement, layout improvements, balancing equipments 10.Govt. policy – policies can change over time- eg: pollution control

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Expected retaliation – conditions that signal strong retaliation are: a history of vigorous retaliation to entrants established firms with substantial resources to fight back –like creating additional capacity to meet all future needs, or leverage with distribution channels or customers established firms with great commitment to the industry with highly illiquid assets employed in it Slow industry growth, which limits the ability of the industry to absorb a new firm

Force II: Intensity of rivalry among existing

competitors Rivalry can be either “warlike”, “bitter”,” cut-throat” or “polite” or “gentlemanly”

Rivalry is the result of interacting structural factors like: Numerous or equally balanced competitors Slow industry growth High fixed or storage costs – when excess capacity leading to price cutting  Lack of differentiation or switching costs – with undifferentiated products like commodities, customers put pressure for better price or services   

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Capacity augmentation in large increments – Large capacity additions for attaining economies of scale can disrupt the industry supply/demand balance especially in periods of

overcapacity and price cutting

Diverse competitors – when competitors are diverse in terms of origins, strategies, personalities will have diverse ways of competing; one may find it difficult to “read” others  High strategic stakes – rivalry becomes more volatile if a number of firms have high stakes in achieving success. For eg Toyota may perceive a strong need to establish a solid position in the US market in order to build global prestige 

High exit barriers- sources of exit barriers can be @specialized assets having low liquidation values or high costs transfer or conversion @fixed costs of exit-like labour agreements, resettlement costs, maintaining capabilities for spare parts etc @strategic interrelationships-of the business with other units of the company in terms of its image, marketing ability, access to financial markets, shared facilities etc @emotional barriers – like management’s identification with the particular business, loyalty to employees, pride, fear for own career etc-not based on any economic reasons

@Govt and social restrictions- Govt may deny or discourage exits due to concerns of job loss and regional economic effects (mostly seen in developing countries) Force III: Pressure from substitute products In a broad sense, all firms in an industry are competing with industries producing substitute products. Substitutes to put a limit to which prices can be increased, and when the price-performance alternative offered by the substitutes, the stronger the pressure on industry profits. (Examples)

Force IV Bargaining Power of Buyers 

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Buyer group will be powerful under conditions of: concentrated purchase or purchases a large volume of seller’s sales-results in – will be able to extract better prices what gets bought forms a significant fraction of buyers costs or purchases what gets purchased are standard or undifferentiated few switching costs, enabling buyer to switch if necessary buyer earning low profits as pressure on profits forces them to be more price sensitive. buyer has potential for backward integration

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the quality of the industry’s product do not put any pressure on the buyer product quality and hence price sensitive to buying When buyer has all the information about the demand, market prices, and even supplier costs. Force V Bargaining Power Of Suppliers when supplier group is more concentrated than the industry or dominated by a few companies, can exert considerable influence in prices, quality and even terms When substitutes are not competing Industry is not important customer for the supplier group

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suppliers’ product is an important input to the buyer’s business.  Supplier group’s products are differentiated or it has built up switching costs.  the supplier group poses a threat of forward integration

Competitor Analysis A response profile can be built on the basis of “Four Components of Competitor Analysis” 1.The future goals of the competitor 2.The current strategy of the competitor 3.Key assumptions that the competitor makes about itself and about industry 4.Its capabilities in terms of strength and weaknesses The profile helps to predict the likely str. moves of the competitor -offensive or defensive

Competitor Analysis- A Framework What drives the Competitor

What the competitor is doing and can do

FUTURE GOALS

CURRENT STRATEGY

At all levels of management And in multiple dimensions

How the business is currently competing

COMPETITOR’S RESPONSE PROFILE Is the competitor satisfied with its current position What likely moves or strategy shifts will the competitor make? Where is the competitor vulnerable? What will provoke the greatest and most effective retaliation by the competitor?

ASSUMPTIONS

CAPABILITIES

Held about itself and the industry

Both strengths and weaknesses

Competitor Analysis helps @to determine each competitor’s probable reaction to the industry & env. Changes @to anticipate the response of each competitor to the likely strategic moves by the other firms @to develop a profile of the nature & success of the possible strategic changes each competitor might undertake

Adopting Competitive Strategy Once the five forces and the underlying causes diagnosed, the firm can identify its strengths and weaknesses relative to the industry. It helps a firm to adopt an offensive or defensive action to defend itself against the five forces. This process leads to the adoption of one or more of Competitive Strategies to have

Competitive Advantage

Generic Competitive Strategies Three strategies namely,  Overall cost leadership -thro’ scale, vigourous pursuit of cost reduction from experience, tight control of costs & OHs, avoiding marginal customer accounts, minimizing expenditure on R&D, service, sales force, advertising etc  Differentiation – can be in terms of design or brand image, technology, features, customer service, dealer network etc .  Focus – on a particular buyer group, segment of the product line or geographic market –rests on the premise that firm is able to serve its strategic narrow target more efficiently and effectively.

• Risks of Generic Strategies (Ref : material) • Competitive Strategy under uncertainty Environment being not static, the industry structure also can’t be static. Sources of uncertainty are numerous and originate both within the industry and in the industry’s broader environment. While contingency plans can alleviate the impact to some extent, they may not be suitable as they fail to examine alternative future industry structures or to force managers to consider their implications. Flexible strategies may be used when firms face considerable uncertainty.

• Using Scenarios One tool to address uncertainty is scenarios. A scenario is an internally consistent view of what the future might turn out to be. By constructing multiple scenarios, a firm can systematically explore the

possible consequences of uncertainty for its choice of strategies. Scenarios can be prepared for the macro or industry level. Pl note that scenarios are not an end itself. Companies have to translate the scenarios into strategy.

Identify the uncertainties that may affect industry structure Determine the causal factors driving them Make a range of plausible assumptions about each important causal factor Combine assumptions about individual factors into internally consistent scenarios Analyze the industry structure that would prevail under each scenario Determine the sources of competitive advantage under each scenario Predict competitive behaviour under each scenario

The Process of constructing Industry Scenarios

The feedback loops are present as it may be difficult to determine fully what uncertainties are most important until a number of scenarios have been analyzed. Strategic Approaches with Scenarios (Ref: Material)

Intended Strategy & Realized Strategy: Strategists might have decided on a particular strategy considering the environment and forecasting the changes therein. Or they will have a “intended” strategy. But, the changes in the environment need not be according to forecast and hence they may change the course as they proceed and the strategy “realized” may be different from intended. Realized strategy may differ also due to execution related issues.

Game Theory In Strategic Analysis When we consider strategy from a competitive perspective, it can be considered as a game, just like any other game. In any game, players plan to succeed by trying to make estimations about the other’s moves. The basic assumption or premise on which it works is that the players are rational and their moves will be rational or based on information and data. This could be a fundamental flaw of the theory because the players and their decisions are not always rational. Hence, it has been observed that the theory is popular in highly regulated industries where there are not very high possibilities of the decision makers being irrational because of limited competition or actions by other players will be more or less predictable (like power generation and certain other basic infrastructure areas) or cartels

Elements in a game  Players: firms who participate in the game who make choices and receive pay-offs  Pay-offs: result of the game, reward or punishment  Rules: who are the players, what are the payoffs, who knows what??? etc etc  Actions: choices that players can make (each is aware that the other firm’s actions can affect its profit)

Framework:  Define the problem  Identify the critical factors  Build a model  Develop intuition using the model  Formulate strategy –covering all possible scenarios Zero-sum game: In any game in a given scenario, the benefits that one gets will be equal to the sum of the negative benefits the others get, or the total benefit for the total game will be zero. If a firm makes more profits, it will be the result of other players getting lesser profits, because the total industry profits is expected to be constant in a given scenario. Such games are called non-cooperative games, where there was no possibility of win-win

The current thinking is that there can be co-operative or participative games leading to win-win situations for two or more players of the industry. This is the result of co-operating while competing. A new terminology has also been evolved- ”Co-opetition”. A number of electronic companies and a number of automobile companies have started collaborating for a number of input items while still competing in the end products. Dominant Strategy: In a game, one player may use a strategy such that it does better by using this strategy than any other strategy, no matter what actions others choose. Such a strategy will be called dominant strategy. For example, the rolling out of projects in large size by RIL

The Nash Equilibrium It is the point when no player can improve his position by changing strategy

Resource-based View (RBV) The fundamental principle of RBV is that the basis for a comp. advantage of a firm lies primarily in the application of the set of valuable resources at the firm’s disposal. In order to achieve sustained competitive advantage, these resources have to be heterogeneous in nature and not perfectly mobile. This results in valuable resources that are neither perfectly imitable nor substitutable without great effort. Then, these resources can assist the firm can to sustain above average returns.

Key points of the theory a. Identify the firm’s potential key resources b. Evaluate whether these resources fulfill the VRIN (Valuable, Rare, In-imitable and Non-substitutable). c. Care for and protect resources that possess these evaluations Resources: include all assets, capabilities, org. processes, firm attributes, information, knowledge etc; controlled by a firm that enable the firm to conceive of and implement strategies that improves its efficiency and effectiveness.

Epilogue Let’s look to the most celebrated corporate leader of the century, Jack Welch, for some insights into new strategic thinking. Welch identified strategy for GE based on what the Prussian General Karl Von Clausenwitz ,who in “ON WAR” observed in 1833 that men could not reduce strategy to a formula because chance events, imperfections in execution and the independent will of opponents automatically doomed detailed planning. ”They didn’t expect a plan of operation beyond the first contact with the enemy. They set only the broadest objectives & emphasized seizing unforeseen opportunities as they arose. Strategy was not a lengthy action plan; it was the evolution of a central idea thro’ continually changing circumstances”

Welch noted that in running GE, he adopted the notion that strategy had to evolve & not be etched in stone. According to him, strategy is nothing but planful opportunism. Buffet on strategy: “We have no master strategy, no corporate planners delivering us insights about socioeconomic trends, and staff to investigate a multitude of ideas presented by promoters & intermediaries. Instead, we simply hope that something sensible comes along- and when it does, we act”. (in his address to shareholders in 1985)

“The question that faces the strategic decision maker is not ‘what his organization should do tomorrow?’. It is, ’what do we have to do today to be ready for an uncertain tomorrow?’” Peter Drucker