A-Z of Business Strategy

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Contents 7

Human Capital 115Hygiene Factors 115

Independent Director 116

Industry 116

Industry Shakeout 118

Innovation 120

Innovators Dilemma 122

Institutional Investor 123

Intrapreneurship 123

Japanese Style of 124

Management

Joint Venture 124

Judo Strategy 124

Justin-Time 125

Kaizen 126

Kanban 126

Kaplan and Norton 126

Keiretsu 127

Kepner-Tregoe Matrix 127

Khanna, Tarun 127

Knowing-Doing Gap 128

Knowledge Management (KM) 128

Lateral Thinking 130

Law of Conservation of Profits 130

Law of Unintended 130

Consequences

Leadership 132

Lean Manufacturing 136

Lean Thinking 137

Licensing 137

Long Term Objectives 138

Loss Leader 138

MBO (Management By 139

Objectives)

Managerial Grid Model 139

Market Defense 140

Market for Corporate Control 141

Marketing Mix 141

Market Power 141

Market Signals 142

Maslow, Abraham 143

Matrix Structure 143

Mayo, Elton and 144

Roethlisberger, Fritz

McGregor, Douglas 145McKinsey 7-S Framework 146

McNamara, Robert S. 147

Merger 147

Mintzberg, Henry 148

Mission 149

Motivation 150

Multi Domestic Industry 151

Murphys Law 152

Nearshoring 153

Net Present Value (NPV) 153

Nine-Cell Planning Grid 153

Not-Invented-Here 154

Offshoring 155Ohmae, Kenichi 155

Oligopoly 156

Operating Strategies 157

Opportunity Cost 157

Optimizing Planning 157

Organic Growth 157

Organizational Behavior 157

Organizational Chart 158

Organizational Culture 158

Organizational Design 160

Organizational Development 161

(OD)

Organizational Inertia 161

Organizational Learning 162

Organizational Mapping 162Organizational Structure 163

Outsourcing 163

Overheads 163

Palepu, Krishna G. 164

Paretos Principle 164

Parkinsons Law 165

Personal Effectiveness 165

PEST (Political, Economic, 166

Social and Technological

Factors) Analysis

Peter Principle 167

Platform Leadership 167

Poison Pill 169

Policies 169

Political Risk 169

Porter, Michael E. 169


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8 A to Z of Business Strategy

Positioning 171Price / Earnings Ratio (P / E) 172

Process Innovation 172

Process Life Cycle 174

Process Networks 175

Product Innovation 175

Product Life Cycle (PLC) 178

Product Platform 179

Prospect Theory 180

Purpose-Process-People 180

Doctrine

Pygmalion Effect 181

q-theory 182

Quinn, James Brian 182

Real Options 183

Regulatory Capture 183

Resource-based Theories 183

Responsiveness Planning 184

Reverse Engineering 185

Risk 185

Rivalry 186

Satisficing 188

Scenario Planning 188

S-Curve 189

Senge, Peter 189

Service Level Agreement (SLA) 190

Shareholder Value 190

Simple Structure 190Simon, Herbert A. 191

Six Sigma 191

Skimming 192

Skunk Work 192

Sloan, Alfred P. 192

Slywotzky, Adrian J. 193

Span of Control 193

Spender, J. C. 194

Stakeholders 194

Strategic Advantage 194

Strategic Alliance 195

Strategic Architecture 196

Strategic Business Unit (SBU) 196

Strategic Choice 196

Strategic Control 197Strategic Cost Management 197

Strategic Fit 197Strategic Groups 198

Strategic Inflection Point 198

Strategic Innovation 199

Strategic Intent 201

Strategic Management 202

Strategic Market 203

Strategic Options 203

Strategic Planning 205

Strategic Pricing 207

Strategy Evaluation 209

Strategy Implementation 210

Stretch 211

Stuck in the Middle 212

Succession Planning 212

Supply Chain Management 213

(SCM)

Switching Costs 215

SWOT Analysis 215

Taylor, Frederick W. 217

Technology Risk 218

Threat of Substitutes 220

Tipping Point 221

Total Quality Management 222

(TQM)

Utterback, James 223

Valuation 224

Value Chain 224Value Migration 227

Value System 227

Values 227

Vertical Integration 228

Value Innovation 231

Vision 232

Whistle Blower 233

White Knight 233

Williamson, Oliver E. 233

Willpower 234

Winners curse 234

Zero Base Budgeting 235

Bibliography 236


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Strategy: An Introduct ion 9

How to Get the MostOut of this Book

Alphabetization: All entries are alphabetized by letter rather than by

word so that multiple-word terms are treated as single words. In cases

where abbreviations or acronyms are more commonly used than full

terms, they are given as entries in the main text. For example, MBO is

more commonly used than MANAGEMENT BY OBJECTIVES, and so theconcept is explained under MBO. Where a term has several meanings, the

various meanings are given.

Cross References:To offer a fuller understanding of a concept, some-

times it is both necessary and useful to refer to other related entries in

the book as well. Such cross references are printed in SMALL CAPITALS.

Italicshave been used to indicate titles of publications, books, journals,

etc.

Parentheses:Parentheses have sometimes been used in entry heading

to indicate that an abbreviation is as commonly used as the term itself,

for example, BIG HAIRY AUDACIOUS GOALS (BHAG).

Examples, Illustrations and Tables:The book contains numerous ex-

amples to help you better understand a concept, or to relate it to the real

business world. Illustrations and tables are also given at many places

along with their related entries.


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Strategy: An Introduction

As the business environment becomes more complex, strategic man-

agement is gaining in importance. Few words are as commonly used in

management as strategy.

In simple terms, strategy means looking at the long term future to

determine what the company wants to become, and putting in place a

plan of getting there.

Strategy is both art and science. Strategy is an art because it requires

creativity, intuitive thinking, an ability to visualize the future, and to

inspire and engage those who will implement the strategy. Strategy is

science because it requires analytical skills, the ability to collect and ana-

lyze information and take well informed decisions.

Without a strategy, an organization is directionless and vulnerable to

changes in the business environment. Strategy acts as some kind of a

guidepost for a companys ongoing evolution. Strategy provides a direc-

tion for the company and indicates what must be done to survive, grow

and be profitable.

According to Constantinos Markides*, strategy addresses three ques-

tions:

Who are the customers?

What products / services should be offered to them?

How can the company do this efficiently?

These questions look deceptively simple. But the answers to these

questions which form the core of corporate strategy.

The termstrategicis widely used, but often in the wrong context. So

we must understand the term carefully. We can call an issue strategic if

it requires top management involvement, involves commitment of major

resources, has either a long term impact or organization-wide implica-

*Markides, Constantinos C., A Dynamic View of Strategy,MIT Sloan Man-

agement Review. Spring 1999. pp. 55-63. Also seeAll The Right Movesby the

same author, published by Harvard Business School Press, 2000.


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tions. Though the involvement of top executives is a must in strategicmanagement, people at all levels in the different business units and func-

tions must also be involved. Unless plans are understood and imple-

mented effectively at these lower levels, the whole purpose of strategic

management would be defeated.

The 10 Schools of StrategyThe body of knowledge on corporate strategy has evolved over time.

With different schools of thought looking at strategy in different ways,

its a good idea to review all of them briefly in order to get an integrated

picture.

According to Henry Mintzerg*, there are ten different schools of

strategy:

The Design School:Aims at creating a fit between a companys inter-

nal strengths and weaknesses and external threats and opportunities.

The Planning School:Views strategy as an intellectual, formal exer-

cise, involving various techniques.

The Positioning School: The company selects its strategic position

after thoroughly analyzing the industry. Effectively, planners become

analysts.

Entrepreneurial School:The focus here shifts to the chief executive

who largely relies on intuition to formulate strategy. The emphasis is

less on precise designs, plans or positions and more on broad vision

and perspectives.

Cognitive School:The focus here is on cognition and cognitive bias-

es.

Learning School:Strategies are emergent, not deliberate. They evolve

as the organization learns.

Power School:Strategy making is rooted in power. At a micro level,

people are involved in bargaining, persuasion and confrontation. At a

macro level, the organization uses its power over others and among

its partners in alliances, joint ventures and other network relation-

ships to negotiate things in its favor.

*Mintzberg, Henry; Lampel, Joseph, and Ahlstrand,Bruce, Strategy Safari: A

Guided Tour Through the Wilds of Strategic Management, The Free Press,

2005.


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Cultural School: Views strategy formulation as a process rooted in

culture. Culture shot into prominence after the Japanese style of

management became widely written about in the 1980s.

The Environment School:The focus here is on coping with the envi-

ronment. As Mintzberg mentions, this school sees the strategy for-

mation as a reactive process. The strategy is a response to the chal-

lenges imposed by the external environment. Where other schools

see the environment as a factor, the environmental school sees it as

an actor.

Configuration School:This school views the organization as a config-

uration and integrates the claims of other schools. A variation of this

somewhat academic perspective is a more practitioner-oriented view

which focuses on how an organization moves from one state to an-

other, such as from start up to maturity.

The approaches mentioned above need not be viewed as exclusive,

watertight compartments. They can be combined in appropriate ways.

The Economic Goals of an OrganizationUnderstanding the firms long term economic goals is the starting point

in strategy formulation. As Pearce and Robinson* rightly put it, three

economic goals must drive the strategy of any organization survival,

profitability and growth. A firm has to first survive, if it is to serve the

interests of its stakeholders. Survival is often taken for granted. But

many companies do go bankrupt. Indeed, the average life of a Fortune

500 company is only 40 to 50 years, according to the research of a for-

mer Shell executive Aries de Geus. Reckless or expedient short term

oriented decision making, complacency and quick fixes to structural

problems are some of the ways in which the survival of an organization

is threatened.

Profitability is the main goal of any business. Not only should a firm

make profits but it must also ensure that these profits are sustainable in

the long run. Moves aimed merely at improving short term profitability

*Pearce, John A. and Robinson, Richard B., Strategic ManagementStrategy

Formulation & Implementation,Richard D. Irwin, 1995.De Geus, Aries P., Planning as Learning,Harvard Business Review, March-

April 1988, pp. 70-74.


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must be avoided. Equally important, profits should come from the com-panys core business, not through non operating income (such as sale of

assets) or accounting manipulation.

The third goal is growth or, more precisely, profitable growth. A

profitable organization which is not growing is a cause for alarm. Lack

of growth means the company is not able to identify opportunities to

expand its market, compete with other players, develop new products,

attract new customers, etc. Lack of growth also implies that competitors

are probably moving ahead, thereby marginalizing the companys com-

petitive position.

For example, slow growth in recent times of famous companies such

as Microsoft and Hindustan Lever has been a major source of worry for

their investors.

Strategic PlanningIn general, strategic plans contain the following components:

Vision:The organizations deeply desired future.

Mission:The organizations purpose in terms of products, technology

and markets.

Core Competencies:The tangible and intangible assets the company

will need to build and leverage to gain competitive advantage.

Values: The driving beliefs that define a companys culture, help

managers to set priorities and guide day-to-day operations.

Strategic Objectives:The targets that allow a company to measure

how it is performing in key result areas such as market share, cus-

tomer loyalty, quality, service, innovation and human capital.

The business environment needs to be analyzed carefully before a

strategic plan is prepared. According to Pearce and Robinson*, the busi-

ness environment can be divided into the remote environment and oper-

ating environment. The remote environment includes political, econom-

ic, social, technological and industry factors. The operating environment

has a direct impact on the ability of the firm to sell its products and ser-

vices profitably. Among the factors to be considered here are competi-


Formulation & Implementation, Richard D, Irwin, 1995.


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tive position, customer profile, reputation among its suppliers / creditorsand the labor market. The operating environment is much more under

the control of a firm, compared to the remote environment. So the firm

should be more proactive in dealing with the operating environment.

Environment data must be collected for a meaningful range of fac-

tors. Such data should be analyzed to determine the implications for the

firm in terms of opportunities and threats. Strategic plans should be suf-

ficiently flexible to deal with unexpected variations from environmental

forecasts.

During the planning stage, the company will also have to identify key

issues; for example, weaknesses to be addressed or opportunities to be

exploited with respect to the products and services to be offered to cus-

tomers, the internal process changes needed to support the companys

strategy, and the skills and resources needed to create value more effi-

ciently and effectively. Some of the important issues faced by any or-

ganization are costs, service, new markets and products, geographic ex-

pansion, acquisitions, divestitures, organizational structure, core compe-

tencies and processes, new technologies, training and development, and

information systems.

Any strategic plan also involves commitment of resources. Adequacy

of existing resources, training needs, requirement of new information

systems, etc. must be carefully examined.

Strategic management decisions take place at three levels: Corporate,

Business Unit and Function. Corporate level decisions tend to be macrolevel and conceptual in nature. The choice of business, the kind of

growth strategy to pursue and the kind of capital structure the company

should have are good examples. Business level decisions cover more

specific areas such as plant location, market segmentation, geographic

coverage and distribution channels. Functional level decisions tend to

cover the next level of detail such as choice of plant / equipment, inven-

tory level, etc.

Operationalising the StrategyThe difference between the best and mediocre companies often lies not

in strategic planning but in the way strategy is implemented. The key

issues must be translated into action plans, which must include the keymetrics, timelines, important steps involved, resources needed, cross


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functional collaboration required, etc. Effective implementation de-mands identification of annual objectives, functional strategies and ap-

propriate policies that are aligned with the long term plans / objectives.

Annual objectives effectively break down long range goals into what

needs to be achieved during the year. So they must be focused, specific

and measurable. Examples of annual objectives include:

To reduce employee attrition by 10% by the end of the year.

To reduce time from order receipt to order execution by 20%.

To increase the member of consultants in the company, who are Six

Sigma Certified Black Belts by 30%.

Functional strategies represent the action plans for sub-units of the

company. Functional strategies outline how key functional areas like

marketing, finance, operations, R&D and human resources must be

managed. Functional strategies must be framed with respect to each key

activity. Take the case of pricing, for example. The following issues

must be addressed:

1. What segment is being targeted mass market or premium end of

the market?

2. How much of price discrimination should be practiced across cus-

tomer segments?

3. Is the cost structure aligned with the price?

4. What kind of discount can be offered, given the cost structure?

5.

Should the price be above or below that of competition?

Policies act as specific guides for operating managers and their sub-

ordinates. By linking policies to long term objectives, strategy imple-

mentation is greatly facilitated. Policies are clear statements about how

things are to be done. They ensure disciplined decision making without

the need for frequent intervention by top management. By standardizing

answers to many questions, policies not only speed up the decision mak-

ing process but also help establish consistent patterns of action and re-

duce the uncertainty involved while handling routine problems.

Strategy implementation will not be effective without defining ac-

countability. Managers need to determine who will be responsible for

the overall effort and, in turn, who will own, or be responsible for,each of the different steps.


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Accountability, autonomy and responsibility go together. Managersneed to clarify how much autonomy individuals and teams will have in

discharging their responsibilities.

Some individuals may like to consult other team members before

making a choice. Others may be capable and confident of making deci-

sions independently. A few others may have relatively little experience

in decision making. Managers may want to empower them to make

some lower risk decisions themselves to gain more exposure.

Communication is an integral part of operationalising the strategy.

Even the best thought-out plans cannot be executed unless team mem-

bers clearly understand the plan, are enthusiastically convinced about it

and discharge their responsibilities skillfully.

Meetings, informal conversations, e-mails, and other communication

channels can be used to communicate the importance of the companys

strategy and the role of different groups in implementing it. Communica-

tion must focus on the following:

Rationale for the companys strategy.

How the initiatives that are being carried out support the corporate

strategy.

The implications if the plans are implemented successfully.

The implications if the company fails to implement its plans.

The attitudes and behavior expected from each person in the team.

Regular communication can go a long way in making people believethat strategy is truly a collective responsibility.

Change ManagementManaging change is an integral part of strategic management. Analysis

of industry structure, competitive positioning, resources currently avail-

able to the firm or a sharp decline in the companys financial perfo r-

mance may indicate the need for launching a major change initiative.

Effective change management calls for a clear vision about where the

organization is heading, involvement of people, responsibility for taking

action and appropriate measurement and control systems.

Radical change is usually best implemented by outsiders, who can

bring in fresh perspectives. A new CEO promoted from within but who


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is not closely associated with the past strategy can also spearhead such achange initiative. Leadership of radical change initiatives usually in-

volves creating an inspiring vision of the future, supporting it with tan-

gible and symbolic actions, and generating support and commitment

across various levels of the organization.

Change is difficult for most people due to various reasons. Change

tends to be seen as an admission that something wrong has happened.

Change also upsets status and power relationships. Resistance might

take the form of outright defiance, apparent agreement to do something

but failure to follow through, an emotional attachment to the way things

have been done in the past and a diminishing commitment to the job.

People who resist change can slow down things. They must be dealt

with on a one-to-one basis. After understanding the reasons for their

resistance, various approaches can be tried out:

Give them plenty of information about market developments and

why a new corporate strategy and initiatives are needed.

Invite them to participate as much as possible in planning and im-

plementation, so that they have a personal investment in the strategy

and initiatives.

Identify the reasons behind the resistance. Mentoring / Counseling

may overcome such resistance.

Training can go a long way in facilitating change. Training can im-

part new skills and competencies and facilitate behavioral interven-

tion.

If all these approaches fail, managers may have little choice but to move

such people to areas where they are less likely to do harm. In extreme

cases, people resistant to change should be dismissed in the larger inter-

ests of the organization.

Strategic ControlStrategy implementation may take years. But companies cannot wait till

a strategy is fully implemented to compare actuals with targets. Strategy

must be tracked even as it is being implemented. Suitable mid-course

correction must be taken in response to various developments, internal


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and external. According to Pearce & Robinson*, strategic control hasfour aspects:

Premise control;

Implementation control;

Strategic surveillance; and

Special alert control.

Premise control aims at systematically checking whether the assump-

tions made during the strategic planning exercise continue to hold good.

It is not necessary to track all the assumptions made during planning. It

makes sense to focus on those assumptions which are likely to change

and which would have a major impact on the organization if they did.

When these assumptions change, plans also must undergo a correspond-

ing change.

Implementation control examines whether the overall strategy should

be changed in light of unfolding events and the results of the various

actions already taken to implement the strategy. One useful technique is

a milestone review. It involves a full-scale reassessment of the strategy

and the advisability of continuing or changing the direction of the com-

pany. Such a review may take place after a passage of time, occurrence

of critical events, or at points before major resource allocations.

Strategic surveillance involves monitoring a broad range of events,

internal and external, that may derail the strategy or significantly influ-

ence the implementation. Special alert control is a mechanism to thor-oughly, and often rapidly, reconsider the firms strategy in the wake of a

sudden, unexpected event. Occurrence of such events must trigger off an

immediate and intense reassessment of the companys strategy and cir-

cumstances, and a re-look at the plan.

At lower levels, operating managers need control systems to guide

the allocation and use of the companys resources. These systems set

performance standards, measure actual performance, identify deviations

from standards and initiate suitable corrective action or adjustment. Ex-

amples of operational control systems include budgets, schedules and

key success factors. A budget is simply a resource allocation plan.


Formulation & Implementation, Richard D. Irwin, 1995.


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Scheduling helps in allocating the use of a time-constrained resource orarranging the sequence of interdependent activities. Key success factors

must receive constant management attention.

Evaluating and Rewarding PerformanceEvaluating performance entails measuring how both a unit as a whole

and its individual members have fared with respect to set objectives,

using both qualitative and quantitative criteria.

Qualitative criteria are those where numbers cannot be put. Some

examples are:

Evaluating whether the unit is exceeding expectations in the accom-

plishment of strategic initiatives. Evaluating the commitment to learning.

Evaluating if individuals are developing innovative ways to accom-

plish the job.

Evaluating how well a unit is working together as a team.

Evaluating how well team members are collaborating with one an-

other, resolving conflicts, and sharing what theyve learned.

Evaluating how well the unit plans ahead.

Evaluating how deeply team members understand the companys

business, their own role in supporting the corporate strategy, and the

details of the action plans theyre responsible for.

Quantitative criteria focus on revenue, cost of goods, market share,and other quantifiable and measurable parameters. For example, a unit

might decide to increase revenue by 20% annually over the next three

years. At the end of Year-1, the unit may review the situation and con-

firm whether revenue did, in fact, increase by 20% that year.

People can be rewarded for good work in different ways. Most peo-

ple want some form of financial reward for their work. A few are moti-

vated by non-monetary factors such as recognition, power and influence,

autonomy, job variety and learning opportunities. So a judicious combi-

nation of financial and non-financial rewards must be used to encourage

a culture of excellence.

The reward system should be transparent. Employees must under-

stand clearly what is expected of them, and the kind of rewards they will


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receive if they perform well. Some of the issues that must be communi-cated to people in a transparent manner include:

Is the reward system permanent, or will it be modified or discontin-

ued after some time?

Will everyone be eligible for rewards?

For example, if the reward system features bonuses for sales of a new

product, will the R&D staff also be rewarded for their contribution?

The Road AheadThe classical views of strategy have focused on understanding industry

structures and developing suitable capabilities to position a firm effec-

tively in relation to competitors. But in todays complex and changing

environment, when the very boundaries of many industries are being

constantly reshaped, does it make sense to try and understand the evolv-

ing industry structure? Are ad hoc short-term movements the only way

to cope with the uncertain environment? Is long term strategic planning

no longer relevant?

The short answer is that strategic planning is as relevant as ever. It

provides direction. As John Hagel III and John Seely Brown*mention,

speed without a sense of direction may result in random motion. Without

a sense of direction, companies may become reactive and sometimes

spread their resources thin by pursuing too many options simultaneous-

ly.Even in tech industries which are always in a state of flux, long range

planning is important. They give the example of Microsoft which devel-

oped a strong sense of direction in two sentences: Computing power is

moving inexorably to the desktop. To succeed, we must own the desk-

top. The directional statement acted as a powerful guiding force even

during times of major challenge over a period of almost two decades. To

be effective, directional statements should be brief and high level. In

complex, rapidly evolving markets, any attempt to specify outcomes in

detail is bound to create the illusion of greater insight and control over

events than warranted . . . it might be more accurate to describe these

*Hagel III, John and Seely Brown, John, The Only Sustainable Edge, Harvard

Business School Press,2005.


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statements of long-term direction as focusing or orienting perspectivesrather than definitive statements of advantaged positions. The statements

help executives know when to look, rather than telling them what they

will find.

To strike a balance between speed and direction, two different time

horizons are neededa long term horizon for setting the direction and

a short term horizon to focus on operational initiatives. Hagel III and

Seely Brown have come up with a frame work called FAST Focus,

Accelerate, Strengthen, Tie it all together. Focus refers to long term

positioning, and specialization and capability building in the chosen area

of business. Accelerate means moving fast in the short term.

Strengthen means removing road blocks that prevent faster movement

in the short run. This includes building shared meaning and trust and

making appropriate investments in information technology. Tie it all

together means integrating these three components across networks of

organizations to amplify learning and accelerate capability building. As

they mention: The sequential approach of traditional strategies simply

cannot generate the rapid learning and capability building that one needs

for moving quickly back and forth between a very short-term operational

horizon and a much longer term strategic horizon.

In fast paced, intensely competitive markets, how can companies

develop superior strategic decision making skills? According to Kath-

leen Eisenhardt, effective strategy formulation is about*:

Building collective intuition;

Encouraging healthy conflict;

Maintaining a pace so that decisions are taken within a stipulated

time; and

Defusing political behavior.

Building collective intuition means gathering information on real

time basis and involving people by holding intensive discussions with

them in groups. Through such discussions, the company can get a sense

of how it should move ahead.

*Cusumano, Michael A. and Markides, Constantinos C. (Editors), Strategy as

Strategic Decision Making in Strategic Thinking for the Next Economy, Jossey

Bass, 2001.


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Inviting and debating divergent views is an important part of strategyformulation. Conflict promotes creative thinking, a healthy debate on the

various options available, validation of the various assumptions made

and an overall improvement in the quality of decisions.

Companies which are good at strategic planning get into action mode

quickly. They encourage debate and bring a lot of energy into the dis-

cussions. But they also know when to end the deliberations and freeze a

decision. While trying to build consensus, they know how to break a

deadlock. They take a decision even when people are finding it difficult

to agree and come to an understanding. On the other hand, companies

which are weak in strategic management tend to postpone strategic deci-

sions and end up making hurried, last minute decisions.

Strategic decision making has its associated share of politics. Politics

must be minimized, if not eliminated, by emphasizing a shared vision

and through a more balanced power structure which gives different deci-

sion makers latitude and scope to contribute. A clear definition of re-

sponsibilities may make managers feel more secure, more willing to

cooperate and consequently reduce unhealthy competition.

The rise of the knowledge economy and the growing importance of

knowledge workers are putting pressure on companies to change their

style of operating. The three Ss, Strategy, Structure, Systems are giving

way to the 3 Ps, Purpose, Process and People. The 3P doctrine devel-

oped by Christopher Bartlett and Sumantra Ghoshal*emphasizes that the

focus must shift from enforcing compliance to facilitating cooperationamong people and valuing initiative more than discipline. Top manage-

ment must establish a sense of purpose within the company. Purpose

allows strategy to emerge from within the organization at different lev-

els. Purpose generates energy and alignment. Instead of emphasizing

structure, the top management should focus on building the core organi-

zational processes that will promote an entrepreneurial mindset that can

help in creating and leveraging knowledge to create value. Finally, in-

stead of building systems, top management should develop people and

help them in fully exploiting their potential. Senior managers should

play the role of mentors rather than rule enforcers.

*Ghoshal, Sumantra and Bartlett, Christopher A., The Individualized Corpora-

tion, Harper Collins,1997.


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24 Ackoff , RUSSELL L .

A

Ackoff, Russell L.One of the early strategy gurus, Ackoff introduced rigor into strategic

planning. In his book A Concept of Corporate Planning, Ackoff men-

tions that there are some aspects of the future about which we can be

virtually certain. Here, companies can pursue commitment planning.

There are other aspects of the future about which we cannot be certain,

but we can be reasonably sure of what the possibilities are. Here, CON-

TINGENCY PLANNINGis useful. A good example is planning for a militaryinvasion. Every possibility is identified and analyzed and a suitable ac-

tion plan prepared because time is of the essence, once a possibility has

become a reality. Finally, there are some aspects of the future, which

cannot be anticipated. Here, RESPONSIVENESS PLANNINGcan be used, i.e.

building flexibility into the organization.

(See also:ADAPTIVEPLANNING)

Activity Based Costing (ABC)Activity based costing increases the accuracy of cost information by

linking overhead and other indirect costs to product or customer seg-

ments more precisely. Traditional accounting systems distribute indirect

costs on the basis of direct labor hours, machine hours, or material costs.

This leads to a distorted picture. Decisions about which product line to

invest in and which not to invest in, become difficult. ABC undertakes

detailed economic analyses of important business activities to improve

strategic and operational decisions.

To build a system that will support ABC, companies should:

Determine the key activities performed;

Determine the cost drivers by activity; and

Determine overhead and other indirect costs by activity, using clearly

identified cost drivers.

ABC can be used to:


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Adjacencies 25

1.

Re-Price Products:Managers can analyze product profitability moreaccurately by combining activity based cost data with pricing infor-

mation. This can result in the re-pricing or elimination of unprofita-

ble products. Managers can also estimate new product costs accurate-

ly.

2. Reduce Cost:ABC identifies the components of overhead costs and

other cost drivers. Managers can reduce costs by lowering the cost of

an activity, or the number of activities per unit.

3. Influence Strategic and Operational Planning: ABC can facilitate

target costing, performance measurement for continuous improve-

ment, and resource allocation based on projected demand and infra-

structure requirements. ABC can also assist a company in identifying /

evaluating new business opportunities.

(See also:FULL COSTING, STRATEGIC COST MANAGEMENT)

Adaptive PlanningThis school of strategic planning, developed by RussellACKOFF, believes

that the principal value of planning lies not in the plans themselves but

in the process of producing them. Companies should try to put in place a

system that will minimize the future need for retrospective planning, i.e.

planning aimed at removing deficiencies produced by past decisions.

This school classifies the future into three types: certainty, uncertainty

and ignorance. When the future is reasonably certain, commitment plan-

ning can be used. When the future is uncertain but we can be reasonablysure of what the possibilities are, CONTINGENCY PLANNINGcan be used.

Finally, there are some aspects of the future that just cannot be anticipat-

ed. The only way to deal with such uncertainties is by building respon-

siveness and flexibility into the organization. This is called RESPON-

SIVENESS PLANNING.

AdjacenciesA term coined by Chris Zook and James Allen

*for markets close to a

companys core business. By identifying and exploiting such markets,

*Zook, Chris,Beyond the Core: Expand Your Market Without Abandoning

Your Roots,HBS Press, 2004; Zook, Chris, and Allen, James,Profit From the

Core: Growth Strategy in an Era of Turbulence, Harvard Business School Press,


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26 Adjusted PRESENT VALUE (APV )

companies can create a new growth trajectory. Adjacencies essentiallyimply related diversification, i.e. moving into a new area which has

some resemblance to the firms core business and taking advantage of its

existing competencies. Adjacencies represent new growth opportunities

which have a strong fit with the existing business.

(See also: CORE COMPETENCE, DIVERSIFICATION)

Adjusted Present Value (APV)NET PRESENT VALUE(NPV) is a popular method of evaluating an invest-

ment decision. NPV involves estimating the cash flows expected from

the project and discounting them to the present value. NPV is, however,

not suitable in other more complex situations where risk is different for

different cash flows. Adjusted present value is a modified version of

NPV. APV uses different discount rates for different cash flows depend-

ing on the associated risk. Higher the risk, higher the discount factor

used.

Agency TheoryA theory which probes the relationship between principals and agents.

Principals appoint agents to get the work done. The goals of principals

usually differ from those of the agents. This gives rise to the agency

problem.

For example, advertisers (principals) tend to emphasize sales goals

and the cost-effectiveness of marketing communications, whereas adver-tising agencies may be more inclined to think of creative goals and atten-

tion-getting commercials. Professors of top business schools would like

to spend most of their time doing research and consultancy. But the

owners expect these professors to spend more time with students both in

the classroom and outside.

Agency theory is a key concept in corporate governance. Profession-

al managers often pursue strategies that increase their personal payoffs at

the expense of shareholders. For example, they may grant themselves

lavish perquisites, including elegant corner offices, corporate jets, large

staffs and extravagant retirement programs.

2001 and Zook, Chris, and Allen, James, Growth Outside the Core,Harvard

BusinessReview,December 2003, pp. 66-73.


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Alignment 27

Managers also often tend to pursue growth at the cost of profitability.Shareholders generally want to maximize earnings, since growth in earn-

ings results in stock appreciation. Since managers are typically compen-

sated more for sales rather than earnings growth, they tend to be enthusi-

astic about strategies such as mergers and acquisitions even when this

enthusiasm is not really justified. Managers may also pursue diversifica-

tion opportunities that are not necessarily in line with the companys

best interests.

In other cases, managers may become complacent and allow things to

drift. They may avoid risk since they feel they are more likely to be fired

for failure than for mediocre performance. Executives may be far less

entrepreneurial than they should be. They may not make the bold moves

that a situation demands.

One way to tackle the agency problem is to align the interests of

managers with those of the owners by using appropriate incentives such

as stock option and executive bonus plans. But, ironically enough, these

schemes may also tempt managers to act against the best interests of the

firm. For example, they may manipulate the financial statements to arti-

ficially increase earnings.

(See also:CORPORATE GOVERNANCE)

AlignmentAkey factor in effective implementation of strategy.Most large organi-

zations are divided into business units which are out of synch and workat cross purposes. The challenge is to coordinate the activities of these

units and leverage their skills for the benefit of the organization as a

whole. Kaplan & Norton*call this alignment.

By aligning the activities of its various business and support units, an

organization can create additional sources of value in various ways. Fi-

nancial synergies can be generated through centralized resource alloca-

tion and financial management. Value can also be created if corporate

headquarters can operate internal capital markets better than external

market mechanisms, and share knowledge across business units in a

*Kaplan, Robert S. and Norton, David P.,AlignmentUsing the BalancedScore-card to Create Corporate Synergies, Harvard Business School Press,

2006.


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28 Al ignment

manner that would be difficult if the various units were independent en-tities.

Customer synergy means enhancing customer relationships by offer-

ing a range of complementary products and services from different busi-

ness units. Corporations can leverage their multiple products and ser-

vices to create unique integrated solutions, resulting in customer satis-

faction and loyalty that less diversified and more focused organizations

cannot match. Companies can also generate value by delivering a value

proposition consistently throughout their decentralized units. Cross sell-

ing to specific customers can also generate value.

Internal process synergies can be created by generating economies of

scale in activities such as procurement, logistics, information technology

and infrastructure. Sharing processes across units generates economies

of scale in such activities and helps cut costs. Centralized resources hav-

ing specialized expertise and knowledge in operating a key process or

service can be leveraged. The sharing of common philosophies, pro-

grams and competencies across business units can also generate signifi-

cant benefits. Expertise sharing can reduce the time it needs to respond

to customer needs and better equip the company to exploit emerging

opportunities in the business environment.

Learning and growth synergies can be generated by developing and

sharing critical intangible assets, including people, technology, culture

and leadership. Corporate headquarters can put in place effective pro-cesses for developing intangible assets and promote the sharing of

knowledge and best practices throughout all its business and support

units. New ideas can rapidly spread across the enterprise and be assimi-

lated by the business units in a manner that would be difficult were they

independent entities. Growing leaders faster than competition can gener-

ate competitive advantage.

There are different ways of achieving alignment. One way is to start

at the top and then cascade down. Another way is to start in the middle,

namely at the business unit level, before building a corporate scorecard

and map. Some companies launch an enterprise-wide initiative right at

the start. Others conduct a pilot test at one or two business units before

extending the scope to other enterprise units.

Alignment has four components:


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Ansoff , IGOR H . 29

1.

Strategic fit;2. Organization alignment;

3. Human capital alignment; and

4. Alignment of planning and control systems.

Strategic fit exists when the internal performance drivers are con-

sistent and aligned with the desired customer and financial outcomes.

Organization alignment explores how the various parts of an organiza-

tion can synchronize their activities to generate synergy. Human capital

alignment is achieved when employees goals, training and incentives

become aligned with business strategy. An alignment of planning and

control systems exists when management systems for planning, opera-

tions and control are linked to strategy.As Kaplan and Norton put it, Strategy execution is not a matter of

luck. It is the result of conscious attention, combining both leadership

and management processes to describe and measure the strategy, to align

internal and external organizational units with the strategy, to align em-

ployees with the strategy through intrinsic and extrinsic motivation and

targeted competency development programs and finally, to align existing

management processes, reports and review meetings, with the execution,

monitoring and adapting of the strategy.

(See also:BALANCED SCORECARD)

Ansoff, Igor H.A famous strategy guru, Igor Ansoff developed the notion of corporate

strategic planning. He argued that any business needs to look at its re-

sources, and align them with its business environment. Ansoffs analyti-

cal tools, such as competence grids, flow matrices, charts and diagrams

are popular in contemporary management literature. He used the term

competitive advantage years before Michael Porter did.

Ansoffs book,Corporate Strategy:An Analytical Approach toBusi-

ness Policy for Growth and Expansion (1987) mentions three classes of

decisions:

5. Strategic (the selection of the product / market mix);

6. Administrative (structure); and

7.

Operating (process).


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30 Ansoff , IGOR H .

According to Ansoff, strategy should focus on three fundamentalissues:

Definition of the firms core objectives;

Whether the firm should diversify and, if so, into what areas; and

How the business should exploit and develop its new or existing

market.

The closer a business stays to its existing products and markets, the

lower the risk. Introducing new products into new markets for diversifi-

cation carries the highest risk. Hence, the recommendation to stick to the

knitting. Ansoff depicted this in a matrix form, with four possible strate-

gies, depending on the situation faced.

Old Products New Products

Old Markets Market Penetration Product

Development

New Markets Market Development Diversification

Market penetration means increasing market share by encouraging

current customers to buy more, attracting competitors customers, or

convincing non-users to use the product.

Market development implies launchingthe current product in a new

market by expanding distribution channels, selling in new locationsor identifying additional potential users.

Product development involves launchinga new product in the current

market by developing new features, improving quality levels, etc.

Diversification means moving beyond the current business. Concen-

tric (related) diversification involves developing new products for the

same market segment. Conglomerate (unrelated) diversification in-

volves developing new products for new markets.

Ansoff is also famous for:

Establishing corporate planning as a formal management process.

Popularizing SWOT analysis.

Developing the idea of environmental scanning.


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Ant i-Takeover STRATEGY 31

Repositioning strategic planning as part of a continuing process

rather than a once-a-year (or less frequent) planning process.

Articulating the various advantages and disadvantages of deliberate

strategy versusemergent strategy.

Gap analysis which looks at the gap between our aspirations

and the likely outcome of current strategies.

Ansoffs seminal book, Corporate Strategyemphasizes the need to

break down the strategy process into various steps:

External analysisunderstanding market opportunities and threats;

Internal analysisunderstanding strengths and weaknesses;

Choice (and our alternatives); and

Implementation.(See also:STRATEGIC OPTIONS, SWOT ANALYSIS)

Anti-Takeover StrategyMethods used by an incumbent management to thwart a takeover bid. A

takeover means change of ownership and, usually, a change of manage-

ment as well. The current management can resist the takeover bid in

various ways. Important methods used in thwarting takeovers include:

The golden parachute is a provision in a CEOs contract to ensure

that he will get a large bonus in cash or stock if the company is ac-

quired.

The supermajorityis a defense that requires an overwhelming major-

ity of shareholders to approve of any acquisition. This makes a take-

over much more unlikely.

A staggered boardof directorsprolongs the takeover process by pre-

venting the entire board from being replaced at the same time. The

terms are staggered so that some members are elected, say, every two

years, while others are elected every four years. The acquirer may not

want to wait four years for completely reconstituting the board.

Dual-class stockallows company owners to hold on to voting stock,

while the company issues stock with little or no voting rights to the

public. This way the new investors cannot take control of the compa-

ny.

Apoison pillrefers to anything the target company does to make itself

less valuable or less desirable as an acquisition once such a raid has


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32 Argyris , CHR IS

begun. For example, high-level managers and other employees maythreaten to leave the company if it is acquired. A specific asset of a

company, such as its R&D center or a particular division may be sold

off to another company, or spun off into a separate corporation. A

flip-in provision may allow current shareholders to buy more stocks

at a steep discount in the event of a takeover attempt. The flow of ad-

ditional cheap shares into the total pool of shares dilutes their value

and voting power. A more drastic poison pill involves deliberately

taking on large amounts of debt.

Argyris, ChrisA social psychologist by training, Chris Argyris conducted pioneering

work on how individuals respond to changing organizational situations

and the impediments to organizational learning. Argyris has undertaken

extensive research on learning in teams and drawn attention to the prob-

lems created by defensive behavior. The cleverer the team is, the more

difficult it becomes to maintain openness to learning, and to avoid be-

coming defensive. Argyris describes the process involved as double-

loop learning. While single-loop learning involves doing existing

things better, double-loop learning entails doing existing things in new

ways, or inventing new things. Effectively, double-loop learning in-

volves reframing problems and stepping outside existing mind-sets. Ar-

gyris language is sometimes hard to understand. So he is often per-

ceived as an esoteric rather than a popular guru. But his ideas andthoughts are profound and continue to guide the functioning of todays

organizations.

(See also:ORGANIZATIONAL LEARNING)


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Balanced SCORECARD 33

B

Backward IntegrationMoving along the VALUE CHAIN towards the inputs side. By producing

internally some or all of the inputs, a firm can benefit in various ways. It

can avoid sharing proprietary information and data with its suppliers.

This can be an important factor if the exact specifications of component

can reveal the key characteristics of the final products design to the

supplier. Backward integration may result in inputs with closely con-

trolled specifications, enabling the firm to improve quality and differen-

tiate its product. If the inputs are critical, backward integration helps a

firm to gain greater control of the value chain and to mitigate the high

BARGAINING POWER OF SUPPLIERS. Some good examples of backward

integration are Indias largest aluminum manufacturer Hindalco setting

up a power plant, Reliance moving into petroleum refining and Tata

Steel setting up its own township in Jamshedpur as also mines and col-

lieries in various parts of Orissa and Bihar.

On the flip side, backward integration can also reduce the flexibility

of a business if the demand for the end-product slows down. Margins

might then reduce due to high overheads. Moreover, the activities in-volved in backward integration can often be handled more efficiently by

a specialized external supplier.

(See also: VERTICAL INTEGRATION)

Balanced ScorecardDesigned by Robert KAPLANand David NORTON, the balanced scorecard

provides a comprehensive set of objectives and performance measures to

monitor a companys progress. These include:

Financial performance, namely revenues, earnings, return on capital,

cash flow, etc.

Customer value performance, namely market share, customer satis-

faction, customer loyalty, etc.


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34 Bargain ing POWER OF BUYERS

Internal business process performance, namely productivity, quality,

delivery, etc.

Learning and growthpercent of revenue from new products, em-

ployee suggestions, rate of improvement, employee morale,

knowledge, turnover, use of best demonstrated practices.

The challenge in implementing balanced scorecard lies in identifying

the key metrics and measuring them on an ongoing basis so that the firm

can systematically achieve its objectives. Too many metrics can make

things complicated. So a few key metrics must be carefully chosen.

(See also:ALIGNMENT)

Bargaining Power of BuyersOne of the forces in Porters FIVE FORCES MODEL. The higher the bargain-

ing power of buyers, less attractive the industry.

The bargaining power of buyers is high under the following circum-

stances:

Few buyers who purchase in large quantities.

Low switching costs, resulting in low loyalty.

Numerous, and relatively small, sellers.

The item being purchased is not an important one for buyers who can

eithertakeitorleaveit.

Buyers have a lot of information about competitive offers, which

theycanuseforbargaining.

Thereisagoodpossibilitythatbuyersmaydecidetointegrateback-

wards,namelymaketheproductthemselvesratherthanbuyit.

(See also:PORTER,MICHAELE.)

BargainingPowerofSuppliersOneoftheforcesinPortersFIVEFORCESMODEL.Higherthebargaining

powerofsuppliers,thelessattractivetheindustry.

*Abstracted from the book, The Essence of Competitive Strategyby David

Faulkner and Cliff Bowman, Prentice Hall of India, 2002.


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Barnard , CHESTER 35

Bargainingpowerofsuppliers tends tobehighunder thefollowingcircumstances:

Thepurchaseisimportanttothebuyer.

Buyersfacehighswitchingcosts.

Therearefewalternativesourcesofsupply.

Anyparticularbuyerisnotanimportantcustomerforthesupplier.

Thereisastrongpossibilitythatthesuppliermayintegrateforward.

(Seealso:PORTER,MICHAELE.)

Barnard,ChesterOneofthefirstmanagementthinkerstothinkdifferentlyfromthethen

gurus,FrederickTaylorandMaxWeber,BarnardspenthiswholecareerasabusinessexecutivewiththeBellTelephoneCompany.Hewrotetwo

influentialbooks,TheFunctionsoftheExecutive(1938)andOrganiza-

tionandManagement(1948).Barnard emphasized the importance of

communicationandsharedvaluesinorganizations.

Barnardexcelledatorganizationbuildingskills.His tenureasCEO

wasmarkedbyasenseofpublicserviceandpersonalintegritythatare

almostunimaginabletomanytoday.Heshowedexemplarycommitment

tocorporatewelfarepolicies.Forexample,attheheightoftheDepres-

sionin1933,Barnardannouncedano-layoffpolicychoosingtoreduce

employeesworkinghoursinstead.

Management authority,he realized, rested in itsability topersuade

ratherthantocommand.Thechallengewastobalancetheinherentten-

sionbetweentheneedsofindividualemployeesandthegoalsofanor-

ganization.Healsorecognizedthatmuchofthecreativepotentialofan

organization lay in informalnetworks,not in its formalhierarchy.He

understoodtheroleofconstructiveconflict.

Barnard viewed the organization as a complex social system. The

main challenge for management was achieving cooperation among its

groups and individuals to facilitate the achievement of organizational

goals,i.e.resolving thetensionbetweenachievingorganizationalgoals

and theneed for individuals to achievepersonalgoals. Organizational

goalscouldnotbeaccomplishedunless the leadershipoftheorganiza-

tionacknowledged individualaspirationsanddevisedameansofhelp-

ingemployeesachievethem.


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36 Barriers TO ENTRY

ForBarnard,conventionalincentiveschemeswereessentiallyaself-fulfillingprophecy.MuchbeforeMaslow,Barnardarguedthatbeyonda

certainlevelofequitablecompensation,employeeswouldnotnecessari-

lybe motivatedby financial incentives. Bonuses and incentives only

createdacultureofgreed.

Barnardarguedthatmanagementhadtofocusonthestrategicfew

thatwouldofferthegreatestleverageovertheoutcomesofaparticular

decision.Hesuggestedthatdecidingwhatdecisionsnottomakewasas

importantaswhichdecisions tomake.Thefineartofexecutivedeci-

sionconsistsinnotdecidingquestionsthatarenotnowpertinent,innot

decidingprematurely, innotmakingdecisions thatcannotbemadeef-

fective, and in not making decisions that others should make. Here,

BarnardseemedtobeinagreementwithPeterDrucker.

BarrierstoEntryOneofthefiveforcesinPortersfamousFIVEFORCESMODEL.barriersto

entryare theobstacles thata firmmustovercome inorder toenteran

industry.Whenhighentrybarriersexist inan industry, competition is

usuallylessintenseandprofitabilitytendstobehigh.Ontheotherhand,

whenentrybarriersarelow,newfirmscanentertheindustrymoreeasi-

ly.Whiledemandmaynotgoup immediately, thenewentrantsbring

alongadditionalcapacityandreducetheoveralllevelofprofitabilityin

theindustry.

Thebarrierstoentrycanbetangibleorintangible.Tangiblebarriers

includecapitalandvariouskindsofphysicalassets likeplantandma-

chineryandinfrastructure.Tangiblebarriersareeasiertoreplicatethan

intangiblebarriers,suchasbrands,corporatereputation,customerloyal-

tyandrelationshipswithvendors/distributionchannels.

Barrierstoentrymaybehighunderthefollowingcircumstances*:

Economies Of Scale:If therearemajorcostadvantages tobegained

fromoperatingonalargescaleorscopethennewentrantswillnot

finditeasy.

*Abstracted from the book, The Essence of Competitive Strategyby David

Faulkner and Cliff Bowman, Prentice Hall of India, 2002.


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Barriers TO IM ITAT ION 37

Learning Curve:If low unit costs canbe achievedby accumulated

learning, inexperienced new entrants willbe at a unit cost disad-

vantage.

Knowledge and Skills: Access toprocess knowledge andparticular

skillscanmakeentrydifficult.

Customer Brand Loyalty:Customers mayhavepreferredbrands,or

theymayhavestrongrelationshipswiththeirexistingsuppliers.New

entrantshavetopersuadecustomersthatitisworthincurringswitch-

ingcostsandmovetotheproductofanewentrant.

Capital Costs: High capital costs involved in setting upproduction

facilities,R&Dcenters,dealernetworksandbrandbuildingwilllimit

thenumberofpotentialentrants.

Distribution Channels:It isoftendifficultforanewplayertobreak

intoanexistingdistributionnetwork.Ifallmajordistributionoutlets

arealreadyclosedtothenewentrants,theymayhavetomakeheavy

investmentsinsettinguptheirowndirectdistributionnetwork.

High Switching Costs:Highswitchingcostsforcustomersconstitute

abarriertoentry.

Government Policy: Government may restrict licenses, issue exclu-

sivefranchisesorestablishregulationsthataretroublesomeandcost-

lytoimplement.

Access to Low-Cost Inputs:Thismayactasabarriertoentryifpoten-

tialentrantsdonothavesuchaccesstoinputswhichcompetitorsenjoy.

(See also:BARRIERSTOIMITATION,FIVEFORCESMODEL)

BarrierstoImitationWith innovations rapidly diffusing, the key to success in todaysbusi-

ness environment is creating barriers to imitation. In general, tangible

assets are easier to replicate compared to intangible resources. Thus,

brands create formidable barriers to imitation but large factories can be

easily replicated. Similarly, when a way of working is built into the

companys culture, imitation becomes difficult. For example, just-in-

time, in which Toyota is a master is less about techniques and more

about corporate philosophy and culture. That is why companies have

found it difficult to implement just-in-time even though so much has

been written about it and Toyota allows managers from all over theworld to visit its factories.


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38 Bart let t , CHR ISTOPHER A .

(See also:BARRIERSTOENTRY,FIVEFORCESMODEL)

Bartlett,ChristopherA.Famousforhisworkonglobalizationandstrategicmanagement.Bartlett

istheauthor/coauthorofseveralimportantbooks,includingManaging

AcrossBordersandIndividualizedCorporationbothcoauthored with

SumantraGHOSHAL.ManagingAcrossBordersisconsideredoneofthe

besteverbookswrittenonbusinessmanagementandpossiblythemost

authoritativebookonglobalization.Thebookhasbeen translated into

severallanguages.

(Seealso:GLOBALIZATION)

BCGGrowth-ShareMatrixTheBostonConsultingGroup(BCG)developedamatrixtohelpcom-

paniesanalyze theirproduct linesandbusinesses.The2x2matrixcon-

siderstwofactors,marketgrowthrateandthecompanysmarketshare,

asindicatedbelow.

Accordingly,theBCGmatrixdividesproducts/businessesintofour

categories:


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BeachheadMARKET 39

Stars: These high growthproducts in a fast growing market need

higherresourcecommitments.ForacompanylikeSatyamComputer

Services,itsERPimplementationbusinessisastar.

Cash Cows:Thesearelowgrowth,highmarketshareproductswhere

minimalinvestmentsareenvisaged.Indeed,cashcowsprovidecash

flows thatsupportotherbusinesses.The soapsanddetergentsbusi-

nessisacashcowforHindustanLeverLtd.

Question Marks:Theseare lowmarketsharebusinessunits inhigh

growthmarkets. Investment isneeded tobuild them into stars.The

foodsdivisionofHLLfalls inthiscategoryasalsothegamesbusi-

ness of Microsoft, and the retailing venture of Reliance. The long

termprofitabilityofthesebusinessesisbynomeanscertain.

Dogs:Thesearelowgrowthandlowmarketsharebusinesseswhich

generatejustenoughcashtomaintainthemselves.Theyarebusiness-

esfromwhichthecompanyislikelytowithdrawinthenearfuture.

IBM thought thePCbusinesswasadogandsold it to theChinese

computermanufacturer,Lenovo.

Businessesevolveovertime.Accordingtotheconventionalproduct

life cycle, question marks may turn into stars, and thenbecome cash

cowsifthemarketgrowthfalls,finallybecomingdogstowardstheend

ofthecycle.Itis,however,notnecessarythatbusinessesmustevolvein

thisfashion.AstarmayturnintoadogovernightifaDISRUPTIVETECH-

NOLOGYemergesinanindustry.Thatiswhathappenedtominicomput-

erswhenPCsarrived.Ontheotherhand,acashcowcanbeconvertedintoastarbybrand repositioningorby targetinganewcustomerseg-

ment. In India,Cadburyshasattempted to reposition itschocolatesas

productsthatcanalsobeconsumedbyadults.

(See also:NINE-CELLPLANNINGGRID)

BeachheadMarketA market similar to a targeted strategic marketbut whichprovides a

low-risklearningopportunity.Forexample,Austria/Switzerlandcanbe

consideredbeachheadmarketsforcompaniesplanning toenterGerma-

ny.SingaporeisabeachheadmarketfortheAsianregion.

(See also:GLOBALIZATION)


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40 Benchmarking

BenchmarkingAprocessbywhichacompanycomparesitselfwithanothercompanyin

thesameordifferentindustryonhowwellitisfaringonvariousparam-

eters.Benchmarkinghelpscompaniesinsettingstretchtargets,improv-

ingthewayoffunctioningandavoidingcomplacency.

(Seealso:BESTPRACTICES)

BestPracticesThemosteffectivewaytocarryoutabusinessactivityorprocess.The

termbest ishighly subjective,contextdependent,andalsoseems to

implythatnofurtherimprovementsarepossible.Manypeoplenowpre-

ferthetermgoodpractice.Bestpracticesareoftencontextual.Sotrans-ferring themacrossorganizationsmaynotbeaseasyas itoftenlooks.

Sometimesthetransferofabestpracticeacrossdepartments/functions

evenwithinanorganization,canbeachallenge.Whenbestpracticesare

embedded inanorganizationsculture, replication inanotherorganiza-

tionbecomesverydifficult.

(See also:BENCHMARKING,BARRIERSTOIMITATION)

BHAGSeeBIGHAIRYAUDACIOUSGOALS.

BiasforActionMany managers fail to takepurposeful action.They tend to ignore orpostponedealingwithcrucialissueswhichrequirereflection,systematic

planning,creativethinking,andaboveall,time.Instead,theytendtobe

happy dealing with operational activities that require more immediate

attention.Dailyroutines,superficialbehaviors,poorlyprioritizedorun-

focused tasksmakeunproductivebusyness themostcriticalbehavioral

probleminlargecompanies.

Managerswhowant tocultivateabiasforactionmust takefullre-

sponsibility for the intentions or goals. Without this kind ofpersonal

commitment,theywilleasilygoastrayorelseblameothersforsetbacks.

BigHairyAudaciousGoals(BHAGs)A term coined by James C. Collins and Jerry I. Porras in their well-known book,Built To Last. Visionary companies set big hairy audacious


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Blue OCEAN STRATEGY 41

goals for themselves that raise the bar and inspire people across alllevels.

ExamplesofBHAGsinclude:

BoeingsdecisiontocommittoaBoeing707or747;

WaltDisneysdecisiontocreateDisneyland;

HenryFordsdeclaration,Wewilldemocratizetheautomobile;

Dhirubhai Ambanis ambition of constructing the worlds largest

petroleumrefinery.

ABHAGshouldbeconsistentwiththecompanyscoreideology.It

shouldbesoclearandcompellingthatitmustrequirelittleornoexpla-

nation.Itmustgetpeopleexcitedandpumpedup.ABHAGshouldfall

welloutside the comfort zone.While it is important forpeople in the

organizationtobelievetheycanpullitoff,itshouldrequiretremendous

effort.ABHAGshouldbesoboldandcompellinginitsownrightthat

even if theorganizations leadersdisappeared, itwouldcontinue toin-

spireprogress.

(See also:COREIDEOLOGY,CORPORATEPURPOSE)

BlueOceanStrategy*Mostcompaniesfocusonbeatingthecompetition.ButaccordingtoW.

ChanKimandReneeMauborgne,twoofthemostrespectedcontempo-

raryscholarsintheareaofstrategy,thebestwaytobeatthecompetition

istostoptryingtobeatthecompetition.Marketscanbedividedintoredoceansandblueoceans.Redoceans

represent theknownorexistingmarket space.Blueoceansdenote the

non-existentorunknownmarketspace.Inredoceans,industrybounda-

ries are defined and accepted, and thebasis for competing is well-

known.Here,companies try tograbmarketsharefromeachother.As

competition intensifies,bothprofitabilityandgrowthdeclineandprod-

uctsbecomecommodities.Blueoceans,incontrast,representuntapped

*Kim, W. Chan; Mauborgne, Renee, Blue Ocean Strategy,Harvard Business

Review, October 2004, pp. 76-84, and Kim, W. Chan; Mauborgne, Renee, Blue

Ocean Strategy: How to Create Uncontested Market Space and Make Competi-

tion Irrelevant,Harvard Business School Press, 2005.


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42 Blue OCEAN STRATEGY

marketsinwhichtherulesofthegamearestillnotdefined.Blueoceansofferhighlyprofitablegrowthopportunities.

Althoughsomeblueoceansarecreatedwellbeyondexistingindustry

boundaries,mostarecreatedfromwithinredoceansbyexpandingexist-

ingindustryboundaries.Identificationofblueoceanscannotbedoneby

lookingatthepast.Aboutahundredyearsago,manyoftodaysindus-

tries,automobiles,musicrecording,aviation,petrochemicals,healthcare

andmanagementconsultingwereeitherunheardoforwerejustemerg-

ing. Even as recently as thirty yearsback, industries such as mutual

funds,cellphones,gas-fired electricityplants,biotechnology,discount

retail,expresspackagedelivery,minivans,snowboards,coffeebarsand

homevideosdidnotexistinameaningfulway.

Blueoceanstrategyistheresultofanewmindsetthatmovestheat-

tentionof companies away from competitorsto alternatives,and from

customerstonon-customers.Itinvolveschangingtherulesofthegame

throughthecarefulexaminationoffactorsthat:

Canbeeliminated;

Shouldbereducedwellbelowtheindustrysstandard;

Shouldberaisedwellabovetheindustrysstandard;and

Shouldbecreated.

Inmostindustries,acommondefinitiontendstoemergeofwhothe

targetbuyersareandwhatvalue theyare lookingfor.Some industries

competeprincipally on functionality. Other industries compete largelyonemotionalappeal.

Butwhat isoftenoverlooked is that theappealofmostproductsor

servicesisrarelyintrinsic.Throughthewaytheyhavecompetedinthe

past, companiesunconsciously shapebuyers expectations.Over time,

functionallyorientedindustriesmaybecomemorefunctionallyoriented

whileemotionallyorientedindustriesmaybecomeevenmoreemotion-

ally oriented. In theprocess, aspirations of customers tend to get ig-

nored.

Whencompaniesarewillingtochallengeconventionalwisdom,they

oftenfindnewmarketspace.Inemotionallyorientedindustries,remov-

ing frillsmaycreatea fundamentallysimpler, lower-priced, lower-cost

businessmodelthatcustomerswouldwelcome.Conversely,functionallyoriented industriescanoften infusecommodityproductswithnew life

byaddingadoseofemotion.


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Brainstorming 43

Swatch transformed the functionally drivenbudget watch industryinto an emotionally driven fashion statement. The Body Shop did the

reverse, transforming theemotionallydrivencosmeticsbusiness intoa

functional,no-nonsenseone.

(See also:VALUEINNOVATION)

BottomofthePyramidA termcoinedby thewell-knownguru,C.K.Prahalad

*.Till recently,

marketers tended to ignorepeopleinthe lower incomegroupsbecause

of their lowper capitapurchasingpower.The current thinking is that

peopleatthebottom-of-the-pyramid(BoP)compriseahugemarketwith

distinctive characteristics. By understanding these characteristics and

tailoring themarketingmixsuitably,companiescanunearthmajorop-

portunities toexploit thismarket.Thebottom-of-the-pyramid isdriven

byfactorssuchasaffordability,accessandavailability.

Affordability:Thekeytosuccessatthebottomofthepyramidisaf-

fordabilitywithoutsacrificingacceptablelevelsofquality.

Access:Distributionpatternsforproductsandservicesmusttakeinto

accountwherethepoorliveaswellastheirworkpatterns.Distribu-

tionnetworksmustpenetratedeeply into small towns andvillages.

MostBoPconsumersworkthefulldaybeforetheyhaveenoughcash

topurchasethenecessitiesforthatday.Thus,forexample,storesthat

closeat5:00PMhavenorelevancetothem,astheirshoppingbegins

after7:00PM.Further,BoPconsumerscannottravelgreatdistances.

Storesmustbeeasytoreach,oftenwithinashortwalk.Thiscallsfor

effectivepenetrationofthedistributionnetwork.

Availability: Often, BoP consumers make theirpurchase decision

basedonthecashtheyhaveonhandatanygiventime.Theytendto

buyforimmediateconsumption.Availability,thus,isacriticalfactor

inservingBoPconsumers.

BrainstormingAusefultechniqueforgeneratingnewideaswhenconfrontinganunfa-

miliarsituationoraproblem.Brainstormingisagroupactivityinwhich

*Prahalad, C. K.,Fortune at the Bottom of the Pyramid: Eradicating Poverty

Through Profits,Wharton School Publishing, 2006.


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44 Brand MANAGEMENT

membersareencouragedtospeakfreely,saythefirstanswerthatstrikesthemabouthow tosolveaproblem,nomatterhowweirdorabsurd it

mightbe. Having obtained as many ideas aspossible, the group then

examineseachoneinmoredetailtodeterminethefeasibilityofimple-

mentation.

BrandManagementFor companies across industries today, brands are becoming increasingly

important in the quest to gain competitive advantage. Brands symbolize

trust, reputation and quality. Brands are intangible assets that are not

easy to imitate. The high valuation of many of the successful companies

today is on account of the brands they own. Brand management must be

considered an integral part of corporate strategy and not just part of the

marketing function. Little wonder that most contemporary CEOs get

personally involved in branding related matters.

BreakevenAnalysisCompaniesincur twokindsofcosts,fixedcostswhichareincurredin-

dependentofthelevelofproduction,andvariablecostswhichvarywith

thelevelofoutput.Thebreakevenpointisthelevelofoutputatwhicha

firmmakesjustenoughprofittocoveritsoverheads.Thedifferencebe-

tweenpriceandvariablecost iscalledcontribution. In theshort run,a

firmmayoperatebelowthebreakevenpointjust torecoverpartofthe

overheads.Butinthelongrun,thefirmmustoperateabovethebreake-venpointandfullyrecoveritsoverheadsinordertosurviveandgrow.

BureaucracyBureaucracy refers to theadministrativeexecutionandenforcementof

rules.Abureaucraticorganizationischaracterizedbystandardizedpro-

cedure,formaldivisionofresponsibility,hierarchy,andimpersonalrela-

tionships. Common examples ofbureaucracies include governments,

armedforcesandthecourts.Bureaucraciesenforceorderanddiscipline,

especiallywhilehandlingroutinematters.Butbeyondapointtheycan

also frustrateemployees.Akey taskofmanagers inknowledge-based

organizationsistoeliminatebureaucracy.
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Business FORECAST ING 45

BusinessEthicsBusiness ethics is a form of applied ethics that is concerned with the

variousmoralorethicalproblemsthatcanariseinabusinesssetting,and

anyspecialdutiesorobligationsthatapplytopersonswhoareengaged

inbusiness.Ethicsisanormativedisciplinewhichinvolvesmakingspe-

cificjudgments aboutwhat is rightorwrong, aboutwhatought tobe

doneorwhatoughtnottobedone.Insomesituations,ifnotall,whatis

rightdependsonthecontext.Manycompanieshaveacodeofethicsthat

helps employeesunderstandwhat actions are acceptable andwhat are

not.

(Seealso:CODEOFETHICS)

BusinessForecastingBusiness forecasting is an integralpart of strategicplanning. Various

typesofforecastsareusedbycompaniesdependingonthesituation:

Economic Forecasts arepublishedby governmental agencies and

private economic forecasting firms. Abusiness firm can use these

forecastsasastartingpoint.

Financial Forecastsincludeforecastsoffinancialvariablessuchasthe

amountofexternalfinancingneeded,earningsandcashflows.

Sales Forecastsprojectfuturesalesforthecompanysgoodsorser-

vicesforacertainperiod.

Technological Forecastsestimatetherateoftechnologicalprogress.

Qualitativeforecastingapproachesarebasedonjudgmentandopin-

ion.Theseincludeexpertopinions,Delphiandconsumersurveys.Quan-

titativeapproacheseithercrunchhistoricaldata(timeseriesanalyses)or

associativedata(causalforecasts).Timeseriesmethodsincludemoving

averages, exponential smoothing and trend analysis. Causal forecasts

includesimple regression,multiple regressionandeconometricmodel-

ing.Quantitativemodelsworkwellinarelativelystableenvironment.In

ahighly volatilebusiness environment, thequalitative approachbased

onhumanintuitionandjudgmentismoreusefulthannumbercrunching.

Thechoiceofaspecificforecastingtechniquewilldependonvariousfactors,likethe:


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46 Business MODEL

Costofdevelopingtheforecastingmodel;

Relationshipsbeingforecasted;

Timehorizon;

Degreeofaccuracydesired;and

Dataavailability.

BusinessModelThe way a company runs itsbusiness. A companysbusiness model

mustaddressthreeissues:

8. Whoarethecustomers?

9. Whataretheylookingfor?

10.How do we deliver theproducts or services neededby customers

betterthanhowcompetitorscan?

These questions may look simple. But it is the ability to address these

questions well that determines the effectiveness of a business model.

Business model design implies making major trade offs, deciding which

customer segments not to serve, which activities not to do in-house,

what kind of risks to avoid, and so on. Business model innovation,

which goes far beyond process or product innovation, is essentially

about changing the rules of the game.(Seealso:PROCESSINNOVATION,PRODUCTINNOVATION,VALUECHAIN)

BusinessProcessReengineering(BPR)BPRinvolvestheradicalredesignofcorebusinessprocessestoachieve

dramatic improvements inproductivity, cycle times, and quality. In

BPR, companies start from scratch and redesign existingprocesses to

increaseefficiencyand todelivermorevaluetothecustomer,oftenby

reducing organizational layers and eliminating unproductive activities.

Functional organizations are transformed into cross-functional teams

withastrongprocessorientation.Informationtechnology(IT)isusedto

improve data dissemination and decision-making. BPR mustbe com-

pletedbefore any major IT intervention, otherwise the existing ineffi-

ciencieswillsimplygetamplified.


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Buy BACK 47

(Seealso:PROCESSINNOVATION)

BusinessRiskBusinessriskreferstothedegreeofuncertaintyassociatedwithafirms

sales volume andprice realization. This risk is core to thebusiness.

Marketcharacteristicsandthefirmsbusinessmodeltogetherdetermine

business risk. Business risk is not easy to quantify. Yet, companies

shouldtrytogobeyondqualitativestatementsandarriveatsomenum-

berswhereverpossible.

(Seealso:ENTERPRISERISKMANAGEMENT)

BuyBackWhenafirmhasmorecapitalthanitneeds,itmaybuybacksharesfromthemarket.Buybacksareoftenviewedpositivelyby thestockmarket

because they signal that the company isprepared to return cash to its

shareholdersinsteadoffritteringitawayonunproductiveinvestmentsor

meaningless diversification. A company may also resort tobuyback

whenthemanagementfeelsthatthemarketisundervaluingitssharesin

relationtotheirintrinsicvalue.


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48 Cadbury COMMITTEE REPORT

C

CadburyCommitteeReportA standard reference point for any discussion on corporate governance.

Prominent institutionsinLondonconcernedaboutauditandregulatory

issuesfollowinganumberofcompanycollapsesinthe1980s,setupa

committeechairedbySirAdrianCadbury.Tokeepundercontrolover-

powerful chief executives or overenthusiastic executive management,

thecommittees1992 reportadvocatedvariouschecksandbalancesat

theboardlevel.Theseincluded:

Wideruseofindependentnon-executivedirectors;

EstablishmentofanAuditCommittee;

SeparationofthepostsofChairmanandCEO;

Useofaremunerationcommittee;and

Adherencetoadetailedcodeofbestpractice.

(Seealso:CORPORATEGOVERNANCE)

CapacityExpansionGrowing an existingbusiness often involves expansion of capacity in

termsofplant,human resources, technological infrastructure,R&Dfa-cilities, etc. Any major capacity expansion is a strategic decision that

involves significant resource commitment, and is often difficult to re-

verse.Sosuchadecisionhastobemadecarefully.

Capacityexpansionisoftennarrowlyappliedtomanufacturing.But

in manybusinesses, there is little or no manufacturing. So capacity

needsalsotobeunderstoodintermsoftheinvestmentsmadeinthemost

criticalareaofthevaluechain.Thusinthepharmaceuticalindustry,ca-

pacityhastobedefinedintermsofscientificmanpowerandsalesforce.

Inasoftwaredevelopmentcompany,capacityhas tobeunderstood in

termsof thenumberofprogrammers employed. In abusiness school,

capacitymaybedefinedasthenumberofprofessorsavailabletoteach

students.


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Capacity EXPANS ION 49

AccordingtoMichaelPORTER,thedecisiontoexpandcapacityhastotakeintoaccountvariousfactors.Someoftheseare:

Futuredemand.

Futureinputprices.

Likelihoodoftechnologicalobsolescence.

Probablecapacityexpansionbycompetitors.

Futureindustrycapacityandindividualmarketshares.

Themainrisk incapacityexpansionis thecreationofexcesscapacity.

When there isexcesscapacity,competitionintensifiesasplayerstry to

increase capacity utilization andprofits come down. Excess capacity

mayresultbecauseofvariousreasons:

Capacityoftenhastobeaddedinlumps,notinincrementalfashion.

Economiesof scal

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