BUSINESS STRATEGY IIBUSINESS STRATEGY II

Strategy Implementation Framework

Strategy ImplementationIt is the process by which the top managers assure that strategic choice is communicated to the enterprise & executed by the people of the enterprise.

Two Steps, related but distinct, in the implementation process1.Organizational implementation of the choice2.Policy implementation of the choice

The first involves examination of the firm’s org. structure & climate- to ensure that it is set up to make the strategy work. Structural adjustment is essential for economic efficiency. While there are no hard & fast rules regarding the structure, the right organ. will make it more effective. Structure will depend on factors like Size, Volatility, Complexity, Personal characteristics & Dependence on the envt.

The org. structure can be

a. Simple

b. Functional

c. Divisional

4. SBU

5. Matrix

(Ref organizational analysis on slide 8)

The policy implementation of strategy:Different Approaches:1.McKinsey 7S Framework

offers a useful tool for focusing on certain policy areas which are vital in implementation & control. The basis of this model is to match the “hardware” to the “software” to achieve the goals.

1.Strategy-the means to accomplish org. purpose2.Structure-the basic framework to designate

responsibilities and functions3.Systems- deals with the tools of planning, decision

making, communicating& controlling 4.Staff-the HR who carries out the process5.Skills-organizational & individual capabilities in getting

things done.

6.Style-the management style- the motivation, the reward system, the overall HR policies & management policies

7.Shared values-the superordinate goals of the organization-the objectives, the goals, the values-shared by everybody.

The first three are ”hardware” related & remaining four are said to be the “software” ;all are interlinked

7S Framework-All 7Ss interlinked

SharedValues

Staff

Structure

Systems

Style

Skills

Strategy

II. Re-engineering (BPR)Aim – Performance improvements by redesigning operational processes in order to maximize value while minimizing costs. BPR has wider uses than just redesigning operating processes; it may even include skill enhancement, team-working, review of the reward systems to improve competitiveness and more co-operative working, implementation of new matrices of performance and even a cultural change.

The Key Tenets of BPR:Ambition: Targets large scale improvements; seeks

redesign of current process configurations and not just optimization

Process Focus: It is concerned with fundamentalbus. processes that underlie the operations of the orgn; does not change or tamper with the org. focus

Questioning fundamental assumptions: it identifies, questions and recasts fundamental assumptions and beliefs concerning the design of the orgn.

IT as an enabler: It uses the advantages used by IT to achieve improvements which were not available when done manually.

Measurement of results and not activities: BPR focuses on new measures of performance. It stresses on the outcomes and not the individual activities that are part of the processes.

III. Reverse Engineering - is the process of learning by deconstruction. The process involves dismantling of a product, analyzing it to understand how it was designed and manufactured. The advantage to the reverse engineer is that he can avoid costly and risky investments in R&D for a new product. While reverse engineering can be a threat to the innovator, the innovator can have two forms of protection (1) by having a first mover advantage and exploiting the market and creating a brand equity and (2) licensing or patenting the technology or process or product.

IV. Quality As A Strategy-The TQM ApproachThe approach is built around an intense focus on customer satisfaction; on accurate measurement of every critical variable in a business’s operation; on continuous improvement of products, services and processes, and on work relationship based on trust & teamwork. Or it is viewed as virtually a new organizational culture and way of thinking. Essential elements of TQM:1.Define quality and customer value from a total company perspective rather than leaving it to individual interpretation. Value is derived from quality, price and speed (responsiveness)2.Develop a customer orientation- customer value is what customer says it is. Rather than relying on secondary information, talk to customers directly to

collect hard data.

3.Focus on company’s business processes. Break down every process and look at ways of improving each one of them.

4.Develop customer and supplier partnerships. Include them as partners rather than external entities.

5.Take a preventive approach. Rather than “fire fighting”, aim for fire prevention.

6.Adopt an “error-free” attitude at every level and in every process

7.Get facts first .Decisions shall be based on facts rather than opinions.

8.Encourage every manager & employee to participate. An inclusive culture to be created

9.Create an atmosphere of total involvement. Quality is not a department’s job. It is everybody’s responsibility.

10.Strive for continuous improvement

INTERNAL DEVELOPMENT

Mergers & Acquisitions

And

Joint Ventures & Strategic Alliances

Framework for successful merger-making M&A work

#Look for synergies-a combination of assets must create more value when they are together than separate; synergies come from cost savings or revenue enhancements with cost synergies essential to the strategic logic of a deal. While, virtually all acquisitions are predicated on realizing cost or revenue synergies, making that happen is quite another matter.

#All synergies are not created equally-synergies are almost always much more difficult to realize than they appear. The more significant the synergy potential, the more momentous the challenge.

#The time factor-one has to remember that immediate savings have more value than savings materializing three years after.

#Synergies don’t come free-making synergies happen is not without cost-downsizing expenses, time spent on co-ordination and interaction to realize synergies, additional training & relocation costs, and even higher OH during integration; these are directly related to achieving synergies even though included in the costs associated with cost of mergers.

#Negative synergies-In a number of takeovers, the core competences of the two entities may be different and sometimes may lead to negative synergies. For example, consider the merger between Sony & Columbia Pictures. Sony had strengths in H/W but not in S/W, which was the necessary competence for Columbia .

Is the acquisition wise? Ask following questions:Is your acquisition justified? Absolute clarity on

the purpose and its importance within the orgn. Can serve as a beacon to lead the way during

problems, complexity and confusion that are inevitable during integration.

Is your core competence in M&A? Just like successful companies develop critical core competencies that drive their competitive strategy, successful M&A companies must develop competencies that make them superior acquirers. The experience people gain from one deal should be captured , disseminated to others & built upon with subsequent deals

Is your M&A strategy tailored to your organization? The appropriate strategy for any company is one that is tailored to its own capabilities, people, and overall competitive strategy; what is needed in another company is not necessarily the same as in yours

Key Implementation Issues Lack of appreciation by managers of the complexities

in the post-merger scenario Leadership related issues Cultural differences Differences in HR processes Differences in compensation levels The nature of organizational structures Geographical issues Technology issues Competency related issues Head count issues

All these may be very serious if the companies are located in two different countries

Steps for effective pre-acquisition planningDue-diligenceAssessment of strategic & financial implicationsNegotiation & announcementAssessment of cultureAssessments of impediments to future

integrationAssessment of competencies of key managers

of the target firmDevelop communication strategiesSelect integration managerClosure of deal

A JV is a co-operative business agreement between twoor more firms that want to attain similar objectives. It allows participating firms to share specific technological skills and knowledge. Eg: The JV between M&M & Renault to make carsA strategic alliance is a relationship that allows firms to create more value than they could individually. The firms come together to attain agreed upon goals, while still maintaining their independence. Eg: IBM, Siemens

& Toshiba are working together to create new generation memory chips.

JVs require direct investment, training , management assistance and technology transfer. JVs can be equity (where both partners have equal stakes) or non-equity (where one partner has a greater stake).

Some countries insist on a JV arrangement for a foreign company to start operations.

The Rationale for JVs.JVs enable the partners to achieve synergies. For example, one firm may have excellent tech. capabilities while deprived of financial muscle while another may have the financial capabilities but lack the tech. skills. Individually they may not be able to any worthwhile goal, a JV can pave way for the achievement of goals.Another reason could be the sharing of risk. Easy approval possibility from antitrust regulators could be another reason. Availing of tax benefits could be another as JVs may be able to use the intellectual property of one of the partners through licensing of

patents which attracts lesser taxes compared to the tax implications in the case of royalties earned thro’ a tech licensing agreement. There may be other reasons also like –sharing of tech, know how and management skills, having access to the input supply or distribution channels, gaining economies of scale, extending business by sharing investments etc.

Reasons for failure

JVs, like any contracts, are prone to difficulties. Studies conducted by McKinsey & Co and Coopers & Lybrand point to disbanding or falling short of expectations. Reasons cold be: Inflexible terms of the contract, lack of commitment by partners, failure or inability to develop the desired tech, lack of adequate pre-planning, failure to reach agreements on issues

where partners differ, changes in the strategies of the partners etc.

International JVs.

Main Reasons

-to learn the partner’s skills

-upgrading and improving skills

-to avail of certain advantages of operating a JV (eg. Mahindra & Renault, Bajaj & Nissan etc)

Strategic Alliances (SAs)A SA is a cooperative agreement between actual or potential competitors. Eg: SA between Siemens & Philips to develop new semiconductor tech; or the SA between Eastman Kodak and Canon of Japan whereby Canon mfers a line of copiers for sale under Kodak’s name.

Generic Motives for a SA design new products minimize costs enter new markets pre-empt competitors generate higher revenues transfer of technology

Advantages & disadvantages of SA

Advantages

-helps in entering into specific areas of technology,

markets

-helps in sharing high costs and risks in the development of new processes or products

-helps in combining skills that neither partner can develop on its own

Disadvantage

-give competitors a low cost route to new technology and markets

Corporate Restructuring

Why?

-primarily (1)to improve efficiency and effectiveness of the firm from a shareholder value point of view(2) to meet the changes & challenges in the competitive environment

-secondary reasons

1.to facilitate division of assets among partners, promoters /family members

2.to meet the requirements of regulators to come out of anti-trust /monopoly issues

What it means and its scope

Encompasses a broad range of activities like acquisition and divestiture of businesses and assets, acquiring controlling stake in other companies, alteration in capital structure thro’ a variety of financial engineering initiatives, and also effecting internal streamlining and business process re-engineering to improve efficiency and effectiveness of the firm

In short, restructuring can lead to changes in one or more of the following three (Forms of Restructuring):

1.Assets and portfolio

2.Capital structure and

3.Organization & management

1.Portfolio & asset restructuringa. Mergers & acquisitions

Merger of two or more legal entities or companies Purchase of assets /business of another firm as a going

concern Substantial acquisition of shares leading to change of

control in the same

b. Divestitures Divestment of assets/business as a going concern Divestment of a controlling stake leading to change of

control Spin-off of a division or a subsidiary into a separate legal

entity Split-off Split-up Equity carveout

2.Financial engineering (leading to cap. Str. Changes

Alteration in D-E mix / D-E swapsIssue of difft. Classes of shares (Pref, Non-

voting etc)Issue of difft. Types of debts to meet Fixed &

Working capital needsInfusion of foreign debts and equityBuyback of shares

3.Internal Streamlining and BPR (leading to changes in organization & management structure of the firm)

Down-sizing or Right-sizingCost reduction programmesClosure of uneconomic unitsDisposal of idle assetsBPRChanges in structure, systems and processes,

skills and culture to facilitate implementation of various change programmes

One of the major restructuring aim is to improve shareholder value. Hence, financial parameters assume lot of importance in any restructuring exercise. The objectives under this aim may be

(a) Operating Margin & Volume Growth• Portfolio & asset restructuring

1.M&A leads to greater economies of scale, growth in volume & market share, more bargaining power with customers and suppliers, better efficiency in operations all leading to creation of greater surplus2.divestment of non-profitable business leading to improvement in margin and releasing of scarce resources

• Internal streamlining and re-engineering leading to improvement in cost competitiveness, quality, delivery & services

(b) Asset/Resource productivity

Both the points above leads to improved usage of

invested capital

(c) Cost of Capital & Risk

Financial re-engineering helps by changing D/E

mix, debt composition and risk exposures

Caution

Restructuring shall not be attempted for short

term gains or because that is the trend. There

must be a genuine rationale for initiating one.

DivestituresReasons for divestment To improve efficiency& performance by getting rid of

non-performing units To better manage internal operations To achieve focus: excessive diversification can result

in management difficulties (fitness problem) There is a buyer for whom value addition happens

whereas it doesn’t add much value to the existing co portfolio

Release resources (financial as well as managerial ) locked in non-attractive businesses and use them in other or new opportunities

Large ,complex organizations are difficult to manage; spin-offs can result in better managerial efficiencies

In response to changing environment: consequent to globalization, it has become necessary to operate on a global scale for maximizing returns-spun-off units can have greater focus and hope to get adequate resources for growth initiatives.

To avail of tax-advantages, depending on tax laws.

To facilitate better valuation by stock markets: markets usually value highly focused companies over conglomerates

Someone is ready to buy at a price which is very attractive

Methods of divestmentSpin-offs: done with subsidiaries, allots shares

the company owns to its shareholders on a pro-rata basis; no money changes hands and subsidiary assets are not revalued.

Split-off: this is a kind of sell-off where willing shareholders of the parent company receive a subsidiary’s shares in exchange of shares held in the parent company. This is usually found in family owned businesses, where there are complex cross-holdings to separate the interests of different family factions

Split-ups: a case of sell-off involving all of a co’s subsidiaries and the parent co no longer exists. All the shares held by the parent company in all the subsidiaries are distributed among its shareholders in the ratio in which they hold its shares.

Equity Carveouts: defined as the first public offering by a parent co of a % of stock held in its wholly owned subsidiary

While restructuring can help, a large number of companies resort to restructuring to achieve short term results. The problem as Prahalad & Hamel says “the urgent drives out the important; the future goes largely unexplored; and the capacity to act, rather than the capacity to think and imagine, becomes the sole measure of leadership”. According to them ,when a competitiveness problem (stagnant growth, declining margins, and falling market share) finally becomes inescapable, most executives pick up the knife and begin the brutal work of restructuring. The goal is to carve away layers of corporate fat, jettison underperforming businesses, and raise assets productivity. Whatever be the names-refocusing, delayering, decluttering or right-sizing-restructuring always has the same result: fewer employees.

Numerator & Denominator Management

Any measure of firm profitability will have two components: a numerator (net profit) and a denominator (investments, assets-at gross level or net level, or capital employed). The measure can be improved either by increasing the numerator (denominator remaining constant or more than proportionate increase in the numerator than denominator) or reducing the denominator (numerator remaining constant or more than proportionate decrease in the denominator). To grow the numerator is a difficult task for any manager as it requires lot of hard and smart work – in finding out where opportunities lie, anticipate customer needs, building new competencies etc. Hence the onus falls on

trimming the denominator. Managers under pressure to show improved profitability every quarter hence do the easiest thing meet the expectations- by manipulating the denominator. This is known as denominator management whereas attempt to improve the numerator by forward thinking is known as numerator management.

Turn-around ManagementMany a time in the life of a firm, it may face severe tests even with respect to its survival. Changes in the environment, changes in the customers’ perceptions, poor management, extreme competition etc may lead to very difficult times for a firm. Its profitability may decrease and may even become negative, products may be rejected by the customers due to poor quality, not able to meet working capital requirements even while being asset rich, poor liquidity leading to defaults in mandatory payments etc etc leading to a crisis. Such a situation will call for what is generally termed as “Turn-around Management”. Managers may have to take clearly identified steps after a thorough analysis of the scenario. Sometimes turn-around may be simple and quick but sometimes it takes many years before the firm turns around. A number of steps

discussed under the restructuring may have to employed.

Time ……………………… The Turnaround Process

Stage1 Decline

Stage 2Response Initiation

Stage 3Transition

Stage 4Outcome

Nadir

Indeterminate

Success

Failure

Performance

Stage 1:Decline-starts from equilibrium and reaches a nadir; two perspectives exist; decline due to macro or external factors like decline of the industry or decline due to reduction or shortage of resources within the firm, independent of external environment. But both can contribute to the reduction of resources and financial performance , eventhough magnitudes of influences may vary.

Stage 2:Response Initiation- management initiates corrective actions; responses can be strategic and operating. Strategic response looks at the business itself (diversification, vertical integration, divestment etc) while operational response focus on the way the firm conducts its business (revenue generation, cost cutting etc)

Stage 3:Transition- firm experiments with different strategies, structures, cultures and technologies. Turn around strategies get implemented while improvements may only happen in future. It takes many years to show performance improvement.

Stage 4:Outcome-activities undertaken during the 3rd stage produces outcomes. Outcomes could be either successes or failures. Measures of outcome are same as the measures used to identify the decline.

Managing Strategic ChangeMost people consider change as threat. That is the reason why people resist changes. When changes are strategic, it may even affect the ways we do business in order to achieve our goals. And such changes could pose even more threats. But changes can bring in lots of opportunities for the company and its people and companies may be required to adopt changes that are strategic during the course of running the business. Leadership abilities will have to be stretched to the people of the necessity for changes. Leaders will have to effectively communicate the message of change and inspire people with a vivid vision of the outcome of changes. Leaders themselves will have to be role-models of change or they will have to walk the talk. They should keep in mind that it is very difficult to bring about changes and sustain the change momentum. Changes may be required to be implemented now, the results of which will

be available or seen much later. Hence, it is better to use the term “leading strategic change” rather than “managing strategic change”. And leading change is a very difficult process. Leaders will have to face lots of risks. They have to come out of their comfort zones. They should very clearly understand that an “organizational approach” dealing with structure, processes and systems will not result in lasting changes. Such changes may bring in temporary changes but lasting changes will happen only if changes happen in people and that too at individual levels. Or the approach has to shift from an “organization in” approach to “individual out” approach. This is what leaders like Andy Grove, Jack Welch, Herb Kellegher, or Roberto Goizueta did in their respective organizations and this is what Narayana Murthy or Bill Gates trying to do in their

respective organizations.

“There is at least one point in the history of any company when you have to change dramatically to rise to the next level of performance. Miss that moment and you start

to decline”

Andy Grove

“Change does not happen when circumstances improve; change happens when you decide to improve your circumstances”

PAUL McGEE in

S. U. M. O (Shut Up, Move On)

“It’s not that ‘an old dog can’t learn new tricks‘. Rather it is that an old dog has a devil of a time unlearning old tricks”

J. Stewart Black& Hal B. Gregersen

in Leading Strategic Change

This is true of any organizational change too.

Leadership & Role of CEO in implementationThe ultimate responsibility of the strategy implementation rests with the top management and the CEO of the organization. They are the ones who are accountable. While everybody in the organization can be said to working towards the goal, the accountability rests with the CEO and top management. Leader will have to use power in enforcing the decisions on strategy. They will ensure that they systematically motivate and encourage people to drive towards the goal. They might use the 7S-framework in order to achieve this. The source of power for any leader can be either of the three namely coercive, incentive or normative

Coercive- through the use of force for the accomplishment of tasks and goals

Incentive – through the offering of incentives for successful completion of tasks

Normative – through articulation of values and a vision

In organizations which show sustained winning over long periods of time, it is observed that leaders usually use the third method for the exercise of power since they have created a culture with solid foundation on values.

Ghoshal & Bartlett have argued that the role of top management has undergone a dramatic change: from Strategy, Structure and Systems(3S s) to Purpose, Process and People. The strategy, structure and systems doctrine emerged in US through pioneering efforts by people like Alfred Sloan of GM. At the time it was a revolutionary discovery which yielded excellent outcomes. Business schools also taught this model, consultants made it popular. According to Ghoshal & Bartlett, the great power- and fatal flaw- of the 3S doctrine lay in its core objective: to create a management system that would minimize a company’s reliance on the idiosyncracies of individuals. It was assumed that strategy making was a monopoly of the top people and once they make a strategy and communicated down the line, it will get implemented because a structure and systems were

in place. People were mere implementation tools. But over a period of time thinking changed. As Andy Grove recalls of the period “We were fooled by strategic rhetoric. But those on the front lines could see that we had to retreat from memory chips….. People make strategy with their fingertips. Our most important strategic decision was made not in response to some clear-sighted corporate plan but by the marketing and investment decisions of the front-line managers who really knew what was going on.”

This has happened because knowledge is replacing capital as the critical scarce resource, and management is being challenged to create an org. environment that can develop, leverage, and diffuse this new competitive asset.

Or, in order to manage the transformational change, leaders are recognizing the need for a different management philosophy and approach. According to Ghoshal & Bartlett, the leader’s greatest challenge is to create a sense of meaning within the company, which its members can identify, in which they share a feeling of pride, and to which they are willing to commit themselves. Or, the top management must convert the contractual employee of an economic entity into a committed member of a purposeful organization.

According to Ghoshal & Bartlett, management in the earlier context conformed to the framework given below (4Cs):

CONSTRAINT

COMPLIANCE

CONTROL CONTRACT

Winning companies follow a different framework for management practice which is more individual-centred:

STRETCH

DISCIPLINE

TRUSTSUPPORT

5 Stages of Organizational Experience in in change-related problem-solving based on BMStage 1- Ignore –The person ignores the problemStage 2- Deny –the person actively denies the existence of the problem rather than ignoringStage 3 – Blaming others – (competition, environment, lack of resources, policies of the organization etc)- the person admits that there is a problem but maintains that it is not his problem. He applies the defense mechanism and continues to avoid responsibility of remedying the situation. This usually happens with people whose past performance has been good but the present performance is nothing much to write about.Stage 4- Assuming responsibility – the biggest step a person has to take. He has to gather courage not only to admit that there is a problem and that it is his problem. This is the crucial stage in problem solving

as once the responsibility has been assumed, the next (final step) is easy.

Stage 5 – Finding the solution – relatively easy because the move from blaming others to assuming responsibility constitutes an emotional step, while the move from assuming responsibility to finding the solution is an intellectual one, and hence is easier.

The control process:Four types of Str. Control1.Premise control2.Implementation control3.Strategic surveillance4.Special alert control1.Premises means assumed conditions. The strategy is designed

around the predicted conditions. Premises control means checking systematically & continually whether the premises are still valid or not.

2.Implementation control is to assess whether overall strategy should be changed in light of unfolding events & results associated with incremental steps & action that implement the overall strategy. Two types of imp. Control-1.Monitoring strategic thrusts

2.Milestone reviews

3.Strategic surveillance is to monitor a broad range of events inside & outside the company that are likely to threaten the course of the firm’s strategy

4.Special alert control is needed to reconsider the firm’s basic strategy based on a sudden unexpected event-some sort of a crisis management

The control process may use some of the methods/tools like

@Budgeting

@Scheduling

@Focusing on key success factors( learnt in BS I)

@Rewarding system in line with achievement of objectives & goals

Competing for the Future

Alternative View of Competitive StrategyCooking Sweet & Sour: Every organization and its top management has to deal with two “symbiotic” forces - the need for ongoing improvement in operational performance as provided by continuous rationalization and the need for growth and expansion as generated by continuous revitalization of the organization. Companies must see these as complementary rather than conflicting, leveraging each to drive and energize the other. Rationalization is a must for improving resource productivity and ensures that assets and resources are used most effectively. But at the same time, the new strategy may need to challenge and change the existing rules of the game and creating new competencies and businesses rather than refinement and rationalization of the old ones. Creating a new business may involve

risks which may result in failure while existing businesses are less risky. While rationalization calls for grit & tenacity, new ventures demand courage & commitment. Ghoshal & Bartlett calls this rationalization “sour” medicine few managers enjoy administering or taking because when the competition catches up they may be forced to another round of rationalization while neglecting the “sweet” agenda of revitalization through continuous search for growth and expansion. Still other companies indulge in the agenda of revitalization and concentrate only on the need for growth and expansion. Many mangers consider rationalization and revitalization as mutually exclusive. According to Ghoshal & Bartlett, these two aspects should not be seen as conflicting but complementary and organizations must take efforts to implement both rationalization and revitalization on a continuous basis or mix both sweet and sour in the recipe

The Sweet & Sour CycleThe Sweet & Sour Cycle

• Portfolio choice

(eliminating low-return activities)• Improving labour productivity

(revenues & profits per employee)• Improving operating efficiency

(speed, reducing waste)• Improving capital productivity

(ROCE)

• Growth Opportunities

(new products & markets expanding

share)• Building competencies

(new capabilities and resources)• Organizational capabilities

(revitalizing organization and people)

RADICAL PERFORMANCE IMPROVEMENT

IMPROVING RESOURCE PRODUCTIVITY

(SOUR)

CREATING & EXPLOITINGNEW OPPORTUNITIES

(SWEET)

Strategy As Stretch & LeverageJust having a strategy isn’t enough. One has to achieve more with less. One has to leverage the resources better. According to Prahalad & Hamel, it hasn’t much to do with resource constraints but is the result of aspirations. It is this aspiration, the stretch-which outpaces resources-that fuels the engine of advantage creation. Exploiting every possible opportunity for resource leverage takes creativity and persistence. A firm with outsized ambition but underdeveloped capacity for resource leverage will be just a dreamer. Alternatively, a firm with capacity for resource leverage, but possesses no galvanizing ambition will be a sleeper. A firm with neither aspiration nor capacity for resource leverage will be a loser and those with both will be winners.

Hamel & Prahalad cite Japanese companies as good examples.

Mfg Labour Productivity (Per Hour):

1988 89 90 91

US 118 119 120 122

Germany 115 118 122 124

Japan 125 135 143 150

Overhead Costs(1991)

US 26%

Germany 21%

Japan 17%

A Comparison of R&D Spending In Absolute Terms ($Millions,1993)

Siemens 5322 Philips 2079Hitachi 3907 Sony 1809

GM 5917 Xerox 922Honda 1447 Canon 794

AT&T 2911 IBM 5083NTT 2157 NEC 2274

Comparison Of R&D Spending In Relative

Terms (R&D As % Of Sales, Fiscal 1993)

Siemens 10 Hitachi 6.7

ABB 8.1 Mitsubishi 4.6

Thomson 8.3 Sharp 6.5

Philips 6.8 Sony 6.1

IBM 7.9 Matsushita 5.6

NTT 11.1 NEC 8.0

Bayer 7.5 Toray 3.4

Kodak 7.9 Fuji 6.6

Xerox 5.4 Canon 5.2

Japanese Companies Topping US Patent Awards, 7th Consecutive Year(1992)1.Canon2.Toshiba3.Mitsubishi4.HitachiThe statistics provided above shows how Japanese companies were able to better leverage the resources at their disposal by applying stretch principles. Notwithstanding the fact that US companies were spending more resources, in absolute and relative terms, it was not reflected in terms of better outputs.

“Stretch essentially means using dreams to set (business) targets –with no real idea as to how to get there. If you know how to get there, it is not a stretch target. It requires one to break out of both conventional thinking & conventional performance expectations. Stretch allows organizations to set the bar higher than they ever dreamed possible”

(Welch, 2001)“Stretch means really challenging yourself and believing there is infinite capacity to improve upon everything you do”

Robert L. Nardelli,CEO, Chrysler, former CEO, Home Depot & Former CEO, GE Power Systems

Strategic IntentIncumbent players usually tend to dismiss or ignore competitors with meager resources. Hamel & Prahalad concludes that starting resource positions are a very poor predictor of future industry leadership. The basic problem in strategic management is that too often competitors are judged in terms of resources rather than resourcefulness. According to H&P, getting to the future is more a function of resourcefulness than resources, don’t sprout from an elegantly structured architecture, but from a deeply felt sense of purpose, a broadly shared dream a truly seductive vision of future opportunities.

Such a dream energizes the company and is more sophisticated, and more positive than a simple mission or vision. H&P calls this dream the strategic intent .While strategic architecture may point the way to the future, it’s the ambitious and compelling strategic intent that provides emotional and intellectual energy for the journey. If strategic architecture is the brain, strategic intent is the heart. According to H&P, strategic intent implies a significant stretch for the organization. Current capabilities and resources are not sufficient for the task. While the traditional view of strategy focuses on the “fit” between existing resources and emerging opportunities, the strategic intent , by design, creates a substantial “gap” between resources and aspirations.

Direction, Discovery & Destiny: The attributes of Strategic IntentA strategic intent implies a particular point of view about the long-term market or competitive position that a firm hopes to build over the future or it conveys a sense of directionA strategic intent is differentiated or implies a competitively unique position about the future. It offers the employees the promise of exploration of new competitive territory or it conveys a sense of discovery.A strategic intent also has an emotional edge to it; employees perceive it as a goal inherently worthwhile or it implies a sense of destiny.

Contemporary Concepts

Balanced Scorecard (BSC)The BSC provides managers with an instrument that can help them to navigate to future competitive success. Today , all organizations compete in complex environments; they vitally need an understanding of their goals and the methods for attaining them. BSC helps an organization to translate its mission and strategy into a comprehensive set of performance measures that provides a framework for strategic measurement and management system from four balanced perspectives: Financial, Customers, Internal Business Processes, and Learning & growth. BSC thus enables companies not only to track financial results but monitoring the progress of building non-financial capabilities and intangible assets required for future growth. The essential difference or advantage is that while traditional

financial measures tell the story of past events or history, BSC includes in addition to financial measures, measures that will monitor the progress of developing or acquisition of non-financial capabilities or intangible assets which will be adding or delivering value to the organization in the future. It helps to capture the critical value-creation activities by the organizational participants, thereby revealing the value drivers for superior long-term financial and competitive performance.

The BSC Framework

To achieve our vision, how should we appear toour customers?

Customer

To succeed financially, how should we appear to our share-holders?

Financial

To achieve our vision, how will we sustain our ability to change andimprove?

To satisfy our shareholders and customersWhat busin-ess process must we excel at?

Learning & Growth

Internal Bus. Process

1 2 3 4

Legend1.Objectives2.Measures3.Targets4.Initiatives

VISION & STRATEGY

12 3 4 1 2 3 4

1 2 3 4

The BSC emphasizes that financial and non-financial measures must be part of the information system for employees at all levels of organization. It should translate a business unit’s mission and strategy into tangible objectives and measures. The measures represent a balance between external measures for shareholders and customers, and internal measures of critical business processes, innovation, and learning and growth. The measures are balanced between the outcome measures-the results from past efforts- and the measures that drive future performance.

Innovative companies use the scorecard as a strategic management tool, to manage strategy over their long run. They use the scorecard to accomplish critical management processes of

1.Clarify and translate vision & strategy

2.Communicate & link strategic objectives and measures

3.Plan, set targets, and align strategic initiatives

4.Enhance strategic feedback & learning

Using BSC as

Framework for

Strategy

Clarifying and Translating Vision and Strategy•Clarifying the vision•Gaining consensus

Planning & Target Setting•Setting targets•Aligning strategic Initiatives•Allocating resources•Establishing milestones

Strategic Feedback & learning•Articulating the shared VisionSupplying strategic feedback •Facilitating strategy review & learning

Communicating & Linking•Communicating & Educating•Setting goals•Linking rewards to Performance measures

Balanced Scorecard

Blue Ocean Strategy (BOS) (W. Chan Kim and Renee Mauborgne)Companies have long engaged in head-to-head competition in search of sustained, profitable growth. They have always fought for competitive advantage, battled over market share, and struggled for differentiation. All strategic thrusts were aimed at the above. Professors Chan Kim and Renee Muagborgnesay that in today’s overcrowded industries the strategy of competing head-on results in nothing but a bloody “red ocean” of rivals fighting over a shrinking profit pool and is increasingly unlikely to create profitable growth in future. They argue that tomorrow’s winners will succeed not by battling competitors, but by creating “blue oceans” of uncontested market space ripe for growth.

Such strategic moves-termed “value innovation”- create powerful leaps in value for both the firm and its buyers, rendering rivals obsolete and unleashing

new demand. It is a systematic approach to make the competition irrelevant. In the earlier context, the overriding focus of strategic thinking has been on competition-based red ocean strategies which had its roots in military strategy. Described in military way, strategy is about confronting an opponent and fighting over a given piece of land that is both limited and constant. But the authors argue that unlike war, industrial history points to a market universe that has never been constant or blue oceans have continuously been created over time.

A focus on red ocean is akin to accepting the constraining factors of war-limited terrain and the need to beat the enemy to succeed- and to deny the distinctive strength of business-the capacity to create new market space that is uncontested.

Value Innovation: The cornerstone of BOSThe strategic approach consistently separated winners from losers in the creation of BOS. While companies caught in the red ocean followed a conventional approach of beating the competition by building a defensible position within the existing industry order, creators of blue oceans, didn’t benchmark on competition but followed a different strategic logic , value innovation .The term coined because BOS focus on making competition irrelevant by crating a leap in value for buyers and the

company, opening up new and uncontested market space. The value innovation by BOS defies the value- cost trade-off dogma of the competition-based strategy. In the earlier context, the choice was between creating greater value at higher cost or reasonable value at low cost – or looking at strategy as making a choice between differentiation & low cost whereas BOS pursue differentiation and low cost simultaneously.

The Four Actions Framework for creating a new value proposition

ReduceWhich factors should

be reduced well below the industry’s standard

RaiseWhich factors shouldBe raised well above

the industry’s standard?

CreateWhich factors should be created that the

Industry has never offered?

EliminateWhich of the factors that the industry takes for granted

should be eliminated?

A New Value Curve

1.Eliminate: There are certain factors that companies in one’s industry have long competed on. Those factors are often taken for granted even though they no longer have value or may even detract from value. There can be even fundamental change in what buyers value but companies hell-bent on benchmarking on one another do not act or even sense the change.

2.Reduce :One has to determine whether products or services have been overdesigned in the race to match and best the competition. While companies overserve at a higher cost which the customer does not value.

3.Raise :One uncovers or eliminates the compromises one’s industry forces customers to make. Sets new standards well above competitors.

4.Create :One discovers entirely new sources of value for buyers and create new demand and shift the strategic pricing of the industry.

According to BOS, there are three characteristics of a good strategy, namely,

1.Focus-the firm doesn’t diffuse its efforts across all key factors of competition

2.Divergence-don’t benchmark competitors but instead look across alternatives

3.Compelling tagline-which makes the strategic profile clear

Focus

The company’s strategic profile will clearly show focus. SWA, for eg, emphasizes only three factors: friendly service, speed and frequent point-to-point departures. By focusing like this, SWA has been able to price against car transportation, by not investing in meals, lounges and seating choices. By contrast, SWA’s traditional competitors invest in all the airline industry’s competitive factors, making it very difficult for them to match SWA’s prices.

Divergence

When a firm’s strategy is the result of reaction as it tries to take on competition, it loses it’s uniqueness. On the strategy canvas, conventional airlines share the same strategic profile by having similarities in meals, lounges etc making the value curve of them more or less identical. SWA, by applying the four principles of elimination, reduction, raise and creation, differentiated their profile from the conventional ones by going for point-to-point travel as against hub-and-spoke system of others.

Compelling Tagline

A good strategy must have a clear-cut & compelling tagline. It must not only deliver a clear message but also advertise an offering truthfully-otherwise customers will lose interest and trust. For eg: SWA uses a tagline “The speed of a plane at the price of a car-whenever you need it”

Reconstructing Market BoundariesSix Paths Framework1.Look across alternative industriesBroadly speaking, a company competes not only with other firms in its industry but also with companies in those other industries that produces alternative products or services. Alternatives are broader than substitutes. While substitutes are products or services that have different forms, but offer the same functionality or core utility, alternatives are products or services that have different functions and forms but the same purpose. Eg: Restaurants and cinemas. Because of difference in form and function, they are not substitutes but are alternatives to choose from. In making every purchase decisions, buyers implicitly weigh alternatives, often unconsciously.

2.Look Across Strategic Groups Within Industries

Strategic groups refers to a group of companies within an industry that pursue a similar strategy. In most industries, the fundamental strategic differences among industry players are captured by a small number of strategic groups. For eg. Merc, BMW and Jaguar focus on outcompeting one another in the luxury segment within the auto industry as economy car makers focus on excelling over one another in their strategic group. A pursuit of BOS requires a firm to break out of this narrow tunnel vision by understanding which factors determine customers’ decisions to move from one group to another. Eg. Lexus by Toyota or Sony’s Walkman

3.Look across the chain of buyersThere are different buyer groups. There are buyers who are users too and there are buyers who are different from users and there may also be a group of influencers. Eg: A corp purchase man may be more concerned about the costs than a corporate user, who may be concerned with the ease of use. Challenging an industry’s conventional wisdom about which buyer group to target can lead to the discovery of new blue ocean. For eg: purchase decision on insulin-traditional focus was on doctors and producers produced vials of insulin. The focus shifted to the users (patients) which resulted in user-friendly insulin pens (Novo Nordisk)

4.Look across complementary product and service offerings

Products and services are not used in vacuum.

In most cases, other products and services affect their values. But in most industries, competitors converge within the bounds of their industry’s product and service offerings. Eg: Movie theatre. The availability and cost of complementary services like baby sitting and car park can affect the perceived value. But few theatres are ready to break the traditional definition of the product offering

5.Look across functional or emotional appeal to buyers

Some industries compete on price and function focusing on utility while others compete largely on feelings or their appeal is emotional. BOS strategy will require companies to challenge the functional-emotional orientation of their industry. For eg, Swatch transformed the functionally driven budget watch industry into an emotionally driven fashion statement, whereas The Body Shop transformed the emotionally driven industry of cosmetics into a functional one.

6.Look across time

This means looking at the value a market delivers today to the value it might deliver tomorrow. It is not an easy proposition and is not predicting the future; it’s about developing insights based on trends of today. Eg: Apple observed the rampant illegal music file sharing that happened in the late 1990s. The recording industry was the worst sufferer. Nobody wanted to buy a CD at a price. But the trend was clearly to digital music. So Apple offered a very economically viable solution in agreement with 5 major music companies, Sony, BMG, EMI, Universal Music Group and Warner Bros. Records in the form of iTunes which offered legal, easy-to-use, and flexible song downloads.

Business Model InnovationA business model depicts how a firm delivers value to the customers. Every business exists because of their ability to meet certain needs of the customer. In the process of meeting the needs of the customer, the firm indulges itself in the transformation of certain inputs into certain outputs that satisfy the needs of the customer. Depending on the activities the firm undertakes, the business model can vary. For example, the firm may do everything internally or outsource part of the processes; they may add products or services which results in enhancement of value to the customer. For example, a textile company can think of making everything from yarn to finished textiles after weaving. Or it may outsource the yarn, bleaching and dyeing, reach the customer through wholesale/retail chain(without necessarily owning

them; decide to offer more value to the customers by entering into apparel making, design services, special event-related need satisfaction (of not only textile and related items) etc etc.

The foundation stone of the business model is the business definition; the business definition gives the scope for a firm to meet variety of needs of the customers.

Business models have to be dynamic and not static . As the environment changes, changes have to be incorporated in the business model too. (Ref reading material: Static Business Models); they also have to be innovated to meet the ever-increasing needs of the customers (not always articulated). (Eg:P&G)

Strategy Mapping

A strategy map is a visual presentation of the cause-and-effect relationships among the components of an organization’s strategy.

It is evolved from the BSC; it illustrates the time-based dynamics of a strategy by adding a second layer of detail, thus giving improved clarity and focus. Regardless of the type of strategic approach, the strategy map provides a uniform and consistent way to describe the strategy enabling us to establish and manage objectives and measures.

Competitive Innovation (Ref: Reading material)

Scenario Planning

Value Capture Vs. Value Creation

Strategy Map is based on 5 principles:

1.Strategy balances contradictory forces. The dominant objective of the firm being the sustained growth in shareholder value which implies and necessitates a commitment to the long-term. All the same, the firm must show improved results in the short-term. Better short term results can always be achieved by sacrificing the long-term investments. Also investing in intangible assets for long-term growth (like brand building etc) usually conflicts with cutting costs for short-term financial performance. Thus, the starting point in describing any strategy is to balance and articulate the ST financial objective of cost reduction and productivity improvements with the LT objectives of revenue growth.

2.Strategy is based on a differentiated customer value proposition. Strategy requires a clear articulation of targeted customer segments and the value proposition to satisfy them. Clarity of this is the single most important dimension of strategy. Common value propositions found in practice are :(1).Low total cost(2) Product leadership (3) Complete customer solutions and (4) system lock-in. Each of these value propositions clearly defines the attributes that must be delivered if the customer is to be satisfied.

3.Value is created through internal business processes. What the firm wants to achieve through strategy as creation and sustenance of values are driven by the internal business processes like (a) Operations Mgt. (producing and delivering products/services to customers) (b) Customer Mgt. (establishing& leveraging relationships with customers) (c) Innovation (developing new products / services / processes /relationships) (d) Regulatory & Social (conforming to regulations & societal expectations)

4.Strategy consists of simultaneous, complementary themes. The outcomes derived from the processes mentioned under 3 above may be in confrontation with each other and hence attempts shall be made for arriving at balance.

5.Strategic alignment determines the value of intangible assets like human capital, information capital and organization capital. None of these intangible assets has value considered in isolation. But all of these derive value from their ability to help the organization implement its strategy.

“Jack Welch believed that US manager’s preoccupation with management tools, such as strategic planning, led to a loss of global competitiveness. It is not that planning is bad or that giving timely feedback to employees is destructive. It clearly I not. Neither of these techniques, however, is the answer to all organizational problems. The problem that arises is that people become enamored of techniques they master and skills they acquire so that they look for situations in which they can be applied. What results is the “little boy with hammer phenomenon”- if you give a little boy a hammer he will soon find that everything broken could be fixed by hammering it”

Noel Tichy & Mary Anne Devanna inTransformational Leader