Strategic Mgmt Notes

Mgmt study material created/ compiled by - Commander RK Singh [email protected]

Page 1 of 48 - Strategic Management (Ver-1.0/03.03.07) Jamnalal Bajaj Institute of Mgmt Studies

Date: 18 Jan 2007 Mr Kuldip Kawatra

Recom mended Books

1. Strategic Management: by John Pearce II and Richard B Robinson (to be used as a Text Book)

2. The Strategic Process, Concepts and Contexts: by Henry Mintzberg and James Brian Quinn

3. The Strategy Safari: by Henry Mintzberg

In addition, there are as many as 12 more books which are recommended for reading. Quite a few of them are authored by Mr Michael Porter.

Additionally, Titanic Shift and Rule of Three by Mr Jagdish Sheth are also recommended for reading. Rule of Three is a book which propounds that a company should strive to be among the top of three in its business, else, it should quit.

Lis t of Top ics 1. Strategy An introduction 2. Components and Hierarchy of Strategy 3. 5 Ps of Strategy 4. Business Strategy, BCG Matrix 5. Factors influencing competitive success 6. Industry analysis. Michael Porters 5 Forces and three generic strategies. Value

chain analysis. 7. Strategic Management 8. Why Strategies fail? 9. Change Management 10. Entrepreneurship and Strategy 11. Strategy and Competitive advantage of Diversified companies 12. Competitive strategies of Declining Industries 13. Vertical Integration and Diversification 14. Global Strategy 15. Entry Strategies. Strategic Alliances 16. Mergers and Acquisitions



Lis t of Cases : 1. The fundamental of Strategy Formulation 2. The case of counter strategy 3. Cultural Concerns 4. The case of strategic acquisitions 5. Change: To be or Not to be 6. The case of vendor development 7. Gramophone Company of India: The Digital Challenge 8. Wal-Mart competing in the Global Market 9. The General Electric 10. Richard Branson & the Virgin Group of companies

This is a university paper and therefore requires comprehensive study. Subject requires special focus since boundaries of this subject are not well defined.

Why is th i s sub jec t impor tant for every bus i ness m anager? The first fundamental of business is to survive. It is euphemistic way of saying that business needs to make profit. Any business not making profits is sure to sink. And in order to survive, business needs to grow constantly. Gone are the days of static business where a business could survive without substantial growth. Your neighbourhood Kiranawala is no more secure in his small shop. He is being threatened by Reliance, Subhiksha, Bharti-Walmart and the Mega Malls mushrooming like Pan shops every where. Your decades old family tailors business is being usurped by the mega branded apparels. Thus, to be able to survive in this globalising market, the business needs to be able to grow.

In the business environment that is prevailing and forecasted to unfold over the next two decades, every business, however big or small, is threatened by the competition. Even Reliance is scared about Wal-Marts entry and is advancing rollout of its retail ventures. While there is always the first mover's advantage, in the end it will be business strategies which will differentiate between successful and failed business.

Business Growt h Mo dels

1. Organic Growth Growth of existing business by building additional capacities from raw factors of production as against growth by procurement of readymade capacities through mergers, acquisitions and takeovers.

2. Inorganic Growth

(a) Growth by acquisitions



(b) Growth by mergers (c) Diversification (d) Innovations

Growth Involves:

1. Managing the Present (Market/Competition) Irrespective of the future plans, every company needs to grow its present market share. According to Rule of Three by Dr Jagdish Sheth, a company needs to be in the top three or retire.

3. Managing Future (Tomorrows Competition) Many greatly successful companies have sunk and been obliterated because they failed to manage the Future. They did not invest timely into technology, cost management, productivity, etc, and were wiped out by the new competitors who came with better and/or cheaper products. (The once thriving lock industry of Aligarh was wiped out by the cheap and better quality Chinese imports because they failed to invest in quality and cost of their locks).

2. Selectively Forget the Present Between managing the Present and the Future, is the requirement to Selectively Forget the Present. Few successful companies have the stomach to come out of the cosy comforts of present success and invest into the uncertainties of future. (AT&T was the largest land line phone company in the world with its business spanning whole of American and even Latin American continents. It was first to conceptualise the idea of mobile phone as early as 1980s but never implemented it. There were many reasons as to why the company did not launch the mobile phone business. Primary one was that the company could not disassociate itself from the present ie the success of its land line business. Second was the Ernst and Young report which forecasted demand of only 90,000 lines per year. Such gross error in estimates happened because of wrong methodology of market survey).

In order to selectively forget the Present, it is essential that an ownership of new project is established. Therefore, setup a separate project team delinked from present business and reporting only to the CEO. Similarly, delink HR department from hiring the people for project team. Their old mind set will not allow hiring right kind of people for project. Delink the evaluation/appraisal process as well since there will no profits, negative ROI and so on for a few years. Even provide a separate financial umbilical chord since Finance Department is often stingy about releasing finance timely and adequately for new unproven products.

While managing future, one needs to manage three c r i t i c a l unk no w ns

1. Consumer Needs It is biggest business challenge to forecast what customer will need in future. And biggest threat is that a competitor may launch a better (next generation) product before or shortly after your launch. AT&T lost its numero-uno position because it failed to gauge customers need for mobile phones.

2. Potential What is the market potential for a particular product? AT&T did not launch the mobile phone because Ernst & Young failed to correctly assess the market potential.



3. Technology at Low Cost Newer Designs/features, newer materials, newer processes and lesser cost are the challenges which are being thrown regularly at every producer. Once a particular production process has been installed, it is often not possible to switch over to another process without incurring huge expenses. While the new entrants come with advantage of newer technology, oldies are saddled with outdated designs and high production cost/lower quality technologies. Unless the plant has been deeply depreciated, it is difficult for old player to match the cost and therefore pricing structure of new entrants.

What i s t he ke y purpose of Strategy Form ula tion? Strategy is aimed at creating sustainable competitive advantage.

Defin it ion of S trategy Strategy is a fundamental pattern of present and planned objectives, resource deployment and interactions of an organisation with markets, competitors and environmental factors.

Components of S tra tegy 1. Scope Scope refers to the expanse of business or more accurately, activities of a

business house. Like ITC starts from its primary business of cigarettes and goes into paper, greeting cards, rural retail, hotels and so on. Similarly, Hindustan Lever has its presence in 100s of the personal care products. Further, scope of each business needs to be decided; like, in hotel business, whether the company wants to be in the budget hotel segment or executive segment or in the luxury segment.

2. Mission, Goals and Objective Mission Goals and Objectives need to be clearly identified. What kind of profitability or ROI is expected? Even Profit is not always the motive. Some times public welfare may be the objective.

3. Deployment of Resources Based on the Mission, Goals and Objectives, resource deployment is decided.

4. Developing Sustainable Competitive Advantage The plan is formulated which will give the company a sustainable competitive advantage which is the core purpose of strategy formulation.

5. Synergise Take advantage of various synergies available. Synergy is all about creating a sum which is more than arithmetic total of its parts.

Stra tegy Form ula tion i s done a t three levels

1. Corporate Level Corporate Strategy 2. Strategic Business Unit (SBU) Level Business Strategy 3. Functional Level -



At each level of business, a strategy needs to be formulated, from macro level to micro level.

5 Ps of S tra tegy 1. Plan - Plans evolve from the patterns of the past and are about intended patterns

for the future.

2. Pattern Patterns are typical progressions of business environment like market growth, customer behaviour and response, etc.

3. Positioning - Positioning is about locating products in particular markets to achieve competitive advantage.

4. Perspective - Perspective is about an organisation's culture - its way of doing things. Tata, Infosys and Wipro would prefer to forego some profit in favour of following business ethics and corporate governance. Some other business house will probably have no qualms in burying all ethics below their profit motive. Strategy will be drawn accordingly.

5. Ploy - Ploy is a specific manoeuvre intended to outwit a competitor.



B T : CASE STUDIES

The Fundamentals of Strategy Formulation

SYNOPSIS

"Do we need a strategy? As an automotive ancillary, we have operated for nearly 15 years without one. Business has been good, our linkages with our customers have been strong, technology and funds have never been a problem since dedicated suppliers like us are not easy to develop. We continue to link our schedules, our costs, and our quality standards with those of our buyers. But, yes, I can sense that there is a change taking place in the industry. Post-liberalisation, a realignment has begun, with the emergence of Tier-I, Tier-II, and Tier-III suppliers. Without your own technology, it is difficult to reach the top of these tiers. Moreover, it is difficult to compete with global suppliers without investing in scale. Everybody in my company is aware that the external environment is changing, but no one is able to fathom its magnitude. Naturally, we are not sure whether a supplier needs a strategy. If we do, how should we develop one? And should we articulate it? Or should it be kept a closely-guarded secret? Can we diversify without a strategy?" Vinod Abhayankar, the young CEO of the Pune-based Auto Components, was tossing the issue of strategic planning in his mind even as he addressed a meeting of the Young Presidents' Organisation. A BT Case Study.

OCCASION: Young Presidents' Organisation (YPO) Meeting DATE: August 7, 1996 TIME: 4 p.m. VENUE: The Carlton Chambers, Mumbai PRESENT: Vinod Abhayankar, CEO, Auto Components; Lalit Desai, Chairman, YPO; Members of the YPO AGENDA: The Need For Strategic Planning

Lalit Desai: Good evening, ladies and gentlemen. Let me begin by welcoming our guest speaker for today, Vinod Abhayankar, the CEO of Auto Components, which manufactures the Zebra brand of shock-absorbers. Founded by his father, Dhanvantri Abhayankar, in 1984, Auto Components now enjoys the status of being a preferred supplier to many of the Original Equipment Manufacturers (OEMs) in the Indian automobile sector. Vinod will speak about the problems he faced while implementing a strategy-planning process in the company. Vinod...

Vinod Abhayankar: Thanks, Lalit. I always look forward to these meetings of the YPO which, apart from being the country's only association of young CEOs, provides me with an opportunity to discuss the problems of managing a business I wish to correct Lalit at the very outset. We haven't implemented strategic planning at Auto Components; we are in the process of doing so. We are still grappling with two questions. First, do we need strategic planning at all? That's surprising since strategy is supposed to be high on every CEO's list of priorities. Second, how should the company formulate a strategy? Should it be based on Auto Components' present position in the industry? Or should we factor in the



emergence of new forces in the future--such as technology, scale, and costs--and draw up a strategy in the light of their impact on our operations? I thought I could use this platform as a sounding-board, and fine-tune my own approach to strategic planning. Please feel free to interrupt me

It has been nearly a year since I took over as the CEO of Auto Components. I returned from the US in 1995 where, after completing my MBA, I worked in the Production Planning Division of a transnational. I was looking forward to a promising career, but chucked it in deference to the wishes of my father, who wanted me to return home to take over the family business. A technocrat, he has spent his life in the automotive sector and decided, in his mid-40s, to set up a company of his own. Auto Components started off as a captive ancillary unit for Sadgati Motors, then a fledgling four-wheeler manufacturer. Our initial capacity of 1 million shock-absorbers per annum has grown into 3.20 million units. Incidentally, the total output in the country is 21 million units per annum. However, the growth in the top-line has been erratic. There were years when Auto Components grew by 80 per cent; in others, the company registered a negative rate of growth Yes?

That is bound to happen when you are a component-manufacturer. A feeder unit's fortunes, invariably, move in tandem with those of its OEMs. Is there anything peculiar about the shock-absorber market?

Yes, there is. The thing is that there is no replacement market. Not only do most auto-ancillary units fare better than the automotive sector, they are also insulated from recessions because of the after market. Unlike most auto components, whose life is between 2 and 3 years, a shock-absorber can last for anything between 6 and 8 years. You can also re-condition a shock-absorber--a process that extends the life of the product by at least 2 years. At less than a quarter of the price of a new one, re-conditioning is cheaper than replacement. Of course, although the owners of premium vehicles will not opt for re-conditioning, we do not get volumes there. So, we are fully dependent on the OEM market.

As a manufacturer of shock-absorbers, are there any other market segments you can target?

No. Basically, the shock-absorber functions as a dampener of shocks resulting from the vertical vibrations of a vehicle. Its function is to absorb the jerks transferred from the wheels to the frames, thus ensuring a comfortable ride. Typically, each shock-absorber consists of 2 oil-chambers. Whenever a vehicle passes over an uneven surface, the movement of a piston-rod results in the displacement of oil, leading to the generation of a dampening force. Almost the entire output of shock-absorbers produced in the country is used by the automotive industry. Shock-absorbers are both technology- and capital-intensive--a big barrier for new entrants. Since the specifications are unique to each customer, their design is critical. A shock-absorber with only a few moving parts is considered to be better. Importantly, the quality of the raw material--bright bars--is crucial to the production of a quality shock-absorber. Again, there is little possibility of the



unorganised and small-scale sectors making a beeline for this business because of these factors.

Incidentally, since 1991, we have had a collaboration with Sephantu, a Japanese component-manufacturer. We chose Sephantu because it supplies shock-absorbers to quite a few Japanese auto majors, some of which have set up operations here. In fact, this collaboration has helped us get new customers since Auto Components enjoys a preferred-supplier partnership with some of them. It has also placed us on a strong wicket as far as our future plans are concerned. It will now be easier for us to become a sourcing-base for both European and Japanese auto majors for their global operations--a possibility that we will examine shortly. I believe that only by becoming a part of the global value-chain can we become competitive.

Let me raise one question that we have frequently asked ourselves in the past 12 months: should we cater to other markets as well? I can cite the example of Sephantu, which has a capacity of about 1 billion shock-absorbers per annum. It also makes telescopic front-forks for two-wheelers, and has a bearings division manufacturing a complete range of bi-metal bearings, flanges, and washers. These bearings cater to the requirements of the railways, the marine, and the power industries. Sephantu looks at them as related diversifications, and sees nothing wrong in focusing on those segments too

THE SWOT STRENGTHS WEAKNESSES

Captive Buyer Base Entrepreneur-Driven Culture Established Customer Links Single-Product Orientation Access to Technology Little Scope for Diversification Healthy Financials Absence of Core Competencies

THREATS OPPORTUNITIES Transnational Competition Expansion of User Industry Integration by OEMs Emergence of New Buyers Dependence on Few Buyers Global Sourcing Base Sense of Complacency Newer Technologies

You are now dependent on a solitary end-user industry, but have a captive clientele. All you need to do is to maintain the relationships with your buyers, work closely with them, and be an integral part of their value-chain. I can see your reservations about the need to evolve a strategy at Auto Components...

As Lalit mentioned, Auto Components enjoys a preferred supplier status with 5 leading OEMs in the country. We get technical and financial assistance from our partners. They encourage outsourcing, and some of their clients have become global sourcing-centres. We have access to their Total Quality manuals and Management Information Systems, like the Spider Web Charts. It is a symbiotic relationship, and both partners tend to win. When the market is assured, production is predictable, the customer-list is captive, and we have a single-product orientation, why do we need to plan 5 years in advance? After all, we will continue to enjoy the benefits of bonding. Auto Components can easily operate



through Management By Objectives and annual budgets--as it has been doing in the past. Our planning schedules are linked to the plans of our customers. We don't need a separate strategic planning process at Auto Components Yes?

It is worthwhile recalling the introduction of the concept of strategic planning in the West. The interest in strategy was caused by the realisation that the external environment was becoming progressively discontinuous with the past. Objectives and annual targets alone were no longer adequate as tools of managerial initiative. Strategy was important because a company needed direction in its search for, and the creation of new opportunities. You had to identify your core strengths as part of developing the business strategy...

Core has little relevance in a business like ours. That is, if you mean a unique attribute which straddles several segments, markets, and products. A two-wheeler company would view itself in the transportation business, and a petroleum company would categorise itself as an energy business. But there is no common core capability as far as our single-product business is concerned. There is no common thread I see that can link our present and future product-markets

I think you are mistaken. Objectives represent the ends that the company seeks to attain. Strategy is the means to achieve those ends. It provides the roadmap...

I thought as much. That is why I took the next step: enlisting the help of an outsider. We short listed 2 consultancy firms, Strategic Consultants, a transnational company, and Transformation Consulting, a local firm, and asked them to submit proposals for formulating a strategy, and to help us implement it at Auto Components. Teams from both the firms have spent several hours with us, and submitted their reports. The contrast in their approach to strategic planning is striking

How does your father view the need for strategy? After all, he was the one who built the company...

He is sceptical. He feels that strategy is fine for large corporations with diversified interests, but doesn't make much sense for Auto Components. He often says that nothing works better in business than gut-feel--his ultimate touchstone. The rest is all frills, serving no more than an ornamental purpose. I am less sceptical, and more open to the idea. I feel that it is imperative for us to know where we will be 5 years from now; it will help us work towards an objective. Once we have identified a goal, we can start building structures, systems, and an organisational framework that will help us achieve that goal. It is crucial to have the big picture. That is where the importance of strategy lies

Aren't both these consultancy companies well-known for their work on strategy?

Yes. Strategic Consultants is headquartered in New York, with 32 offices across the world and over 500 consultants on its pay-roll. It enjoys a formidable reputation in strategy-formulation. What interested me was the fact that it has done substantial work on the



automotive industry and has a senior partner, based in Frankfurt, who focuses exclusively on the auto industry. The distinguishing feature of Strategic Consultants' approach is an underlying belief that strategy must be based on present data--not future trends. It will identify for us those segments, channels, price-points, product-differentiators, selling-propositions, and value-chain configurations that will yield us profits. But the identification is focused strictly within the present framework of the auto components industry. Incidentally, the firm has made it clear that it will not be involved in the implementation process

I am not very comfortable dealing with a consultant who stays away from implementation. What about the second firm?

The sheet-anchor of Transformation Consulting is just the opposite. It believes that the purpose of strategy is not only to enable Auto Components to compete today, but also to ensure that it remains competitive in a fluid market situation. The firm aims at reconfiguring the auto components sector to the advantage of Auto Components--not just maximising the company's profits.

Both the proposals I have received are well-structured and cover a wide canvas although I must mention that the fees quoted by them are quite high for a 3-month project. While Transformation Consulting has quoted Rs 12 lakh, Strategic Consultants has asked for a fee of Rs 17 lakh. The former says it will depute a senior partner and 3 associates, one of whom will work full-time on our project. Strategic Consultants will depute a principal and 2 associates on a part-time basis. But its offer is quite attractive since its partner will be flown in from Frankfurt for all the major discussions

The fee is, indeed, high. But it isn't a major issue as long as the consultant delivers. My concern is more about the organisational approach of the 2 consultancies...

Strategic Consultants' approach is top-driven. It does not believe in involving employees at different levels in formulating a strategy. It forms a team consisting of 2 senior managers of the company and 2 of its consultants. The team lays down the strategy that, it thinks, is good for the company. That is quite in contrast with Transformation Consulting's approach, which is both top-down and bottom-up. It seeks the active involvement of employees, who are asked to define the kind of organisation they want their company to be given, of course, the changes that are expected in the future

Strategic Consultants is too focused on the present while Transformation Consulting builds a vision for the future as part of its strategy. The latter's approach is a radical departure from the conventional route to strategy-formulation. It is the novelty of the approach that fascinates me...

Permit me to read out the relevant portions from Transformation Consulting's report: "Our methodology comprises 4 phases: Envisioning, External Analysis, Internal Analysis, and Action Plan. These phases will be implemented during the course of 4 separate retreats



spread over 3 months at the company's holiday-home at Lonavla (near Mumbai), where all the senior managers of Auto Components will gather...

At the beginning of the one-day session on Envisioning, the lights will be put out in the conference-room for a minute to signify a disconnect with the past. Once the lights re-appear, the designated co-ordinator from Transformation Consulting will announce that it is 2003. Each manager will then be asked to imagine himself as part of Auto Components in the 21st Century, and talk of what the company will be as he, or she, sees it. Although the exercise will be structured, it will be informal and free-flowing to break the ice and loosen up people. Not used to looking beyond day-to-day operations, many managers are likely to fumble. But, at the end of the day, everyone will be comfortable with looking ahead into the future...

External Analysis, spread over the next 3 days, will be more focused. Managers will be asked for their perceptions about the customer, the competitor, and the macro-environment in 2003. They will be required to answer the following questions: who are Auto Components' customers? Are they local or global? What are the specific needs that they expect these products to fulfil? Why do they prefer Auto Components to other manufacturers? The competitor-analysis would seek to probe questions like: who are Auto Components' competitors? What are their cost advantages? What are their strengths and weaknesses vis-a-vis Auto Components? Why do customers buy these products? What is their brand equity? The analysis will examine the impact of technology, government policies, and cultural and demographic trends on the auto components industry. Mainly, the objective of Phase II will be to arrive at a summary of opportunities and threats for Auto Components in 2003...

Phase III, comprising Internal Analysis, will begin a month later, and will be spread over 4 days. Aimed at enabling managers to look inwards, the Internal Analysis will be split into Performance Analysis, and Strategic Options. The performance of the group will be measured both on financial parameters, like profitability, sales, and returns on assets, and on non-financial parameters, like supplier relationships, product quality, and customer satisfaction. The participants will, then, determine the strategic options available to Auto Components. This would involve reviewing past strategies to identify strategic problems, organisational capabilities, and constraints. Based on these findings, a summary of the strengths and weaknesses of the group will be arrived at.

The final part of Phase III will involve defining the core competencies of Auto Components, and updating a statement of vision. The last session will be used to determine the strategic plan to move Auto Components from 1998 to 2003. It will address questions like the core competencies the company should build, the product-market segments that it should focus on, and the buyer-and-supplier linkages it should leverage within the industry..."

There is a difference between the two approaches. Strategic Consultants' gameplan depends solely on the CEO's vision while Transformation Consulting's approach seeks the involvement of senior managers in obtaining a vision...



Transformation Consulting's approach to strategy is different from the conventional time-tested approach in many ways. I, for one, am wary of any approach that is untested. Traditionally, corporate strategic planning has been based on the present position of the company in the industry. There are a number of grey areas in this approach. Take the capsule on Envisioning, for instance. Very few middle-level managers, caught up as they are with routine operational issues, have the ability to look beyond the limited time-horizon of a year. That's my major apprehension

More fundamentally, I am not sure if strategy-formulation can be a bottom-up exercise. A vision, for example, is always driven from the top. It is only when a vision needs to be articulated that the involvement of middle management becomes imperative. But, as far as envisioning is concerned, it has to be confined to senior management. This raises a second crucial issue: is there a need to document strategy? Personally, I feel that the strategy of a company should not be documented. Only then will it ensure confidentiality. As Strategic Consultants' approach points out, strategy should be confined to a handful at the top. It can never be an across-the-board initiative...

That is the way I feel too. But I am open to both opinions although, I must confess, I am unable to decide on which one to follow. I am aware that some companies link strategy to vision, but this linkage has not been well-documented. Strategy should be based on the realities of today; not the dreams of tomorrow. We have to make sure that we do not become the guinea-pigs for a strategy-formulation exercise.

THE FINANCIALS

0.78 0.810.92

1.04

1.56

0.13 0.14 0.16 0.170.22

0.05 0.06 0.07 0.090.11

00.20.40.60.8

11.21.41.61.8

1991-92 1992-93 1993-94 1994-95 1995-96

Sales Gross Profits Net Profits

Figures in Rs crore



Is there a need for a strategy at Auto Components? Does a small company operating in a predictable environment need to formulate one? Can approaches to strategy be so conceptually different? Should Abhayankar go by gut-feel and, by using in-house talent, do what he believes is right for the company? Instead of spending time on documenting a strategy, shouldn't Auto Components just have an informal plan of action, governed by the intuition of its senior managers? Since the company has a team which knows its business better than any consultant, why should Auto Components bank on external ideas? Should strategy ever be documented?

READINGS Strategic Planning: What Every Manager Must Know; George Albert Steiner Strategy And Strategic Management; J.I. Moore Applied Strategic Planning: A Comprehensive Guide; Leonard Goodstein Business Policy And Strategic Management; Mark L. Sirower Chart Your Own Course: Strategic Planning Tools For Business Leaders; James C.

Collins & Jerry I. Porras Creating Strategic Change: Designing The Flexible High Performance

Organisation; William A. Passmore Fourth Generation Management The New Business Consciousness; Brian L.

Joiner The New Rules of The Game; James R. Eemshof & Teri E. Denlinger The New Strategists; Stephen J. Wall & Shanon Rye Wall Corporate Strategy; Igor Ansoff

Solution:

Let us first analyse various beliefs and assumptions of Mr Abhayankar before we start with the doubts, dilemma and indecision that he is facing:

Should it be based on Auto Components' present position in the industry?

Any growth strategy should be based on opportunities and threats that the market will present in future but duly moderated by strengths and weakness of the company at present. Thus, any strategy that is based totally on todays internal and external environment without any heed to emerging trends of the future is sure to fail in the medium to long run. Real growth does not emerge from normal progression of the present but from the disconnects from the present. (Japan and America were both booming manufacturing power houses of 1970s and 1980s. They were the sunrise economies those days. American economy, though larger, was far behind Japan in competitiveness. Yet it continued to surge ahead through 1990s and 2000s while for Japan, these were the L o s t D e ca d e s . Despite all the super refined productivity tools in place, hardworking and honest workforce with highest productivity and commitment anywhere in the world, Japanese economy is going through a recession. Why?

America spotted the opportunities lying with knowledge economy and created a disconnect by shifting its thrust from manufacturing to knowledge industry. Japan on the other hand was so deeply obsessed with its success in manufacturing sector that it refused to look into the future and kept trying to refine its production processes and quality further and further. Remember the basic fundamental of life. Most of the graphs are



parabolic. Increase in any input will fetch you gains on the principal of diminishing marginal utility till it reaches zero after which there is negative return on increasing investment).

Parabolic relationship between investment and ROI

Companys Growth Although the company grew by 220% over a period of one and half decades, not much comfort could be drawn from it. Its market share in domestic market was barely 15%. Thus, there was enormous potential for top line growth without even considering explosive growth in four wheeler market that was just beginning to unfold at that time.

Scope of Business and Diversification Very few single product companies have been able to register spectacular growth. Diversified companies, be it Tata, ITC, Wipro or Reliance, have scripted much faster growth rate. Auto Components is apparently refusing to see beyond its nose. It has not even considered diversification. There are plenty of diversification opportunities available. To begin with company can make a bid for replacement market by establishing own facilities or appointing franchisees for shock absorber reconditioning the way many tyre units have done for retreading of worn out tyres or Maruti True Value scheme. Or, the company can opt for horizontal growth by encashing on existing goodwill as quality conscious company with current customers and diversify into other auto component businesses. In addition, company can also go for concentric diversification by diversification into technologically related products like tubular auto components, marine engine components, and non-auto engineering products.

Threats Company is considering its future position secure under the assumption that the technological complexity of the product as well as capital requirement will keep away the new entrants. Its assumption may be true for local small scale sector but there are plenty of big players with enough technological and financial muscle are available who can enter the fray and spoil the party. Another factor that company has completed overlooked is the possibility to competition emerging from overseas in a market which was fast globalising. Thus, benefits of bonding can not be taken for granted.

Core Competency Company has once again failed to identify its strength by saying that there is no common thread that links its present and future product markets. 15 years

Input

Gai

ns



experience is a substantial competency in the auto ancillary field. As stated earlier, it can lead to diversification into various other auto components or non auto engineering products.

Distrust on Middle Level Managers Ability to Contribute in Evolving a Viable Strategy Almost every one has streak for future planning. Only, people either do not get time to devote to such ideas or there is not enough incentive and encouragement to forward those brainwaves and thus get suppressed. Given the right ambience and impetus, they can resurrect. Transformation Consulting's approach of taking the executives away from present humdrum to holiday home in Goa for brain storming sessions is based exactly on this precept.

Envisioning and Strategy Formulation by Senior Management Only It is true that envisioning and Strategy Formulation should be done by Senior Management or ideally by Chairman/CEO himself, but there is no harm in taking inputs from all and sundry. Once inputs are received, final strategy should be chalked by senior management.

Mr Abhayankar is suffering from decisional paralysis. He is completely confused as to what course of action he should take.

Gut feel is not the call of sixth sense as many people would believe. Gut feel emanates from long experience and well meditated analysis of all the known and unknown factors. Only, the thought process is no so well structured. And yet, going by the gut feel is not the right course of action in such a situation. Two things go against gut feel action in this case. First is the absence of experience in Mr Abhayankar and secondly, the pace of changes that were taking place in the business environment at that instant, made gut feel reaction a risky affair.

Whether a small company operating in a predictable environment needs a strategy?

The false notion of predictable environment has already been busted above. Auto Components competition is no more going to be limited to local companies only. In view of the liberalisation that was underway, global competition in the business was a certainty. Thus, company needed a strong strategy lest it got swept away by the multinational behemoths.

Can approaches to strategy be so conceptually different?

Mr Abhayankars bewilderment at conceptual divergence between two approaches to strategy formulation is truly bewildering. Strategies and approaches to strategies follow no predictable pattern and can be as diverse as ones imagination goes. There are in any case always more than one ways of achieving a target.

Instead of spending time on documenting a strategy, shouldn't Auto Components just have an informal plan of action, governed by the intuition of its senior managers?



Although it would be ideal to document the action plan, it can be done away with in favour of an informal plan of action if it is not too complex. But plan of action, whether documented or informal, has to emerge from the long term strategy. Therefore, strategy formulation is inevitable.

Since the company has a team which knows its business better than any consultant, why should Auto Components bank on external ideas?

It is true that the company has experts in the field of its business. But their experience and knowledge is probably limited to existing ways of doing business. Their capabilities in the field of strategy development and business models appropriate for the then unfolding liberalised, globally competitive environment were untested. Secondly, old occupants develop a Tunnel Vision Syndrome. They can not see beyond what is existing and apparent. New people bring new ideas and therefore involvement of external people in any brainstorming session always pays. Also, strategy development is an art/craft and experience of particular business is a poor substitute for this art.

And remember, a guide who is willing to walk the distance with you is always better than one who tells you the path on the map. So, involve an external consultant, who is willing to work through the implementation of the strategy rather than one who will wash off his hands after handing you a 1000 page report written in Queens English and collecting his green backs.

Should strategy ever be documented?

Documentation of strategy should be avoided as far as possible. Ideally it should lie in the minds of top management for the sake of confidentiality. However, strategy is always a combination of two or more deeply correlated but seemingly independent course of actions. Each course has its own action plan which should be well documented so that middle and lower levels of management can implement it effectively. But when external consultants are hired, strategy also comes as a document.

Let us now examine the above case study from the perspective of Components of Strategy:

Scope Mr Abhayankar has limited the scope of his business to just the current business. If he opts for in-house strategy building, the scope may remain limited to just that. Engagement of external consultants may widen the scope to include Horizontal, lateral or concentric diversification.

Mission, Goals and Objectives These are often formulated by Scenario-Building. Scenario Building is the foundation stone of strategic planning. Future is uncertain and could take more than one possible course; some logical and other unbelievably dramatic. Scenario-Building process encourages people for out of the box thinking; to think about those dramatic turns in the future growth path. Many assumptions (critical unknowns)



about the future of the company future customer needs, changing industry structures, and the company's response to both--get answered in the process.

However, there is one pitfall that needs to be guarded against. Most people to tend to extrapolate the future as a logical extension of the present. Strategic planning's advantage lies in finding the discontinuity in the business environment in near future. Discover if there is one building up; and create one if there is none developing on its own. One who is prepared to take advantage of this discontinuity will secure the biggest competitive advantage. Such an approach would provide an auto-components manufacturer with critical insights into emerging supplier-buyer configurations. But to be able to achieve this, a thorough environment scan is essential.

Resource Planning/Deployment Execution of any action plan requires deployment of resources. Availability of adequate resources, from money to men (5 Ms), is critical to success of plans. Many strategic plans fall flat since they omitted to pinpoint their resource requirements and therefore planning. It is vital that the organisational structure, finances, technologies, and alliances required to achieve the aspirations spelt out in the strategic plan be clearly spelled out.

Resources assume even more importance when there is a discontinuity. A discontinuity often calls for resources that are scarce and mustering them is the first challenge during plan implementation phase. (BPO/Call Centre boom demanded English speaking educated youth which China and many other low wage countries do not have in adequate numbers. Off late, even India has begun to feel the shortage. But we still have plenty of non English speaking educated youth. Considering this resource base, some entrepreneurs have created KPO (Knowledge Process Outsourcing India based scientific and social research). This is a discontinuity that Indian entrepreneurs have created).

Developing Sustainable Competitive Advantage The eventual aim of entire strategic planning is to have a competitive advantage. An in-depth understanding of your competitors--their visible performance and their less-visible management practices--is important. Competitive analysis enables a company to look for ways in which it can best position itself not only to exploit its inherent strengths, but also to attack the weaknesses of its competitors. Minimise your own vulnerabilities and attack the weaknesses of competitors.

Another important part of developing Competitive Advantage is Gap Analysis. Gaps are difference between future requirements vis a vis organisations capabilities. Out of the possible series of gaps that will emerge from scenario building and SWOT analysis, it is advisable to concentrate only on the few that can provide maximum leverage (Rule of 80:20). This is important from the point of view of focus.

Next important part of development of Sustainable Competitive Advantage is effective implementation. Unfortunately, implementation of a new idea is inherent strength of only few organizations/people. So, any key strategic initiative, especially discontinuity, should be treated as a new project, and assigned to independent project leaders at various levels of implementation. Apply the strategy of selectively forget the present. Disconnect HR Department from selecting people for project team, disconnect finance department from



funding this project, disconnect HR Department from appraisal process of project people and so on. Dont allow non-believers anywhere near the project. Guard tightly against development of vested interests in the organisation.



CAPABILITY Vs COMPETENCY Vs CORE COMPETE NCY

Capability is what you can do (as well as others). Competency is what you can do better than most; and Core competency is what you are most proficient at.

Let us see the core competencies of some of the companies

Amul Advertising (Copy based on recent high decibel news/event) Reliance Project Mgmt (Fast and economical execution) Sony New technology product development

Distinctive/Strategic Competency A competency which gives you edge over your competitors. Marutis distinctive competency is in manufacturing entry level cars. Despite close of 100 models of various cars launched, Maruti 800 still retains over 50% of the total car market. Maruti has not been so successful in other segments. Its Zen and Wagon R models were successfully challenged by first by Daewoo and then Hundae with Santro model.

Core Assets Your best assets are your core assets. Take the case of Wipro Ltd. It is a multibusiness highly diversified company. It has software, lighting, Oils, etc. But their software division is their core asset.

Distinctive Assets Distinctive assets are those assets which differentiate you from your competitors and give you competitive advantage. Assets need not be physical/tangible. They could be intangible as well. Brand Value is one such asset and Tata group has unmatched strength in that. HLLs and ITC distinctive assets are their distribution network. Toyotas distinctive asset is its production system where productivity is highest in the world among all car makers.



PORTER S BUSINESS MANAGE MENT STRATEGY

(Porter was originally an engineer, then an economist before he specialised in strategy)

Michael Porters business management strategy is a three step process: - (a) Assessment of problem, (b) Planning to fight the problem and then (c) Application

These three broad steps of Porters business management strategy are christened as: -

(I) Michael Porters Five Forces Model (to identify the profit limiting forces)

(II) Michael Porters Generic Strategy (Plan to fight these forces and meet the challenges)

(III) Michael Porters Value Chain Analysis (to build competitive advantage which is the core of any strategy).

( I ) Por ters Five Forces Mode l This model was developed by Michael Porter in 1979. It uses concepts developed in economics to derive 5 forces that determine the attractiveness of an industry/market. It is also known as FFF (Fullerton's Five Forces). These are the forces that have maximum impact on companys ability to make a profit. A change in any of the forces will require a company to re-assess its business.

A graphical representation of Porters Five Forces

Suppliers Bargaining Power

Industry Competitors

(Rivalry among existing firms)

Buyers Bargaining Power

New Entrants

Substitutes



These five forces are: -

1. Bargaining power of customers,

2. Bargaining power of suppliers,

3. Threat of new entrants,

4. Threat of substitute products, and

5. Level of competition in an industry. (Rivalry among existing players)

Now let us see when, why and how the 5 forces affect the profitabitability of a company: -

1. Bargaining Power of Customers (a) Buyer Concentration to Firm Concentration Ratio In simple terms, this

is demand supply gap. When there is oversupply of product, and many competitors for a small group of buyers, buyer has option to switch to other supplier and there is tendency among suppliers to woo the customer through price discounts, gifts etc to garner larger share of the market.

(b) Bargaining Leverage Many customers have leverage over suppliers due to various reasons. There could be host of reasons, like political clout, muscle power, status, locational advantage, etc. Sugarmills have this advantage while buying sugarcane from farmers. Farmers are unable to transport sugarcane to other factories because only one mill is permitted in specified area. Mills often pay the farmers after months and even less than govt rate. Those who insist immediate payments are denied sale. Similarly malls insist on higher discount on MRP (approx 40% of MRP).

(c) Volume Buyer Customers who are large buyers are often able to bargain better prices. Like almost 50% of P&Gs world wide sales comes from Walmart stores. Therefore Walmart has huge bargaining power with P&G. (For that matter, with any supplier)

(d) Buyers Switching Costs relative to Firm Switching Costs Some times there is substantial cost involved in switching from one supplier to another supplier. Take the cost of telephones. The cost and efforts involved in informing all your contacts of change in your number is huge and is the biggest deterrent in switching your cell number. Thus, once a mobile phone company is able to retain a customer for about 6 months, he is a captive customer thereafter. But once number portability is allowed across telecom service providers, the churnrate among mobile phone companies will increase substantially.

(e) Buyer Information Availability Information is Power. Once the buyer is aware about inside information of the company, like production cost,



customer base, capacity utilisation, material usage, etc, he will bargain from a position of strength. If he knows that you have additional unutilised capacity, he will ask for additonal supplies at marginal cost + small profit. Similarly, if he comes to know that your production cost is very low, or you have inventory build up, or your sales are down, he will bargain hard for higher discounts.

(f) Ability to Integrate Backwards If the customer has capacity and capability to integrate backward into your business, he will bargain harder with the threat that you will not only lose your business from him but precipitate another competitor as well.

(g) Availability of Competitive/Substitute Products Any one who has easy and at par cost or cheaper access to competitive/substitute product is a tough customer. Take instance of soft drinks. For coke and Pepsi, besides each other, a host of substitutes are available starting with water (yes! mineral water and even plain cold matka water) to beer, lassi, Nimbu Pani, Jaljeera, etc. That is why their advertising spend is among the highest in all sectors.

(h) Undifferentiated Product If a product is undifferentiated, a customer will have no difficulty in switching over to another supplier.

(i) When His Profit Margins Are Low - Bargains hard to keep his margin intact.

(j) When product is unimportant to him. 2. Bargaining Power of Suppliers

(a) Supplier Switching Costs Relative to Firm Switching Costs Reverse of above.

(b) Degree of Differentiation of Inputs If a supplier has a well differentiated product, he can command a premium on price. Customer has little choice but to be a victim of such a suppliers fancy.

(c) Absence of substitute inputs If a product does not have substitutes and there are not multiple suppliers with over capacity of that product in sourcing area, such suppliers will command premium on their product

(d) Supplier concentration to firm concentration ratio

(e) Threat of forward integration by suppliers relative to the threat of backward integration by firms

(f) Cost of inputs relative to selling price of the product

(g) Insignificance of volume to supplier



(h) Cartelisation by Suppliers OPEC is an example which keeps adjusting production to keep crude prices artificially high.

3. Threat of New Entrants (a) Existence of Barriers to Entry Any kind of barriers like cartelisation by

existing manufacturers, govt regulations (licences), natuaral barriers, etc.

(b) Capital Requirement Capital intensive industries have relatively lesser threat of new entrants since very few people can afford to invest that kind of capital.

(c) Economies of Scale There are some products which afford huge economy of scale. While the existing players would have slowly grown to build adequate market share/demand, new entrant would have to start with similar capacity without any demand/market to be able to produce at competitive cost. Maruti could slowly build a network of its service stations and spare parts vendors across India. Any new entrant can not afford to build that kind of network unless they have that kind of density of vehicles on roads and therefore are finding it difficult to compete.

(d) Brand Equity If there is a well entrenched product in the market, it hard for any new product to find a market for itself and therefore discourages new entrants.

(e) Switching Costs (f) Access to Distribution Distribution network is the trump card in the

hands of a company. HLL, with its reach to the remotest corner or the country, enjoys that advantage and poses a barrier to the new comers. Many companies, including HLL are known to buy out all the prime shelf and advertising hoarding space ahead of launch of a competing product to black out them in the market.

(g) Absolute Cost Advantages If a firm is enjoying a cost advantage due to any reason, may be captive mines, or pit head location (so low transportation cost) or cheap captive power generation in a power intensive product like metals, it poses hurdle for new entrants.

(h) Learning Curve Advantages

(i) Expected Retaliation

(j) Government Policies 4. The Threat of Substitute Products

(a) Buyer Propensity to Substitute



(b) Relative price Vs performance of substitutes

(c) Buyer switching costs

(d) Perceived level of product differentiation

5. The Intensity of Competitive Rivalry (a) Number of Competitors Higher the number of competitors, higher the

struggle for the market share. Bigger group also brings in ego clashes leading to indiscrimanate poaching even at otherwise prohibitive costs.

(b) Industry Growth Rate This happens in later stages of product life cycle when product demand begins to stabilise or even decline after peaking while new entrants continue to set up additional capacities without observing the life cycle stage of the product, leading to overcapacity

(c) Intermittent Industry Overcapacity It is again a common phenomenon. Many people who catch the cyclic demand late end up adding capacity when demand begins to ebb. Thus, there is huge overcapacity during lean demand period. This phenomenon is most prominent in agriculture. One season, there will be scarcity of, say, pulses and therefore very high prices. Attracted by the good prices, there will be increased acreage under pulses cultivation. And then due to oversupply of pulses, the prices will not be adequate even to recover the costs. Having suffered huge losses, farmers will switch the crop next year and there will be scarcity of pulses once again and the cycle continues.

(d) Exit Barriers If exist routes are not available, existing players will continue to attempt to garner larger market share through price cuts or discounts etc.

(e) Diversity of Competitors Rivalry becomes intense with diversity of competitors. Say, a product is being supplied by manufactures from across the world (take for instance BPO services). Each supplier has a different cost advantage, different problems, different govt policies, and so on. On the other hand suppliers have no common forum to meet and plan their strategy against arbitrary damaging actions by individual player.

(f) Informational Complexity and Asymmetry increases distrust and rivalry.

(g) Thin Profit Margin Products Rivalry is intense when profit margins are already thin since only way out to increase profits is by increasing sales. (Imagine the intensity of competition in salt business. Consumption can not be increased in any way. Probably this is the only product in the world whose consumption can not be increased. Profit margins are thin. (Govt would not want a second Dandi March by a new born Mahatma). What growth strategies can the salt manufactureres follow but to snatch each others market share? (But Catch salt did it by differentiation and packaging)



(h) Lack of Product Differentiation If there is no real avenue for product differentiation, like in case of soft drinks, rivalry increases.

Though not supported by all, some argue that a 6th force should be added to Porter's list to include a variety of stakeholder groups from the task environment. This force is referred to as "Relative Power of Other Stakeholders". Some examples of these stakeholders are governments, local communities, creditors, shareholders, employees, & so on.

Not every industry faces all the forces. Some industries face as low a two while some other might face all the five. Again the intensity of individual forces will vay with industry. Your job is to identify the forces and find a position where the sum total effect of all the forces is minimum.

Cr i t ic ism

Porter's framework has been challenged by other academics who have raised objections to underlying assumptions in the model, viz -

(a) That buyers, competitors, and suppliers are unrelated and do not interact and collude

(b) That the source of value is structural advantage (creating barriers to entry)

(c) That uncertainty is low, allowing participants in a market to plan for and respond to competitive behavior.

(I I ) Po r t er Ge ner i c S t ra t eg ie s Michael Porter has described three general types of strategies that are commonly used by businesses. These three generic strategies are defined along two dimensions:

(a) Strategic Strength is a supply-side dimension and addresses the core competency of the firm: Cost Leadership or Product Differentiation. Please remember that the two strengths are exclusive to each other. Cost leadership and product differentiation do not go hand in hand. Either a company goes cost leadership way or opts for product differentiation. Vi-John (Barbers favourites) and Gillette range of saving products are the examples of two strategies.

(b) Strategic Scope is a demand-side dimension and looks at the size and composition of the market you intend to target.

In his 1980 classic Competitive Strategy: Techniques for Analysing Industries and Competitors, Porter lays down the three best strategies. They are

(a) Cost Leadership,



(b) Product Differentiation, and (c) Market Segmentation (or Focus).

While first two are standalone strategies, and exclusive to each other, Market Segmentation, as a strategies, can not stand on its own feet without supposrt of one of the two other strategies. It complements both the other strategies and is necessarily an accompaniment. It has to be adopted irrespective of cost or differentiation leadership. Only scope will differ in two cases.

Combining a market segmentation strategy with a product differentiation strategy is an effective way of matching your firms product strategy (supply side) to the characteristics of your target market segments (demand side).

Empirical research on the profit impact of marketing strategy indicated that firms with a high market share were often quite profitable, but so were many firms with low market share. The least profitable firms were those with moderate market share. Porters explanation of this is that firms with high market share were successful because they pursued a cost leadership strategy and firms with low market share were successful because they used market segmentation to focus on a small but profitable niche market. Firms in the middle were less profitable because they did not have a viable generic strategy.

1 . Co st Le a d e r ship S t ra t eg y

This strategy emphasizes efficiency. The product is often a basic no-frills product that is produced at a relatively low cost and made available to a very large customer base (It is assumed that benefits of low cost production are passed on to the customer in the form of low prices. But it does not happen everytime. In many cases company continues to charge market rate of product despite substantially low cost of production and uses this advantage strategically). Maintaining this strategy requires a continuous search for cost reductions in all aspects of the business.

2 . Dif fe re nt ia t io n St ra te gy Differentiation involves creating a product that is perceived as superior to its competitors. The unique features or benefits should provide superior value for the customer if this strategy is to be successful. Because customers see the product as unrivaled and unequaled, the price elasticity of demand tends to be reduced and customers tend to be more brand loyal. (Pears Soap (Glycerine based transparent) and Dove (with moisturising cream) are two products which have maintained their differentiation for a very very long time). This can provide considerable insulation from competition. However, there are usually additional costs associated with the differentiating product features (both glycerine and moisturising cream are expensive ingredients and this could require a premium pricing strategy.

To maintain this strategy the firm should have:



(a) Strong research and development skills (b) Strong Product engineering skills (c) Strong creativity skills (d) Strong marketing skills (e) Focus (Segmentation) Strategy

In this strategy, the firm targets a few selected markets, be it demographics or geography or any other parameter.. It is also called a focus strategy or niche strategy. It is hoped that by focusing your marketing efforts on one or two narrow market segments and tailoring your marketing mix to these specialized markets, you can better meet the needs of that target market. The firm typically looks to gain a competitive advantage through effectiveness rather than efficiency. It is most suitable for relatively small firms but can be used by any company. As a focus strategy it may be used to select targets that are less vulnerable to substitutes or where a competition is weakest to earn above-average return on investments.

(I II ) Va lue Cha in (Value Chain is a concept that was first described and popularized by Michael Porter in his 1985

best-seller, Competitive Advantage: Creating and Sustaining Superior Performance).

A firm is a bundle of activities. The activities can be broadly divided into two groups

(a) Primary Activities The activities for which the company exists. The activities that add value to the product.

(b) Secondary Activities Peripheral or support activities.

The primary activities include:

(a) Inbound logistics, (b) Operations (production), (c) Outbound logistics, (d) Marketing and sales, and (e) Customer Service

The support activities include:

(a) Procurement (b) Human resource management, (c) R&D (d) Administrative



(e) Infrastructure management,

Support activities are not specifically related to any one primary activity but span across all of them. The value chain framework quickly made its way to the forefront of management thought as a powerful analysis tool for strategic planning. Its ultimate goal is to maximize value creation while minimizing costs.



BUSINESS STRATEGY

Unlike Corporate Level Strategy which takes care of a Business Houses broad strategies, Business Level Strategy is strategy at the SBU level.

The classical BCG model (four quadrangles of cash cow, star, dog and Question Mark) is utilised to fine tune resource deployment plan.

Following factors help in developing competitive advantage

(a) Distribution System This is the strongest weapon in the armoury of market men. Any other marketing strategy can fail but this is hard to fail.

(b) Research and Development (c) Field Strength (d) Assets

Five Rules to create competitive advantage

(a) . (b) . Michael Porters three rules (c) . (d) First Movers Advantage Walkman and Windows are two products where

the owner companies benefitted hugely.

(e) Synergy Advantage A sports goods manufacturing company can start sports garment business. Since the market is same, customers are same, distributors and retailers are also same, brand equity can also be encashed.

Wha t i s S tra te g ic Co m pe te ncy ?

It is defined as strength of companys core competency Vs strength of competitors core competency

Str a teg ic Co mpe te nc ie s

1. Brand Equity Brand Equity create Image assest as well as financial assets. It helps company to realise better margins on its products and achieve higher sales with lesser investment in marketing.

2. Creative Methods of Pricing Some companies are capable of making the prices affordable for the customer. Shampoo bottles even in 100 ml bottles, was unaffordable for lower middle class segment girls. Shampoo sachets at Re 1/- per wash was like offering shampoo bottle on flexible installment plan. It brought this



elite product within the reach of poor girls and created a huge market for the company.

3. Market Management Market management is not same as marketing management. While marketing management is about reaching the minds of consumer and managing sales and distribution of the product, market management is about future planning by forecasting the market trends or quick reaction to changes in the market through product innovation, positioning etc. Planning cycles in yesteryears used to be pretty long. Long term plans used to be drawn with 5, 7 or even 10 years perspective. Such kind of time frame is unthinkable now. Markets have become volatile and planning cycles have shortened. Market Management involves following steps

(a) Develop Real Time Information System for collecting information not only from local market but from across the world. Even though a company may not be a global player, competitor might source his products from a foreign country at substantially lower cost. (Ganesh idols (made in China) during this Ganesh Chaturthi were being sold at one third the last years price. Who would have envisioned that China, a communist (atheist) would invade the Ganesh idol market? )

(b) Developing sensitivity to information (useful information only).

(c) Flexibility in Planning Capability to change the plans at short notice in response to dynamic change in situation.

(d) Online Scanning & Analysis of Information There is veritable flood of information. Therefore, it is beneficial to scan and analyse the information online itself.

(e) Proactive Approach Company should have a proactive approach to market management. It should analyse and forecast market direction and take appropriate action.

Cha rac ter i s t ic o f Co mpa ny Whic h C a n Ma na g e Marke t 1. Sensitive to Market

(a) In-Out Organisation Such companies scan the prevailing business environment and react to the changes that are taking place in the market.

(b) Out-in Organisation The company scans macro environment and changes its strategy proactively before the effects of changes in macro environment manifest themselves in market. The company is ready to take the advantage of changes in market when the time comes. There are companies which are even smarter. They manage the environment itself. They mould the environment according to their need. Take the case of Reliance. They laid out the cables across length and breadth of country for



CDMA phone which was a WLL (Wireles in Local Loop restricted area roaming) service. (This technology is much cheaper in installation and equally cheap in operation. Even licence fee was only a fraction of what GSM cellular services providers had to pay). After Reliance completed its cable laying and rolled out the services, restrictions on roaming for CDMA phones were suddenly removed and the service was offered in completition with GSM cellular phones.

(c) Give Importance to Real Time Information Management They are good at online analysis of information and action is taken immediately. Take the case of Walmart Retail Stores. Information about a product sold and billed is directly communicated to their central server where sales data is collated from all the stores and is analysed by computer. Depending upon sales pattern and current stock levels in various stores, order for supply is placed on the supplier automatically by the computer itself. Or, slow moving inventory from one store is shifted to other store.

(d) Knowledge Management Let us first understand difference between Information and Knowledge. Information is unorganised raw data, facts and figures. Knowledge is when this random data is organised in the mind in a structured and logical form to facilitate deductions/analysis/forecasts. In simple words, information is knowing what had happened or who had done it; Knowledge is knowing why did it happen and why did he do it; and Wisdom is knowing what to do to make the best use of what had happened. Thus, Knowledge is a mental aspect and very difficult to manage. Since knowledge lies in the minds of managers, many companies often call for brainstorming sessions/meetings where free flow of ideas and discussions take place and strategies are formulated. This is called knowledge management.

(e) Capability to scan information online.

(f) Entrepreneurial Thrust The management should be quick at identifying the opportunities, arranging the necessary resources, building team and converiting it into a profitable business.

(g) Global Perspective Refer to Strategic Competencies. (Page 28).

(h) Effective use of various marketing tools.



Proc e ss o f S tra t e g ic Ma na gem e nt (S tra t eg i c Ma nag eme nt Mo de l)

Strategic Management process begins after the Vision and Mission statement have been set. Vision and Mission statement actually indicate the direction of strategic management process.

Vision Corporate vision is a short, succinct, and inspiring statement of what the organization intends to become and to achieve at some point in the future. Vision is intentions that are broad, all-intrusive and forward-thinking. It describes aspirations for the future, without specifying the means that will be used to achieve those desired ends.

In simple terms - Vision is the description of desired future form/state of the company. It is the dream of top management as to where it would like the company to be in future. It is a common folly to extrapolate the present into future.

Strategy Formulation

Mission & Objectives

Internal Resource Analysis

Environmental Analysis

Strategy Choice

Generic Corporate Strategy

Generic Business Strategy

Strategy Implementation

Culture Organisation Culture Leadership Reward System

Functional Policies

Strategy Evaluation & Control



Drawing the Vision requires the top management to empty their mind of the past and present before they sit down for the purpose.

Once the Vision Statement has been drawn, it needs to be communicated to the employees. It is not enough to communicate just the Vision. Vision statement does not include the action plan, because it is meant for not only the company but the general masses as well. But it is a must to communicate the action plan for achieving those lofty aims to the employees. Else, it will lack the authenticity and belief of the people whose heart and soul is must for making it a reality.

Mission Mission is the dream for the near future. It is a statement of what company wishes to achieve in the short term.

Strategy Management Process consists of following steps

1. Analysis of External (Macro) Environment Macro environment is source of threats, opportunities & constraints and uncontrollable. Therefore, the strategy has to be drawn around those uncontrollables within the contraints imposed and opportunities offered by them. Macro Environment can be further sub-dived into following

Remote Environment (Global as well as Domestic) (i) Social (ii) Technological (iii) Legal (iv) Political (v) Economic

Industry Environment Porters five forces model (vi) Entry Barriers (vii) Suppliers Powers (viii) Buyers Power (ix) Substitute Availability (x) Competitive Rivalry

Operating Environment

(i) Competitors (ii) Creditors (iii) Customers



(iv) Labour (v) Suppliers

(a) Socio - Cultural Environment

(i) Demographic factors such as: (aa) Population size and distribution (ab) Age distribution (ac) Education levels (ad) Income levels (ae) Ethnic origins (af) Religious affiliations (ag) Housing conditions

(ii) Attitudes/Belief towards: Materialism/capitalism/socialism, free enterprise individualism, role of family, role of government, collectivism, language, etc

(iii) Cultural structures including: Religious beliefs and practices, consumerism, environmentalism, Work Ethics, Pride of accomplishment, diet and nutrition, etc.

(b) Technical Environment (i) Efficiency of infrastructure, including: roads, ports, airports, rolling

stock, hospitals, education, healthcare, communication, etc. (ii) New manufacturing processes (iii) New products and services of competitors (iv) New products and services of supply chain partners (v) Any new technology that could impact the company

(c) Legal Environment (i) Minimum Wage laws (ii) Environmental Protection laws (iii) Industrial laws (iv) Union laws (v) Copyright and Patent laws (vi) Effectiveness of Law & Order enforcement machinery.



(d) Political Environment (i) Political Climate Type of govt

(Capitalist/Communist/Democratic/ Autocratic/Monarchy/etc) (ii) Political Stability and Risk What political stability relates to

business is the stability of govt policies. In many countries like Japan, Italy, France, Germany and even in our own country, govts have changed but business policies of the govt have remained constant over the time. Political instability is serious when business policies change drastically with govts.

(e) Economic Environment (i) GNP or GDP per capita (ii) Economic growth rate (iii) Inflation rate (iv) Consumer and investor confidence (v) Currency exchange rates (vi) Unemployment rate (vii) Balance of payments (viii) Future trends (ix) Budget deficit or surplus (x) Corporate and personal tax rates (xi) Import tariffs and quotas (xii) Export restrictions (xiii) Restrictions on international financial flows

Scanning these macro environmental variables for threats and opportunities requires that each issue be rated on two dimensions. It must be rated on its potential impact on the company, and rated on its likeliness of occurrence. Multiplying the potential impact parameter by the likeliness of occurrence parameter gives us a good indication of its importance to the firm. Let us see how Times of India has been affected by the changes in its external environment:

Demographic Changes There is a change in readership of newspapers. The average age of newspapers readers have come down. TOI has responded to this demographic change with change in the content and presentation of its articles.

Social Changes TOI has started with various supplements like Matrimonial, Property, Suburban Specials, etc



Technological Paper is in colour, more prompt (even late hour news gets coverage due to faster printing technology, and more and more editions.

Economic Lower prices

2. Internal Resource Analysis Let us see how to evaluate our internal resources. We need to ask a few questions to ourselves -

(a) Is it a distinctive Asset?

(b) What is the life of resource? (Kodak company which had become a household name world over due to its photographic films and equipment business failed to see the end of this business due to advent of digital (filmless) photography. Companies in the business of non-renewable natural resources have to be specially aware of this fact).

(c) Is your resource copyable? If it is, does it have copyright protection? If no then, it has no value because along with your launch it will proliferate.

(d) What is your Brand Power?

(e) What is the result of SWOT analysis?

3. Strategy Formulation Once we know the external and internal environment (SWOT analysis) vis a vis our vision and mission, it is time to formulate the strategy. Strategy formulation is done on the basis of following principles

(a) Cost Leadership (b) Product Differentiation (c) Market Segmentation (or Focus) (d) First Movers Advantage (e) Synergy

Company has to take a call as to which of routes to adopt.

4. Implementing the Strategy

A bad strategy may still succeed if implementation is good but best of the strategies will not succeed if implementation is bad.

Above matter of fact statement sums up the importance of implementation phase. Strategy implementation is dependent on organisational strength. Following organisational factors affect the implementation:

(a) Leadership

(b) Organisational Structure Flat/Project Team/Matrix/Hierarchical, etc.



(c) Reward Systems Appraisals and monetary and non-monetary rewards.

(d) Functional Policies Implementation/execution on the ground is done at the middle and lower manager levels. Thus, HR policies assume high significance. Implementation is dependent on incentives, employees motivation and commitment towards company which are shaped by the HR policies. Marketing policies also affect the implementation some times.

(e) Is the organisation a learning organisation? Implementation in a learning organisation is always much better since lessons from previous implementations must have been used to strengthen the system.

Based on above requirements, you need to create an organisation capable of carrying out the strategy successfully in following steps:

(a) Allocate necessary and adequate resources. (b) Create strategy supportive systems and procedures. (c) Create work culture conducive to strategy implementation (d) Install information storage and retrieval system.

5. Evaluation and Control System In order to evaluate the performance, targets need to be set. An effective, accurate and prompt feedback system is essential so that any deviations from plan can be spotted in time and course correction applied. High performers need to be kept motivated through awards and rewards and low performers should be motivated or changed. If the need be fine tune/reformulate your strategy.



WHY STRATEGIES FAIL?

A strategy is impacted by numerous factors and most of them are uncertain. Some, like external factors, are uncontrollable. Such factors are forecasted and factored in the strategy formulation. Success is achieved when all or at least most forecasts turn out correct. However, if forecasts turnout to be way off the mark, strategy fails. Quite often, strategies fail because they were not implemented properly. Yet another time, a competitor comes up with a counter strategy (like ambush marketing done by Pepsi in cricket World Cup against Coca Cola). In addition, there are a host of other factors that also affect success of strategy

(a) Faulty strategy due to inaccurate/scanty data or assumptions or pure inaptitude of strategists.

(b) Inadequate training/preparation/commitment/inaptitude of people entrusted with strategy implementation (generally line managers)

(c) Faulty definition of business

(d) Faulty Definition of SBU Some times so much of independence is given to SBUs that they start

Strategic Mgmt Notes

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