Strategic Management Lecture Notes 685sm

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Detailed Risk management Reporting

YES

NO

NO

Corporate Governance Report

YES

YES

YES

Detailed Subsidiary information

YES

NO

NO

Value Reporting

YES

NO

NO

Intangible Asset Scoresheet

YES

NO

NO

Human resource Valuation

YES

NO

NO

EVA information

YES

NO

NO

Brand Valuation

YES

NO

NO

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Quality

People

Predictability

Transparency

Sustainability

Maintenance

Translating clients to partners Long-term relationship Offshore Software Development Centers

Growth Higher value services Increase revenue productivity Offshore model - Global Delivery

Exposure limits for client concentration Exposure limit for dotcom businesses

Upsell to existing customers

Exposure limit for opportunity businesses (like Y2K)

Iterative Model of Development

Geographical diversification

Profitability

De-risking

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Business Strategy • A company can make use of its business strategy to improve the competitive position of its business units and products/services within the specific market segment or industry • The generic strategies suggested by Porter i.e., cost leadership, differentiation and focus, could help the company in drawing up the business strategy • Whereas the corporate strategy asks what industry/industries, should the company be in, the business strategy asks how the company should compete or co-operate in each industry

Cost Dynamics Cost Levels in India: Textiles

For comparable pre-tax RET. On invest, a typical Indian Plant with cap of 6,000 tons/yr polyester production has 84% higher selling price than a typical polyester plant with 30,000 tons/yr cap in USA. Even with same cap, India: 24% higher selling prices

Similar trends are obtained in tyre and tube, Al, Steel Causes

Excise, Customs, Sales Tax Levies, Etc, Uneco, Production levels, Obsolete technology, high B/E points, excess dependence on import of semi=finished goods

High costs narrowed Dom. Cons. Markets & competition in International markets Larger size plants not only save on initial invest. Cost but also on operational costs (cost v/s size of production) Cost v/s Market

Sellers Market

Product s Price

= Intl. Cost + desired profit margin

Profit Margin

Buyers market = Permissible price – intl. Cost

Tolerable Cost

= Permissible price – acceptable profit

OR

Experience Curve: Unit Manufacturing Cost

When Production Quantity

When Production Quantity

of time of Dir. Lab components for each item

80%

Experience

Accumulated Production 2 4 (100*0.80) = 8 (80*0.80) = 16(64*0.80) =

Curve

Cost/Unit (RS) 100 80 64 51

Plot give 80% Exp. Curve – Hyperbola Causes: Improved Lab. Productivity Incre4ased specialisation Innovation in production methods Value engineering & fine tuning Line balancing Rationalisation of methods & systems Exp. Curves

- Simple approximations of extremely complex real-time relationships; extreme care is to be exercised to get rreliable results – distinguish time from exp; unit exp; consider influence of time

Sensitivity Analysis:

Can be w.r.t., FC, VC, and/or price decrease in FC results in decrease in B-E-P. Profitability at a particular volume of production improves with lower FC in VC has marked effect on B-E-P & eats up profits in VC improves profitability in permissible price, B-E-P and vice-versa. At a particular volume of production profitability improves. Price-most sensitive instrument followed by VC & FC

Non-Linear B/E Analysis

When prices may be consciously reduced to gain additional sales vol. & market share or in response to computer s action

Assumptions

FC Fixed for all production volumes

(often unrealistic)

VC do not fall with increasing level of production TC && TR vary in linear relationship with output Maximise profit BEF int. & tax is the desirable BUS. objective

Experience curve relationship

- Good framework for marginal considerations for predicting industrial scenario w.r.t., future costs, profit margins and corresponding cash flows for own & competitor s opns - Has done very well in segments such as PC mkt; implications – a few large plants with standardised productions would be able to supply global market marketing efforts SH. Be fully coordinated with manufacturing plans; lowering prices SH. Not be inferior quality; more applicable when dem is elastic - Limitations: detn. of cost; data reg. competitors; a late market entrants has to operate at lower initial prices to survive

B/E Analysis TC = FC + VC * Q

(VC-Unit Var. Cost-R/M, electricity, fuel, packing etc)

TR = P * Q At B/E point TR = TC p * QB = FC + VC * QB [P – VC = Unit Contribution]

QB = FC/(P-VC)

Doom Loops ! Self reinforcing processes. ! Drive an organization into cyclical situations from which an organization finds it difficult to extract itself. ! To avoid getting into a doom loop, it is required to constantly upgrade the products, services and efficiency of distribution channels. ! To get out of a doom loop – refocus on the small business units and a change has to be brought about in the firm s culture.

Doom loop - Example Competitors innovate & develop better Pdt. at lower cost.

Competitor matches price & yet is profitable.

Competitor gains mkt. Share at firms expense.

Firm cuts price to hold onto the market share.

Employees become demoralized.

Firm has inadequate margins to reinvest.

Quality of Pdt. & services becomes poor.

Corporate Strategy The important issues involved in Corporate Strategy are: !  The company s orientation towards growth, stability or retrenchment. This is referred to as directional strategy. !  The markets in which the company competes through its products or business units. This is referred to as Portfolio strategy. ! Activity co-ordination and transfer of resources for achieving capabilities among product lines and business units. This is referred to As parenting strategy.

Relative Cost advantage & Competitive Strategy Examples

Modi Tyres

- Initially entered largest product segment i.e., truck with latest technology & lower prices (good value for money). Subsequently matched market leader s price and displaced him by capturing higher market share

Hero Cycles

- Dropped irrelevant product attributes; subcontracted production of parts

Portfolio Analysis and Display Matrices Portfolio Analysis Balancing

- Corp. investments in different products or industries (SBUs) - w.r.t. net cash flow Stake of development Risk

Display Matrices: BCG Matrix McKinsey Matrix Strategic Planning Institute s Matrix (Profit impact of Market Strategy – PIMs) Arthur D.Little Co s Matrix Hofer s Product/Market evaluations Matrix

The Boston Consulting Group s Growth-Share Matrix SBU Objectives: Stars 22%

Hold (for strong Cash Cows)

20%

Market Growth Rate

Build (For Question Marks)

Question Marks 4

1

18%

3

14%

Divest (for Question Marks and Dogs which are a drag on company profits)

2

12%

5

10%

Cash Cow

8%

Dogs

Strategic Planning

6%

Planning: Viable fit between organization s objectives and its changing market opportunities

6

4%

7

2% 0

Harvest (for weak Cash Cows; can also be used with Question Marks and Dogs)

8

10x

4x

2x

1.5x 1x 0.5x 0.4x 0.3x 0.2x 0.1x

Relative Market Share

Key: investment portfolio, future profit potential, strategy

Source: B. Heldey, Strategy and the Business Portfolio , Long Range Planning, February 1977, p.12 Reprinted with permission from Long Range Planning, © 1977, Pergamon Press Ltd.

BCG Matrix (New) ! 2*2 Matrix !  Size of competitive advantage Vs. No. of approaches to competitive advantage. Size of the comp. Adv.

Fragmented

Specialization

Many

No. of approaches to achieve comp. Adv.

Stalemate

Volume

Few

BCG Matrix (Contd.) Fragmented Specialization ! Small and Regionalized.

! Focused segments.

! Profitability not related to size.

! Steep learning curves.

! Advantage gained by focus.

! Ex. Cray research in field of Super computers.

! No on growth. ! Ex. Specialty restaurants or designer labels.

Stalemate

Volume

! Where it is difficult to gain advantage.

! Where there are economies of scale and IRS operates.

! CA often is the sheer sustaining power.

! Constrained by market segmentation and differentiation.

! Ex. Kellogg's in India.

! Ex. The car industry.

GE Matrix

Protect Position • Invest to grow at maximum digestible rate • Concentrate effort on maintaining strength

Invest to build • Challenge for leadership • Build selectively on strengths • Reinforce vulnerable areas

Build selectively • Specialize around limited strengths • Seek ways to overcome weaknesses • Withdraw if indications of sustainable growth are lacking

Medium

Build Selectively • Invest heavily in most attractive segments • Build up ability to counter competition • Emphasize profitability by raising productivity

Selectivity/ manage for earnings • Protect existing program • Concentrate investments in segments where profitability is good And risk is relatively low

Limited expansion or harvest • Look for ways to expand without high risk; otherwise, minimize investment and rationalize operations

Low

Protect and refocus • Manage for current earnings • Concentrate on attractive segments • Defend strengths

Manage for earnings • Protect position in most profitable segments • Upgrade product line • Minimize investment

Divest • Sell at time that will maximize cash value • Cut fixed costs and avoid investment meanwhile

High MARKET ATTRACTIVENESS

Strong

Medium BUSINESS STRENGTH

(b) Strategies

Weak

Table 2-2 Factors underlying market attractiveness and competitive position in GE Multifactor Portfolio Model: Hydraulic Pumps Market Weight Market Attractiveness

Overall market size Annual market growth rate Historical profit margin Competitive intensity Technological requirements Inflationary vulnerability Energy requirements Environmental impact Social/political/legal

Competitive Position

Market share Share growth Product quality Brand reputation Distribution network Promotional effectiveness Productive effectiveness Productive efficiency Unit costs Material supplies R&D performance Managerial personnel

Rating (1-5)

Value

0.20 0.20 0.15 0.15 0.15 0.05 0.05

4.00 5.00 4.00 2.00 4.00 3.00 2.00

0.80 1.00 0.60 0.30 0.60 0.15 0.10

0.05 Must be acceptable 1.00

3.00

0.15 . 3.70

0.10 0.15 0.10 0.10 0.05 0.05 0.05 0.05 0.15 0.05 0.10 0.05 1.00

4.00 2.00 4.00 5.00 4.00 3.00 3.00 2.00 3.00 5.00 3.00 4.00

0.40 0.30 0.40 0.50 0.20 0.15 0.15 0.10 0.45 0.25 0.30 0.20 3.40

Source: La Rue T. Hormer, Strategic Management, Englewood Cliffs, N.J.: Prentice Hall, 1982, p.310

McKinsey Matrix Used for GE: Factors determining industry (Market) attractiveness 1.  2.  3.  4.  5.  6. 

Weightage (typical) Size of the market 10% Growth rate (sales) 15% Nature of Competition 15% Technology Requirements 10% Entry conditions & Social factors 10% Profitability 40%

SBUs rated on a scale of 1-10

100% Factors Determining Competitive Position 1.  2.  3.  4.  5.  6.  7. 

Market Share Growth rate Location & Distribution Mgt. Skills Work force harmony Technical excellence Company image

Weightage 20% 10% 10% 15% 20% 20% 5% 100%

Rating (1-10) 7 7 5 6 7 8 8

Score 1.4 0.7 0.5 0.9 1.4 1.6 0.4 6.9

Shall Matrix :

Similar to GE approach – identifies different strategies for each grid sector

PIMS Model:

Profit impact of market strategy (PIMS) started at GE – used later by strategic planning institute – develops industry CH/C, bus avg. profitability using crosssectional regrn. Of more than 2000 industries

Shell s Directional Policy Matrix

SECTORAL PROSPECTS

Attractive

Leader

Try Harder

Double or quit

Average

Leader Growth

Custodial

Phased withdrawal

Cash Generation

Phased Withdrawal

Disinvest

Strong

Average

Weak

Unattractive

UNIT S COMPETITIVE POSITION Strategy

Business Prospects

Competitive Capability

Recommended Strategy

1. Leader

High

Strong

High priority with all necessary resources to hold high market position

2. Try Harder

High

Medium

Allocate more resources to move to leader position

3. Double or Quit

High

Weak

Pick products likely to be future high flyers for doubling and abandon others

4. Growth

Average

Avg. strong

May have some strong competition with no one company as leader. Allocate enough resources to grow with market

5. Custodial

Average

Average

May have many competitors, so maximise cash generation with minimal new resources

6. Phase withdrawal

Low

Average

Slowly withdraw to recover most of investment

7. Cash generation

Low

Strong

Spend little cash for further expansion, and use this as a cash source for faster growing businesses

8. Disinvest

Low

Weak

Assets should be liquidated as soon as possible and invested elsewhere.

Misfit between Critical Success Factors and Parenting characteristics

Low Heartland Ballast

Edge of Heartland

Alien Territory

Value trap

High Low

High

Fit between Parenting Opportunities and Parenting characteristics

Arthur D Little Company s Matrix •  The Matrix considers the different stages of the PLC with the business strength. •  The businesses are classified according to business strength as weak, tenable, favorable, strong or dominant. •  The Horizontal axis has the four stages of the PLC: Embryonic, Growth, Mature and Decline.

B U S I N E S S S T R E N G T H

Dominant

Harvest Hold

Strong

Build

Favorable

Tenable

Weak

Unacceptable

•  The Strategy recommended in the growth and embryonic stage is to build the business except when the business strength is weak. •  For Businesses in the mature stage, with dominant to favorable business strength, hold strategy is recommended. •  For Businesses with strong and dominant position in the declining stage, harvest strategy is recommended. •  For Businesses which are weak and in the mature/decline stage, the return-on-investment is unacceptable.

Hofer s Product/Market Evolution Matrix •  It is a 3x5 matrix, where businesses are plotted in of the product/market evolution and competitive position. •  The circles show the relative size of the industry, and the shaded portion depicts the market share.

According to the matrix, •  Businesses in the Development or the Growth stage have the Potential to become Stars. !  If the market share is large, additional resources must be invested, to develop competitive position. ! If the market share is low, a strategy to improve should be developed.

•  Businesses in Shake out/Maturity stages can be Cash Cows. These may require some Investments. •  Businesses in the Decline stage with a low Market share are in the category of Dogs and should be considered for Divestment or Liquidation.

Intenational Portfolio Analysis •  Portfolio analysis can be applied to international markets to help in the international strategic planning. •  The matrix makes use of country s attractiveness, which comprises market size, market growth rate, extent and type of government regulation, economic and political factors. •  It also makes use of the product s competitive strength, which consists of Market share, product fit, contribution margin and market . Depending on how the product fits in the matrix, funding or harvesting can be decided upon.

HIGH H I G H

M E D I U M

L O W

C O U N T R Y A T T R A C T I V E N E S S

MEDIUM

LOW DOMINANT/DIVEST T VENTURE

INVEST/GROW SELECTIVE STRATEGIES

HARVEST/DIVEST COMBINE/LICENSE

Functional Strategy The approach followed by a functional area to achieve the objectives set by the corporate and business strategy by maximizing resource productivity is called FUNCTIONAL STRATEGY. •  It is concerned with the nurturing and development of distinctive competitiveness. •  Orientation of Functional Strategy is dictated by the Parent s strategy.

Utility of Display Matrices: Correlate industry growth or profitability with market share either as direct single variable or as an index based on multiple variables

Facilitate graphic display of diversity of orgn; help raise critical questions; not provide precise answer; not applicable where mkt. share is not critical or capital cannot be easily withdrawn; if value added is low or cost can be decreased without experience, rapid technology transfer, seasonal/cyclic business, patent restrictions. Low economies of scale complicate their outcome Indian Situation: - Industrial development much behind Japan or USA - Huge dom. Potl. Mkt still untapped - Manager s will & systematic approach with top management can help make use of these matrices for developing competitive strength and corp. growth

A distinctive Competency must meet the following three tests: 1.  Customer Value 2.  Competitor Unique 3.  Extendability For a Functional Strategy to be successful, it should be built on a distinctive competency within a Functional Area, else should consider outsourcing.

Outsourcing •  Outsourcing refers to purchasing a product or service which the company was previously producing. •  The key to Outsourcing lies in the purchasing from outside only those activities that are not key to company s distinctive competencies.

Marketing Strategy •  Marketing strategy deals with the pricing, selling and distribution of a product. •  Using this strategy, a business unit can improve its market share for current products through market saturation and penetration, or develop new products for existing markets.

Financial Strategy •  Financial strategy examines the financial implications at corporate and business levels to identify the best financial course of action. •  This can provide competitive advantage through lower cost of funds and flexibility to raise capital. This strategy normally helps in maximizing the financial value.

R&D Strategy •  The R&D strategy determines the R&D mix that a company has to follow. •  It determines the mix of basic research, product development and process R&D. •  This strategy also influences the decisions in the areas of development of new technologies, acquisition of technology from external sources, strategic alliances, product/process innovation and improvement.

Operations Strategy •  Operations strategy answers vital questions of manufacturing, concerning where to produce, vertical integration, deployment of resources, relationship with suppliers, technology to be used and levels of quality to be acheieved.

Purchasing Strategy •  Decisions regarding raw materials, parts and suppliers for the manufacturing function are influenced by the purchasing strategy. •  The company has the options of single, multiple or parallel sourcing. Single sourcing- It helps in reduction of both cost and time and in controlling quality. Parallel sourcing- It provides two suppliers for two different parts, with each of them backing up the other s parts. Multiple Sourcing-It has an advantage in that it forces suppliers to compete, leading to reduction in costs and improvement in quality for the company.

Logistics Strategy •  Logistics strategy deals with the flow of the product into and out of the manufacturing function. •  This requires synergies across business units and expertise in transportation modes. Two Important decisions on logistics strategy !  Centralization ! Outsourcing

Human Resource Management Strategy •  This strategy deals with the recruitment of skilled employees and their training to participate in self managed work teams.

Information Systems Strategy •  Information systems make use of information technology to provide companies with competitive advantage

Strategic Choice and Development of Policies •  .Strategic choice represents the evaluation of alternative strategies and selection of the best alternative.

Assignment 4 •  What are the different types of Environments that a firm faces? For a Firm you are acquainted with, chart the relevant Environment. •  According to Porter s Model, what determines the Competition Intensity in an Industry? With respect to a Firm that you know, identify the key Strategic factors in its External Environment. •  For the above Firm, develop the Industry Matrix and an EFAS. •  For the same Firm, compare and contrast different scenarios by using Trend Extrapolation.

Assignment 5 •  What are the criteria used to determine the Corporate Strengths and Weaknesses? Use these criteria for a company you are familiar with to identify its Strengths and Weaknesses. Suggest Corrective Actions. •  How can Value Chain Analysis be used to Identify Corporate Strengths and Weaknesses? •  How can a Company make use of its Structure and Culture in Internal Corporate Analysis? •  What is VRIO Framework? How can this be used for gaining Sustainable Competitive Advantage? •  List the Strategic Marketing, Financial, R&D, Operational and HRM issues for a Company you are familiar with. •  How has Information Systems affected Strategic Decisionmaking? What are the issues that have surfaced in the light of rapid changes in Information Technology.

Assignment 6 •  What is a Propitious niche? Which Industry forces can make it to disappear? •  When the Industry becomes Hypercompetitive, is it possible to have a sustainable Competitive Advantage? Give reasons. •  Strategic Alliances are temporary. Do you Agree? Justify. •  What is Doom Loop? Why do Industries find it difficult to get out of it? •  Discuss how Corporate Parenting is different from Portfolio Analysis. In what aspects are they similar? How could this be useful in Global Marketing? •  When should a company Outsource a Function or Activity? •  How does Policy relate to Strategy? Explain

Strategy Implementation Strategy implementation refers to the sum total of the activities and choices required for execution of a strategic plan. The implementation process has to answer these questions: • Who will carry out the strategic plan? • What should be done to align the company s operations in the new direction? • W hen and how everyone concerned, should respond?

Factors Differentiating Stage I, II and III Companies Function

Stage I

Stage II

Stage III

1. Sizing up: Major problems

Survival and growth dealing with short-term operating problems

Growth, rationalization, and expansion of resources, p ro v i d i n g f o r a d e q u a t e attention to product problems

Trusteeship in management and investment and control of large, increasing and diversified resources. Also, important to diagonise and take action on problems at division level

2. Objectives

Personal and subjective

Profits and meeting functionally oriented budgets and performance targets

ROI, profits EPS

3. Strategy

Implicit and personal; exploration of immediate opportunities seen by owner-manager

Functionally oriented moves to one product scope; exploitation of one basic product or service field

G ro w t h a n d p ro d u c t d i v e r s i f i c a t i o n ; exploitation of general business opportunities

4. Organisation: Major characteristic of structure

One unit, show

One unit functionally specialized group

Multiunit general staff office and decentralised operating divisions

5. (a) Measurement and control

Personal criteria, relationships with owner, operating efficiency ability to solve operating problems

Functional and internal criteria such as sales, performance compared to budget, size of empire, status in group, personal relationships, etc

More interpersonal application of comparisons such as profits, ROI, P/E ratio, sales, market share, productivity, product leadership, personal development, employee attitudes, public responsibility

6. Reward punishment system

Informal, personal, subjective; used to maintain control and divide small pool of resources to provide personal incentives for performers

More structured; usually based to a greater extent on agreed policies as opposed to personal opinion and relationships

Allotment by due process of a wide variety of different rewards and punishments on a formal and systematic basis. Companywide policies usually apply to many different classes of managers and workers with few major exceptions for individual cases

one-man

Source: O.H. Thain, Stages of Corporate Development, Business Quarterly, p.37, Winter 1969.

Board of Directors

Chairman & Managing Directors

R&D

Operating Companies (India)

Corporate Staff

Operating Companies (SAARC Countries)

Operating Companies (Africa)

Operating Companies (Europe)

Product Group

Product Group

Product Group

Product Group

Product Group

A

B

C

D

E

Geographical Area Structure of an MNC

Classification According to Risk :

Low Moderate High

Courses of Action

: Niche Vertical Integration – Backward and Forward Horizontal expansion Diversification

According to desired rate of growth: Alternatives are - Internal Expansion. (adding more capacity) - Internal Stability (by augmenting resources - Internal retrenchment or turnaround (eg: Hind. Photo-Films) - External Retrenchment or Divestiture (ITDC- decided to close Hotel Akbar some years ago) - External expansion through mergers - Combination of the above strategies Selection of Strategy

: Based on growth objects, resources, S&W, government policy & best method to close the gap between projected performance and desired performance; PL-C of product/SBU could also be helpful; marginal factors (attitudes towards risk) also influence selection.

Matrix and Network Structure Top Management

Manufacturing

Marketing

Finance

Human Resource

Manager: Project A

Manufacturing Unit

Marketing Unit

Finance Unit

Human Resource Unit

Manager: Project B

Manufacturing Unit

Marketing Unit

Finance Unit

Human Resource Unit

(a) Matrix Structure

Packers

Designers

Suppliers Corporate Headquarters (Broker)

Manufacturers

Distributors Promotion/ Advertising Agencies

(b) Network Structure

Diversification

Related: Eg. JK- from textiles to synthetic fibres unrelated

Related: Constrained or Controlled Linked - Closely related to main product line - Weak link as well as to teach other - Bus reln. Eg: Nirlon – from nylon filament yarn for Eg: India to nylon tyre cord for industrial Shaving products. applications to conveyor belts, V-belts,…. all based on industrial grade nylon yarn (Blades to toiletries and writing products) Qns. Co. SH. Ask: • Do the common skills & Res. Really exist? • Will the economies/benefits resulting from sharing of skills and res. be substantial? • Will the related diversification improve overall results? • Will the related diversification lead to any difficulties or problems and does the Co. have cap. To overcome these? Unrelated diversification

By setting up new projects, Through mergers, take overs off-running business. Eg: Hyderabad Allwun: Bus body Building to refrigerators to deep freezeders, water coolers, Acs, Watches,….

Planned diversification Options to Management

- Status Quo - Sail with the wind - Go on moving in the direction - Move in new direction in a planned manner

Diversification in an ongoing process - Define your bus - SWOT analysis - GAP Analysis - Competition & Risk analysis Corporate diversification in India – Now actively pursued due to - Liberalisation - Indian Entrepreneur willing to think big and grow big - higher risk bearing attitude by financial institutions - Middle class confidence in equity market - shrinking demand for Indian consumables abroad; so t ventures in India; NRI scheme for technology & finance flow - Massive market expansion (largely middle class domestic market

Integration

Horizontal – Owning (or controlling) a number of similar but separate activities in the same industry of business Vertical – Backward – Diversifying into R/M & other supplies for the company s products – may enable a co. to improve the quality of final product Eg: Vimal Forward – Div ersification further down the line to final consumer – direct control on distribution and logistic channel Eg: Nirlon

Diversification & Synergy Production Synergy: Co. mfg coolers, refrigerator,s ACs, getting into room heaters, ovens Marketing Synergy: Cricket balls & bats; tennis balls and rackets Financial Synergy: Fan manufacturers offering discount in winter Organisation Synergy: Manufacturing organisation starting consulting services Diversification V/s Expansion: Before diversifying company can & SH. Consider expansion in existing product line

Mergers and Acquisitions: Merger - Takes place when two or more Cos roughly of equal size or strength formally submerge their corporate identities into a single one in a friendly atmosphere; a holding Co. may be formed and its shares are exchanged for shares held by the share-holders of the merging Cos Acquisition – When a Co. offers cash or securities in exchange for the or take over the majority shares of another co. – happens when merger is not agreed upon – when the battle is severe, tgt price may be 100% above market price Merger - Improving Economies of scale, gaining managerial expertise, motivations market supremacy, acquiring a new product or brand name, diversifying the portfolio, reducing risk and borrowing costs taxation or investment incentives

Screening Process: - Identify industries – Medium scale investment/large scale investment - Select sectors: based on data w.r.t., sales T/O, ROI, market shares, competition, asset turn over, etc - Choose Cos – by sales turnover & asset level- determines acqn. Cost - Cost of acquisition & returns: Compare candidates - Ranking: Concept of Fit - Identifying good ones: High market share Growing market Good management system Diversified portfolio ROI above bench mark level Assembling suitability of a proposal - Funds availability - Likely positive synergies - Negative synergies & Weaknesses - Is timing appropriate - Is required management style available Valuation for mergers and acquisitions: Market price per share P/E Ratio:-------------------------------------------Net earnings after tax per share

- P/E Ratio & EPS (Market price of Share / P/E ratio) SH. Be compared with balance sheet & P&L A/C Acquirer should - Divest loss making opns - Use ratio analysis (to compare with ind. Avg) - current ratio (reduce C.L.) Stocks - Stock Level = (reduced stock level)

* 12 months Cost of Goods sold

Debtors - Avg. Age of debtors (in days) =-----------(Reduce ave age of Debtors) Sales

* 365

- Revise B/S & P&L A/c - Incorporate growth & expectation rates age of assets - Calculate replacement value of assets = 1 - ----------------Tot. Eco. Life of asset

* current cost of asset

Managing after merger: Indian scene

- NRI status is helping in mergers (to get out of FERA) - Likely to become more dominant in future

Evaluation and Control Process can be viewed as a five-step model: • To determine what to measure – this means that the processes and results must be capable of being measured in an objective and consistent manner. • To establish performance standards = these specify the measures & acceptable results i.e., provide a tolerance range. • Actual performance measurement • Comparison of actual with standard • Taking corrective action – this becomes necessary when the actual results are outside tolerance range. Before acting, the manager has to ensure whether the deviation is due to chance fluctuation and whether the process is correct and appropriate.

Problems in Measurement of Performance Short–term orientation (high ROI in short-term) • Goal displacement – refers to the confusion of means with end. It occurs when activities intended to help managers achieve corporate objectives become ends in themselves or are adapted to meet ends other than those for which they are intended. Goal displacement can be of two types – Behaviour Substitution and Sub-optimisation. Behaviour Substitution: refers to a phenomenon where activities that do not lead to goal accomplishment are substituted for activities that do lead to goal accomplishment. In other words, the wrong activities and people who focused on these activities are being rewarded. Sub-optimisation: is a situation where optimisation occurs for a unit or a functional area to the detriment of an organisation as a whole.

Strategy Audit The idea of strategy audit is to develop benchmarks. This process involves the following steps: • Identification of area or process to be examined – usually an activity which can give competitive advantage to a business unit. • Determination of measures of performance of the area or process. • Competitors against whom the company has to benchmark – these have to be generally the best among the industry. • Difference in performance measurement of the company and the best in class. • To develop tactical program for bridging performance gap. • Implementation of programs and comparing the results of new measures with those of best-in-class.

The following guidelines can be made use of for proper control of strategic planning implementation exercise: • Focus should be on critical success factors i.e., 20% that determine 80% of the results. • C ontrol should be directed towards monitoring meaningful activities and results and should be timely. Controls can be both long term and short term. • Controls should help in pinpointing exceptions. There should be emphasis on rewards on meeting or exceeding standards of performance.

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IT and Strategy •  Traditional and Alternative views of IT vary in four dimensions – !  Nature !  Evaluation !  Use !  Returns. •  There is a growing feeling in organizations, as per the alternative view, that the returns on IT investments, may not, at the expected levels, be making the investment decisions look suboptimal. This is due to the fact that IT is viewed as providing strategic inputs.

IT Strategy Components Sound strategic plans contain at least six components or elements, they include ! Application system components ! Application development components ! Infrastructure component ! Maintenance component ! Operations component ! Security component

Viewing IT as Strategy •  Investments should be made in those IT based applications and services that are likely to yield the best returns. •  Information systems for competitive advantage are those that reflect the fundamental objectives of the firm and that may have a significant impact on its success.

Influence of IT on pricing strategies •  Increased availability of information – Increased information gathering, handling, and analysis capabilities enhance price customization, bundling and unbundling, revenue management and automated pricing strategies •  Enhanced reach – Enhanced reach catalyses various pricing strategies, in particular the internet provides companies, access to an extended universe of customers, more demand and new markets •  Expanding interactivity - IT may increase efficiency through electronic transactions and online customer interactions, which can affect pricing by creating exchanges, such as maintenance, repairs and operations hubs, through which buyers and sellers group together.

Emphasis on Strategy for IT •  Organizations with more experience in automation, realize that IT can not only improve the efficiency and effectiveness, but also play a decisive role in the companies success thus acquiring a strategic quality.

Strategic Contributions of IT Nolan Growth Curve and the Growth of Management

Looking ahead •  The nature of the linkage between IT investment and corporate strategy needs to be put on firmer grounds •  The nature of IT in organizations is undergoing continuous change. There is need to quantify the benefits arising out of the shift towards IT in organizations.

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Technology Management ! Tech. Management – Due to market changes. ! Tech. Management – Crucial for Corporate success. ! Cos. should think of methodologies to generate max. return on R&D investment. ! Innovative approaches from personnel thus becomes essential. ! This calls for taking risks on the part of Management. ! Top Mgmt. - To stress upon new product development, having customer needs and wants in mind.

Environmental Scanning ! Scanning internal and external environments. ! Marketing intelligence system – Help in building a Technology Road Map . ! I ndian firms in the ongoing process of globalization – should learn to listen not only to their current customers, but also look at new customers. ! Firms to always escape from technological discontinuity.

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Balanced Score Card. !  Strategy Evaluation - 4 Parameters: a)  The Financial perspective. b)  The Customer perspective. c)  The Internal business perspective. d)  Learning and Growth. !  Managing the Strategy – 4 processes: a)  Translating the Vision. b)  Communicating and Linking. c)  Business Planning. d)  and Learning.

Balanced Score Card (Contd.) !  BS as a tool: Using BS companiesa)  Clarify and update Strategy. b)  Communicate throughout the company. c)  Align unit and individual goals throughout the company. d)  Identify and align Strategic initiatives. e)  Conduct periodic performance reviews.

BCG Matrix (New) !  2*2 Matrix !  Size of competitive advantage Vs. No. of approaches to competitive advantage. Size of the comp. Adv.

Fragmented

Specialization

Many

No. of approaches to achieve comp. Adv.

Stalemate

Volume

Few

BCG Matrix (Contd.) Fragmented

Specialization

! Small and Regionalized.

! Focused segments.

! Profitability not related to size.

! Steep learning curves.

! Advantage gained by focus.

! Ex. Cray research in field of Super computers.

! No on growth. ! Ex. Specialty restaurants or designer labels.

Stalemate

Volume

! Where it is difficult to gain advantage.

! Where there are economies of scale and IRS operates.

! CA often is the sheer sustaining power.

! Constrained by market segmentation and differentiation.

! Ex. Kellogg's in India.

! Ex. The car industry.

Competitive Advantage of Nations. !  Porter – Differences - 4 Decisive elements: a)  Availability of strengths in certain narrow, technical fields. b)  High demand in the home country. c)  Related and ing industries in the home country. d)  Strong domestic rivals, Local rivalry. Porter also refers to this as the NATIONAL DIAMOND .

Competitive Adv. Of Nations (Contd.) ! Generalizations for Strategic management: a) Devaluation is bad for competitiveness. b) Relaxing antitrust is bad. c) Relaxing product safety and environmental regulation is bad. d) Deregulation is good. e) Promoting inter-firm cooperation is bad. f) Orderly marketing agreements are bad. g) Increasing defence contracts are bad.

Competitive Convergence. ! Firms compete on the basis of similar strategies as in Strategic groups. ! Cannot be the basis for sustained Competitive advantage. ! Firms to compete for unique positioning – different Strategies (Competitive divergence). ! Also loosely related to Prahlad s concept of Dominant Managerial Logic.

Grand Strategy Matrix (Dimensions: Competitive position and Market growth). Rapid Mkt. growth Mkt Development, Mkt Penetration, Pdt. Development, Horizontal Integration, Divestiture, Liquidation.

Q2 Weak Comp. Posn. Retrenchment, Concentric Diversification, Horizontal Diversification, Conglomerate Diversification, Divestiture, Liquidation.

Q4

Mkt Development, Mkt Penetration, Fwd Integration, Bwd Integration,Horizontal Integration, Divestiture, Liquidation.

Q1 Q3

Strong Comp. Posn.

Concentric Diversification, Horizontal Diversification, Conglomerate Diversification, Divestiture, t Ventures.

Slow Mkt. growth

Doom Loops. ! Self reinforcing processes. ! Drive an organization into cyclical situations from which an organization finds it difficult to extract itself. ! To avoid getting into a doom loop, it is required to constantly upgrade the products, services and efficiency of distribution channels. ! To get out of a doom loop – refocus on the small business units and a change has to be brought about in the firm s culture.

Doom loop - Example Competitors innovate & develop better Pdt. at lower cost.

Competitor matches price & yet is profitable.

Competitor gains mkt. Share at firms expense. Firm cuts price to hold onto the market share.

Employees become demoralized.

Firm has inadequate margins to reinvest.

Quality of Pdt. & services becomes poor.

J Curve, Floating

! First noticed by Jack Welch. ! Future predictions – Things would get worse before it got better. ! Welch – J curve would shift to right as time came closer. ! Myopic pessimism becomes clear here.

J Curve, Floating.

Performance

Time

Cobweb Theorem. ! Equilibrium need not necessarily be established in an iterative process.

Convergence

! Originally conceived to explain why inflation may arise through a mismatch of expectations. ! Has widespread applicability in pricing strategies. ! Diagrams – Denoting demand supply imbalances, one process guarantees converging, the other, diverging [dis] equilibrium.

Divergence

End Game Strategies. Enhance the productivity of declining businesses till they collapse absolutely. The decline phase, according to Harrigan and Porter becomes volatile because – ! Uncertain demands due to changing technology, preferences, rising uncertainty. ! Exit barriers. ! Strategic considerations. ! Management resistance. ! Asset Disposition.

End Game Strategies.(Contd.) Harrigan and Porter s four strategic options -

Fav. Industry structure for decline.

Unfav. Industry structure for decline.

Has competitive strengths for remaining demand pockets.

Lacks competitive strengths for remaining demand pockets.

Leadership

Harvest

Or

Or

Niche

Divest

Harvest Or Niche

Divest Quickly.

4 Strategies: Leadership, Niche, Harvesting, Divest.

Economic Value Added (EVA). ! EVA = The after tax cash flow generated by a business - cost of capital it has deployed to generate that cash flow. ! Can be employed to evaluate the performance of a company. ! Important role is Strategy formulation. ! EVA – 4Ms in Implementation: • Measurement • Management system • Motivation • Mindset

National Diamond. !  Porter s way of looking at a nation s competitive advantage. !  National Diamond – why? Because it s valuable, adds value. !  Four parts : a)  Factor conditions (Land, Labor, Capital, Entrepreneurship). b)  Demand conditions. c)  Role of ing Industries. d)  Firms Structure Rivalry and Strategy.

Space Matrix. !  Strategic Position and ACtion Evaluation Matrix. !  For determining an organization s overall strategic performance. FS

!  4 Quadrant framework – a)  Aggressive. b)  Conservative. c)  Defensive. d)  Competitive.

Aggressive

Conservative CA

IS Competitive

Defensive ES

Space Matrix(contd.) 2 internal dimensions – ! Financial Strengths (FS) – Cash flows, liquidity, ROI, ease of exit from market etc. ! Competitive Advantage(CA) – Mkt. Share, Product life cycle, customer loyalty etc. 2 External dimensions – ! Environmental Stability(ES) – Technological changes, Rate of inflation, Demand variability etc. ! Industry Strength – Growth potential, Profit potential, Technological know-how etc.

Strategic Control Grid. !  To measure the power that a firm is able to establish in its working environment. !  Mapping of this control grid w.r.t competitors can give the strategist useful ideas of the appropriateness of the strategy. !  5 elements to the manifestation of this power – a)  Position. b)  Profits. c)  Process. d)  Product. e)  Perception.

Web Structure. !  Definition: A set of companies that use a common architecture to deliver independent elements of overall value propositions that grows stronger as more companies . !  2 conditions: !  A common platform, either technology or geography etc. !  Increasing returns to scale. !  3 types of webs (Hagel): a)  Market web : Shopping Malls. b)  Consumer web : Readers digest. c)  Technology web : Tech. Platforms – windows etc.

X Efficiency. ! The measure of a firm s management in minimizing the cost of producing a given output or maximizing the output given a set of inputs. ! Supposed to capture the discrepancy between the efficient behavior of firms as implied by economic theory and their observed behavior in practice. ! Libenstein introduced this theory of inefficiency generated due to lack of competition.

Organisational

Agency 3.  10. 11.

Awareness Confidence Strategy

1.  2.  5. 7.  8.  9. 

Image Disposition Resource – in – kind Resource Monetary Top Management Self - interest

External 4. 6.

External Social Comparison

NPO

Parameters of NPO Choice • Responsiveness • Credibility • Capability • Confidence • Communication • Channel • Tangibility • Top Management A Theoretical Model for Corporate Philanthropy (Note: Numbers denote factor rankings)

Policy and Programs

Non Profit Organizations Important factors for an NPO choice in the Indian context are – Responsiveness

Channel

Credibility

Tangibility

Capability

Top management

Confidence

Communication

Small and Medium Enterprise (SME) • Small and Medium Enterprise (SME) employs less than two hundred People with an annual turnover of Rs.5 crores. SMEs in India have to develop entrepreneurial characteristics in order to survive in the changing market scenario. Four important characteristics which are key to the success of the firm are: • Ability to identify potential opportunities better. • A sense of urgency making them action oriented. • Knowledge of key to success in the industry. • Supplementing through outside help skills, knowledge and ability

Guidelines • Focus on industries facing sustained technological or regulatory changes, especially those which witnessed exits by established competition • Seek industries whose smaller firms have relatively weak competitive position • Seek industries that are in early, high-growth stage of evaluation • Seek industries in which it is possible to create high barriers for subsequent entry • Seek industries with heterogeneous products that are relatively unimportant to the customers overall success • Seek to differentiate your products from those of your competitors in ways that are meaningful to your customers • Focus differentiation efforts on product quality, marketing approaches and customer service – and charge enough to cover the costs of doing so • Seek to dominate the market segments you compete in. if necessary, segment the market differently, or change the nature and focus of your differentiation efforts to increase the domination of the segments you serve. • Stress innovation, especially new product innovation, that is built on existing organisational capabilities • Seek natural, organic growth through flexibility and opportunism that builds on existing organisational strengths. Some guidelines for new venture success Source: C.W. Hofer, and W.R. Sandberg, Improving New Venture performance: Some guidelines for new venture success , American Journal of Small Business, pp.17, 19, Summer 1987.

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