Mgmt study material created/ compiled by - Commander RK Singh

Date: 18 Jan 2007

Prof: Mr Kuldip Kawatra

Recommended 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 Threeis a book which propounds that a company should strive to be among the top of three in its business, else, it should quit.

List of Topics

  1. Strategy – An introduction
  2. Components and Hierarchy of Strategy
  3. 5 “P”s of Strategy
  4. Business Strategy, BCG Matrix
  5. Factors influencing competitive success
  6. Industry analysis. Michael Porter’s 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

List 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 this subject important for every business manager?

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 tailor’s 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-Mart’s 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.

Good strategies help in achieving the objectives. It reduces the cost, improves the profits and provides competitive advantage which are so vital for success of any business.

Business Growth Models

  1. Organic Growth– Growth ofexisting 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)Acquisitions

(b)Mergers

(c)Takeovers

(d)Amalgamations

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” (Tomorrow’s 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 critical unknowns –

  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. Growth 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. Threat of Low CostTechnology –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 is the key purpose of Strategy Formulation?

Strategy is aimed at creating sustainable competitive advantage.

Definition of Strategy –

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

In Simple terms – Strategy is the action plan aimed at achieving sustainable competitive advantage.

Components of Strategy –

  1. Scope – A business may have several segments and each segment has several dimensions; Finance, Production, Marketing, HR, Distribution, Advertising, ………… 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. Which segment of the above is your focus? Scope refers to the business oractivities of a business where you wish to take advantage. 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 is the objective of strategy? What do you want to achieve? Do you want to increase the profitability? Or, do you want to increase the market share? Or do you want to reduce the competition? Even Profit is not always the motive. Some times public welfare may be the objective.
  3. Deploymentof 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.

Strategy Formulation is done at 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 Strategy

  1. Plan - Plans are the intended set of the actions to be executed in future. Often plans evolve from the patterns of the past. However, for an effective strategy, the plans should have a disconnect from the present.
  2. Pattern – Patterns are typical progression characteristics 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

STRENGTHSWEAKNESSES

  • Captive Buyer BaseEntrepreneur-Driven Culture
  • Established Customer LinksSingle-Product Orientation
  • Access to TechnologyLittle Scope for Diversification
  • Healthy FinancialsAbsence of Core Competencies

THREATSOPPORTUNITIES

  • Transnational CompetitionExpansion of User Industry
  • Integration by OEMsEmergence of New Buyers
  • Dependence on Few BuyersGlobal Sourcing Base
  • Sense of ComplacencyNewer 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?