Frameworks:

CHAPTER 1
Why go out? Objectives Risk reduction Fungibility Inalienability Synergies Retaliation Recoupment of losses Conversion of status Dog to Star Profitability Growth opportunities Relationship maintenance Legal compliance Least cost path Parameters Correlation EIC Analysis . Environment / context . Industry analysis (5 forces) . Company SWOT analysis

ENTRY STRATEGIES

Diversification

Poor performance here

Attractiveness of other industries Necessity of exit

EIC analysis Economy Demographics Economic (Income levels, level of development and credit buoyancy) Natural (raw materials, laws and energy costs) Technology (obsolescence and new changes) Political (laws and regulations, taxation and politics) Social (cultural traits) PESTEL Industry (Five Forces) Threat of Substitutes Threat of Entrants (entry barriers) Rivalry (size of the pie now /likely, number of rivals, existing nature of rivalry) Suppliers' powers Buyers' powers demand analysis Company (S/W) Resources People Finances Past history Knowhow and experience Skills Processes / methods Systems (e.g. distbn.) Name and image

An alternative approach to EIC (viability of an investment) Commercial - legal environment, rivalry, demand, supply, costs and prices Technological - processes, technology

Financial - ROCE with funding mix Promoters - S/W analysis of the Company

How to enter?
A. Location Export goods Options Risks HIGH: Tariff and Non Tariff barriers LOW: risk related to demand LOW: foreign exchange risk Local capacity better used Fiscal incentives Leveraging the local costs and strengths Export knowhow sell in that country Assemble Manufacture HIGH: Capital outlay costs HIGH: Input sourcing risks HIGH: Capital import controls risks HIGH: Repatriation of returns HIGH: Cultural differences, Managerial risk Presence and proximity Inside the Trade Barriers Government patronage likelier (FDI) Cost arbitrage (e.g. labour costs)

Benefits

B. Status of the firm Acquisition of going concern Benefits Using existing capacity - no risk of glut Lesser capital costs (can pay for existing technology and capital rather than replacement value) Brand name leverage Low gestation period Existing systems and resources C. Control Solus

Startup venture Control Tax benefits of a new industrial undertaking

Joint venture Sharing of capital outlays Sharing of resources - technology, financing, personnel and systems The local touch - for a new environment

D. Scope of entry Segments Gaps Flanks Weak links

Whole market Needs resources Creates impact and visibility Immediate effect Volumes generated

CHAPTER 2

PROFITABILITY ANALYSIS

What is the CSF ??? And how is it operating . Measurement metric: ROCE Returns Revenue Price Volume Mix Driver s 3 Cs Drivers Supply Demand Drives Synergi es Strategy Classified on the basis of function Analysis of variances price / rate volume yield mix ( product / buyer / market ] Fixed costs Scale economies Production levels Costs Manufacturing a. Procurement b. Inwards logistics c. Operations: Materials/Labour /Conversion

Costs Variabl e

Capital Employed Fixed assets Fixed Capacity utilisation Technology used Off-balance sheet

Working capital

Period held, for each item

Selling a. Outbound logistics b. Distribution c. Marketing costs d. Sales servicing

Administration a. Salaries b. Soft costs - Culture - Motivation - Recruitment

Research a. Salaries b. Materials c. Capital outlays

Price a. Product type (differentiation v/s commodity) b. Demand power c. Market structure (oligopoly, monopoly, competition) The 3 C's model Competition Pricing strategies Product: differentiation v/s commodity

Volume Sold i.e. demand drivers a. Company b. Customers c. Competition 3 C's model

Produced a. Capacity b. Bottlenecks of Labour / Technology / Inputs c. Laws

Customers Tastes Number Switching costs

Company Price Product Place

Incomes Trends Demographics

Promotion

Demand drivers 1st classification: Systemic v/s Firm specific nd 2 classification: Price v/s Non price Non price: Quality delivered, Season, Tastes, Loyalty, Switching costs and Substitutes availability OPTIMISING PRODUCTION WITHIN LIMITED RESOURCES The case: Machinery available .. product mix to be decided .. costs etc. given Approach: maximise profits per unit resource hence produce in decreasing order of the profitability per unit resource Constraints: specificity of resources minimum utilisation levels minimum batch sizes availability of ancillary resources (other resources may become scarce and constraints) market demand availability personal preferences Algo: if a minimum demand has to be met, meet it first out of all resources and then use the balance as per efficiency measure. If a maximum exists on a product, produce it to its maximum when its turn comes, and then proceed.

CHAPTER 3

PRICING - THE SECOND P

PRICING MODEL OUTLINE a. Objective of pricing: strategic / tactical - cost recovery - market share b. Extent of pricing: - customers: demand curve, elasticities (simple / cross) - competitors: price wars and game theory - context: laws and regulations, cartels c. Pricing is the distribution of value: cost to supplier as the minimum, value to customer as maximum

The Pricing Decision Demand determination demand curve elasticity (sensitivity of demand to prices) Cost estimation operation distribution returns on outlay

Objectives Survive Cost recovery Increase / maintain share Reposition push sales leadership role

Benchmark ing with the rivals

Price and Demand Demand function and price elasticity Cross elasticity and substitutes Product differentiation and virtual monopoly The buyer's first criterion will be affordability, and value only second. Strategic Pricing Models MU = MC / Price is the threshold for a buyer Perfect competition: Zero switching costs, free entry and exit, price = long run average cost Monopolistic competition: Product differentiation, moderate switching costs and reasonable price differences. Prices equal average costs Oligopoly: Limited firms, existence of entry and exit barriers, well differentiated products with selling costs. Elastic demand curves, and higher possibility of price leadership and collusion increases Monopoly: One firm and the entire industry demand curve. Price high and output restricted. Depends on the barriers to entry and on the contestability Tactical Pricing Models Market skimming: High publicity financed through a high price, mainly for a product for which the aim is short term profits. Penetration: A long term focus which seeks to gain first-time usage and trial through attractive low prices, then raises prices and adds features and builds a brand and a strong monopolistic position. Price Computation Markup / ROI based pricing: The typical pricing is based on a markup on costs. Market pricing: Match average market price to the average brand, and price after benchmarking for features, if the market price reflects the buyer's value perception

Target costing: A target price is set based on desired market share and the full product design, configuration and delivery - is developed around the target price. This is useful in case of an entry strategy.

Adapting Pricing Cross subsidisation: For multiple products, strong brands will finance start-up losses on entry brands which may have to go for penetration and predatory pricing. Discounts: Basically reduce the costs borne by buyers, and are typically linked to seasons or events and result in a boost in sales. May dilute brand image. Discriminatory pricing: Requires a substantial market power, and non arbitrage opportunities to the buyers, as also different elasticities in demand across buyers' segments (market power) Two part pricing: A start-up / entry price as the price of use of the facility for using the product, accompanied by the actual usage charge. Very flexible especially in case of products which are not divisible by themselves but the use of which is divisible (e.g. car rentals) Inflation: Inflation induces price changes as it cause an increase in costs and hence in the required returns. Benchmarking of prices: Under collusion or cooperation, the firms may agree to benchmark prices against one another (price leadership, advance announcement of prices etc.) New role of pricing a Driver of the Marketing Mix Entry: As an entry tool, price attracts attention and trials Product: Pricing of rivals forces benchmarking and a lower price forces a redesign, often eliminating features and offerings. Promotion: Price is a now strong promotion tool to differentiate products amidst the clutter of value-added features. Place: Price acts as strong signal of value and hence influences the service level perceived by the customer as also determines the nature of the outlets, their ownership, the dealership costs etc. Managing the customer for strategic price marketing Stimulate customer's purchase decisions by rewriting the value equation (psychological threshold, attention to the USP, redefining the substitutes and enticing inventory building) Price triggers evoke comparison with different products, and tempt the buyer, attracted by a lower price, to make a replacement purchase before schedule. Target price of buyer = f(urgency, estimates of future, the contextual environment and historical prices) The downside risk of price-led marketing, is that volumes may not climb though margins drop and retracing out of the mass market up the price-ladder is impossible. The solution is to manage the customers mix, by avoiding discount-seekers. The discounts can be designed into a sliding structure with rate falling in proportion to the frequency of usage.

Strategic price marketing Match the value that the customer pays with the expectations he has about its value, with different price expectations for each segment balance the customers requirements and the firms requirements Aim: right price-level for each segment, and then progressively moving through them. High quality and low price are not a trade-off, they make a winning marketing strategy. Price Marketing will not compensate for a diluted brand image, or poor penetration, or indifferent advertising or for the product offering. The BARON Akai case in terms of models studied The consumer durables market is an oligopolistic market, but Baron attempted commoditisation of the market with price cuts and exchange offers , which were clearly predatory with an intention of rapid sales, and no concern for sustained brand image. The pricing was supported by promotion schemes and cost cutting, which allowed the low prices to be sustained. The competition reacted by price cutting (oligopolistic model) or by distancing the products (product differentiation) through brand repositioning and advertising. The industry has migrated again towards brands and product differentiation. The price bubble, howsoever short-lived, has however had an impact as it demonstrated the price sensitivity of the customer. The customer loves value-for-money, whether value be heightened by product differentiation or money be reduced by price cutting is of no concern.

CHAPTER 4
Threat of entry Deterrents: Barriers to entry. These are however not static.

PORTER AND HIS FIVE FORCES

Economies of scale Product differentiation Joint resources/operations Volume economies Brand identification Switching costs of buyers Relationships Ability to mobilise the resources and systems needed to replicate the setups of existing participants E.g. plant, distribution, networks Knowledge Learning curve Exit barriers Depends on the rivals

Resources required

Governmental policy Propreitary resources Contestability of markets Retaliation Definition of the subistitute Changes in technology Changes in the tastes / needs Performance / price ratio of

Threat of substitutes

Rivalry The idea is that firms in the same industry interact with one another through decisions Changes in rivalry: entry / exit, mergers /alliances

the competing product The pie

Size of the pie Growth in the pie size The number of rivals Size of rivals Product nature (commodity ) Cartelisation Diversity of rivals - goals, values etc. Exit barriers Entry barriers

The pieces

redefinition of industry Buyer's power and Vendor's power The bargaining powers depend on the change in needs and requirements dependence and alternatives information

Criticality Integration threat Costs Elasticities Market structure

To buyer To seller Backward integration by buyer Forward integration by seller Switching costs Transaction costs of lost sales Supply curve Demand curve Monopoly Monopsony Oliopoly Oligopsony Monopolistic Competition competition Pure competition

Two approaches to using the Five forces model: a. Positioning the firm within the framework b. Influencing in the forces themselves COMPETITION ANALYSIS Analysis of the competitor involves: a. his current strategy b. his future goals c. assumptions he holds about himself and about the industry d. competencies and strengths Preparation of a response profile for: a. prediction of strategic changes that competitors are likely to make b. evaluate the defensive abilities and attacking threats c. evaluate mismatches between the competitors in respect of goals and profiles

CHAPTER 5

GROWTH IN PROFITS

To grow in profits: one needs to Grow in volumes Increase sales implies: Capacity increase methods (acquired / leased etc.) Demand increase demand drivers Growth means: Internal Organic growth (on expansion) Systemic growth (market expanding) It is achieved through changes in business - product market combinations Through acquisitions (examine issues in acquisitions) Change the mix Mix includes: Buyers Markets Products Grow in margins Raise prices Cut costs Improve efficiency Reduce wastage Beter bargaining

External

CHAPTER 6

RESTRUCTURING BUSINESSES

SELLING OFF A BUSINESS To sell or not to Why are profits falling sell Remedies available costly No remedies available, hence sell off Loss of embedded options Linkages with the existing business portfolio esp. contribution to a competitive positioning What value to Options pricing model, Valuation techniques, Competitive scenario (5 charge forces) etc.

VALUATION OF A BUSINESS Stand Alone Ventures Typical case: tea shop / caf Issues: Traffic Time of the day Day of the week mix Costs including Personal time involved (opportunity cost) For M&A Purposes TO DO

Product

TAKE OVER BIDS Identifying targets (including evaluation) McKinsey Pentagon Framework Share value - Intrinsic value - Internal changes - External changes - restructured value - Share value Fending off bids Who are we and Who are they History Business Resources Last few years Avoiding the bid: Why? Methods Remove the incentive Improve usage of resources Get rid of the inefficiency Why do they want us Synergy Arbitrage (ability to use the resources better)

Reduce the value Increase the cost Sources of synergy and Increase the resources needed arbitrage to be taken away (price) e.g. Counter bids Increase the cost of resources required

ACQUISITIONS IN DIFFERENT BUSINESSES a. Unrelated b. Related: Downstream / Upstream / Byproducts / Complements / Substitutes Synergies What do we have in X What do we need from Y Can we bridge the two

Critical success factors 5 Forces analysis

CHAPTER 7

CAPACITY DECISIONS

What capacity to build Expansion of capacity How to acquire Using capacity what level Selling off capacity EXPANSION OF CAPACITY 1st question: Why expand ? the objectives Impact of a change in capacity Supply potential increases Economies of scale Demand pressures reduce Product differentiation price cutting Nature of Rivalry changes Impact on the 5 forces ??

Learning curve else Game theory concepts such as early mover, commitment etc. Outlook of industry and potential for the future

Value of change in capacity Recovery of revenue Does demand justify the expansion Can price be increased Impact on costs

Payback horizon Cross subsidisation Break even Cost of resources used Synergies

CHANGES IN CAPACITY UTILISATION Utilisation = %ge of usage vis--vis capacity Capacity = installed v/s normal utilised v/.s actual utilised Compare with industry standards Constraints: a. Availability for use Downtime Bottlenecks Critical mass Batch processing b. Requirement to use Demand & demand drivers Logistics and delivery / distribution Inventory norms Smoothening USING EXCESS CAPACITY

Capacity = Resources = Labour + Technology + Machinery Qn: which of these is excess? Why? a. Demand fall: not correctible (e.g. Government stops buying arms under defence budget cuts) b. Increase in efficiency (e.g. breakthrough technology or innovation) Using excess capacity a. Continue production Same product - Different product-markets c. Sell out To evaluate the profits from each now and later, using the traditional 5 Forces model etc. for each model. The other parameters to examine: Costs of modifying capacity Opportunity costs Extent of reutilisation

b. Lease out

Costs of altering the capacity mix Laws

CHAPTER 8

COST MANAGEMENT

Basic funda: Costs arise out of activities

WHAT IF VENDORS RAISE COSTS? - Understanding Where is the cost increase which part of value chain? How is it likely to affect the operations of the firm ? How long is it likely to last ? (temporary v./s permanent) Whose costs are so affected ? (only oneself v/s many others) Coping cost Depends on price elasticity + 3 Cs model + market structure (eco fundae) What is the impact on volumes now and later Strategic impact cost cost

Pass on increase Retain increase Manage structure

WHAT IF COSTS ARE REDUCED - Understanding Where is the cost increase which part of value chain? How is it likely to affect the operations of the firm ? How long is it likely to last ? (temporary v./s permanent) Whose costs are so affected ? (only oneself v/s many others) Coping cost Depends on price elasticity + 3 Cs model + market structure (eco fundae) What is the impact on volumes now and later Strategic impact drive out the competition cost Impact on image cost Redeploy cost savings to alternative heads of costs e.g. R&D impact Capital expenditure

Pass on decrease Retain decrease Manage structure

ESTIMATING COST STRUCTURES OF RIVALS Areas of costs Logistics Selling

Production Administration

Distribution Development

Difference in costs can be linked to Rate Volume Efficiency Mix Logistics, Networks and relationships, Bargaining power Capacity, Utilisation achieved, Demand Technology, Process design Marketing, Demand

REDUCING COSTS What is the cost structure: Now / then - Us / industry What is the composition of costs Cost measurement and allocation v/s Actual costs burden (the ABC method) Source of costs - activities and Cost drivers Sources of over-cost - inefficiency / slack / wastage / buffer (e.g. inventories)

CHAPTER 9

OTHERS

LOCATION ANALYSIS Comparing two locations Evaluate the main drivers whether these are location-specific Product nature: design, target Delivery method market Demand drivers Cost drivers SPRINKER v/s DRIP IRRIGATION Customisation v/s mas marketing Customisation a. Better value proposition b. Better margins c. Riding the demand curve d. Needs identifiability of the targets e. Monitoring and managing the targeting process f. Scale will be fragmented g. Flexibility Mass marketing a. Volumes, costs and diversification Rivals