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STRATEGIC MANAGEMENT

Professor S. M PRABHU
LECTURE (1)
Thursday 11th January
Books:1.
2.
3.
4.

Strategic Management Robert Pits & Daniel lei


Strategic Management Jim Thompson
Corporate Strategic Roger Bennett
Strategic Views of Industry & org Markets Michael Hit &
Thompson spel
5. Michael Porter Competitive advantage
6. Introduction to Corporate Strategy Richard Pettinger
7. Strategy Management A casebook in policy & planning Charles
Haler
Strategic Management is a general Management started in 1911
Initially before even Strategic Management started following were the
scenarios
Only Production was developed
Monopoly Customer had no choice and had to purchase the only
Quality and dictated price
Marketing was lacking
Scientific techniques was introduced for different functional areas
Later Complexity was creeping
Art of War
Taking someones territory
Holding on to your territory
Giving away your territory
Corporation is an Organization Army workforce
Organization is

Group of People
Common Objective
Belonging to the group, identify
Interdependent
Interactions

All groups are not organization, but all organization is groups


1

Structured entity
Perpetuation of the groups

E.g.:- Group of people standing in a bus stop, Alumina, college


STUCTURE

Input Resources
they are managed,

Quality of Input & how


Create competency & Core

Competency
ASSETS
Which create Sustainable
Competitive Advantage
TANGIBLE

INTANGIBLE

PROCESS

ATTITUDE

External Environment
Competitor
To meet Shareholder expectations
To Create Shareholder wealth
Fit between your Competency and the External
Environment??????????
Structure: Positions Roles and Responsibility with
accountability
Tall or Flat (Team based circular)
Process :-

Production , Quality , Communication , Technology ,


Research and Development , Distribution, Inventory ,
Control , IT ( Driving the process to improve the efficiency
Customer Satisfaction, achieve the objective
Attitude: People at work place
Way of looking at the something
Most dangerous of all
Effects production
Organization problem
Morale Bundle of attitude
Attitude towards policy, Boss, subordinates, grievance system, control
systems, timings, PMS, etc
2

Attitude drives production, Attrition, skills


Skills Application of knowledge to a situation
Attitude drive the process
Efficient Whatever doing but right (wrong thing done rightly or right
things done rightly)
Effective Doing right things
Survival

Effective
Efficient
Economy cost
Asset: -

Tangible wear and tear during the course


Intangible R&D, Advertisement
Investing in Brand building, training (Intellectuals)

When man becomes old, etc , education and additional skills (intangible
asset) enhances the tangible asset (human)
Converting Tangible to Intangible (Hope) e.g., Lipsticks advertisement
Management Decision making in an ethical manner
Competency
1.
2.
3.
4.
5.

Unconscious In Competency I dont know that I dont know


Conscious In competency I know that I dont know
Conscious Competency I know & I can do
Conscious Super Competency I know & I can do better than
Unconscious Super Competency I know how good I am but dont
know how (Competing against oneself)

The above last two 4th and 5th are Core Competency
Core Competency:1. I have control over Raw material that other people dont
have e.g., Mines, gas mines of Reliance etc
2. Intellectual property Rights, I have you dont have
Patents, copyrights, Trademarks (No life) Brand building
3. Distribution Network Geographical vast, demand is
dispersed Colgate 3 million outlets
4. Relationships Supplier network, Vendor network,
customer network, Politic network, government network,
bank, creditors network
Sustain & growth
5. Tacit Knowledge Integrity, team work, Culture strong
All the above is SYNERGY Achieve Synergy for core competency

Strategy has 5 components:1. Domain or terrain What are we going to fight the war , which
customer
Segment, competitive, market, geography
Do we understand the battle field?
2. What objective do we want to set our self on the terrain :- Market
share , profitability , Brand , knowledge of Competitor , Primary
demand , secondary demand , financial objective , market
objective
3. To which SBU are we going to deploy our resource manpower ,
money , technology , assets , capacity
4. Which competency are we going to use to make Unique , which
weapon will make us superior
5. What Synergy will be achieved as a wholly rather than partially
External environment: - Legal, Political, Economical,
Technological, competitor, Ecological
Market / Product Spectrum
Commodiation
Market Segment Niche Market
Mass Customization
Customization

One for All


one for some
One for few
one for each (e.g., DELL)
One of a Kind (High value)

Mass Customization requirements are 4 Mix and Match product


1. Advanced Mfg technology Where you can achieve economies due
to batch size
2. Modular Platform
3. Interactive Web site
4. Delivery System courier system should be perfect & available
5. Payment Gateway
Shareholder Expectations

Customers
Society

Distributors

Creditors

Shareholders
Company

Government

Suppliers

Managers

Employee

1. Society: - Social Causes, Environment Concerns, Affirmative


Action (Job)
2. Supplier: - Regular orders, Higher Prices, Prompt Payment
3. Distributors:- Fair trade Practices , Higher margin , credit,
favorable, Policies on returns etc .
4. Workers Job security,wages,good supervisor & training , fair
treatment
5. Manager :- Power , prestige , Perks
6. Government :- Contribution to GDP , Taxes , Forex , employment
7. Customer :- Novelty, Value for money , Services
8. Creditors :- Safety of capital , regular interest payment , use of
extended facilities ( Insurance and other products )
9. Shareholders :- Dividend , capital Appreciation , Corporate
Governance
Stakeholders expectation is only the result and end
Business: - Existence of any Business is because of existence of
Problems and Business comes into existence for providing Solution to
the problem (Any business is called a solution provider)
Problems:1. Dont know problem Scope for solution ( Opportunity )
2. Know Problem
But dont have Solution
3. Know Problem
But little Solution
4. Know problem
Full Solution
Better Solution
But not best solution
Value is a solution for which People are ready to
pay
Value = Perceived Benefits
Cost
Perceived Benefits = Emotional / functional / sensual
Cost = Physical, Financial, Functional, Search (time),
Physiological , Social
Physical Risk, side effects, rash on body clothes,
medical side effects
Financial he purchased for 20/- Rs less than I feel
cheated
Search Car parking
6

Physical Feel Good factor


Business is a value creation & delivery
Value > 1 Core Competency
Value = 1 (business will collapse)
Value < 1 (Business will collapse)

Identify the Value


Select
Create
Communicate
Deliver Supply chain
Assess 6 Sigma ( Defect level )

Before Customer paid for Cost, Now for value


Engine Pulls the (weight) of the entire Bogie
20 % pulls 80% (80% are only passengers) and 20% are the real
sloggers
Risks
Business Risks are Volatile: Credit Risk - Bad debts , doubtful debts , overdue Accounts
Receivable( Interest)
Operational Risk-labor strikes , power , quality, market, trade
union Tata mines steel low risk in operation , Jindal have to
export high risk
Legal Risk- Long time justice , too many cases pending , outside
court settlement
Political Risk unstable government
Country Risk Rating of Country
Currency Risk Infosys projects , Exports & Imports orders
Market Risk Economic stability , price , inflation
Reputation risk loss of reputation , defending brands
Disaster Risk flood , famine , tsunami
The Value Chain Michael Porter

Infrastructure (Fin & Acct / Telecom / IT)


R&D
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SBU 1

(Generation)

SBU 2

(Transmission)

Note: - The Entire Value Chain works for Each SBU (Strategic
Business Units)
Each of the SBU = INVESTMENT CENTER/PROFIT

CENTER/COST CENTER

A. Inbound Activity :Vendor Development, Purchasing, transport, Insurance,


Warehousing,
Material Handling, Inventory Control
B. Operations :Production, Process, Maintenance, Utilities, Quality Control
C. Outbound Logistics :Channel Management, transport, Insurance
D. Sales & Marketing :Advertising, Sales, Sales Person, PR, Direct Marketing
E. Service :After Sales Service, Spares Management, Repairs & Services like
Installation, Commissioning, Warranty, Guarantee, Returns
A + C = SCM (Supply Chain Management)
D + E = CRM (Customer Relation Management)
SCM + OPS + CRM = Co (Company)
A = Raw material
B = Production
C = Finished Product
Price
Output

V/s

Cost
Input

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Sequence Flow of Activities, Where at each Activity in the Chain Cost


are incurred & surplus / Margin needs to be generated
E.g.; - Petroleum Industry
Petroleum Industry Value chain
Exploration
Filament

Drilling

Transport

Refining

Petroleum

Synthetic Yarn

Sari

Each one is a different Company


Multiple Core Competence required being on the Entire Value
chain within an Industry
Strategic Value Analysis (SVA)
Bread Britannia
Wheat A variety of Wheat
McDonnell Potato a particular type of size grown in Punjab
Wheat from Where to buy
How are you going to buy Import, grow, Subcontract
Core Competence in procuring wheat
Wheat bagged & transported - 4 Rs/KG
Who is going to bag - Plastic / jute
Insure
Transport outsource or self
Wheat
Bagged & transported
Cleaning 0.30p/kg

4 Rs/KG
0.20p/kg

Disaggregate from Aggregate Whether adding cost or value


(Value addition in each chain) Adding cost close the department /
Activity and outsource it
Even if activity is Expensive & Costly, but critical activity then not
to outsource as it will collapse the entire organization
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Glaxo : Every Activity is outsourced AP- Stamping , Billing ,


Collecting , Printing / Couring

Earlier: if Cost increased add to the Selling Price (SP) & sell it
In Competitive days: you cant pass your inefficiency to your
Customer

Reducing Inefficiency
=
Cost Reduction
Value is not absolute; it is relation to market/Completion etc
Perception
It is not a onetime activity

Economies of Scales
Fixed cost is maximum than Variable cost, increase the production
spreading the Fixed cost, then cost per unit reduces Fixed cost
proportionate is more than the Total cost
Diseconomies of Scale
1. Break down because of Continuous Shift operations for taking big
orders
2. Too much of Overtime , Absenteeism , Fatigue , Accidents
3. Consequences of Diseconomies of scale Reputation loss ,
Breakdown, Non delivery , Penalty
Economies of Scope
How many products can share various activities commonly?
Sharing the same Activity by different SBUs
E.g., Warehouse can share different products rather than different
warehouse
Legal department handling for different SBUs
Experience Curve Effects
Every time we double cumulative production, cost drop by 15%
1. Production improves because of continuity
2. Deficiency decreases because of Expertise & Experience
3. Ideas improvement

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A
B

Unit Cost
10000

20000

40000

Cumulative Product

13

Marginal Contribution basis = SP VC

C sell at 98
B & C will get the market share of 10000
C Sell at 93
C gets the market share of 20000 = 70000
Why is C able to sell at less, because of Economies curve of Sale?
Economies curve of sale, Exp curve of effect Profit unit 7/-

Hierarchy & Strategy

Corporate level
Business level
Functional level

Vision
Mission
Objectives
Policies
Strategy

Vision: Dream
Where you want to be
What you want to be remembered for
Mission
Road Map What exactly are we going to do?
Mission Scope
Industrial Scope
Geography scope
Product scope
Customer scope
Vertical Scope
Technology Scope
Industry Scope
Which Industry do we propose to enter into business?
Diversified Business, or single Business
Core competency in different industries
Core Competency of a particular or competency into different industries
Geography: Scope
Rate of return from the geography
Is it only people only money or area or resource
Risk Political, Legal, Liquidity, Currency
Multi nation, National, Regional, Global
14

Product Scope:Which product -All product or Specific Product


Confectionary - Chocolate, mints, Butter, Lozenges
Pharmacy Antibiotics, Minerals, Calcium, Steroids ( all or Specified)
Vertical Scope:In Which part of Industry Value chain
In the Whole start to Finish , Or some part of the Chain , Or outsource
Technology Scope:Which Technology Research, Buy, License, Manual, Customer, State of
art
Mission is a pointer to manager to which area he should concentrate
plane glass or sheet glass
OBJECTIVE
Within the scope what do you want to achieve Market share , Profits ,
Sales units , Goals , Budgets
Manage variance and Deviation
POLICY
Guidelines to action
Boundaries within which it should be achieved
Pricing, Admn, Inventory , Credit , leverage, product , Marketing ,
overtime , leave , , termination , transfer , recruitment , Training ,
promotion
Rules: - dos and donts
Policy Broad framework
Procedure Activity done in Chronological order
Strategy Art of Walk
Policy is orders, guidelines to achieve the Objective
External Policy Government & Trade policy
Internal Policy Management and Down below level

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HIEARCHY

Corporate Objective

SBU 1

Competitive Strategy

Deployment of
Resources

SBU 2

Deployment of Resources
Over Product MKT

Market Strategy Operation Strategy Finance Strategy

Corporate Strategy

SBU 3

Business level
Objective

HR Strategy

What Business Should we be in?


How will we grow them?
What competence do we have?
How will be competitive in our industry
What goals will we achieve in which production category & geography
tactic
Corporate Strategy = board
4 GRAND STRAGEGIES AT CORPORATE LEVEL
1. STABILITY ;

Maintain Statuesque
Sustainable growth

2. GROWTH :

Organic All by Myself


Joint Venture (JV) Boyfriend & Girlfriend
Mergers - Marriage
Acquisitions Hostile Forced Marriage
Conglomerate - Diversification
Concentric Same business Steel ranges
Vertical Integration Value chain, Forward,
Backward
Horizontal Integration Connected Business
Franchising give under certain Conditions,
Vasan Motor f
Licensing Patent, Copy right
Strategic Alliance Co-opetation = Cooperation
+ Competitive (Reliance + LG handset)
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3. RETRENCHMENT:

Turnaround
Transformation Change forms
Divestment Sell Whole
Disinvestment Sell some Part
Captive Unit
Bankruptcy (Liquidation)

4. COMBINATION:

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Knowledge of following

Domain Expertise
Macro Economic
Global Economics
Not only theoretical SWOT

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How good SWOT in Buying Corus


Richard Pseal along with Mckincy 7S Model
Why Japanese have been successful
America Hard Components Structure Systems Strategy
Japanese Soft Components Skills Style Staff

Structure
Systems

Strategy
Shared
Values

Skills

Staff
Style

1. Shared Values :- Organization Culture


Japanese use culture to great advantage
Culture comes to Work place.
Perform so well within any natural resources
Japanese Bottom decesision Heavy
America Top Decisions heavy
2. Style :-

Leadership Style
Deficiency of Leaders
(0, 9)
Philanthropic

Democratic (9, 9)

Bureaucratic

Autocratic

Concern for
People
(0, 0)

(9, 0)

Concern for Production

18

Manager is a position given to a chair Positional Power


Leader Reward and Punishment Power, Sack You , Warning
Letter , Awards
Exercise influence, Knowledge through Power
Charisma Power of persuasion Jesus, Sai Baba, BAL
Thakare
Power of Emulation - Role model Power Narayan
Murthy, Bill Gates
People want to be like them would listen
to them
Handling situation and People Adapt to situation /
Flexible
Versatile in nature Can exercise

Bureaucratic Assurance given to all


Autocratic - Instructions
Philanthropic Ignore things
Democratic

3. Systems:
Excessive system & Excessive process is bad, stops things
Upto what point systems & what point freedom
Balancing is not so easy
4. Staff :
Quality of people Quality Experience Productivity
Caliber Motivation
Win people not buy leadership quality
Training & Recruitment Cost
Attrition cost
5. Structure
How many Boxes do you have?
Responsibility / Communication Line
Carrier Plans, Succession Plan
How flat / Circular/ Team oriented / Formal structure
Traditional Structure Pyramid (Triangular)
Future hierarchy Circular Team based
6. Skills
Six skills to be a Manager
Application of Knowledge to a Situation
a. Technical Skill ( IQ) - Entry level Skill
E.g. Book keeping skill as a B.com
b. Analytical Skill (IQ) : Gaps are bigger
Diagnostic Skill, Problem solving, Identifying Problems
Diagnostic the cause & Effect
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Optional Solution Which decision you would take


Doctors Skill all based on IQ
c. Human Relationship (EQ) Communication
EQ Emotional Quotient
Can be cultivated, driven by EQ
How well you get along with People
How well do you understand people
How well understand others moods
How well others understand you
How well you manage your mood
Sense Humor shorter distance between two people
Sense of Courtesy
Sense of Empathy can you understand someone elses view
point?
d. Enterprise Skill (AQ) Risk taking skill
Taking decisions means there is consequence & consequence
means Risk
AQ Adversity Quotient

Climbers

Campers

Climbers 10%
Campers 80%
Quitters 10%

Quitters

10
%
80
%

10
%

e. Political Judgment (SQ):- Balancing Priorities


SQ Spiritual Quotient Enlightenment
Weakest link, lack of sense of priority
Time management
f. Conceptual Skill (SQ)
Ability to see all parts, fit in as a whole
Eg. Marketing, Production, Price, etc
Cannot to top without Conceptual Skill
Should have a top view of the whole scenario, Organization,
Problems
Richard Pascal: - 4 factors drive Stagnation & renewal in
organizations.
1. FIT ( Unity ) Pertains to drawings internal Consistency
2. SPLIT ( Plurality) Describes a variety of techniques for
breaking a bigger organization units into smaller units 7
20

providing them with a stronger sense of identity &


Ownership
3. CONTEND ( Duality) Refers to a management process
that harness
(Rather than suppress) the contradictions that are
inevitable products in organization
4. TRANSCEND ( Vitality ) Alerts us t higher order of
complexity that successfully managing the renewal
process entails

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4 Indicators tell how an organization is likely to perform


1. Power : Do Employees think they have any influence over the
cause of events
2. Learning :- How does the organization deal with new ideas ,
Ideas implemented, rewarded and recommended
3. Identity : To what extent do individuals identity with the
organization as a whole rather than a narrow group
Certain section are recognized much than others , recognize as a
organization
4. Contention : is Conflict brought out into the open & used as a
learning tool

Organization Culture:Dimension of organization Culture:1. Attention to Details :- Degree to which Employees are expected to
exhibit precession
Analysis & Attention to details Low High
2. Innovation Risk Taking :
Degree to which employee is encouraged to be innovative & take
risk Low .High
3. Stability :
Degree to which organization decision & actions emphasis
maintaining the statues-quo Low .. High
4. Aggressiveness
Degree to which employee are Aggressive & Competitive rather
than cooperative Low ..high
5. Team Orientation :
Degree to which work is organized around team rather than
Individuals Low....High
6. People Orientation:
Degree to which management decision take into account efforts
on people in the Company
Low High
7. Outcome a orientation :
Degree to which managers focus on outcomes rather that on how
those outcomes are achieved Low ..High

1. ORGANIC

Like a tree grow by itself along with it branches


Dont use JV, Acquisition, Alliances, and Mergers
Manage their own affairs and grow by themselves , no
partners
22

If you want to grow Organically you require terrific high


level of Competence
No body can challenge you in your Business
Others need them , they dont need others
E.g., INTEL , Walt Disney , Toyota , Boeing
Organic Strategy has been thrown out of practice

23

Prerequisites for Organic Strategy:


Technological Competency
Access to capital People to put the money
Practiced by companies having limited Objectives
********
2. JOINT VENTURES
Definition:
JV is a partner ship between two companies where each
company retains its Individual identity while forming a
third Company , which generally is for a specific objective
for a specific period of time , it is not a Marriage , but for a
living together , it is like a special purpose vehicle ( SPV)
It may result into a Marriage ( Merger ) or Separate ,
generally they a project oriented generally it does not end
into a Marriage ( Merger )
Eg:., Project Bid for a Specialized Job of laying a GAS Pipe line
through a Continent , this requires a Core Competence in valves ,
GAS , Pipes , Under Ground Water , Formalities , Legal issues etc ,
generally a company who has to undertake this project Bid is not
sufficiently adequate to avail all the Pool of these resources of
talent and technology and expertise , which requires to opt for
this project , therefore two partners come together with certain
common understanding to Pool their Resources and core
competence and bid for the project and on completion of the
project , they separate or continue to take the advantage by
merging

For developing countries in India


Used as a Entry Strategy How to enter a country look out for
a partner in local area
In China local partners is Government body
In India Minority partners as JV
Greater Tragedy in India Foreign Companies can set up a
100% Subsidiary in India without any Indian Participation,
foreign Companies can own 100% Equity in India.. This
Stupidity has never been questioned in the Parliament.
Used Very well by Foreign Companies Foreign companies
have used this entry strategy very Successfully through the
Vehicle of JV into India & Deserted the Indian Partners & went
on their own , de-listed from stock list and ploughed back the
profits to their country
2/3rd of JV have failed very few have succeeded Hero Honda ,
Maruti Suzuki

24

Cadbury 50/60 yrs before came in India with this entry


strategy , became successful , bought back all the shares and
de-listed from stock list and became 100% Subsidiary
Caterpillar with Birla another example who became 100%
Subsidiary
Procter Gambler with Godrej used their Distribution Net work
Press Note 18 Rule if you want to do a similar business of the
partner with the JV, then you require to have a written consent
from the partner

Why do people form JV


1. When an activity is Uneconomical for an Organization to
undertake , they require to pool resources Investment too large
2. spread Risk , Risk is too big , Risk Sharing
3. Competency involved are more that what I am ( L&T Joined hands
2 999999 to enter into business
4. Government facility & Overseas insist in JV
Eg. Kodaks V/s Fuji (Cheaper)
Kodak Hard skills Structure System America China ( 4
years Contract)
Fuji Soft Skills Japan
5. Life Cycle Scheduled
6. Eliminate Competitive while forming JV
E.g., Toyota Hybrid car
7. Increase Market Value IPO gets value because partners in JV
8. Development Cost are very high e.g., R&D
World Standard e.g., CD is standard Size, JV of Sony & Philips
9. Trial Marriage Test out , cultural , Decision match before
undertaking a merger
10.
Entry strategy to get into international market
11.
Handling the Local people / Beauracrats Bribing
Study JV for Indians going abroad, entry strategy abroad to the world
Foreign into India does not work
**********************

22/02/07
MERGERS & ACQUISITIONS

Rare to have Mergers


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Most time Acquisitions & then acquisitions is merged


MERGERS

Two Companies dissolve its identity


Two Balance sheet is made single
Organization gets restructured
Down Sizing Reducing No of Employees
Down Scoping - Reducing No of Non Core Activity
Bringing in Synergy
Operations are Combined
Assets and Liabilities are Combined
Too Many Complications

26

Good Mergers

Dominant market Space , Monopoly the Situation


1/3rd parties is Dominant players
50% is Monopoly
Dominant Market means Niche Makers / Up markets , Non
General Market
Dominant Market within your own space cultural difference
**********
ACQUISITION

Acquisition could be FRIENDLY OR HOSTILE


Generally they are Hostile
Once Acquired , Choice either to Merge it or Growing it in a
Stand alone basis

Reasons for Acquisition & Problems in Achieving Success


Reasons
1. Increase Market Share
2. Increased Diversification
3. Overcome barriers to Entry
4. Enter New areas in your Industry
5. Increased Speed to Market
6. Cost of New Product Development
7. Avoid Excessive Competition
8. Lower Risk Compared to Green Field Dev
9. Reshaping Competitive Scope
10.
Get Brand technology
Problems
1.
2.
3.
4.
5.
6.

Too large
Inability to Achieve Synergy
Integration difficulty
Large or extraordinary Debt
Too much Diversification
Managers over focused on Acquisitions

Reasons
1. Increase market Power

Tata Corus Size gives good muscle


Oracle & People Soft ( IT Industry)
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Particularly in Basis Industry


Dominant Players

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2. Increase Diversification

More over in your own Industry for having future


Tobacco Anti Social, facing Suits in courts , Future is Black
ITC Tobacco no future, 60% market share
They did not go for Acquisition Finest Company, Best
managed
Grown from Home, Organic, started with Hotel, Spices,
clothing,
Packing materials and because of Learning curve effect
Now Greeting cards -- This diversification is to take care
of Future Threats to this Anti Social Industry i.e., Tobacco

3. Overcome barriers to Entry

Opening Office , Branch office Building Contacts


Barriers for Indians , But after Globalization , only way to
create Space for Market share and Space Automobile Space ,
Pharmacy Space
Eg., If you are a Company manufacturing Automobiles and
want a space and market share in Germany , then Acquire a
Company in Germany of a Similar Industry , this will give you
an entry in Germany

4. Enter new areas in your Industry

Backward & Forward Industry


New Technology. Value Added
Application Area of Steel
Commercial Steel
Fusion Steel
Home Products
Since Raw Material is yours Areas of application can
be varied based
The Technology you acquire
Eg., Suppose Tata Steel Manufacturer of only Commercial Steel
, can Acquire an Industry manufacturing Fusion Steel , or
Home products in Steel ( It is the Technology which is being
Acquired ) since the Raw material is the same which you own ,
areas of application has increased & thus the Mkt share &
space
5. Increased Speed to Market
Whirlpool bought Philips and landed in India, another e.g., is
Dalda
6. Cost of New Product Development

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Cost of Developing new product is High


Risk , Market Survey , Research etc too High

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Problems
1. Inability to Achieve Synergy

We overestimate Synergy
Cutting Workforce down not trees and saving cost
People have Experience, competency, Knowledge
People make Company
Question is who Stays and Who Moves out
Union Problems belonging to different political Party
Medical Rep of two different Company( Acquired and your
Company ) are paid differently
Job Description , Specification , Evaluation is different
Reward & Punishment are different
How to resolve all the above
Restructuring is tough , takes years
Acquisition is simple , but Restructuring is tough
Which plant to close
Which Brand to Continue
Distribution Channel , stockiest
Sizes & profitability is different in different areas
Synergy is simple in paper but difficult to Implement

2. Large & Extraordinary Debt:

Heavily backed by debt which is through collateral by


Assets
Auction game , bidding game
Debt is taken on what price fixed , F----, LIBOR
Increase interest rates company cannot pass on to
customers & the Company Balance sheet shows a Red line
( Loss) in other words the Pun is you are working for the
Bank as the major chunk of Interest is paid to Bank

3. Too Much Diversification :

Just like a Zoo Different Expertise is required to handle


different animals of various breeds and species ( various
diversification )

4. Too Large :
Tracking and Control becomes difficult because of the
following

Reporting System
Material & Dealing Industry
Geography spread
31

Political Risk

5. Managers over focused on Acquisition


It is just like when the new baby arrives attention to the old baby
is ignored
STEPS INVOLVED IN M&A PROCESS
1. Evaluation phase

This Job is mainly taken up by Investment banker


a) Identifying the Strategic case for a M&A
- Understand your Companys SWOT
- Industry Structure
- Identify Value added approach that could work i.e.,
1. Strengthen or leverage the Companys Core business
2. Capitalize on functional Economies of Scale
3. Benefit from Technology or Skill Transfer
b) Develop a list of Potential buyouts
c) Strategic Screening
Develop Knockout Criteria to eliminate those that do
not fit with the Company (Too Big / Too Small)
Compatibility of Ethics / Culture/ Availability etc
d) Develop the analysis & justification for Specific
Target Option Strategic
Financial
e) Financial Justification ( Do Proper Valuation)
f) Due Diligence
g) Secrecy to be maintained of deal else the target price will
increase & kill it

2. Negotiation & deal Structuring Phase:


Develop a negotiating strategy which will depend on
Acquisition value to the Acquirer
Value of the target to the Existing owners
Value of the target to the other potential Buyers
Financial Conditions of existing owners
Financial Conditions of other potential buyers
Strategy & motivation of Existing owner & other potential
Acquirers
Potential important of authorities on takeover
Finalize the deal structure & enter into agreement
Valuation: Brand / Unlisted Companys / Earning DCF
Debt & tax implications
32

Break up value i.e., Book value and Hidden Assets like Real
estate
/Patents/ Copy Wrights / Licensing or leasing Possibilities
which
Can be sold separately so some of parts > Whole
Less Hidden liabilities (Long term Risk Contracts)
Issue (time span analysis / Risk- Market, Tech, Fin,
Env/Taxation)
Revaluation of Assets / Fiscal Incentives

33

Procedural Steps
-

Boards of Company
Shareholders meetings
Application & Approval of High Court
Registrar of Company / RBI/ Stock exchange

************************************************************************
01/03/07

DIVERSIFICATION

Diversification Related
Unrelated

Getting into Business other than your core Business , that is not
connected into your type of Business , no particular logic of
getting into a type of business
License were given pre 1995 and business men jumped into it and
went for the business
Since 1995 the logic were reversed, realizing the core competence
to face the global market

WHY DIVERSIFIATION
1. Survival Your company could vanish any time ( Anti Social
Industry ) e.g., Tobacco and Gutka industry
E.g. ITC went for Hotels, Packaging, Greeting Cards, Clothing,
Spices, Juices, Food grains, Confectionary, Farm products
E.g., Pepsi went for Tropicana juice
Socially Undesirable type of Industry fall in this bracket
2. Product & Technology Obsolesce
One of the most dangerous thing to happen
Substitutes comes from where do not know, then technology
becomes obsolesce for your product
Technology is moving fast as light
E.g., Jute Industry & Typewriter
Cement bags from Jute to paper bags
Alloys & Titanium would get replaced by steel which are
used in planes
Pharmacy my no more exist replaced by Immunology , Nano
technology , Bio Technology
Should Steel Company Diversify
Fiber optic cables replaced from copper
34

Fusion Copper & Steel utensils

35

3. Profit Margin
Profits are getting squeezed
Brands and products are getting Commodiated means
priced, means profits are getting squeezed, then companies
have to get into other business for earning more and better
profits
E.g., Herbal is in and Allopath is out
4. Stability
Old markets and New markets balancing
Cargo Air Planes in Demand replacing road & Sea Cargo
Commercial Air Flights replaced by Cargo Air Planes
Private Jets Maximum no of Private Jet in the World
Owned by Individuals Nigeria Since they make money
from Oil
5. Products of high Margin & Low Margin Balance
Some Products have high Margin , low Market
Some products have low margin , High market
E.g., Sony Expensive High margin low market
IVA Low brand Low margin High market
Charminar low margin , Marlboro high margin
6. Apply Technology into different range of goods
Videocon into different range of products TV , Refrigerator
, Music system etc
7. Tie up Customers to a Firm
Ancillary Business e.g., compressor will serve for Jack , Drill
, etc real money come from consumables
Car Accessories at petrol Bunk make a good business
8. Maintain a assured source of supply / Market
E.g., Mines Coal, Gold, Oil
General motors supplying to Hertz
9. Close Substitute Product
Hybrid cars Petrol & Diesel
10.

11.

Growth
Saturation of Product Market e.g. :- Cease Fire Product
Reinvest Savings :Banks into Insurance & Insurance in Banks
Insurance is good at Colleting their Premiums Highly
liquid
36


12.

Banks are supposed to Invest & earn on spread ( Deposit &


Invest)
Stimulate Sales & Basic Products
Where is the tax savings
E.g., you are making cement , then go for Mfg Concrete
Pipes , Concrete Roads
Nylon Canvas , Fish net , Stockings
Amul Milk Cheese , Butter , Chocolate , Confectionary ,
Baby foods

13.
Getting Something unusually Cheaper & Attractive
Offer
Court Case , Opportunity in favors
14.

Satisfy Ambition of Top Management Vijay Malaya

15.
Productive Utilization of Waste Products , Bye
Products
Eg., Sugar Bagas- Busa ( Electricity , Paper )
Poultry Shit, Feather
16.

17.

18.

19.
20.

Utilization excessive Productive Capacity


Multiple uses to put technology
Pepper Plant Dehydrate Plant
Curry Leaf
Shrimps head also used for fragrance as powders
Application of human Mind
Capitalization on distinctive Know-how
Eg., Britannia Handle Perishables , Short shelf Life, Sales
Forecasting
Shortest life time News paper
Magazines have readership
Newspaper have circulation
Product complains , distance to be considered
Packing & transporting, timings to be expertise.
Utilization Excess Marketing Capacity :
Vans , Distribution Channels , Salesman & Market to vast
but not many products push in Eg., Godrej
Exploit & Establish trade name : Eg., TATA
Realize Advantage of tax structure

37

21.
Sick Company taking over having highly Management
Skill Power
COST OF DIVERSIFICATION
Intangible Cost Cannot be Quantified
1. Cost of Ignorance :
No core Competence , learning curve mode
Only if you can drive your core competence into a
diversified business , Regions , Markets , Costing ,
Technology etc
Knowledge SWOT analysis for each Business is different
2. Cost of Neglect :
New baby born ignore the Old baby, Old one taken for
granted, shift people to other business, top management
attend to new Business.
3. Cost of Cooperation
Includes cost of Communication , Sharing of Common
resources eg., Welingkar Institute
Pricing not acceptable by other Division
4. Cost of Compromise :
Quality Price delivery etc
*****************************
08.03.07

OUTSOURCING

Make or buy decision depending on how you read a


situation
Should we do it or let others do it
What is the consideration for the both
Cost of transaction is high then outsourcing is the best
solution 1930 Ronald
Most Company do not make 30to 40% of the end product
Outsource is because of Competency
Eg., Glaxo Production / Accounting Outsourced , R&D is
not outsourced as it is their Core competency
IBM Biggest outsourcer in IT
Cost is not the only factor

Areas of Outsourcing:
38

1. Contract Manufacturing

Auto Components Mfg largest in world Acquired


in Germany and supplied spare parts to Ford
Pharma ,Jem & Jewelry , Sea Food ,glaxo

2. .Logistic
Physical handling of goods & services
Physical Movements of goods and services
Inbound & Outbound
Employee Bus contract
FedEx Owns 600 to 700 planes cargo planes
Caterpillar spare parts IBM 48 hours supply
FedEx Unique selling proposition / Claims and
rendering services
Without logistic we are dead Claims
Earlier Companies doing themselves
Increase Exp , Capital exp , Inefficiency, delays ,
Market shares
OTIEF On time In full Error Free
Delivery - Qty - Invoice / Billing
Document, tax,
Discount
Inefficiency 6sigma Company Outsource
Wal-Mart Procter & Gambler Space given to
manage all they mg to sell , Inventory , handle ,
Promote & Sell
Working on negative Working Capital
Rate of Return is Infinite
3. Accounting :AP/AR/Basic Accounting Functions
4. Design - Creativity
5. Research Bio-tech
6. Recruitment
7. Training
8. Assessment Center Competence center
9. Marketing
10. Distribution
11. After Sales Service Cost is not the only factor as
the image will get damaged
12. Maintenance Housekeeping , Electrical , Plumbing
13. Call center-Documentation-Transportation
WHY DO WE OUTSOURCE RESOURCE

39

1. Scarcity of Capital : Some body already got a set up Car


maintenance Garage
2. Cheaper Labor rate
3. Lack of Know-how Difficult in Development in-house
Competence, Learning Curve is too long.
4. Flexibility : Dont get locked to a technology , trend keeps
changing , Product & Technology obsolesce
5. Asset Utilization or Spare Capacity : Marginal Costing / Marginal
Contribution
Your space & others space
6. Economic of Scales
7. Conservation of Resource
8. Taking advantage of others specification
9. High Risk Investment E.g., Research
10.
Transaction Cost
Cutting down Transaction cost

40

Two Models of Outsourcing


How to decide what to outsource and what to not?
Essential
Competence

Parasitic
InCompetence

Distintictive
Competence

Spillover
Competence

Protective
Competence

Distinctive Competence: Core Competence


What we do better than anybody else in the industry, most important of
an Organization
E.g., Amul Milk product, Raymond Woolen Garment
Spillover Competence:
Competence that allow an organization to obtain profits in a related
industry, thanks to Distinctive Competence e.g., Tendulkar, Big B
SRK is not an ANKOR but an actor earns 240 crores from KBC, making
more money from main brand image
Protective Competence:
Activities that pose a Considerable Risk to the organization if not well
managed
e.g., Bank ATM if not spread you cannot protect your business
Technology
Pharma Drugs, School Bus Rather than contract bus , this protect
risk & Responsibility of Children
FedEx Deliver on time, not about delivery but delivery on time
Essential Competence:
Activity vital to organization to operate e.g., ISO 9000 or food plant
approved by Environment
Parasitic In-Competence:
Activities done in-house that waste organization Resources often results
of legacies of previous decisions or Industry Situations.
Inherited or always being doing business e.g., Bills payable always done
by your company Outsource to Bank, since the accounts & Check are
always with banks
E.g., Bus Transport always given by company Outsource them
41

42

MODEL II

Protective
Get Out

High
P
A
R
A
S
I
T
I
C

In source
D
I
S
T
I
N
C
T
I
V
E

Essential

Out Source

Low

Spillover

3
High

Low

Effectiveness of the Activity when performed In-house V/s out side


Risk associated with the activity include loss of Know-how , not being
able to operate in the market etc
If effectiveness is high keep for In-house
In-source if Risk is high so you better control the operation
Low risk how effectiveness Outsource
In India it is used as a turnaround strategy
E.g., sick companies Phoenix mills
************

Vertical Integration
Vertical Integration refers to Value Chain
Vertical Integration refers to How many activities do you participate in
the value chain either in forward end, backward end or Integrated.
Big gap between Amateurs & Professionals
Vertical Chain started breaking because Constrains & thus outsource
came to picture
More benefit in forward integration
Supply is controlled by supply in Value chain
Demand is controlled by Demand in value chain
43

Oil Company is fully integrated Chain in Value chain Exploration,


Depots , transportation etc
Backward end Exploration High Risk
Forward end Transportation Low risk
Ford is fully integrated
Disadvantages of Forward Integration
1. Locked into a Infrastructure change
2. Migration pattern & location locked a change in technology in
one area requires change in technology in other areas of value
chain
3. Huge resources
Backward Integration
1.
2.
3.
4.
5.
6.

Control over Raw material


Quality control of input can be controlled & ensured easily
Economies of Scale possible for various Parties
Indirect Taxes can be Minimized
Technology is disadvantage for any change
Adverse economies ( recession in the front end will hit you at
backend )
7. Balancing the chain is a big problem

Retrenchment Strategy
Net worth is declining Loss
Share buyback
Transfer Calls for Vision
Turnaround calls for Action
Before 1995 all Monopoly companies were really sick companies they
did not know that Bata to compete with Road side sellers , to have more
collections , Revamp the design / Products , Revamp Stores /
Distribution , Training programme , customer relationship
Physiology Pricing 999 not working anymore
Bank helps them to become sick NPA
Biggest hospital corporate Bodies BIFR
Turnaround Strategy
When an organization is turning Sick
Incurs losses continuously

44

Demand for products is reducing for product is obsolesce, Substitute in


place
Cash flow no control Trade union problem etc
Obsolesce Technology
Low productivity to meet Globalization
Increased Debt & decreased Debt Servicing capability
Working capital Problem
High rate of Employee Turnover, Iteration rate
Significant decrease in Market price of share
E.g., Bata (Classic case) , Idorama, DCM
Two Approach: -

Surgical approach (Consolidation)


HR Approach

Surgical Approach of Turnaround


1. Stop the Bleeding
Teffific Cost Reduction plan
Tell employees pay cuts
Downsizing
Working OT, Long Hours
Renegotiate with banks & vendors
Restructure with debts
Renegotiate with Suppliers
Renegotiate with Distributors Discounts,
payments
Change of Management
Coordination & Understanding of all Employees,
Trade union, creditors etc
All assets not used sell it off
How to cut costs
Cut out all the concessions / Discounts
Unnecessary Activities / SBUs
Things which are subsidized
Whom to carry whom to discard
Deciding of people skills
Best managers are managers who can work on Turnaround,
Understanding of cross functional Management
HR Approach:
Take everybody on board for decisions
Chapter 11 Court takes the issues
HR plan to be submitted to the court
Action Plan Shareholders/ Employees/Banks / Suppliers/Customers etc
Change people / Assets/Thinking /Managing / Handling/Controlling
Transformation of Sick Company (Future anticipation)

45

Which is not Sick Presently, your see the company has no future unless
you take a Transformation Change
Change the face of the Company so that no body recognize it any more
Strategy to avoid sickness not to land up to sickness
Running Business, going Business, profitable Business, which I can see
now, 10 years later I am going to be a sick company.
E.g., Westing House = Americas Oldest House Electrical divisions
Michael Jones Anticipated no future sell a going Company 100
year old company Transformed Electrical Company into a Media
Company
E.g., GHCL :- Mfg of Soda Ash Soaps , buying Brands of Sick company
, larges Home linen company ,

DISINVESTMENT
I sell of a portion of my stakes
I have reduced my stakes I the business
Reasons
1. I have better opportunity else where
2. My core Business is suffering from cash
3. Influence decision & corporate Policy
E.g., VSNL, HDFC, BPCL
DIVESTMENT
Sell of Whole Portion
Where are Promoters Diluting Stake
Should we get out now or gradually or should we reinvest
Now Divestment
Gradually Disinvestment
Capital Units
Capital Units for Survival
Bankruptcy / Liquidation
Sell of Assets & pay of Liability in sequence of order
Society is affected, tragic & sad for company & country
Combination Strategy

BCG
GE
46

Shell- Directional Matrix


Hofers Life Cycle Model

Strategy at Business Level Michael Porter


Differentiation
Cost Leadership
Focus
Artificial legal Monopoly given to society

Patent Act:
Invention is product of your Mind
Discovery is already exists
Plants is a Discovery
Hybrid Seed is a Invention
Invention can be Paten

Trademark Act: Attract Franchising, Branding

Copy Wright Act: Franchising Software Products

Application & Driver


BCG Matrix: Boston Consulting Group
Functioning Point of view BCG is correct
Board Directors Point of view BCG is incorrect exactly opposite
Board has to have a larger perspective that the functional
Strategy is fighting a war, Loosing battle is better than loosing the
war
The entire three Boxes is nothing but SWOT
X-axis Market share, Business strategy, Business sector Prospects
How to decide where to when to diversify, merge etc
All Matrixes is representation of SWOT analysis
Place SBUs in Different Quadrants
Place Products, Market in different Quadrants
Assume you are in many Business, Multiple Business, Multiple SBUs
SBUs Cost center / Profit Center / Investment center
Decision centers does not mean a separate Company but necessary a
separate Division nothing but SBUs, we say he is Profit Center Head,
Investment Cost head
Cash cow funds all Experimentations, which will tend to convert to
Stardom and finally Cash cow

47

Presume you have excess funds Promoters Capital, IPO, Debts etc
(Cash cow)
Then you launch it to (Problem Child) Industry Attracts or scope of
growth,
Question Mark (?) Because you cannot predict the outcome of the
launch
Many firms become Star or die (dogs)
Dogs Star to overtake dogs not worth Liquidate
E.g.,
ITC, sun feast, Juice
Question Mark
Hotel, paper
- Star
Wimco /Packaging - Star
All other Industries are trial may work or not (Kitchen, spices)
HLL 7/8 products are Cash cow (Surf, Lux, and Wheel) High
market , growth
Question Mark Knor soups, Annuparna, Captian Cook
Blade & Mixer and Pencil Sharpener Business
SUB-B

SBU-A
Mixer

Blade

Aluminium

SBU-C
Pencil Sharpener
Plastic

Activity
Housing

Fraction horse Power Motor


Assembly in same Plant
Different Packaging
Warehousing
Distributors
Salesman

B
A

On BCG chart the position is like this


C = Dog
B = Moving to Stardom
A = Cash Cow
If you discontinue C then, position will be like this
48

B will go back to Question Mark


A will go back to star
Buying Market share Promotion etc, Bottom line of product is low
Less market share, Bottom line is more

49