comp adv & strategy

Porters Diamond - Four Determinants of Porters Diamond - Four Determinants of National Competitive Advantage theory National Competitive Advantage theory

The Diamond - Four Determinants of The Diamond - Four Determinants of

National Competitive AdvantageNational Competitive Advantage

Four attributes of a nation comprise Porter’s Four attributes of a nation comprise Porter’s Diamond of national advantage. They are: Diamond of national advantage. They are:

a. a. factor conditions (i.e. the nation's position in factor conditions (i.e. the nation's position in factors of production, such as skilled labour and factors of production, such as skilled labour and infrastructure), infrastructure),

b. b. demand conditions (i.e. sophisticated demand conditions (i.e. sophisticated customers in home market), customers in home market),

c. c. related and supporting industries, and related and supporting industries, and

d. Firm strategy structure and rivalry (i.e. d. Firm strategy structure and rivalry (i.e. conditions for organization of companies, and conditions for organization of companies, and the nature of domestic rivalry). the nature of domestic rivalry).

a.a. Factor ConditionsFactor Conditions

Factor conditions refers to inputs used as factors Factor conditions refers to inputs used as factors of production - such as labour, land, natural of production - such as labour, land, natural resources, capital and infrastructure. resources, capital and infrastructure.

This sounds similar to standard economic theory, This sounds similar to standard economic theory, but Porter argues that the "key" factors of but Porter argues that the "key" factors of production (or specialized factors) are production (or specialized factors) are createdcreated, not , not inherited. inherited.

Specialized factors of production are skilled labour, Specialized factors of production are skilled labour, capital and infrastructure. capital and infrastructure.


"Non-key" factors or general use factors, such as "Non-key" factors or general use factors, such as

unskilled labour and raw materials, can be obtained unskilled labour and raw materials, can be obtained by any company and, hence, do not generate by any company and, hence, do not generate sustained competitive advantage. sustained competitive advantage.

However, specialized factors involve heavy, However, specialized factors involve heavy, sustained investment. sustained investment.

They are more difficult to duplicate. They are more difficult to duplicate.

This leads to a competitive advantage, because if This leads to a competitive advantage, because if other firms cannot easily duplicate these factors, other firms cannot easily duplicate these factors, they are valuable. they are valuable.


Porter argues that a lack of resources often actually Porter argues that a lack of resources often actually helps countries to become competitive (call it helps countries to become competitive (call it selected factor disadvantage). selected factor disadvantage).

Abundance generates waste and scarcity generates Abundance generates waste and scarcity generates an innovative mindset. an innovative mindset.

Such countries are forced to innovate to overcome Such countries are forced to innovate to overcome their problem of scarce resources. their problem of scarce resources.


Switzerland was the first country to experience Switzerland was the first country to experience labour shortages. They abandoned labour-intensive labour shortages. They abandoned labour-intensive watches and concentrated on innovative/high-end watches and concentrated on innovative/high-end

watcheswatches . .

•Japan has high priced land and so its factory Japan has high priced land and so its factory spaces at a premiumspaces at a premium..

This lead to just-in-time inventory techniques This lead to just-in-time inventory techniques (Japanese firms can’t have a lot of stock taking up (Japanese firms can’t have a lot of stock taking up space, so to cope with the potential of not have space, so to cope with the potential of not have goods around when they need it, they innovated goods around when they need it, they innovated

traditional inventory techniques)traditional inventory techniques) . .

Sweden has a short building season and high Sweden has a short building season and high construction costs. These two things combined construction costs. These two things combined created a need for pre-fabricated housescreated a need for pre-fabricated houses

b. Demand Conditionsb. Demand Conditions

Porter argues that a sophisticated domestic market Porter argues that a sophisticated domestic market is an important element to producing is an important element to producing competitiveness. competitiveness.

Firms that face a sophisticated domestic market Firms that face a sophisticated domestic market are likely to sell superior products because the are likely to sell superior products because the market demands high quality and a close proximity market demands high quality and a close proximity to such consumers enables the firm to better to such consumers enables the firm to better understand the needs and desires of the understand the needs and desires of the customers customers

b. Demand Conditionsb. Demand Conditions

If the nation’s discriminating values spread to other If the nation’s discriminating values spread to other countries, then the local firms will be competitive in countries, then the local firms will be competitive in the global market. the global market.

One example is the French wine industry. One example is the French wine industry.

The French are sophisticated wine consumers.The French are sophisticated wine consumers.

These consumers force and help French wineries These consumers force and help French wineries to produce high quality wines. to produce high quality wines.

Another example-- obsession of superior quality Another example-- obsession of superior quality amongst Japanese consumers--- ensured high amongst Japanese consumers--- ensured high quality for Consumer electronics and cars industryquality for Consumer electronics and cars industry

c. Related and Supporting Industriesc. Related and Supporting Industries

Porter also argues that a set of strong related and Porter also argues that a set of strong related and supporting industries is important to the supporting industries is important to the competitiveness of firms. competitiveness of firms.

This includes suppliers and related industries.This includes suppliers and related industries.

This usually occurs at a regional level as opposed This usually occurs at a regional level as opposed to a national level. to a national level. Examples Examples include Silicon valley in the U.S., Detroit (for the include Silicon valley in the U.S., Detroit (for the auto industry) and Italy (leather-shoes-other auto industry) and Italy (leather-shoes-other leather goods industry). leather goods industry).

d. Firm Strategy, Structure and Rivalryd. Firm Strategy, Structure and Rivalry

11..StrategyStrategy

))aa ( (Capital MarketCapital MarketDomestic capital markets affect the strategy of Domestic capital markets affect the strategy of firms. Some countries’ capital markets have a firms. Some countries’ capital markets have a long-run outlook, while others have a short-run long-run outlook, while others have a short-run outlook. Industries vary in how long the long-outlook. Industries vary in how long the long-run is. Countries with a short-run outlook (like run is. Countries with a short-run outlook (like the U.S.) will tend to be more competitive in the U.S.) will tend to be more competitive in industries where investment is short-term (like industries where investment is short-term (like the computer industry). Countries with a long the computer industry). Countries with a long run outlook (like Switzerland) will tend to be run outlook (like Switzerland) will tend to be more competitive in industries where more competitive in industries where investment is long term (like the pharmaceutical investment is long term (like the pharmaceutical

industry)industry) . .

(b) Individuals’ Career Choices(b) Individuals’ Career ChoicesIndividuals base their career decisions on Individuals base their career decisions on

opportunities and prestige. A country will be opportunities and prestige. A country will be competitive in an industry whose key personnel competitive in an industry whose key personnel hold positions that are considered prestigious. hold positions that are considered prestigious.

Porter argues that the best management styles Porter argues that the best management styles vary among industries. Some countries may be vary among industries. Some countries may be oriented toward a particular style of management. oriented toward a particular style of management. Those countries will tend to be more competitive in Those countries will tend to be more competitive in industries for which that style of management is industries for which that style of management is suited. suited.

For example, Germany tends to have hierarchical For example, Germany tends to have hierarchical management structures composed of managers management structures composed of managers with strong technical backgrounds and Italy has with strong technical backgrounds and Italy has smaller, family-run firmssmaller, family-run firms

33 . .RivalryRivalry

Porter argues that intense competition spurs Porter argues that intense competition spurs innovation. Competition is particularly fierce in innovation. Competition is particularly fierce in Japan, where many companies compete Japan, where many companies compete

vigorously in most industriesvigorously in most industries . .

International competition is not as intense and International competition is not as intense and motivating. With international competition, there are motivating. With international competition, there are enough differences between companies and their enough differences between companies and their environments to provide handy excuses to managers environments to provide handy excuses to managers who were outperformed by their competitorswho were outperformed by their competitors..

International Business StrategyInternational Business Strategy

Corporate- Level StrategiesCorporate- Level Strategies

Are basically about decisions related to allocating Are basically about decisions related to allocating resources among the different businesses of a firm , resources among the different businesses of a firm , transferring resources from one set of businesses to transferring resources from one set of businesses to others and managing and nurturing a portfolio of others and managing and nurturing a portfolio of businesses in such a way that the overall corporate businesses in such a way that the overall corporate objectives are achieved.objectives are achieved.

Corporate- Level StrategiesCorporate- Level Strategies

There are Grand StrategiesThere are Grand Strategies

1) Stability Strategies1) Stability Strategies

2) Expansion Strategies2) Expansion Strategies3) Retrenchment Strategies 3) Retrenchment Strategies

Grand StrategiesGrand Strategies 1) 1) Stability StrategiesStability Strategies

a) No- change Strategya) No- change Strategyb) Pause/proceed with cautionb) Pause/proceed with cautionc) Profit Strategiesc) Profit Strategies

2) 2) Expansion StrategiesExpansion Strategiesa) Intensivea) Intensiveb) Integrative b) Integrative

c) Diversificationc) Diversificationd) Cooperation (M&A, JV/Foreign d) Cooperation (M&A, JV/Foreign

Collaboration)Collaboration) e) Internationalizatione) Internationalization 3) 3) Retrenchment Strategies Retrenchment Strategies

a) Turnaround a) Turnaround b) Restructuring b) Restructuring

Stability StrategiesStability Strategies

Refer to attempts made by a company at incremental Refer to attempts made by a company at incremental improvement of functional performance.improvement of functional performance.

Strategy relevant for a firm operating in a reasonably Strategy relevant for a firm operating in a reasonably certain and predictable environment.certain and predictable environment.

Followed by small and medium –sized firms .Followed by small and medium –sized firms .

Stability StrategyStability Strategy

Reasons for stability strategy :Reasons for stability strategy : The company is doing fairly well and will continue to do The company is doing fairly well and will continue to do

so.so. The feeling that sticking to the known business is better The feeling that sticking to the known business is better

and safe.and safe. Expansion may lead to dilution in stake or non effective Expansion may lead to dilution in stake or non effective

supervision by family members.supervision by family members. The company may not have the resources /capabilitiesThe company may not have the resources /capabilities May be risk averseMay be risk averse Stick to core competencies.Stick to core competencies.


No-change Strategy : No-change Strategy : When faced with a predictable and certain external When faced with a predictable and certain external

environment , a firm decides to continue with its present environment , a firm decides to continue with its present

strategystrategy. .

e.g --- Monopoly sectors like railways, Power etc.e.g --- Monopoly sectors like railways, Power etc.

Also small and medium companies operating in familiar Also small and medium companies operating in familiar markets --- e.g Nirula in delhi , Natural Icecreams in markets --- e.g Nirula in delhi , Natural Icecreams in Mumbai, Mumbai,


Profit Strategy: Profit Strategy:

In situations when profits are dipping, firms undertake measures likeIn situations when profits are dipping, firms undertake measures like

1)1) Reduce investmentsReduce investments

2)2) Cut costsCut costs

3)3) Raise pricesRaise prices

4)4) Increase productivity etc--- to tide over what are supposed to be Increase productivity etc--- to tide over what are supposed to be temporary difficulties.temporary difficulties.

e.g – companies sell assets like land in commercial location and e.g – companies sell assets like land in commercial location and move out to the suburbs.. Or companies sell non-core business move out to the suburbs.. Or companies sell non-core business to stay afloat.to stay afloat.


Pause /proceed with caution strategy: Pause /proceed with caution strategy:

is employed by firms that wish to test the ground before is employed by firms that wish to test the ground before moving ahead with a full – fledged grand strategy or by moving ahead with a full – fledged grand strategy or by firms that have had a blistering pace of expansion and firms that have had a blistering pace of expansion and wish to rest a while before moving ahead.wish to rest a while before moving ahead.

Growth/Expansion StrategyGrowth/Expansion Strategy

Growth strategy amounts to redefining the business by Growth strategy amounts to redefining the business by adding new products/services or new markets or adding new products/services or new markets or expanding current businessexpanding current business

A company can pursue internal or external growth A company can pursue internal or external growth strategies or both. strategies or both.

The different expansion strategies are :The different expansion strategies are : Expansion StrategiesExpansion Strategies

a) Intensivea) Intensiveb) Integrative b) Integrative

c) Diversificationc) Diversificationd) Cooperation (M&A, JV/Foreign d) Cooperation (M&A, JV/Foreign

Collaboration)Collaboration) e) Internationalizatione) Internationalization

Expansion StrategyExpansion Strategy

Reasons for growthReasons for growth Natural urgeNatural urge SurvivalSurvival Market shareMarket share CompetitionCompetition Diversification of riskDiversification of risk OpportunitiesOpportunities Better utilization of resourcesBetter utilization of resources MotivationMotivation profitsprofits

Expansion StrategyExpansion Strategy

Expansion through Concentration/Intensive strategy:Expansion through Concentration/Intensive strategy: Concentration is a simple , first –level type of expansion strategy. Concentration is a simple , first –level type of expansion strategy.

I t involves converging resources in one or more of a firm’s I t involves converging resources in one or more of a firm’s businesses. businesses.

Concentration strategies are also known as intensification, focus Concentration strategies are also known as intensification, focus or specialization strategies.or specialization strategies.

e.g – Bajaj Auto , Nokia , Infosys, Bose speakers e.g – Bajaj Auto , Nokia , Infosys, Bose speakers Concentration strategies can be of the following types—Concentration strategies can be of the following types—1)1) Product developmentProduct development2)2) Market developmentMarket development3)3) Market penetration.Market penetration.Igor Ansoff has presented the matrix for intensive growth.Igor Ansoff has presented the matrix for intensive growth.

IGOR ANSOFF’S PRODUCT/MARKET IGOR ANSOFF’S PRODUCT/MARKET EXPANSION GRIDEXPANSION GRID

Current Product New Product

Current

Market

New

Market

Market

Penetration

Market

Development

Product Development

Diversification


Current Market –Current ProductCurrent Market –Current Product

Market Penetration:Market Penetration:

Encourage current customers to buy more.Encourage current customers to buy more.

Attract competitors customers to switch to its Attract competitors customers to switch to its brandbrand

Convince non users who resemble current Convince non users who resemble current users to start using the company’s product.users to start using the company’s product.

e.g --- Pepsodent, Colgatee.g --- Pepsodent, Colgate

Market DevelopmentMarket Development

Geographical expansion: Opening retail outlets in Geographical expansion: Opening retail outlets in other areas.other areas.

e.g --- Mc-Donalds, Shoppers’ Stope.g --- Mc-Donalds, Shoppers’ Stop

Channel expansion : If only present in consumer Channel expansion : If only present in consumer market, then look at institutional sales also.market, then look at institutional sales also.


Product development Strategy :Product development Strategy :

Introduce products with new featuresIntroduce products with new features

Introduce different quality versionsIntroduce different quality versions

Alternative product formsAlternative product forms

e.g – LG in colour TVs– Flat TVs, Plasma TVs, e.g – LG in colour TVs– Flat TVs, Plasma TVs, LCD TVs, Projection TVs.LCD TVs, Projection TVs.

Diversification StrategyDiversification Strategy

Expansion Through IntegrationExpansion Through Integration

Vertical IntegrationVertical Integration (V I) : When an organization starts making new (V I) : When an organization starts making new products that serve its own needs , vertical integration takes place.products that serve its own needs , vertical integration takes place.

V I are of two types--- Forward and Backward integrationV I are of two types--- Forward and Backward integration Backward integration : When a company starts making some or all Backward integration : When a company starts making some or all

of its material requirements (Inputs ) it is backward integration.of its material requirements (Inputs ) it is backward integration. Forward Integration : moves the company nearer to the ultimate Forward Integration : moves the company nearer to the ultimate

consumer.consumer. E.g If Tata Indica starts making tyres --- backward integrationE.g If Tata Indica starts making tyres --- backward integration If Sona Steering starts making cars--- its forward integrationIf Sona Steering starts making cars--- its forward integration


Backward Integration: -- Backward Integration: -- BenefitsBenefits

1)1) It ensures smooth supply of materialsIt ensures smooth supply of materials

2)2) Better control on quantity and quantity.Better control on quantity and quantity.

3)3) Results in economies of scaleResults in economies of scale

DisadvantagesDisadvantages

1)1) The cost of making may be higher then the cost of The cost of making may be higher then the cost of buyingbuying

2)2) Exiting the business in future may be more difficultExiting the business in future may be more difficult


Forward Integration : Benefits:Forward Integration : Benefits:

1)1) It creates a captive demand for the productIt creates a captive demand for the product

2)2) It generates additional profits .It generates additional profits .

e.g Raymond’s getting into ready made shirts –(Park e.g Raymond’s getting into ready made shirts –(Park Avenue, Parx)Avenue, Parx)

Disadvantages of FI :Disadvantages of FI :

1)1) The new business may not succeedThe new business may not succeed


Horizontal Integration : Integration at the Horizontal Integration : Integration at the same level of business – same level of business –

e.g HLL buying TOMCOe.g HLL buying TOMCO

Or sister concerns of the same company Or sister concerns of the same company can be combined into one entity.can be combined into one entity.

Expansion Though DiversificationExpansion Though Diversification

Diversification : Diversification :

Companies diversify for the following reasonsCompanies diversify for the following reasons

1)1) Saturation or decline of current businessSaturation or decline of current business

2)2) Additional/Better opportunitiesAdditional/Better opportunities

3)3) Risk MinimizationRisk Minimization

4)4) Better utilization of Resources and strengthBetter utilization of Resources and strength

5)5) ConsolidationConsolidation

6)6) Inspiration and motivation to employeesInspiration and motivation to employees

Risks of DiversificationRisks of Diversification

1)1) No guarantee of successNo guarantee of success

2)2) Competition may retaliate in old businessCompetition may retaliate in old business

3)3) May lead to neglect of old business.May lead to neglect of old business.


Three types of diversification:--Three types of diversification:--

1)1) Concentric Diversification StrategyConcentric Diversification Strategy : company : company makes products that have technological and / or makes products that have technological and / or marketing synergies with existing product lines , even marketing synergies with existing product lines , even though the product may appeal to a new class of though the product may appeal to a new class of customerscustomers

e.g--- A audio cassette/CD company may start making e.g--- A audio cassette/CD company may start making computer CD --- computer CD ---

A washing machine company starts making A washing machine company starts making dishwasher.dishwasher.


Horizontal Diversification strategy : Company searches Horizontal Diversification strategy : Company searches for new products that serve the same customer though for new products that serve the same customer though technologically unrelated to its current product . technologically unrelated to its current product .

e.g – A cassette manufacturing company starts making tray e.g – A cassette manufacturing company starts making tray to hold the cassette.to hold the cassette.

A CD company starts making CD boxesA CD company starts making CD boxes


Conglomerate DiversificationConglomerate Diversification : When an : When an organization seeks new businesses that have no organization seeks new businesses that have no relationship to the company’s current technology, relationship to the company’s current technology, products or markets its known as Conglomerate products or markets its known as Conglomerate diversification.diversification.

e..g : ITC ( Cigarettes, Hotels, Paper )e..g : ITC ( Cigarettes, Hotels, Paper ) TATA ( Steel, salt, cement, power, tea, retail, TATA ( Steel, salt, cement, power, tea, retail,

hotels,coffee chain, software)hotels,coffee chain, software)TTK ( Pressure cookers, chemicals, TTK ( Pressure cookers, chemicals,

contraceptives, pharmaceuticals)contraceptives, pharmaceuticals)Anchor (consumer electronics, Toothpaste, talcum Anchor (consumer electronics, Toothpaste, talcum

powder, electrical switches)powder, electrical switches)

Mergers & AcquisitionsMergers & Acquisitions

Reasons for MergersReasons for Mergers Why Buyer wishes to mergeWhy Buyer wishes to merge To increase value of the organization's stockTo increase value of the organization's stock To increase growth rate and make a good investmentTo increase growth rate and make a good investment To improve stability of earning and salesTo improve stability of earning and sales To balance , complete or diversify product lineTo balance , complete or diversify product line To reduce competitionTo reduce competition To avail tax concessions /tax benefits.To avail tax concessions /tax benefits. To take advantage of synergy.To take advantage of synergy.

Brooke Bond and Lipton merged because their Brooke Bond and Lipton merged because their businesses overlapped and hence they could benefit businesses overlapped and hence they could benefit from operational economics and synergies.from operational economics and synergies.

BBLIL took over Kwality , Milkfoods and Dollops BBLIL took over Kwality , Milkfoods and Dollops icecreamsicecreams

BBLIL took over Kissan .BBLIL took over Kissan . BBLIL merged with HLL.BBLIL merged with HLL.

Important criteria before acquisitionImportant criteria before acquisition

Earning PotentialEarning Potential Value of company: The commonly used methods of evaluation areValue of company: The commonly used methods of evaluation are 1) Valuations based primarily on assets and liabilities1) Valuations based primarily on assets and liabilities 2) valuation based on the projected earnings of the company2) valuation based on the projected earnings of the companyThumb rule to buy an consumer product company is to offer 1.5 times the Thumb rule to buy an consumer product company is to offer 1.5 times the

turnoverturnoverCOKE PAID 170 crores to Parle to acquire ThumsupCOKE PAID 170 crores to Parle to acquire ThumsupWhirlpool paid 300 crores for 51 % stake in KelvinatorWhirlpool paid 300 crores for 51 % stake in KelvinatorWilliamson Magor paid 290 crores to Get Eveready brand name from UCILWilliamson Magor paid 290 crores to Get Eveready brand name from UCIL Condition of Plant and MachineryCondition of Plant and Machinery Quality of Management team and other staff.Quality of Management team and other staff. Market position.Market position.

Joint Venture StrategiesJoint Venture Strategies

Two or more companies form a partnership for a specified purpose.Two or more companies form a partnership for a specified purpose.

Conditions for JVConditions for JV When an activity is uneconomical for a company to do alone.When an activity is uneconomical for a company to do alone. When the distinctive competence of two or more organizations can When the distinctive competence of two or more organizations can

be brought together.be brought together. When the risk of business has to be shared.When the risk of business has to be shared.

Types of JVTypes of JV Between two firms in one industryBetween two firms in one industry Between two firms across different industriesBetween two firms across different industries Between an Indian firm and a foreign firm in IndiaBetween an Indian firm and a foreign firm in India Between an Indian firm and a foreign firm in that foreign countryBetween an Indian firm and a foreign firm in that foreign country Between an Indian firm and a foreign firm in a third country.Between an Indian firm and a foreign firm in a third country.

Turnaround Management & RestructuringTurnaround Management & Restructuring

Danger SignalsDanger Signals Deteriorating performance Indicators:Deteriorating performance Indicators:

1) Decreasing Market share1) Decreasing Market share

2) Decreasing constant rupee sales:2) Decreasing constant rupee sales:

3) Decreasing Profitability3) Decreasing Profitability Deteriorating Financing Problems:Deteriorating Financing Problems:

1) Increasing reliance on debt: A substantial rise in the amount of 1) Increasing reliance on debt: A substantial rise in the amount of debt , a lopsided debt-to-equity ratio and a lowered credit rating debt , a lopsided debt-to-equity ratio and a lowered credit rating may cause banks and other lenders to apply restrictions which may cause banks and other lenders to apply restrictions which would further compound the financial problems.would further compound the financial problems.

2) restrictive dividend policy: to conserve cash is a danger signal.2) restrictive dividend policy: to conserve cash is a danger signal.

Danger SignalsDanger Signals

Investment Policies:Investment Policies:1) Inadequate Reinvestment in Business: Adequate reinvestment in 1) Inadequate Reinvestment in Business: Adequate reinvestment in

plants, machinery and maintenance is necessary for a company to plants, machinery and maintenance is necessary for a company to stay competitive.stay competitive.

2) Proliferation of New ventures at the expense of the priority 2) Proliferation of New ventures at the expense of the priority business:business:

A common policy in troubled companies is to ignore the basic A common policy in troubled companies is to ignore the basic business and rely on new ventures.business and rely on new ventures.

Lack of PlanningLack of Planning : : Problems at Top Management LevelsProblems at Top Management Levels::1) Lack of receptiveness of CEO1) Lack of receptiveness of CEO2) Management succession problem2) Management succession problem3) Ineffective directors/management team3) Ineffective directors/management team

TURNAROUND MANAGEMENTTURNAROUND MANAGEMENT

Turnaround Management refers to the management Turnaround Management refers to the management measures that reverse the negative trends in the measures that reverse the negative trends in the performance indicators of the company. performance indicators of the company.

In other words TM refers to the management measures In other words TM refers to the management measures which turn a sick company back to a healthy one or which turn a sick company back to a healthy one or those measures which reverse the deteriorating trends of those measures which reverse the deteriorating trends of the performance indicators such as falling market share , the performance indicators such as falling market share , sales or worsening debt-equity ratio.sales or worsening debt-equity ratio.

Turnaround ManagementTurnaround Management

The important factors employed in turnaround management are as The important factors employed in turnaround management are as follows:follows:

Management factor: appoint a new CEO (Motorola)Management factor: appoint a new CEO (Motorola) Human Resource factor: shed surplus manpower, recruit Human Resource factor: shed surplus manpower, recruit

competent people competent people Production Facilities: Modernize the plants which improves Production Facilities: Modernize the plants which improves

efficiencies at the shop floor.efficiencies at the shop floor. Financial Management:Arranging cheaper finance, cost cutting Financial Management:Arranging cheaper finance, cost cutting

etc.etc. Product Mix modification : Unprofitable products needs to be Product Mix modification : Unprofitable products needs to be

dropped, some current products need quality improvements, dropped, some current products need quality improvements, new models need to be introduced.new models need to be introduced.

Marketing Strategy: enter new markets/segments etc.Marketing Strategy: enter new markets/segments etc. Miscellaneous : liquidation in assets, close down some Miscellaneous : liquidation in assets, close down some

divisions, restraints on emoluments of employees, better raw divisions, restraints on emoluments of employees, better raw material procurement etc.material procurement etc.

Elements in Turnaround ManagementElements in Turnaround Management

Change in top managementChange in top management Initial credibility building actions.Initial credibility building actions. Neutralizing external pressures.Neutralizing external pressures. Initial controlInitial control Identifying quick payoff activities.Identifying quick payoff activities. Quick cost reductionsQuick cost reductions Revenue generation.Revenue generation. Asset Liquidation for generating cashAsset Liquidation for generating cash Mobilization of the organizationMobilization of the organization Better internal co-ordination.Better internal co-ordination.

Khandwalla’s ten elements of a successful turnaround strategy.

RestructuringRestructuring

Restructuring may be resorted in the following cases:Restructuring may be resorted in the following cases:

To turnaround a sick unit.To turnaround a sick unit. To prevent a unit from becoming sick.To prevent a unit from becoming sick. To further improve the vitality and performance of units which are To further improve the vitality and performance of units which are

doing well.doing well. To facilitate growth and expansion.To facilitate growth and expansion. To improve the organizational efficiency.To improve the organizational efficiency. To influence management control. To influence management control.

Forms of Corporate RestructuringForms of Corporate Restructuring

Expansion :Expansion :

1) M & A: 1) M & A:

2)Tender offers: public offer to acquire the shares in the market.2)Tender offers: public offer to acquire the shares in the market.

3) JV3) JV Sell-offsSell-offs

1)Spin-offs : refers to creation of new legal entity by the parent 1)Spin-offs : refers to creation of new legal entity by the parent company.company.

The existing share holders are given shares of new company. They The existing share holders are given shares of new company. They are done for better focus on different businesses.(e.g Sterlite , are done for better focus on different businesses.(e.g Sterlite , Sterlite optical)Sterlite optical)

2)Divestitures : involves sale of a division unit or part of the asset of 2)Divestitures : involves sale of a division unit or part of the asset of a company to anothera company to another

RestructuringRestructuring

Changes in ownership structureChanges in ownership structure::Private companies become public for several reasonsPrivate companies become public for several reasons1) Increase in capital base: This helps in raising loans1) Increase in capital base: This helps in raising loans2) Foreign collaboration : Foreign firms normally prefer to have 2) Foreign collaboration : Foreign firms normally prefer to have

collaborations with public companies..collaborations with public companies..3) Respectability3) RespectabilityExchange offers: Exchange debt for equity . The govt.. loan to a Exchange offers: Exchange debt for equity . The govt.. loan to a

PSU may be converted to Equity.PSU may be converted to Equity.Share repurchase : Buy back of shares from the market to increase Share repurchase : Buy back of shares from the market to increase

management control and keep predators at bay.management control and keep predators at bay. Types of corporate Restructuring in IndiaTypes of corporate Restructuring in India1) Portfolio Restructuring1) Portfolio Restructuring2) Organizational Restructuring2) Organizational Restructuring3) Functional Restructuring3) Functional Restructuring

Management of ChangeManagement of Change

““The only thing permanent in this world is change”The only thing permanent in this world is change”Types of changesTypes of changes

1) Incremental : gradual changes ---> expansion to a new market.1) Incremental : gradual changes ---> expansion to a new market.

2) Piecemeal :some strategies change and others remain unchanged2) Piecemeal :some strategies change and others remain unchanged

3) Flux: Strategic change without any clear direction3) Flux: Strategic change without any clear direction

4) Transformational : Major discontinuous change.: adoption of an 4) Transformational : Major discontinuous change.: adoption of an entirely new technology or conglomerate diversification . This is due entirely new technology or conglomerate diversification . This is due to some major environment change like liberalization.to some major environment change like liberalization.

Barriers to changeBarriers to change 1) Lag in recognizing the problem1) Lag in recognizing the problem2) Behavioral Resistance2) Behavioral Resistance

Change RequirementsChange Requirements1) Urgency1) Urgency2) Crisis Change2) Crisis Change3) Reactive change3) Reactive change4) Anticipation change 4) Anticipation change 5) resources5) resources6) Leadership6) Leadership7) Internal factors7) Internal factors

BCG matrix- Growth/share matrixBCG matrix- Growth/share matrix

STARS Question Marks

DogsCash cow

Relative Market sharex

0.1 x10x

Market

Growth

Rate (%)

0

10

20

Protect Position Invest to growConcentrate effort on maintaining strength

Invest to build Challenge for leadershipBuild selectivelyReinforce vulnerable areas

Build SelectivelySpecialize around limited strengthsSeeks ways to overcome weaknessWithdraw if indications of sustain growth is lacking

Build Selectively Invest heavily in most attractive segmentsBuild up ability to counter competitionEmphasize profitability by raising productivity

Selectivity/Manage for earnings Protect existing programConcentrate investments in segments where profitability is good and risks are relatively low

Limited Expansion or Harvest Look for ways to expand without high risk ,Otherwise minimize investment and rationalize operations

Protect and Refocus Manage for current earningsConcentrate on attractive segmentsDefend strengths

Manage for earnings Protect position in most profitable segmentsUpgrade product lineMinimize investment

Divest Sell at time that will maximize valueCut fixed costs and avoid investment meanwhile

Strong Medium Weak

High

Medium

Low

Business Strength M

A

R

K

E

T

A

T

T

R

A

C

T

I

V

E

N

E

S

S

GE MODEL

GE ModelGE Model

Market Attractiveness:Market Attractiveness:

Overall Market sizeOverall Market size

Annual Market growth rateAnnual Market growth rate

Historical profit marginHistorical profit margin

Competitive intensityCompetitive intensity

Technological requirementsTechnological requirements

Energy requirementsEnergy requirements

Inflationary vulnerabilityInflationary vulnerability

Social/ political / legalSocial/ political / legal

G E MODELG E MODEL

Business StrengthBusiness Strength Market shareMarket share Share growthShare growth Product qualityProduct quality Brand reputationBrand reputation Distribution networkDistribution network Promotional effectivenessPromotional effectiveness Productive capacityProductive capacity Productive efficiencyProductive efficiency Unit costsUnit costs R & D performanceR & D performance Managerial personnelManagerial personnel

Porter’s 5 Forces- Determining Segment Porter’s 5 Forces- Determining Segment Structural AttractivenessStructural Attractiveness

Industry Competitors

Buyers (Buyer Power)

Suppliers(Supplier Power)

Substitutes(Threat of substitutes)

Potential Entrants

Threat of EntryThreat of Entry

Barriers To Entry :Barriers To Entry :

)Economies of scale)Economies of scale

)Product Differentiation of existing firms)Product Differentiation of existing firms

)Huge capital requirements)Huge capital requirements

)Switching costs)Switching costs

)Access to distribution channels)Access to distribution channels

)Govt. Policy)Govt. Policy

Bargaining Power of BuyersBargaining Power of Buyers

Buyers compete with the industry by forcing down prices , Buyers compete with the industry by forcing down prices , bargaining for higher quality or more services and playing bargaining for higher quality or more services and playing competition against each othercompetition against each other

Buyer group is powerful under the following conditionsBuyer group is powerful under the following conditions )It is concentrated or purchases large volumes relative to )It is concentrated or purchases large volumes relative to

seller salesseller sales )The product it purchases from the industry represent a )The product it purchases from the industry represent a

significant fraction of the buyer’s costssignificant fraction of the buyer’s costs )The product it purchases from the industry are standard )The product it purchases from the industry are standard

or undifferentiated: Buyers, sure that they can find or undifferentiated: Buyers, sure that they can find alternate suppliers , may play one company against alternate suppliers , may play one company against other to extract maximum mileage.other to extract maximum mileage.

Bargaining Power of BuyersBargaining Power of Buyers)Faces few switching costs: switching costs, lock )Faces few switching costs: switching costs, lock

the buyer to particular sellers. Lower the cost the buyer to particular sellers. Lower the cost better for buyer to bargainbetter for buyer to bargain

)Buyers pose a credible threat of backward )Buyers pose a credible threat of backward integration---- if buyers are partially integrated or integration---- if buyers are partially integrated or pose a credible threat of backward integration, pose a credible threat of backward integration, they are in a position to demand bargaining they are in a position to demand bargaining concessions.concessions.

)The industry’s product is unimportant to the )The industry’s product is unimportant to the quality of the buyer’s product quality of the buyer’s product

The buyer has full informationThe buyer has full information

Bargaining power of suppliersBargaining power of suppliers

A supplier group is powerful if the following apply A supplier group is powerful if the following apply

)The supplier’s product is an important input to the )The supplier’s product is an important input to the buyer’s businessbuyer’s business

)The supplier’s products are differentiated or it has built )The supplier’s products are differentiated or it has built in switching costsin switching costs

)Supplier poses a serious threat of forward integration)Supplier poses a serious threat of forward integration )The industry is not an important customer of the supplier )The industry is not an important customer of the supplier

group.:== When a supplier sells to a number of group.:== When a supplier sells to a number of industries and a particular industry doesn't represent a industries and a particular industry doesn't represent a significant fraction of sales , suppliers are much more significant fraction of sales , suppliers are much more prone to exert power.prone to exert power.

Three Generic StrategiesThree Generic Strategies

Differentiation

Overall costleadership

Focus

Strategic AdvantageLow cost positionUniqueness perceived

by customer

Industrywide

Particular

segment

To cope with the 5 competitive forces--- To cope with the 5 competitive forces--- there are 3 generic strategies there are 3 generic strategies

1. Overall cost leadership1. Overall cost leadership 2. Differentiation2. Differentiation 3. Focus3. Focus

Overall Cost Leadership

Requires construction of efficient – scale facilities Cost minimization in areas like R&D, ADVERTISING,

SERVICE, SALES FORCE ETC.

How does low cost help fight the 5 forcesHow does low cost help fight the 5 forces

)gives the firm a defense against rivalry from competitors , )gives the firm a defense against rivalry from competitors , because its lower costs gives the company certain returns.because its lower costs gives the company certain returns.

)Defends against powerful buyers because buyers can exert )Defends against powerful buyers because buyers can exert power only to drive down prices to the level of next most power only to drive down prices to the level of next most efficient competitor.efficient competitor.

)Defends against powerful suppliers by providing more )Defends against powerful suppliers by providing more flexibility to cope with input cost increases.flexibility to cope with input cost increases.

)Defends against new entrants --- entry barriers in terms of )Defends against new entrants --- entry barriers in terms of scale or cost advantages.scale or cost advantages.

To achieve cost leadership --- upfront capital investment To achieve cost leadership --- upfront capital investment in state-of-the –art equipment/plant is required.in state-of-the –art equipment/plant is required.

e.g --- Texas instruments, DU PONT, Black & Decker, e.g --- Texas instruments, DU PONT, Black & Decker, Bic, Kodak etc.Bic, Kodak etc.

Timex has specialised in manufacturing simple low cost Timex has specialised in manufacturing simple low cost watches for the mass market.watches for the mass market.

Differentiation ---- creating something that is perceived Differentiation ---- creating something that is perceived industrywide as unique.industrywide as unique.

Differentiation can take many forms ----Differentiation can take many forms ---- Design / brand image--- MercedesDesign / brand image--- Mercedes Technology--- Bose -- speakers and sound systemTechnology--- Bose -- speakers and sound system Service--- MarutiService--- Maruti Dealer Network – caterpilar, VideoconDealer Network – caterpilar, Videocon Quality-- MaytagQuality-- Maytag Rolex watches are handmade of gold and stainless steel Rolex watches are handmade of gold and stainless steel

and are subjected to strenuous tests of quality and and are subjected to strenuous tests of quality and reliabilityreliability

Nikon , HP, CrossNikon , HP, Cross

How does differentiation help fight the 5 forcesHow does differentiation help fight the 5 forces

Provides insulation against competitive rivalry because Provides insulation against competitive rivalry because of brand loyalty and resulting lower sensitivity to priceof brand loyalty and resulting lower sensitivity to price

Customer loyalty and need for the competitor to Customer loyalty and need for the competitor to overcome uniqueness provides entry barrier –for new overcome uniqueness provides entry barrier –for new entrantsentrants

Yields higher margins with which to deal with supplier Yields higher margins with which to deal with supplier power power

Mitigates buyer power , since buyers lack comparable Mitigates buyer power , since buyers lack comparable alternatives and are therefore less price sensitive.alternatives and are therefore less price sensitive.

Focus--- Focus--- Focusing on a particular buyer group , segment of the Focusing on a particular buyer group , segment of the

product line,, or geographic market product line,, or geographic market

The strategy rests on the premise that the firm is able to The strategy rests on the premise that the firm is able to serve the narrow strategic target very well, more serve the narrow strategic target very well, more effectively and efficiently then competitors who are effectively and efficiently then competitors who are competing more broadly.competing more broadly.

Focus Differentiation --- Longines makes high jeweled Focus Differentiation --- Longines makes high jeweled watches to wealthy female consumerswatches to wealthy female consumers

Focus Cost – Fiat sells its automobiles only in Italy and Focus Cost – Fiat sells its automobiles only in Italy and selected regions of Europeselected regions of Europe

Focus differentiation- Alpha Romeo sells high –Focus differentiation- Alpha Romeo sells high –performance cars in the same market (as above)performance cars in the same market (as above)

Risks of Generic StrategiesRisks of Generic Strategies

Overall Cost Leadership: Overall Cost Leadership:

Technological change that nullifies past Technological change that nullifies past investments or learning--- e.g – cassettes- CD- investments or learning--- e.g – cassettes- CD- VCD-DVDVCD-DVD

Low cost learning by industry newcomers through Low cost learning by industry newcomers through imitation or through their ability to invest in state-of imitation or through their ability to invest in state-of –the art facilities–the art facilities

Inability to see required product or marketing Inability to see required product or marketing change because of attention placed on cost.change because of attention placed on cost.

e.g--- Ford Motor company—1920s --- achieved e.g--- Ford Motor company—1920s --- achieved unchallenged cost leadership through limitation of unchallenged cost leadership through limitation of models and varieties (only black colour) , backward models and varieties (only black colour) , backward integration and highly automated facilitiesintegration and highly automated facilities

As incomes rose, Americans wanted more style, colours, As incomes rose, Americans wanted more style, colours, --- GM (Sloan) gave them what they required.--- GM (Sloan) gave them what they required.

Ford faced enormous costs of strategic readjustment Ford faced enormous costs of strategic readjustment given the rigidities created by heavy investments in cost given the rigidities created by heavy investments in cost minimization of an obsolete model.minimization of an obsolete model.

Risks of DifferentiationRisks of Differentiation

Cost differential between low-cost competitors and Cost differential between low-cost competitors and the differentiated firm becomes too great for the differentiated firm becomes too great for differentiation to hold brand loyalty. Buyers thus differentiation to hold brand loyalty. Buyers thus sacrifice some of the features, services or image sacrifice some of the features, services or image possessed by the differentiated firm for large cost possessed by the differentiated firm for large cost savings.savings.

Imitation narrows perceived differentiation, a Imitation narrows perceived differentiation, a common occurrence as industries mature.common occurrence as industries mature.

Risks of FocusRisks of Focus

The cost differential between broad range competitors and The cost differential between broad range competitors and the focused firm widens to eliminate the cost advantages of the focused firm widens to eliminate the cost advantages of serving a narrow target or to offset the differentiation serving a narrow target or to offset the differentiation achieved by focus.achieved by focus.

Differences in desired products or services between the Differences in desired products or services between the strategic target and the market as a whole narrows.strategic target and the market as a whole narrows.

Competitors find submarkets within strategic target and Competitors find submarkets within strategic target and outfocus the focuser.outfocus the focuser.

comp adv & strategy

Education

key factors of production

asnonkey factors

general use factors

sophisticateddemand

factorsfactor conditions

demand conditions porter

key factors ofbut porter

obtainedunskilled labour