Prof.Sushil\IITD\Session-VI1 MANAGEMENT POLICY AND STRATEGY SESSION - VI Generic and Grand...

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Prof.Sushil\IITD\Session-VI 1

MANAGEMENT POLICY AND STRATEGY

SESSION - VIGeneric and Grand

StrategiesProf. Sushil

Department of Management Studies

Indian Institute of Technology, DelhiINDIA

Email: [email protected]


Generic Strategies

Differentiation

Low-cost leadership

Focus


PORTER’S GENERIC STRATEGIES

1. Cost Leadership

2. Differentiation

3 A. Cost Focus 3 B. Differentiation Focus

Narrow Target

Broad Target

DifferentiationLower Cost

Competitive Advantage

Competitive Score


REQUIREMENTS FOR GENERIC COMPETITIVE STRATEGIES

Generic Commodity Required Common Organizational

Strategy Skills and Resources Requirements

Overall cost Sustained capital investment Tight cost control

leadership access to capital Frequent, detailed control reports

Process engineering skills Structured organization and responsibilities

Intense supervision of labour Incentives based on

Products designed for ease meeting strict quantitative

Low-cost distribution system targets in manufacture

Differentiation Strong marketing abilities Strong coordination Product engineering among functions in R&D, Creative flare product development, and marketing


REQUIREMENTS FOR GENERIC COMPETITIVE STRATEGIES

CONTD…

Strong capability in basic Subjective measurement and research incentives instead of

quantitative measures Corporate reputation for Amenities to attract highly quality or technological skilled labour, scientists, or leadership creative people Long tradition in the industry or unique combination of skills drawn from other businesses Strong cooperation from channels

Focus Combination of the above Combination of the above policies

policies directed at the directed at the regular strategic

particular strategic target target


RISKS OF THE GENERIC STRATEGIES

Risks of Cost Leadership Risks of Differentiation Risk of Focus

Cost of leadership is not Differentiation is not The focus strategy is sustained initiated

sustained: Competitors imitate The target segment Competitors imitate: Bases for differentiation becomes structurally

unattractive Technology changes becomes less imported to Structure erodes Other bases for cost buyers Demand disappears

leadership erodeProximity in differentiation Cost proximity is lost Broadly targeted is lost competitors overwhelm

the segment: The segment’s differences

from other segments narrow The advantages of a broad line increase

Cost focusers achieve Differentiation focusers New Focusers sub-segmentseven lower cost in segments achieve even greater the industry

differentiation in segments


STAGE OF `INDUSTRY’ DEVELOPMENT

Keeping ahead of the field

Cost leadership Raise barriers Deter competitors

Redefine scope Divest peripherals Encourage departures

Imitation at lower cost Joint ventures

Differentiation Focus

Differentiation New opportunities

Leader

Follower

Growth Maturity Decline

Strategic position of organization


Types of Grand Strategies

Consortia Consortia

Concentrated Growth Concentrated Growth

Market Development Market Development

Product DevelopmentProduct Development

InnovationInnovation

Horizontal Integration Horizontal Integration

Vertical Integration Vertical Integration

Concentric Diversification Concentric Diversification

Conglomerate Diversification Conglomerate Diversification

TurnaroundTurnaround

DivestitureDivestiture

LiquidationLiquidation

Bankruptcy Bankruptcy

Joint Ventures Joint Ventures

Strategic Alliances Strategic Alliances


Characteristics of a Concentrated Growth Strategy

Involves focusing resources on the profitable growth of a single product, in a single market, with a single dominant technology

Rationale - Firm develops and exploits its expertise in a delimited competitive arena

Determinants of competitive market success– Ability to assess market needs– Knowledge of buyer behavior– Customer price sensitivity– Effectiveness of promotion


Conditions Favoring a Concentrated Growth Strategy

Firm’s industry is resistant to major technological advancements

Firm’s industry is resistant to major technological advancements

Firm’s targeted markets are not product saturatedFirm’s targeted markets are not product saturated

Firm’s markets are sufficiently distinctive to dissuade competitors in adjacent markets from entering firm’s segment

Firm’s markets are sufficiently distinctive to dissuade competitors in adjacent markets from entering firm’s segment

Firm’s inputs are stable in price and quantity and available in amounts and at times needed

Firm’s inputs are stable in price and quantity and available in amounts and at times needed

Firm’s industry is stableFirm’s industry is stable

Firm’s competitive advantages are based on efficient production or distribution channels

Firm’s competitive advantages are based on efficient production or distribution channels

Success of market generalistsSuccess of market generalists


Strategies of Market and Product Development

Market development– Consists of marketing present products, often with

only cosmetic modifications, to customers in related market areas by

Adding channels of distribution or Changing content of advertising or promotion

Product development– Involves substantial modification of existing products

or creation of new but related products– Based on penetrating existing markets by

Incorporating product modifications into existing items or

Developing new products connected to existing products


Specific Options for Selected Grand Strategies

Concentration: Increasing use of present products in present markets

1. Increasing present customers’ rate of use:a. Increasing size of purchaseb. Increasing rate of product obsolescencec. Advertising other usesd. Giving price incentives for increased use

2. Attracting competitors’ customersa. Establishing sharper brand differentiationb. Increasing promotional effortc. Initiating price cuts

3. Attracting nonusers to buy the producta. Inducing trial use through sampling, price

incentives, and so onb. Pricing up or downc. Advertising new uses


Specific Options for Selected Grand Strategies (continued)

Market Development: Selling present products in new markets

1. Opening additional geographic markets

a. Regional expansion

b. National expansion

c. International expansion

2. Attracting other market segments

a. Developing product versions to appeal to other segments

b. Entering other channels of distribution

c. Advertising in other media


Specific Options for Selected Grand Strategies (concluded)

Product Development: Developing new products for present markets

1. Developing new product featuresa. Adapt (to other ideas, developments)b. Modify (change color, motion, sound, odor,

form, shape)c. Magnify (stronger, loner, thicker, extra value)d. Minify (smaller, shorter, highere. Substitute (other ingredients, process, power)f. Rearrange (other patterns, layout, sequence,

components)g. Reverse (inside out)h. Combine (blend, alloy, assortment, ensemble;

combine units, purposes, appeals, ideas)2. Developing quality variations 3. Developing additional models and sizes (product proliferation)


Innovation Strategy

Involves creating a new product life

cycle, thereby making similar existing

products obsolete


Strategies of Horizontal and Vertical Integration

Horizontal integration– Based on growth via acquisition of one or more

similar firms operating at the same stage of the production-marketing chain

– Involves eliminating competitors, providing acquiring firm with access to new markets

Vertical integration– Involves acquiring firms

To supply acquiring firm with inputs - backward integration or

Are customers for firm’s outputs - forward integration


Acquisitions or mergers of suppliers or customer businesses are vertical integrationsvertical integrations

Acquisitions or mergers of competing businesses are horizontal integrationshorizontal integrations

Textile producer

Shirt manufacturer

Clothing store

Textile producer

Shirt manufacturer

Clothing store

Vertical and Horizontal Integrations


Motivations Related to Diversification Strategies

Increase growth rate of firm

Investment is better use of funds than using them for internal growth

Improve stability of earnings and sales

Balance or fill out product line

Diversify product line

Acquire a needed resource quickly

Achieve tax savings

Increase firm’s stock value

Increase efficiency and profitability


Diversification Strategies

Concentric diversification– Involves acquisition of businesses related to

acquiring firm in terms of technology, markets, or products

Conglomerate diversification– Involves acquisition of a business because it

represents a promising investment opportunity– Primary motivation is profit pattern of venture

Difference between the approaches– Concentric diversification emphasizes

commonality whereas conglomerate diversification emphasizes profits for each individual unit


Turnaround Strategy

Involves a concerted effort over a

period of time to fortify a firm’s

distinctive competencies, returning it

to profitability


Declining sales or margins

Imminent bankruptcy

Low

High

Cost reduction

Asset reduction

Efficiency maintenance

Entrepreneurial reconfiguration

Sta

bilit

y

Recovery

Internal factors

External factors

Turnaround situation Turnaround responseCause Severity Retrenchment phase Recovery phase

(operating)

(strategic)

A Model of the Turnaround Process


Divestiture and Liquidation Strategies

Divestiture strategy

– Involves selling a firm or a major component of a firm

– Reasons for divestiture

Partial mismatches between acquired firm and parent firm

Corporate financial needs

Government antitrust action

Liquidation strategy

– Involves selling parts of a firm, usually for its tangible asset value and not as a going concern


The Strategy of Bankruptcy

Two approaches– Liquidation - Involves complete distribution of a

firm’s assets to creditors, most of whom receive a small fraction of amount owed

– Reorganization - Involves creditors temporarily freezing their claims while a firm reorganizes and rebuilds its operations more profitably

Advantage of a reorganization bankruptcy– Proactive option offering maximum repayment

of a firm’s debt in the future if a recovery strategy is successful


Corporate Combination Strategies

Joint venture– Involves establishing a third company (child),

operated for the benefit of the co-owners (parents) Strategic alliance

– Involves creating a partnership between two or more companies that contribute skills and expertise to a cooperative project

Exists for a defined period Does not involve the exchange of equity

Consortia, Keiretsus, and Chaebols– Defined as large interlocking relationships

between businesses of an industry


The Top Five Strategic Reasons for Outsourcing

1. Improve Business Focus1. Improve Business Focus

2. Access to World-Class Capabilities2. Access to World-Class Capabilities

3. Accelerated Reengineering Benefits3. Accelerated Reengineering Benefits

4. Shared Risks4. Shared Risks

5. Free Resources for Other Purposes5. Free Resources for Other Purposes


INDIAN BUSINESS HOUSES TATA GROUP

Group Overview

India’s largest business house More than 85 companies 39 listed 8% of India’s market capitalization 2.6 Million shareholders 2,70,000 employees Turnover Rs 343 billion (1996-1997)


INDIAN BUSINESS HOUSES TATA GROUP Contd...

1996-97 Rs (Billion)322343 30 23 40

% change Over 1995-96

18.818

-7.1 - 16

19

Financial Highlights

AssetsTurnoverPBTPATExports



Metals Automobiles Energy Engineering Chemicals Pharmaceuticals

Consumer Products Services Agro Industries IT and Communication Exports Finance



Tata Heritage Jamsetji Tata

– Started textile mill in 1877– Inspired steel and power industry– Technical education and philanthropy

JRD Tata– Pioneered civil aviation– Funded Hom Bhabha’s nuclear programme– Guided the Tata group for over half a century

Ratan Tata– Present Chairman since 1991



Holding Companies Tata Sons

– Founded by Jamsetji Tata– Promoted many of the present Tata companies– 63% held by Tata philanthropic trusts

Tata Industries– 100% subsidiary of Tata Sons founded in 1945 – Managing agency till 1970– Promoted new Tata companies in technology based

businesses Cross holdings among other Tata companies



Restructuring Prompted by post 1991 changing environment Need to identify and focus on core businesses Resistance from satraps

– Russi Mody, Darbari Seth, Ajit Kerkar Shrink number of companies

– From over 85 to about 30 Shrink number of core businesses

– From about 25 to around 10 or 12 Mergers and divestments McKinsey hired as a consultants



Restructuring Strategy Keep and grow

– Power, watches, metals, chemicals, telecom, hospitality, financial services, infotech, emerging services, infrastructure, automobiles

Forge strategic tie ups– Tea and beverages, retailing

Remain only as strategic investors– Luxury cars, infotech, printing, cosmetics

Sell– Refrigeration, paints, textiles, trading, electronics, oil

drilling, petrochemicals, pharma, specialty chemicals



Recent Developments Voltas focus on air conditioning and

engineering business– Hive off pesticides business to Ralchem Pesticides

(wholly owned subsidiary of Rallis - largest integrated agrochemical company in India)

Electrolux Voltas - JV between Voltas and AB Electrolux– Refrigerators– Washing machines– Compressors for refrigerators



Recent Developments Tata Tea focusing on global agro business

– Manages 32 tea gardens in Sri Lanka– Adding tea gardens inTurkey– Acquired a 9.5% stake in Asian Coffee

Overseas Operations– Automobile assembly in Bangladesh– Instant tea operations in the US– Chain of hotels across the world– Precision tooling operations in Singapore

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