MANAGEMENT POLICY AND STRATEGY SESSION - VI

1. MANAGEMENT POLICY AND STRATEGYSESSION - VI Generic and Grand Strategies Prof. Sushil Department of Management Studies Indian Institute of Technology, Delhi INDIA Email: sushil@dms.iitd.ernet.in Prof.Sushil\IITD\Session-VI

2. Low-cost leadership Focus Differentiation Generic Strategies Prof.Sushil\IITD\Session-VI

3. PORTER’S GENERIC STRATEGIES Competitive Advantage Lower Cost Differentiation Broad Target 1. Cost Leadership 2. Differentiation Competitive Score 3 B. Differentiation Focus 3 A. Cost Focus Narrow Target Prof.Sushil\IITD\Session-VI

4. 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 Prof.Sushil\IITD\Session-VI

5. REQUIREMENTS FOR GENERIC COMPETITIVE STRATEGIESCONTD…  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 Prof.Sushil\IITD\Session-VI

6. 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 erode Proximity 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-segments even lower cost in segments achieve even greater the industry differentiation in segments Prof.Sushil\IITD\Session-VI

7. STAGE OF `INDUSTRY’ DEVELOPMENT Maturity Decline Growth Redefine scope Divest peripherals Encourage departures Cost leadership Raise barriers Deter competitors Keeping ahead of the field Leader Strategic position of organization Imitation at lower cost Joint ventures Differentiation Focus Differentiation New opportunities Follower Prof.Sushil\IITD\Session-VI

8. Types of Grand Strategies Concentrated Growth Conglomerate Diversification Market Development Turnaround Product Development Divestiture Innovation Liquidation Horizontal Integration Bankruptcy Vertical Integration Joint Ventures Concentric Diversification Strategic Alliances Consortia Prof.Sushil\IITD\Session-VI

9. 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 Prof.Sushil\IITD\Session-VI

10. Conditions Favoring a Concentrated Growth Strategy Firm’s industry is resistant to major technological advancements Firm’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 inputs are stable in price and quantity and available in amounts and at times needed Firm’s industry is stable Firm’s competitive advantages are based on efficient production or distribution channels Success of market generalists Prof.Sushil\IITD\Session-VI

11. 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 Prof.Sushil\IITD\Session-VI

12. 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 purchase • b. Increasing rate of product obsolescence • c. Advertising other uses • d. Giving price incentives for increased use • 2. Attracting competitors’ customers • a. Establishing sharper brand differentiation • b. Increasing promotional effort • c. Initiating price cuts • 3. Attracting nonusers to buy the product • a. Inducing trial use through sampling, price incentives, and so on • b. Pricing up or down • c. Advertising new uses Prof.Sushil\IITD\Session-VI

13. 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 Prof.Sushil\IITD\Session-VI

14. Specific Options for Selected Grand Strategies (concluded) Product Development: Developing new products for present markets • 1. Developing new product features • a. 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, higher • e. 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) Prof.Sushil\IITD\Session-VI

15. Innovation Strategy Involves creating a new product life cycle, thereby making similar existing products obsolete Prof.Sushil\IITD\Session-VI

16. 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 integrationor • Are customers for firm’s outputs - forward integration Prof.Sushil\IITD\Session-VI

17. Textile producer Textile producer Shirt manufacturer Shirt manufacturer Clothing store Clothing store Acquisitions or mergers of suppliers or customer businesses arevertical integrations Acquisitions or mergers of competing businesses arehorizontal integrations Vertical and Horizontal Integrations Prof.Sushil\IITD\Session-VI

18. Increase firm’s stock value 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 efficiency and profitability Motivations Related to Diversification Strategies Prof.Sushil\IITD\Session-VI

19. 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 Prof.Sushil\IITD\Session-VI

20. Turnaround Strategy Involves a concerted effort over a period of time to fortify a firm’s distinctive competencies, returning it to profitability Prof.Sushil\IITD\Session-VI

21. A Model of the Turnaround Process Turnaround situation Turnaround response Cause Severity Retrenchment phase Recovery phase (operating) Internal factors Declining sales or margins Cost reduction Efficiency maintenance Low Stability Recovery High Imminent bankruptcy Asset reduction Entrepreneurial reconfiguration External factors (strategic) Prof.Sushil\IITD\Session-VI

22. 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 Prof.Sushil\IITD\Session-VI

23. 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 Prof.Sushil\IITD\Session-VI

24. 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 Prof.Sushil\IITD\Session-VI

25. The Top Five Strategic Reasons for Outsourcing 1.Improve Business Focus 2. Access to World-Class Capabilities 3. Accelerated Reengineering Benefits 4. Shared Risks 5. Free Resources for Other Purposes Prof.Sushil\IITD\Session-VI

26. 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) Prof.Sushil\IITD\Session-VI

27. 1996-97 Rs (Billion) 322 343 30 23 40 INDIAN BUSINESS HOUSES TATA GROUP Contd... Financial Highlights Assets Turnover PBT PAT Exports % change Over 1995-96 18.8 18 -7.1 - 16 19 Prof.Sushil\IITD\Session-VI

28. Metals Automobiles Energy Engineering Chemicals Pharmaceuticals Consumer Products Services Agro Industries IT and Communication Exports Finance INDIAN BUSINESS HOUSES TATA GROUP Contd... Prof.Sushil\IITD\Session-VI

29. INDIAN BUSINESS HOUSES TATA GROUP Contd... 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 Prof.Sushil\IITD\Session-VI

30. INDIAN BUSINESS HOUSES TATA GROUP Contd... 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 Prof.Sushil\IITD\Session-VI

31. INDIAN BUSINESS HOUSES TATA GROUP Contd... 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 Prof.Sushil\IITD\Session-VI

32. INDIAN BUSINESS HOUSES TATA GROUP Contd... 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 Prof.Sushil\IITD\Session-VI

33. INDIAN BUSINESS HOUSES TATA GROUP Contd... 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 Prof.Sushil\IITD\Session-VI

34. INDIAN BUSINESS HOUSES TATA GROUP Contd... 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 Prof.Sushil\IITD\Session-VI