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Contents 5

Contents

How to Get the Most Out of 9

this Book

Strategy: An Introduction 11

The 10 Schools of Strategy 12

The Economic Goals of 13

an Organization

Strategic Planning 14

Operationalising the 15

Strategy

Change Management 17

Strategic Control 18

Evaluating and Rewarding 20

Performance

The Road Ahead 21

Ackoff, Russell L. 25

Activity Based Costing (ABC) 25

Adaptive Planning 26

Adjacencies 26

Adjusted Present Value (APV) 27

Agency Theory 27

Alignment 28

Ansoff, Igor H. 30

Anti-Takeover Strategy 32

Argyris, Chris 33

Backward Integration 34

Balanced Scorecard 34

Bargaining Power of Buyers 35

Bargaining Power of Suppliers 35

Barnard, Chester 36

Barriers to Entry 37

Barriers to Imitation 38

Bartlett, Christopher A. 39

BCG Growth-Share Matrix 39

Beachhead Market 40

Benchmarking 40

Best Practices 41

BHAG 41

Bias for Action 41

Big Hairy Audacious Goals 41

(BHAGs)

Blue Ocean Strategy 42

Bottom of the Pyramid 44

Brainstorming 44

Brand Management 45

Breakeven Analysis 45

Bureaucracy 45

Business Ethics 45

Business Forecasting 46

Business Model 47

Business Process 47

Reengineering (BPR)

Business Risk 47

Buy Back 48

Cadbury Committee Report 49

Capacity Expansion 49

Capital Structure 51

Cartel 51

Cash Cow 52

Chandler, Alfred DuPont 52

Change Management 53

Christensen, Clayton M. 54

Clusters 55

Coase, Ronald 56

Code of Ethics 56

Commoditization 56

Company Profile 57

Comparative Advantage 57

Competitive Advantage 58

Competitor Analysis 59

Competitive Strategy 62

Concentration Ratio 63

Concentric Diversification 64

Conglomerate Diversification 64

Contestability 64

Contingency Planning 64

Contract Manufacturing 64

Co-opetition 65

6 A to Z of Bus iness Strategy

Core Competence 65

Core Ideology 67

Core Values 68

Corporate Governance 68

Corporate Image 69

Corporate Philanthropy 69

Corporate Purpose 70

Corporate Renewal 71

Corporate Restructuring 71

Corporate Social Responsibility 71

(CSR)

Corporate Venturing 72

Cost Leadership 72

Cost of Capital 74

Counterparry 74

Country of Origin Effect 74

Country Risk 74

Critical Success Factor (CSF) 74

Cross Country Subsidization 75

Cross Holding 75

Customer Relationship 75

Management (CRM)

Customer Switching Costs 76

Cusumano, Michael 76

Decision Making 77

Deming, William Edwards 78

Demographic Environment 80

Devil’s Advocacy 80

Diamond 80

Differentiation 83

Discovery Driven Planning 84

Diseconomies of Scale 84

Disruptive Technology 85

Diversification 85

Divestiture 88

Divisional Structure 89

Downsizing 89

Drucker, Peter F. 89

Due Diligence 90

Dynamic Capability Building 91

Dynamic Specialization 91

Earnings Before Interest and 93

Taxes (EBIT)

Economic Value Added (EVA) 93

Economies of Scale 94

Economies of Scope 94

Emotional Intelligence 94

End-game Strategies 95

Enterprise Resource Planning 96

(ERP)

Enterprise Risk Management 96

(ERM)

Entrepreneurship 96

Environmental Scanning 97

Experience Curve 98

Fayol, Henri 99

First Mover Advantage 99

Five Forces Model 100

Flat Organization 101

Focus 101

Follett, Mary Parker 102

Force Field Analysis 102

Forward Integration 103

Franchise 103

Free Rider 104

Full Costing 104

Functional Strategy 104

Functional Structure 105

Game Theory 106

Garbage In, Garbage Out 106

Generic Strategy 106

Ghoshal, Sumantra 107

Global Corporations 108

Global Industry 108

Global Leverage 108

Global Value Chain 109

Configuration

Globalization 109

Goals 111

Golden Handcuffs 111

Golden Handshake 111

Golden Hello 112

Golden Key 112

Golden Parachute 112

Govindarajan, Vijay 112

Handy, Charles 113

Hedgehog Principle 113

Herfindahl Index 113

Herzberg, Frederick 114

Hierarchical Organization 115

Hostile Bid 115

Contents 7

Human Capital 115

Hygiene Factors 115

Independent Director 116

Industry 116

Industry Shakeout 118

Innovation 120

Innovator’s Dilemma 122

Institutional Investor 123

Intrapreneurship 123

Japanese Style of 124

Management

Joint Venture 124

Judo Strategy 124

Just–in-Time 125

Kaizen 126

Kanban 126

Kaplan and Norton 126

Keiretsu 127

Kepner-Tregoe Matrix 127

Khanna, Tarun 127

Knowing-Doing Gap 128

Knowledge Management (KM) 128

Lateral Thinking 130

Law of Conservation of Profits 130

Law of Unintended 130

Consequences

Leadership 132

Lean Manufacturing 136

Lean Thinking 137

Licensing 137

Long Term Objectives 138

Loss Leader 138

MBO (Management By 139

Objectives)

Managerial Grid Model 139

Market Defense 140

Market for Corporate Control 141

Marketing Mix 141

Market Power 141

Market Signals 142

Maslow, Abraham 143

Matrix Structure 143

Mayo, Elton and 144

Roethlisberger, Fritz

McGregor, Douglas 145

McKinsey 7-S Framework 146

McNamara, Robert S. 147

Merger 147

Mintzberg, Henry 148

Mission 149

Motivation 150

Multi Domestic Industry 151

Murphy’s Law 152

Nearshoring 153

Net Present Value (NPV) 153

Nine-Cell Planning Grid 153

Not-Invented-Here 154

Offshoring 155

Ohmae, Kenichi 155

Oligopoly 156

Operating Strategies 157

Opportunity Cost 157

Optimizing Planning 157

Organic Growth 157

Organizational Behavior 157

Organizational Chart 158

Organizational Culture 158

Organizational Design 160

Organizational Development 161

(OD)

Organizational Inertia 161

Organizational Learning 162

Organizational Mapping 162

Organizational Structure 163

Outsourcing 163

Overheads 163

Palepu, Krishna G. 164

Pareto’s Principle 164

Parkinson’s Law 165

Personal Effectiveness 165

PEST (Political, Economic, 166

Social and Technological

Factors) Analysis

Peter Principle 167

Platform Leadership 167

Poison Pill 169

Policies 169

Political Risk 169

Porter, Michael E. 169

8 A to Z of Bus iness Strategy

Positioning 171

Price / Earnings Ratio (P / E) 172

Process Innovation 172

Process Life Cycle 174

Process Networks 175

Product Innovation 175

Product Life Cycle (PLC) 178

Product Platform 179

Prospect Theory 180

Purpose-Process-People 180

Doctrine

Pygmalion Effect 181

q-theory 182

Quinn, James Brian 182

Real Options 183

Regulatory Capture 183

Resource-based Theories 183

Responsiveness Planning 184

Reverse Engineering 185

Risk 185

Rivalry 186

Satisficing 188

Scenario Planning 188

S-Curve 189

Senge, Peter 189

Service Level Agreement (SLA) 190

Shareholder Value 190

Simple Structure 190

Simon, Herbert A. 191

Six Sigma 191

Skimming 192

Skunk Work 192

Sloan, Alfred P. 192

Slywotzky, Adrian J. 193

Span of Control 193

Spender, J. C. 194

Stakeholders 194

Strategic Advantage 194

Strategic Alliance 195

Strategic Architecture 196

Strategic Business Unit (SBU) 196

Strategic Choice 196

Strategic Control 197

Strategic Cost Management 197

Strategic Fit 197

Strategic Groups 198

Strategic Inflection Point 198

Strategic Innovation 199

Strategic Intent 201

Strategic Management 202

Strategic Market 203

Strategic Options 203

Strategic Planning 205

Strategic Pricing 207

Strategy Evaluation 209

Strategy Implementation 210

Stretch 211

Stuck in the Middle 212

Succession Planning 212

Supply Chain Management 213

(SCM)

Switching Costs 215

SWOT Analysis 215

Taylor, Frederick W. 217

Technology Risk 218

Threat of Substitutes 220

Tipping Point 221

Total Quality Management 222

(TQM)

Utterback, James 223

Valuation 224

Value Chain 224

Value Migration 227

Value System 227

Values 227

Vertical Integration 228

Value Innovation 231

Vision 232

Whistle Blower 233

White Knight 233

Williamson, Oliver E. 233

Willpower 234

Winner’s curse 234

Zero Base Budgeting 235

Bibliography 236

Strategy: An Introduc t ion 9

How to Get the Most Out of this Book

Alphabetization: All entries are alphabetized by letter rather than by

word so that multiple-word terms are treated as single words. In cases

where abbreviations or acronyms are more commonly used than full

terms, they are given as entries in the main text. For example, MBO is

more commonly used than MANAGEMENT BY OBJECTIVES, and so the

concept is explained under MBO. Where a term has several meanings, the

various meanings are given.

Cross References: To offer a fuller understanding of a concept, some-

times it is both necessary and useful to refer to other related entries in

the book as well. Such cross references are printed in SMALL CAPITALS.

Italics have been used to indicate titles of publications, books, journals,

etc.

Parentheses: Parentheses have sometimes been used in entry heading

to indicate that an abbreviation is as commonly used as the term itself,

for example, BIG HAIRY AUDACIOUS GOALS (BHAG).

Examples, Illustrations and Tables: The book contains numerous ex-

amples to help you better understand a concept, or to relate it to the real

business world. Illustrations and tables are also given at many places

along with their related entries.

10 A to Z of Business St rategy

Strategy: An Introduction

As the business environment becomes more complex, strategic man-

agement is gaining in importance. Few words are as commonly used in

management as strategy.

In simple terms, strategy means looking at the long term future to

determine what the company wants to become, and putting in place a

plan of getting there.

Strategy is both art and science. Strategy is an art because it requires

creativity, intuitive thinking, an ability to visualize the future, and to

inspire and engage those who will implement the strategy. Strategy is

science because it requires analytical skills, the ability to collect and ana-

lyze information and take well informed decisions.

Without a strategy, an organization is directionless and vulnerable to

changes in the business environment. Strategy acts as some kind of a

guidepost for a company’s ongoing evolution. Strategy provides a direc-

tion for the company and indicates what must be done to survive, grow

and be profitable.

According to Constantinos Markides*, strategy addresses three ques-

tions:

Who are the customers?

What products / services should be offered to them?

How can the company do this efficiently?

These questions look deceptively simple. But the answers to these

questions which form the core of corporate strategy.

The term strategic is widely used, but often in the wrong context. So

we must understand the term carefully. We can call an issue strategic if

it requires top management involvement, involves commitment of major

resources, has either a long term impact or organization-wide implica-

* Markides, Constantinos C., “A Dynamic View of Strategy”, MIT Sloan Man-

agement Review. Spring 1999. pp. 55-63. Also see All The Right Moves by the

same author, published by Harvard Business School Press, 2000.


tions. Though the involvement of top executives is a must in strategic

management, people at all levels in the different business units and func-

tions must also be involved. Unless plans are understood and imple-

mented effectively at these lower levels, the whole purpose of strategic

management would be defeated.

The 10 Schools of Strategy The body of knowledge on corporate strategy has evolved over time.

With different schools of thought looking at strategy in different ways,

it’s a good idea to review all of them briefly in order to get an integrated

picture.

According to Henry Mintzerg*, there are ten different schools of

strategy:

The Design School: Aims at creating a fit between a company’s inter-

nal strengths and weaknesses and external threats and opportunities.

The Planning School: Views strategy as an intellectual, formal exer-

cise, involving various techniques.

The Positioning School: The company selects its strategic position

after thoroughly analyzing the industry. Effectively, planners become

analysts.

Entrepreneurial School: The focus here shifts to the chief executive

who largely relies on intuition to formulate strategy. The emphasis is

less on precise designs, plans or positions and more on broad vision

and perspectives.

Cognitive School: The focus here is on cognition and cognitive bias-

es.

Learning School: Strategies are emergent, not deliberate. They evolve

as the organization learns.

Power School: Strategy making is rooted in power. At a micro level,

people are involved in bargaining, persuasion and confrontation. At a

macro level, the organization uses its power over others and among

its partners in alliances, joint ventures and other network relation-

ships to negotiate things in its favor.

* Mintzberg, Henry; Lampel, Joseph, and Ahlstrand, Bruce, Strategy Safari: A

Guided Tour Through the Wilds of Strategic Management, The Free Press,

2005.


Cultural School: Views strategy formulation as a process rooted in

culture. Culture shot into prominence after the Japanese style of

management became widely written about in the 1980s.

The Environment School: The focus here is on coping with the envi-

ronment. As Mintzberg mentions, this school sees the strategy for-

mation as a reactive process. The strategy is a response to the chal-

lenges imposed by the external environment. Where other schools

see the environment as a factor, the environmental school sees it as

an actor.

Configuration School: This school views the organization as a config-

uration and integrates the claims of other schools. A variation of this

somewhat academic perspective is a more practitioner-oriented view

which focuses on how an organization moves from one state to an-

other, such as from start up to maturity.

The approaches mentioned above need not be viewed as exclusive,

watertight compartments. They can be combined in appropriate ways.

The Economic Goals of an Organization Understanding the firm’s long term economic goals is the starting point

in strategy formulation. As Pearce and Robinson* rightly put it, three

economic goals must drive the strategy of any organization — survival,

profitability and growth. A firm has to first survive, if it is to serve the

interests of its stakeholders. Survival is often taken for granted. But

many companies do go bankrupt. Indeed, the average life of a Fortune

500 company is only 40 to 50 years, according to the research of a for-

mer Shell executive Aries de Geus†. Reckless or expedient short term

oriented decision making, complacency and quick fixes to structural

problems are some of the ways in which the survival of an organization

is threatened.

Profitability is the main goal of any business. Not only should a firm

make profits but it must also ensure that these profits are sustainable in

the long run. Moves aimed merely at improving short term profitability

* Pearce, John A. and Robinson, Richard B., Strategic Management — Strategy

Formulation & Implementation, Richard D. Irwin, 1995.

† De Geus, Aries P., “Planning as Learning”, Harvard Business Review, March-

April 1988, pp. 70-74.


must be avoided. Equally important, profits should come from the com-

pany’s core business, not through non operating income (such as sale of

assets) or accounting manipulation.

The third goal is growth or, more precisely, profitable growth. A

profitable organization which is not growing is a cause for alarm. Lack

of growth means the company is not able to identify opportunities to

expand its market, compete with other players, develop new products,

attract new customers, etc. Lack of growth also implies that competitors

are probably moving ahead, thereby marginalizing the company’s com-

petitive position.

For example, slow growth in recent times of famous companies such

as Microsoft and Hindustan Lever has been a major source of worry for

their investors.

Strategic Planning In general, strategic plans contain the following components:

Vision: The organization’s deeply desired future.

Mission: The organization’s purpose in terms of products, technology

and markets.

Core Competencies: The tangible and intangible assets the company

will need to build and leverage to gain competitive advantage.

Values: The driving beliefs that define a company’s culture, help

managers to set priorities and guide day-to-day operations.

Strategic Objectives: The targets that allow a company to measure

how it is performing in key result areas such as market share, cus-

tomer loyalty, quality, service, innovation and human capital.

The business environment needs to be analyzed carefully before a

strategic plan is prepared. According to Pearce and Robinson*, the busi-

ness environment can be divided into the remote environment and oper-

ating environment. The remote environment includes political, econom-

ic, social, technological and industry factors. The operating environment

has a direct impact on the ability of the firm to sell its products and ser-

vices profitably. Among the factors to be considered here are competi-


Formulation & Implementation, Richard D, Irwin, 1995.


tive position, customer profile, reputation among its suppliers / creditors

and the labor market. The operating environment is much more under

the control of a firm, compared to the remote environment. So the firm

should be more proactive in dealing with the operating environment.

Environment data must be collected for a meaningful range of fac-

tors. Such data should be analyzed to determine the implications for the

firm in terms of opportunities and threats. Strategic plans should be suf-

ficiently flexible to deal with unexpected variations from environmental

forecasts.

During the planning stage, the company will also have to identify key

issues; for example, weaknesses to be addressed or opportunities to be

exploited with respect to the products and services to be offered to cus-

tomers, the internal process changes needed to support the company’s

strategy, and the skills and resources needed to create value more effi-

ciently and effectively. Some of the important issues faced by any or-

ganization are costs, service, new markets and products, geographic ex-

pansion, acquisitions, divestitures, organizational structure, core compe-

tencies and processes, new technologies, training and development, and

information systems.

Any strategic plan also involves commitment of resources. Adequacy

of existing resources, training needs, requirement of new information

systems, etc. must be carefully examined.

Strategic management decisions take place at three levels: Corporate,

Business Unit and Function. Corporate level decisions tend to be macro

level and conceptual in nature. The choice of business, the kind of

growth strategy to pursue and the kind of capital structure the company

should have are good examples. Business level decisions cover more

specific areas such as plant location, market segmentation, geographic

coverage and distribution channels. Functional level decisions tend to

cover the next level of detail such as choice of plant / equipment, inven-

tory level, etc.

Operationalising the Strategy The difference between the best and mediocre companies often lies not

in strategic planning but in the way strategy is implemented. The key

issues must be translated into action plans, which must include the key

metrics, timelines, important steps involved, resources needed, cross


functional collaboration required, etc. Effective implementation de-

mands identification of annual objectives, functional strategies and ap-

propriate policies that are aligned with the long term plans / objectives.

Annual objectives effectively break down long range goals into what

needs to be achieved during the year. So they must be focused, specific

and measurable. Examples of annual objectives include:

To reduce employee attrition by 10% by the end of the year.

To reduce time from order receipt to order execution by 20%.

To increase the member of consultants in the company, who are Six

Sigma Certified Black Belts by 30%.

Functional strategies represent the action plans for sub-units of the

company. Functional strategies outline how key functional areas like

marketing, finance, operations, R&D and human resources must be

managed. Functional strategies must be framed with respect to each key

activity. Take the case of pricing, for example. The following issues

must be addressed:

1. What segment is being targeted — mass market or premium end of

the market?

2. How much of price discrimination should be practiced across cus-

tomer segments?

3. Is the cost structure aligned with the price?

4. What kind of discount can be offered, given the cost structure?

5. Should the price be above or below that of competition?

Policies act as specific guides for operating managers and their sub-

ordinates. By linking policies to long term objectives, strategy imple-

mentation is greatly facilitated. Policies are clear statements about how

things are to be done. They ensure disciplined decision making without

the need for frequent intervention by top management. By standardizing

answers to many questions, policies not only speed up the decision mak-

ing process but also help establish consistent patterns of action and re-

duce the uncertainty involved while handling routine problems.

Strategy implementation will not be effective without defining ac-

countability. Managers need to determine who will be responsible for

the overall effort and, in turn, who will “own”, or be responsible for,

each of the different steps.


Accountability, autonomy and responsibility go together. Managers

need to clarify how much autonomy individuals and teams will have in

discharging their responsibilities.

Some individuals may like to consult other team members before

making a choice. Others may be capable and confident of making deci-

sions independently. A few others may have relatively little experience

in decision making. Managers may want to empower them to make

some lower risk decisions themselves to gain more exposure.

Communication is an integral part of operationalising the strategy.

Even the best thought-out plans cannot be executed unless team mem-

bers clearly understand the plan, are enthusiastically convinced about it

and discharge their responsibilities skillfully.

Meetings, informal conversations, e-mails, and other communication

channels can be used to communicate the importance of the company’s

strategy and the role of different groups in implementing it. Communica-

tion must focus on the following:

Rationale for the company’s strategy.

How the initiatives that are being carried out support the corporate

strategy.

The implications if the plans are implemented successfully.

The implications if the company fails to implement its plans.

The attitudes and behavior expected from each person in the team.

Regular communication can go a long way in making people believe

that strategy is truly a collective responsibility.

Change Management Managing change is an integral part of strategic management. Analysis

of industry structure, competitive positioning, resources currently avail-

able to the firm or a sharp decline in the company’s financial perfor-

mance may indicate the need for launching a major change initiative.

Effective change management calls for a clear vision about where the

organization is heading, involvement of people, responsibility for taking

action and appropriate measurement and control systems.

Radical change is usually best implemented by outsiders, who can

bring in fresh perspectives. A new CEO promoted from within but who


is not closely associated with the past strategy can also spearhead such a

change initiative. Leadership of radical change initiatives usually in-

volves creating an inspiring vision of the future, supporting it with tan-

gible and symbolic actions, and generating support and commitment

across various levels of the organization.

Change is difficult for most people due to various reasons. Change

tends to be seen as an admission that something wrong has happened.

Change also upsets status and power relationships. Resistance might

take the form of outright defiance, apparent agreement to do something

but failure to follow through, an emotional attachment to the way things

have been done in the past and a diminishing commitment to the job.

People who resist change can slow down things. They must be dealt

with on a one-to-one basis. After understanding the reasons for their

resistance, various approaches can be tried out:

Give them plenty of information about market developments and

why a new corporate strategy and initiatives are needed.

Invite them to participate as much as possible in planning and im-

plementation, so that they have a personal investment in the strategy

and initiatives.

Identify the reasons behind the resistance. Mentoring / Counseling

may overcome such resistance.

Training can go a long way in facilitating change. Training can im-

part new skills and competencies and facilitate behavioral interven-

tion.

If all these approaches fail, managers may have little choice but to move

such people to areas where they are less likely to do harm. In extreme

cases, people resistant to change should be dismissed in the larger inter-

ests of the organization.

Strategic Control Strategy implementation may take years. But companies cannot wait till

a strategy is fully implemented to compare actuals with targets. Strategy

must be tracked even as it is being implemented. Suitable mid-course

correction must be taken in response to various developments, internal


and external. According to Pearce & Robinson*, strategic control has

four aspects:

Premise control;

Implementation control;

Strategic surveillance; and

Special alert control.

Premise control aims at systematically checking whether the assump-

tions made during the strategic planning exercise continue to hold good.

It is not necessary to track all the assumptions made during planning. It

makes sense to focus on those assumptions which are likely to change

and which would have a major impact on the organization if they did.

When these assumptions change, plans also must undergo a correspond-

ing change.

Implementation control examines whether the overall strategy should

be changed in light of unfolding events and the results of the various

actions already taken to implement the strategy. One useful technique is

a milestone review. It involves a full-scale reassessment of the strategy

and the advisability of continuing or changing the direction of the com-

pany. Such a review may take place after a passage of time, occurrence

of critical events, or at points before major resource allocations.

Strategic surveillance involves monitoring a broad range of events,

internal and external, that may derail the strategy or significantly influ-

ence the implementation. Special alert control is a mechanism to thor-

oughly, and often rapidly, reconsider the firm’s strategy in the wake of a

sudden, unexpected event. Occurrence of such events must trigger off an

immediate and intense reassessment of the company’s strategy and cir-

cumstances, and a re-look at the plan.

At lower levels, operating managers need control systems to guide

the allocation and use of the company’s resources. These systems set

performance standards, measure actual performance, identify deviations

from standards and initiate suitable corrective action or adjustment. Ex-

amples of operational control systems include budgets, schedules and

key success factors. A budget is simply a resource allocation plan.


Formulation & Implementation, Richard D. Irwin, 1995.


Scheduling helps in allocating the use of a time-constrained resource or

arranging the sequence of interdependent activities. Key success factors

must receive constant management attention.

Evaluating and Rewarding Performance Evaluating performance entails measuring how both a unit as a whole

and its individual members have fared with respect to set objectives,

using both qualitative and quantitative criteria.

Qualitative criteria are those where numbers cannot be put. Some

examples are:

Evaluating whether the unit is exceeding expectations in the accom-

plishment of strategic initiatives.

Evaluating the commitment to learning.

Evaluating if individuals are developing innovative ways to accom-

plish the job.

Evaluating how well a unit is working together as a team.

Evaluating how well team members are collaborating with one an-

other, resolving conflicts, and sharing what they’ve learned.

Evaluating how well the unit plans ahead.

Evaluating how deeply team members understand the company’s

business, their own role in supporting the corporate strategy, and the

details of the action plans they’re responsible for.

Quantitative criteria focus on revenue, cost of goods, market share,

and other quantifiable and measurable parameters. For example, a unit

might decide to increase revenue by 20% annually over the next three

years. At the end of Year-1, the unit may review the situation and con-

firm whether revenue did, in fact, increase by 20% that year.

People can be rewarded for good work in different ways. Most peo-

ple want some form of financial reward for their work. A few are moti-

vated by non-monetary factors such as recognition, power and influence,

autonomy, job variety and learning opportunities. So a judicious combi-

nation of financial and non-financial rewards must be used to encourage

a culture of excellence.

The reward system should be transparent. Employees must under-

stand clearly what is expected of them, and the kind of rewards they will


receive if they perform well. Some of the issues that must be communi-

cated to people in a transparent manner include:

Is the reward system permanent, or will it be modified or discontin-

ued after some time?

Will everyone be eligible for rewards?

For example, if the reward system features bonuses for sales of a new

product, will the R&D staff also be rewarded for their contribution?

The Road Ahead The classical views of strategy have focused on understanding industry

structures and developing suitable capabilities to position a firm effec-

tively in relation to competitors. But in today’s complex and changing

environment, when the very boundaries of many industries are being

constantly reshaped, does it make sense to try and understand the evolv-

ing industry structure? Are ad hoc short-term movements the only way

to cope with the uncertain environment? Is long term strategic planning

no longer relevant?

The short answer is that strategic planning is as relevant as ever. It

provides direction. As John Hagel III and John Seely Brown* mention,

speed without a sense of direction may result in random motion. Without

a sense of direction, companies may become reactive and sometimes

spread their resources thin by pursuing too many options simultaneous-

ly.

Even in tech industries which are always in a state of flux, long range

planning is important. They give the example of Microsoft which devel-

oped a strong sense of direction in two sentences: “Computing power is

moving inexorably to the desktop. To succeed, we must own the desk-

top.” The directional statement acted as a powerful guiding force even

during times of major challenge over a period of almost two decades. To

be effective, directional statements should be brief and high level. “In

complex, rapidly evolving markets, any attempt to specify outcomes in

detail is bound to create the illusion of greater insight and control over

events than warranted . . . it might be more accurate to describe these

* Hagel III, John and Seely Brown, John, The Only Sustainable Edge, Harvard

Business School Press, 2005.


statements of long-term direction as focusing or orienting perspectives

rather than definitive statements of advantaged positions. The statements

help executives know when to look, rather than telling them what they

will find.”

To strike a balance between speed and direction, two different time

horizons are needed — a long term horizon for setting the direction and

a short term horizon to focus on operational initiatives. Hagel III and

Seely Brown have come up with a frame work called FAST — Focus,

Accelerate, Strengthen, Tie it all together. “Focus” refers to long term

positioning, and specialization and capability building in the chosen area

of business. “Accelerate” means moving fast in the short term.

“Strengthen” means removing road blocks that prevent faster movement

in the short run. This includes building shared meaning and trust and

making appropriate investments in information technology. “Tie it all

together” means integrating these three components across networks of

organizations to amplify learning and accelerate capability building. As

they mention: “The sequential approach of traditional strategies simply

cannot generate the rapid learning and capability building that one needs

for moving quickly back and forth between a very short-term operational

horizon and a much longer term strategic horizon.”

In fast paced, intensely competitive markets, how can companies

develop superior strategic decision making skills? According to Kath-

leen Eisenhardt, effective strategy formulation is about*:

Building collective intuition;

Encouraging healthy conflict;

Maintaining a pace so that decisions are taken within a stipulated

time; and

Defusing political behavior.

Building collective intuition means gathering information on real

time basis and involving people by holding intensive discussions with

them in groups. Through such discussions, the company can get a sense

of how it should move ahead.

* Cusumano, Michael A. and Markides, Constantinos C. (Editors), “Strategy as

Strategic Decision Making” in Strategic Thinking for the Next Economy, Jossey

Bass, 2001.


Inviting and debating divergent views is an important part of strategy

formulation. Conflict promotes creative thinking, a healthy debate on the

various options available, validation of the various assumptions made

and an overall improvement in the quality of decisions.

Companies which are good at strategic planning get into action mode

quickly. They encourage debate and bring a lot of energy into the dis-

cussions. But they also know when to end the deliberations and freeze a

decision. While trying to build consensus, they know how to break a

deadlock. They take a decision even when people are finding it difficult

to agree and come to an understanding. On the other hand, companies

which are weak in strategic management tend to postpone strategic deci-

sions and end up making hurried, last minute decisions.

Strategic decision making has its associated share of politics. Politics

must be minimized, if not eliminated, by emphasizing a shared vision

and through a more balanced power structure which gives different deci-

sion makers latitude and scope to contribute. A clear definition of re-

sponsibilities may make managers feel more secure, more willing to

cooperate and consequently reduce unhealthy competition.

The rise of the knowledge economy and the growing importance of

knowledge workers are putting pressure on companies to change their

style of operating. The three Ss, Strategy, Structure, Systems are giving

way to the 3 Ps, Purpose, Process and People. The 3P doctrine devel-

oped by Christopher Bartlett and Sumantra Ghoshal* emphasizes that the

focus must shift from enforcing compliance to facilitating cooperation

among people and valuing initiative more than discipline. Top manage-

ment must establish a sense of purpose within the company. Purpose

allows strategy to emerge from within the organization at different lev-

els. Purpose generates energy and alignment. Instead of emphasizing

structure, the top management should focus on building the core organi-

zational processes that will promote an entrepreneurial mindset that can

help in creating and leveraging knowledge to create value. Finally, in-

stead of building systems, top management should develop people and

help them in fully exploiting their potential. Senior managers should

play the role of mentors rather than rule enforcers.

* Ghoshal, Sumantra and Bartlett, Christopher A., The Individualized Corpora-

tion, Harper Collins, 1997.


The basic principles of Porter’s competitive strategy also need to be

reinterpreted in a fast paced business environment. As Arnoldo Hax and

Dean Wilde* suggest, in addition to competing on cost leadership or dif-

ferentiation, companies can explore other options. The “customer solu-

tions” option is based on offering a wider range of products and services

that satisfy most if not all the customers’ needs. This broad bundle of

services might be customized according to market needs. This strategy

emphasizes bonding with customers, anticipating their needs and work-

ing closely with them to develop new products. The “system lock in”

option considers all the meaningful players in the system that contribute

to the creation of economic value. The company concentrates on nurtur-

ing, attracting and retaining complementors’ share to lock out competi-

tors and lock in customers.

As the new millennium gets under way, there is little doubt that strat-

egy will play a key role for companies across industries. Flexibility,

shorter planning cycles, the ability to gather data in real time, rapid mid-

course corrections and efficient execution will hold the key to success in

the coming years.

*Hax, Arnoldo C and Wilde II, Dean L. “The Delta Model: Adaptive Manage-

ment for a Changing World”, Sloan Management Review, Winter 1999, pp. 11-

28.

24 Ackof f , RUS S E LL L .

A

Ackoff, Russell L. One of the early strategy gurus, Ackoff introduced rigor into strategic

planning. In his book A Concept of Corporate Planning, Ackoff men-

tions that there are some aspects of the future about which we can be

virtually certain. Here, companies can pursue commitment planning.

There are other aspects of the future about which we cannot be certain,

but we can be reasonably sure of what the possibilities are. Here, CON-

TINGENCY PLANNING is useful. A good example is planning for a military

invasion. Every possibility is identified and analyzed and a suitable ac-

tion plan prepared because time is of the essence, once a possibility has

become a reality. Finally, there are some aspects of the future, which

cannot be anticipated. Here, RESPONSIVENESS PLANNING can be used, i.e.

building flexibility into the organization.

(See also: ADAPTIVE PLANNING)

Activity Based Costing (ABC) Activity based costing increases the accuracy of cost information by

linking overhead and other indirect costs to product or customer seg-

ments more precisely. Traditional accounting systems distribute indirect

costs on the basis of direct labor hours, machine hours, or material costs.

This leads to a distorted picture. Decisions about which product line to

invest in and which not to invest in, become difficult. ABC undertakes

detailed economic analyses of important business activities to improve

strategic and operational decisions.

To build a system that will support ABC, companies should:

Determine the key activities performed;

Determine the cost drivers by activity; and

Determine overhead and other indirect costs by activity, using clearly

identified cost drivers.

ABC can be used to:

Adjacencie s 25

1. Re-Price Products: Managers can analyze product profitability more

accurately by combining activity based cost data with pricing infor-

mation. This can result in the re-pricing or elimination of unprofita-

ble products. Managers can also estimate new product costs accurate-

ly.

2. Reduce Cost: ABC identifies the components of overhead costs and

other cost drivers. Managers can reduce costs by lowering the cost of

an activity, or the number of activities per unit.

3. Influence Strategic and Operational Planning: ABC can facilitate

target costing, performance measurement for continuous improve-

ment, and resource allocation based on projected demand and infra-

structure requirements. ABC can also assist a company in identifying /

evaluating new business opportunities.

(See also: FULL COSTING, STRATEGIC COST MANAGEMENT)

Adaptive Planning This school of strategic planning, developed by Russell ACKOFF, believes

that the principal value of planning lies not in the plans themselves but

in the process of producing them. Companies should try to put in place a

system that will minimize the future need for retrospective planning, i.e.

planning aimed at removing deficiencies produced by past decisions.

This school classifies the future into three types: certainty, uncertainty

and ignorance. When the future is reasonably certain, commitment plan-

ning can be used. When the future is uncertain but we can be reasonably

sure of what the possibilities are, CONTINGENCY PLANNING can be used.

Finally, there are some aspects of the future that just cannot be anticipat-

ed. The only way to deal with such uncertainties is by building respon-

siveness and flexibility into the organization. This is called RESPON-

SIVENESS PLANNING.

Adjacencies A term coined by Chris Zook and James Allen* for markets close to a

company’s core business. By identifying and exploiting such markets,

* Zook, Chris, Beyond the Core: Expand Your Market Without Abandoning

Your Roots, HBS Press, 2004; Zook, Chris, and Allen, James, Profit From the

Core: Growth Strategy in an Era of Turbulence, Harvard Business School Press,

26 Adjusted PRE S E NT V A LUE (A PV )

companies can create a new growth trajectory. Adjacencies essentially

imply related diversification, i.e. moving into a new area which has

some resemblance to the firm’s core business and taking advantage of its

existing competencies. Adjacencies represent new growth opportunities

which have a strong fit with the existing business.

(See also: CORE COMPETENCE, DIVERSIFICATION)

Adjusted Present Value (APV) NET PRESENT VALUE (NPV) is a popular method of evaluating an invest-

ment decision. NPV involves estimating the cash flows expected from

the project and discounting them to the present value. NPV is, however,

not suitable in other more complex situations where risk is different for

different cash flows. Adjusted present value is a modified version of

NPV. APV uses different discount rates for different cash flows depend-

ing on the associated risk. Higher the risk, higher the discount factor

used.

Agency Theory A theory which probes the relationship between principals and agents.

Principals appoint agents to get the work done. The goals of principals

usually differ from those of the agents. This gives rise to the agency

problem.

For example, advertisers (principals) tend to emphasize sales goals

and the cost-effectiveness of marketing communications, whereas adver-

tising agencies may be more inclined to think of creative goals and atten-

tion-getting commercials. Professors of top business schools would like

to spend most of their time doing research and consultancy. But the

owners expect these professors to spend more time with students both in

the classroom and outside.

Agency theory is a key concept in corporate governance. Profession-

al managers often pursue strategies that increase their personal payoffs at

the expense of shareholders. For example, they may grant themselves

lavish perquisites, including elegant corner offices, corporate jets, large

staffs and extravagant retirement programs.

2001 and Zook, Chris, and Allen, James, “Growth Outside the Core”, Harvard

Business Review, December 2003, pp. 66-73.

Al ignment 27

Managers also often tend to pursue growth at the cost of profitability.

Shareholders generally want to maximize earnings, since growth in earn-

ings results in stock appreciation. Since managers are typically compen-

sated more for sales rather than earnings growth, they tend to be enthusi-

astic about strategies such as mergers and acquisitions even when this

enthusiasm is not really justified. Managers may also pursue diversifica-

tion opportunities that are not necessarily in line with the company’s

best interests.

In other cases, managers may become complacent and allow things to

drift. They may avoid risk since they feel they are more likely to be fired

for failure than for mediocre performance. Executives may be far less

entrepreneurial than they should be. They may not make the bold moves

that a situation demands.

One way to tackle the agency problem is to align the interests of

managers with those of the owners by using appropriate incentives such

as stock option and executive bonus plans. But, ironically enough, these

schemes may also tempt managers to act against the best interests of the

firm. For example, they may manipulate the financial statements to arti-

ficially increase earnings.

(See also: CORPORATE GOVERNANCE)

Alignment A key factor in effective implementation of strategy. Most large organi-

zations are divided into business units which are out of synch and work

at cross purposes. The challenge is to coordinate the activities of these

units and leverage their skills for the benefit of the organization as a

whole. Kaplan & Norton* call this alignment.

By aligning the activities of its various business and support units, an

organization can create additional sources of value in various ways. Fi-

nancial synergies can be generated through centralized resource alloca-

tion and financial management. Value can also be created if corporate

headquarters can operate internal capital markets better than external

market mechanisms, and share knowledge across business units in a

* Kaplan, Robert S. and Norton, David P., Alignment — Using the Balanced

Score-card to Create Corporate Synergies, Harvard Business School Press,

2006.

28 A l ignment

manner that would be difficult if the various units were independent en-

tities.

Customer synergy means enhancing customer relationships by offer-

ing a range of complementary products and services from different busi-

ness units. Corporations can leverage their multiple products and ser-

vices to create unique integrated solutions, resulting in customer satis-

faction and loyalty that less diversified and more focused organizations

cannot match. Companies can also generate value by delivering a value

proposition consistently throughout their decentralized units. Cross sell-

ing to specific customers can also generate value.

Internal process synergies can be created by generating economies of

scale in activities such as procurement, logistics, information technology

and infrastructure. Sharing processes across units generates economies

of scale in such activities and helps cut costs. Centralized resources hav-

ing specialized expertise and knowledge in operating a key process or

service can be leveraged. The sharing of common philosophies, pro-

grams and competencies across business units can also generate signifi-

cant benefits. Expertise sharing can reduce the time it needs to respond

to customer needs and better equip the company to exploit emerging

opportunities in the business environment.

Learning and growth synergies can be generated by developing and

sharing critical intangible assets, including people, technology, culture

and leadership. Corporate headquarters can put in place effective pro-

cesses for developing intangible assets and promote the sharing of

knowledge and best practices throughout all its business and support

units. New ideas can rapidly spread across the enterprise and be assimi-

lated by the business units in a manner that would be difficult were they

independent entities. Growing leaders faster than competition can gener-

ate competitive advantage.

There are different ways of achieving alignment. One way is to start

at the top and then cascade down. Another way is to start in the middle,

namely at the business unit level, before building a corporate scorecard

and map. Some companies launch an enterprise-wide initiative right at

the start. Others conduct a pilot test at one or two business units before

extending the scope to other enterprise units.

Alignment has four components:

Ansof f , I G OR H . 29

1. Strategic fit;

2. Organization alignment;

3. Human capital alignment; and

4. Alignment of planning and control systems.

Strategic fit exists when the internal performance drivers are con-

sistent and aligned with the desired customer and financial outcomes.

Organization alignment explores how the various parts of an organiza-

tion can synchronize their activities to generate synergy. Human capital

alignment is achieved when employee’s goals, training and incentives

become aligned with business strategy. An alignment of planning and

control systems exists when management systems for planning, opera-

tions and control are linked to strategy.

As Kaplan and Norton put it, “Strategy execution is not a matter of

luck. It is the result of conscious attention, combining both leadership

and management processes to describe and measure the strategy, to align

internal and external organizational units with the strategy, to align em-

ployees with the strategy through intrinsic and extrinsic motivation and

targeted competency development programs and finally, to align existing

management processes, reports and review meetings, with the execution,

monitoring and adapting of the strategy.”

(See also: BALANCED SCORECARD)

Ansoff, Igor H. A famous strategy guru, Igor Ansoff developed the notion of corporate

strategic planning. He argued that any business needs to look at its re-

sources, and align them with its business environment. Ansoff’s analyti-

cal tools, such as competence grids, flow matrices, charts and diagrams

are popular in contemporary management literature. He used the term

competitive advantage years before Michael Porter did.

Ansoff’s book, Corporate Strategy: An Analytical Approach to Busi-

ness Policy for Growth and Expansion (1987) mentions three classes of

decisions:

5. Strategic (the selection of the product / market mix);

6. Administrative (structure); and

7. Operating (process).

30 Ansof f , I G OR H .

According to Ansoff, strategy should focus on three fundamental

issues:

Definition of the firm’s core objectives;

Whether the firm should diversify and, if so, into what areas; and

How the business should exploit and develop its new or existing

market.

The closer a business stays to its existing products and markets, the

lower the risk. Introducing new products into new markets for diversifi-

cation carries the highest risk. Hence, the recommendation to stick to the

knitting. Ansoff depicted this in a matrix form, with four possible strate-

gies, depending on the situation faced.

Old Products New Products

Old Markets Market Penetration Product

Development

New Markets Market Development Diversification

Market penetration means increasing market share by encouraging

current customers to buy more, attracting competitors’ customers, or

convincing non-users to use the product.

Market development implies launching the current product in a new

market by expanding distribution channels, selling in new locations

or identifying additional potential users.

Product development involves launching a new product in the current

market by developing new features, improving quality levels, etc.

Diversification means moving beyond the current business. Concen-

tric (related) diversification involves developing new products for the

same market segment. Conglomerate (unrelated) diversification in-

volves developing new products for new markets.

Ansoff is also famous for:

Establishing corporate planning as a formal management process.

Popularizing SWOT analysis.

Developing the idea of environmental scanning.

Anti-Takeove r S TRA TE G Y 31

Repositioning “strategic planning” as part of a continuing process

rather than a once-a-year (or less frequent) planning process.

Articulating the various advantages and disadvantages of deliberate

strategy versus emergent strategy.

“Gap” analysis — which looks at the gap between our aspirations

and the likely outcome of current strategies.

Ansoff’s seminal book, Corporate Strategy emphasizes the need to

break down the strategy process into various steps:

External analysis — understanding market opportunities and threats;

Internal analysis — understanding strengths and weaknesses;

Choice (and our alternatives); and

Implementation. (See also: STRATEGIC OPTIONS, SWOT ANALYSIS)

Anti-Takeover Strategy Methods used by an incumbent management to thwart a takeover bid. A

takeover means change of ownership and, usually, a change of manage-

ment as well. The current management can resist the takeover bid in

various ways. Important methods used in thwarting takeovers include:

The golden parachute is a provision in a CEO’s contract to ensure

that he will get a large bonus in cash or stock if the company is ac-

quired.

The supermajority is a defense that requires an overwhelming major-

ity of shareholders to approve of any acquisition. This makes a take-

over much more unlikely.

A staggered board of directors prolongs the takeover process by pre-

venting the entire board from being replaced at the same time. The

terms are staggered so that some members are elected, say, every two

years, while others are elected every four years. The acquirer may not

want to wait four years for completely reconstituting the board.

Dual-class stock allows company owners to hold on to voting stock,

while the company issues stock with little or no voting rights to the

public. This way the new investors cannot take control of the compa-

ny.

A poison pill refers to anything the target company does to make itself

less valuable or less desirable as an acquisition once such a raid has

32 Argyr i s , C HR I S

begun. For example, high-level managers and other employees may

threaten to leave the company if it is acquired. A specific asset of a

company, such as its R&D center or a particular division may be sold

off to another company, or spun off into a separate corporation. A

flip-in provision may allow current shareholders to buy more stocks

at a steep discount in the event of a takeover attempt. The flow of ad-

ditional cheap shares into the total pool of shares dilutes their value

and voting power. A more drastic poison pill involves deliberately

taking on large amounts of debt.

Argyris, Chris A social psychologist by training, Chris Argyris conducted pioneering

work on how individuals respond to changing organizational situations

and the impediments to organizational learning. Argyris has undertaken

extensive research on learning in teams and drawn attention to the prob-

lems created by defensive behavior. The cleverer the team is, the more

difficult it becomes to maintain openness to learning, and to avoid be-

coming defensive. Argyris describes the process involved as “double-

loop learning”. While “single-loop learning” involves doing existing

things better, double-loop learning entails doing existing things in new

ways, or inventing new things. Effectively, double-loop learning in-

volves reframing problems and stepping outside existing mind-sets. Ar-

gyri’s language is sometimes hard to understand. So he is often per-

ceived as an esoteric rather than a popular guru. But his ideas and

thoughts are profound and continue to guide the functioning of today’s

organizations.

(See also: ORGANIZATIONAL LEARNING)

Balanced S C ORE C A R D 33

B

Backward Integration Moving along the VALUE CHAIN towards the inputs side. By producing

internally some or all of the inputs, a firm can benefit in various ways. It

can avoid sharing proprietary information and data with its suppliers.

This can be an important factor if the exact specifications of component

can reveal the key characteristics of the final product’s design to the

supplier. Backward integration may result in inputs with closely con-

trolled specifications, enabling the firm to improve quality and differen-

tiate its product. If the inputs are critical, backward integration helps a

firm to gain greater control of the value chain and to mitigate the high

BARGAINING POWER OF SUPPLIERS. Some good examples of backward

integration are India’s largest aluminum manufacturer Hindalco setting

up a power plant, Reliance moving into petroleum refining and Tata

Steel setting up its own township in Jamshedpur as also mines and col-

lieries in various parts of Orissa and Bihar.

On the flip side, backward integration can also reduce the flexibility

of a business if the demand for the end-product slows down. Margins

might then reduce due to high overheads. Moreover, the activities in-

volved in backward integration can often be handled more efficiently by

a specialized external supplier.

(See also: VERTICAL INTEGRATION)

Balanced Scorecard Designed by Robert KAPLAN and David NORTON, the balanced scorecard

provides a comprehensive set of objectives and performance measures to

monitor a company’s progress. These include:

Financial performance, namely revenues, earnings, return on capital,

cash flow, etc.

Customer value performance, namely market share, customer satis-

faction, customer loyalty, etc.

34 Bargain ing PO WE R OF B UYE RS

Internal business process performance, namely productivity, quality,

delivery, etc.

Learning and growth — percent of revenue from new products, em-

ployee suggestions, rate of improvement, employee morale,

knowledge, turnover, use of best demonstrated practices.

The challenge in implementing balanced scorecard lies in identifying

the key metrics and measuring them on an ongoing basis so that the firm

can systematically achieve its objectives. Too many metrics can make

things complicated. So a few key metrics must be carefully chosen.

(See also: ALIGNMENT)

Bargaining Power of Buyers One of the forces in Porter’s FIVE FORCES MODEL. The higher the bargain-

ing power of buyers, less attractive the industry.

The bargaining power of buyers is high under the following circum-

stances:

Few buyers who purchase in large quantities.

Low switching costs, resulting in low loyalty.

Numerous, and relatively small, sellers.

The item being purchased is not an important one for buyers who can

either take it or leave it.

Buyers have a lot of information about competitive offers, which

they can use for bargaining.

There is a good possibility that buyers may decide to integrate back-

wards, namely make the product themselves rather than buy it.

(See also: PORTER, MICHAEL E.)

Bargaining Power of Suppliers One of the forces in Porter’s FIVE FORCES MODEL. Higher the bargaining

power of suppliers, the less attractive the industry.

* Abstracted from the book, The Essence of Competitive Strategy by David

Faulkner and Cliff Bowman, Prentice Hall of India, 2002.

Barnard , C HE S TE R 35

Bargaining power of suppliers tends to be high under the following

circumstances:

The purchase is important to the buyer.

Buyers face high switching costs.

There are few alternative sources of supply.

Any particular buyer is not an important customer for the supplier.

There is a strong possibility that the supplier may integrate forward.

(See also: PORTER, MICHAEL E.)

Barnard, Chester One of the first management thinkers to think differently from the then

gurus, Frederick Taylor and Max Weber, Barnard spent his whole career

as a business executive with the Bell Telephone Company. He wrote two

influential books, The Functions of the Executive (1938) and Organiza-

tion and Management (1948). Barnard emphasized the importance of

communication and shared values in organizations.

Barnard excelled at organization building skills. His tenure as CEO

was marked by a sense of public service and personal integrity that are

almost unimaginable to many today. He showed exemplary commitment

to corporate welfare policies. For example, at the height of the Depres-

sion in 1933, Barnard announced a no-layoff policy choosing to reduce

employee’s working hours instead.

Management authority, he realized, rested in its ability to persuade

rather than to command. The challenge was to balance the inherent ten-

sion between the needs of individual employees and the goals of an or-

ganization. He also recognized that much of the creative potential of an

organization lay in informal networks, not in its formal hierarchy. He

understood the role of constructive conflict.

Barnard viewed the organization as a complex social system. The

main challenge for management was achieving cooperation among its

groups and individuals to facilitate the achievement of organizational

goals, i.e. resolving the tension between achieving organizational goals

and the need for individuals to achieve personal goals. Organizational

goals could not be accomplished unless the leadership of the organiza-

tion acknowledged individual aspirations and devised a means of help-

ing employees achieve them.

36 Barr ier s TO E NTRY

For Barnard, conventional incentive schemes were essentially a self-

fulfilling prophecy. Much before Maslow, Barnard argued that beyond a

certain level of equitable compensation, employees would not necessari-

ly be motivated by financial incentives. Bonuses and incentives only

created a culture of greed.

Barnard argued that management had to focus on the “strategic” few

that would offer “the greatest leverage over the outcomes of a particular

decision”. He suggested that deciding what decisions not to make was as

important as which decisions to make. “The fine art of executive deci-

sion consists in not deciding questions that are not now pertinent, in not

deciding prematurely, in not making decisions that cannot be made ef-

fective, and in not making decisions that others should make.” Here,

Barnard seemed to be in agreement with Peter Drucker.

Barriers to Entry One of the five forces in Porter’s famous FIVE FORCES MODEL. barriers to

entry are the obstacles that a firm must overcome in order to enter an

industry. When high entry barriers exist in an industry, competition is

usually less intense and profitability tends to be high. On the other hand,

when entry barriers are low, new firms can enter the industry more easi-

ly. While demand may not go up immediately, the new entrants bring

along additional capacity and reduce the overall level of profitability in

the industry.

The barriers to entry can be tangible or intangible. Tangible barriers

include capital and various kinds of physical assets like plant and ma-

chinery and infrastructure. Tangible barriers are easier to replicate than

intangible barriers, such as brands, corporate reputation, customer loyal-

ty and relationships with vendors / distribution channels.

Barriers to entry may be high under the following circumstances*:

Economies Of Scale: If there are major cost advantages to be gained

from operating on a large scale or scope then new entrants will not

find it easy.

*Abstracted from the book, The Essence of Competitive Strategy by David

Faulkner and Cliff Bowman, Prentice Hall of India, 2002.

Barr ie rs TO I M ITA T ION 37

Learning Curve: If low unit costs can be achieved by accumulated

learning, inexperienced new entrants will be at a unit cost disad-

vantage.

Knowledge and Skills: Access to process knowledge and particular

skills can make entry difficult.

Customer Brand Loyalty: Customers may have preferred brands, or

they may have strong relationships with their existing suppliers. New

entrants have to persuade customers that it is worth incurring switch-

ing costs and move to the product of a new entrant.

Capital Costs: High capital costs involved in setting up production

facilities, R&D centers, dealer networks and brand building will limit

the number of potential entrants.

Distribution Channels: It is often difficult for a new player to break

into an existing distribution network. If all major distribution outlets

are already closed to the new entrants, they may have to make heavy

investments in setting up their own direct distribution network.

High Switching Costs: High switching costs for customers constitute

a barrier to entry.

Government Policy: Government may restrict licenses, issue exclu-

sive franchises or establish regulations that are troublesome and cost-

ly to implement.

Access to Low-Cost Inputs: This may act as a barrier to entry if poten-

tial entrants do not have such access to inputs which competitors enjoy.

(See also: BARRIERS TO IMITATION, FIVE FORCES MODEL)

Barriers to Imitation With innovations rapidly diffusing, the key to success in today’s busi-

ness environment is creating barriers to imitation. In general, tangible

assets are easier to replicate compared to intangible resources. Thus,

brands create formidable barriers to imitation but large factories can be

easily replicated. Similarly, when a way of working is built into the

company’s culture, imitation becomes difficult. For example, just-in-

time, in which Toyota is a master is less about techniques and more

about corporate philosophy and culture. That is why companies have

found it difficult to implement just-in-time even though so much has

been written about it and Toyota allows managers from all over the

world to visit its factories.

38 Bart lett , C HR I S TOPHE R A .

(See also: BARRIERS TO ENTRY, FIVE FORCES MODEL)

Bartlett, Christopher A. Famous for his work on globalization and strategic management. Bartlett

is the author / coauthor of several important books, including Managing

Across Borders and Individualized Corporation both coauthored with

Sumantra GHOSHAL. Managing Across Borders is considered one of the

best ever books written on business management and possibly the most

authoritative book on globalization. The book has been translated into

several languages.

(See also: GLOBALIZATION)

BCG Growth-Share Matrix The Boston Consulting Group (BCG) developed a matrix to help com-

panies analyze their product lines and businesses. The 2x2 matrix con-

siders two factors, market growth rate and the company’s market share,

as indicated below.

Accordingly, the BCG matrix divides products / businesses into four

categories:

Beachhead MA RK E T 39

Stars: These high growth products in a fast growing market need

higher resource commitments. For a company like Satyam Computer

Services, its ERP implementation business is a star.

Cash Cows: These are low growth, high market share products where

minimal investments are envisaged. Indeed, cash cows provide cash

flows that support other businesses. The soaps and detergents busi-

ness is a cash cow for Hindustan Lever Ltd.

Question Marks: These are low market share business units in high

growth markets. Investment is needed to build them into stars. The

foods division of HLL falls in this category as also the games busi-

ness of Microsoft, and the retailing venture of Reliance. The long

term profitability of these businesses is by no means certain.

Dogs: These are low growth and low market share businesses which

generate just enough cash to maintain themselves. They are business-

es from which the company is likely to withdraw in the near future.

IBM thought the PC business was a dog and sold it to the Chinese

computer manufacturer, Lenovo.

Businesses evolve over time. According to the conventional product

life cycle, question marks may turn into stars, and then become cash

cows if the market growth falls, finally becoming dogs towards the end

of the cycle. It is, however, not necessary that businesses must evolve in

this fashion. A star may turn into a dog overnight if a DISRUPTIVE TECH-

NOLOGY emerges in an industry. That is what happened to mini comput-

ers when PCs arrived. On the other hand, a cash cow can be converted

into a star by brand repositioning or by targeting a new customer seg-

ment. In India, Cadbury’s has attempted to reposition its chocolates as

products that can also be consumed by adults.

(See also: NINE-CELL PLANNING GRID)

Beachhead Market A market similar to a targeted strategic market but which provides a

low-risk learning opportunity. For example, Austria / Switzerland can be

considered beachhead markets for companies planning to enter Germa-

ny. Singapore is a beachhead market for the Asian region.


40 Benchmark ing

Benchmarking A process by which a company compares itself with another company in

the same or different industry on how well it is faring on various param-

eters. Benchmarking helps companies in setting stretch targets, improv-

ing the way of functioning and avoiding complacency.

(See also: BEST PRACTICES)

Best Practices The most effective way to carry out a business activity or process. The

term “best” is highly subjective, context dependent, and also seems to

imply that no further improvements are possible. Many people now pre-

fer the term good practice. Best practices are often contextual. So trans-

ferring them across organizations may not be as easy as it often looks.

Sometimes the transfer of a best practice across departments / functions

even within an organization, can be a challenge. When best practices are

embedded in an organization’s culture, replication in another organiza-

tion becomes very difficult.

(See also: BENCHMARKING, BARRIERS TO IMITATION)

BHAG See BIG HAIRY AUDACIOUS GOALS.

Bias for Action Many managers fail to take purposeful action. They tend to ignore or

postpone dealing with crucial issues which require reflection, systematic

planning, creative thinking, and above all, time. Instead, they tend to be

happy dealing with operational activities that require more immediate

attention. Daily routines, superficial behaviors, poorly prioritized or un-

focused tasks make unproductive busyness the most critical behavioral

problem in large companies.

Managers who want to cultivate a bias for action must take full re-

sponsibility for the intentions or goals. Without this kind of personal

commitment, they will easily go astray or else blame others for setbacks.

Big Hairy Audacious Goals (BHAGs) A term coined by James C. Collins and Jerry I. Porras in their well-

known book, Built To Last. Visionary companies set big hairy audacious

Blue OC E A N S TRA TE G Y 41

goals for themselves that raise the bar and inspire people across all

levels.

Examples of BHAGs include:

Boeing’s decision to commit to a Boeing 707 or 747;

Walt Disney’s decision to create Disneyland;

Henry Ford’s declaration, “We will democratize the automobile”;

Dhirubhai Ambani’s ambition of constructing the world’s largest

petroleum refinery.

A BHAG should be consistent with the company’s core ideology. It

should be so clear and compelling that it must require little or no expla-

nation. It must get people excited and pumped up. A BHAG should fall

well outside the comfort zone. While it is important for people in the

organization to believe they can pull it off, it should require tremendous

effort. A BHAG should be so bold and compelling in its own right that

even if the organization’s leaders disappeared, it would continue to in-

spire progress.

(See also: CORE IDEOLOGY, CORPORATE PURPOSE)

Blue Ocean Strategy* Most companies focus on beating the competition. But according to W.

Chan Kim and Renee Mauborgne, two of the most respected contempo-

rary scholars in the area of strategy, the best way to beat the competition

is to stop trying to beat the competition.

Markets can be divided into red oceans and blue oceans. Red oceans

represent the known or existing market space. Blue oceans denote the

non-existent or unknown market space. In red oceans, industry bounda-

ries are defined and accepted, and the basis for competing is well-

known. Here, companies try to grab market share from each other. As

competition intensifies, both profitability and growth decline and prod-

ucts become commodities. Blue oceans, in contrast, represent untapped

* Kim, W. Chan; Mauborgne, Renee, “Blue Ocean Strategy”, Harvard Business

Review, October 2004, pp. 76-84, and Kim, W. Chan; Mauborgne, Renee, Blue Ocean Strategy: How to Create Uncontested Market Space and Make Competi-

tion Irrelevant, Harvard Business School Press, 2005.

42 B lue OC E A N S TRA TE G Y

markets in which the rules of the game are still not defined. Blue oceans

offer highly profitable growth opportunities.

Although some blue oceans are created well beyond existing industry

boundaries, most are created from within red oceans by expanding exist-

ing industry boundaries. Identification of blue oceans cannot be done by

looking at the past. About a hundred years ago, many of today’s indus-

tries, automobiles, music recording, aviation, petrochemicals, health care

and management consulting were either unheard of or were just emerg-

ing. Even as recently as thirty years back, industries such as mutual

funds, cell phones, gas-fired electricity plants, biotechnology, discount

retail, express package delivery, minivans, snowboards, coffee bars and

home videos did not exist in a meaningful way.

Blue ocean strategy is the result of a new mindset that moves the at-

tention of companies away from competitors to alternatives, and from

customers to non-customers. It involves changing the rules of the game

through the careful examination of factors that:

Can be eliminated;

Should be reduced well below the industry’s standard;

Should be raised well above the industry’s standard; and

Should be created.

In most industries, a common definition tends to emerge of who the

target buyers are and what value they are looking for. Some industries

compete principally on functionality. Other industries compete largely

on emotional appeal.

But what is often overlooked is that the appeal of most products or

services is rarely intrinsic. Through the way they have competed in the

past, companies unconsciously shape buyer’s expectations. Over time,

functionally oriented industries may become more functionally oriented

while emotionally oriented industries may become even more emotion-

ally oriented. In the process, aspirations of customers tend to get ig-

nored.

When companies are willing to challenge conventional wisdom, they

often find new market space. In emotionally oriented industries, remov-

ing frills may create a fundamentally simpler, lower-priced, lower-cost

business model that customers would welcome. Conversely, functionally

oriented industries can often infuse commodity products with new life

by adding a dose of emotion.

Brainsto rming 43

Swatch transformed the functionally driven budget watch industry

into an emotionally driven fashion statement. The Body Shop did the

reverse, transforming the emotionally driven cosmetics business into a

functional, no-nonsense one.

(See also: VALUE INNOVATION)

Bottom of the Pyramid A term coined by the well-known guru, C. K. Prahalad*. Till recently,

marketers tended to ignore people in the lower income groups because

of their low per capita purchasing power. The current thinking is that

people at the bottom-of-the-pyramid (BoP) comprise a huge market with

distinctive characteristics. By understanding these characteristics and

tailoring the marketing mix suitably, companies can unearth major op-

portunities to exploit this market. The bottom-of-the-pyramid is driven

by factors such as affordability, access and availability.

Affordability: The key to success at the bottom of the pyramid is af-

fordability without sacrificing acceptable levels of quality.

Access: Distribution patterns for products and services must take into

account where the poor live as well as their work patterns. Distribu-

tion networks must penetrate deeply into small towns and villages.

Most BoP consumers work the full day before they have enough cash

to purchase the necessities for that day. Thus, for example, stores that

close at 5:00 PM have no relevance to them, as their shopping begins

after 7:00 PM. Further, BoP consumers cannot travel great distances.

Stores must be easy to reach, often within a short walk. This calls for

effective penetration of the distribution network.

Availability: Often, BoP consumers make their purchase decision

based on the cash they have on hand at any given time. They tend to

buy for immediate consumption. Availability, thus, is a critical factor

in serving BoP consumers.

Brainstorming A useful technique for generating new ideas when confronting an unfa-

miliar situation or a problem. Brainstorming is a group activity in which

* Prahalad, C. K., Fortune at the Bottom of the Pyramid: Eradicating Poverty

Through Profits, Wharton School Publishing, 2006.

44 Brand MA NA G E ME N T

members are encouraged to speak freely, say the first answer that strikes

them about how to solve a problem, no matter how weird or absurd it

might be. Having obtained as many ideas as possible, the group then

examines each one in more detail to determine the feasibility of imple-

mentation.

Brand Management For companies across industries today, brands are becoming increasingly

important in the quest to gain competitive advantage. Brands symbolize

trust, reputation and quality. Brands are intangible assets that are not

easy to imitate. The high valuation of many of the successful companies

today is on account of the brands they own. Brand management must be

considered an integral part of corporate strategy and not just part of the

marketing function. Little wonder that most contemporary CEOs get

personally involved in branding related matters.

Breakeven Analysis Companies incur two kinds of costs, fixed costs which are incurred in-

dependent of the level of production, and variable costs which vary with

the level of output. The breakeven point is the level of output at which a

firm makes just enough profit to cover its overheads. The difference be-

tween price and variable cost is called contribution. In the short run, a

firm may operate below the breakeven point just to recover part of the

overheads. But in the long run, the firm must operate above the breake-

ven point and fully recover its overheads in order to survive and grow.

Bureaucracy Bureaucracy refers to the administrative execution and enforcement of

rules. A bureaucratic organization is characterized by standardized pro-

cedure, formal division of responsibility, hierarchy, and impersonal rela-

tionships. Common examples of bureaucracies include governments,

armed forces and the courts. Bureaucracies enforce order and discipline,

especially while handling routine matters. But beyond a point they can

also frustrate employees. A key task of managers in knowledge-based

organizations is to eliminate bureaucracy.

http://en.wikipedia.org/wiki/Standard_Operating_Procedures

http://en.wikipedia.org/wiki/Standard_Operating_Procedures

http://en.wikipedia.org/w/index.php?title=Division_of_responsibility&action=edit

http://en.wikipedia.org/wiki/Hierarchy

http://en.wikipedia.org/wiki/Social_relation

http://en.wikipedia.org/wiki/Social_relation

http://en.wikipedia.org/wiki/Government

http://en.wikipedia.org/wiki/Court

Business FORE C A S T ING 45

Business Ethics Business ethics is a form of applied ethics that is concerned with the

various moral or ethical problems that can arise in a business setting, and

any special duties or obligations that apply to persons who are engaged

in business. Ethics is a normative discipline which involves making spe-

cific judgments about what is right or wrong, about what ought to be

done or what ought not to be done. In some situations, if not all, what is

right depends on the context. Many companies have a code of ethics that

helps employees understand what actions are acceptable and what are

not.

(See also: CODE OF ETHICS)

Business Forecasting Business forecasting is an integral part of strategic planning. Various

types of forecasts are used by companies depending on the situation:

Economic Forecasts are published by governmental agencies and

private economic forecasting firms. A business firm can use these

forecasts as a starting point.

Financial Forecasts include forecasts of financial variables such as the

amount of external financing needed, earnings and cash flows.

Sales Forecasts project future sales for the company’s goods or ser-

vices for a certain period.

Technological Forecasts estimate the rate of technological progress.

Qualitative forecasting approaches are based on judgment and opin-

ion. These include expert opinions, Delphi and consumer surveys. Quan-

titative approaches either crunch historical data (time series analyses) or

associative data (causal forecasts). Time series methods include moving

averages, exponential smoothing and trend analysis. Causal forecasts

include simple regression, multiple regression and econometric model-

ing. Quantitative models work well in a relatively stable environment. In

a highly volatile business environment, the qualitative approach based

on human intuition and judgment is more useful than number crunching.

The choice of a specific forecasting technique will depend on various

factors, like the:

46 Business MO DE L

Cost of developing the forecasting model;

Relationships being forecasted;

Time horizon;

Degree of accuracy desired; and

Data availability.

Business Model The way a company runs its business. A company’s business model

must address three issues:

8. Who are the customers?

9. What are they looking for?

10. How do we deliver the products or services needed by customers

better than how competitors can?

These questions may look simple. But it is the ability to address these

questions well that determines the effectiveness of a business model.

Business model design implies making major trade offs, deciding which

customer segments not to serve, which activities not to do in-house,

what kind of risks to avoid, and so on. Business model innovation,

which goes far beyond process or product innovation, is essentially

about changing the rules of the game.

(See also: PROCESS INNOVATION, PRODUCT INNOVATION, VALUE CHAIN)

Business Process Reengineering (BPR) BPR involves the radical redesign of core business processes to achieve

dramatic improvements in productivity, cycle times, and quality. In

BPR, companies start from scratch and redesign existing processes to

increase efficiency and to deliver more value to the customer, often by

reducing organizational layers and eliminating unproductive activities.

Functional organizations are transformed into cross-functional teams

with a strong process orientation. Information technology (IT) is used to

improve data dissemination and decision-making. BPR must be com-

pleted before any major IT intervention, otherwise the existing ineffi-

ciencies will simply get amplified.

Buy B A C K 47

(See also: PROCESS INNOVATION)

Business Risk Business risk refers to the degree of uncertainty associated with a firm’s

sales volume and price realization. This risk is core to the business.

Market characteristics and the firm’s business model together determine

business risk. Business risk is not easy to quantify. Yet, companies

should try to go beyond qualitative statements and arrive at some num-

bers wherever possible.

(See also: ENTERPRISE RISK MANAGEMENT)

Buy Back When a firm has more capital than it needs, it may buy back shares from

the market. Buy backs are often viewed positively by the stock market

because they signal that the company is prepared to return cash to its

shareholders instead of frittering it away on unproductive investments or

meaningless diversification. A company may also resort to buy back

when the management feels that the market is undervaluing its shares in

relation to their intrinsic value.

48 Cadbury C O MMIT TE E RE PORT

C

Cadbury Committee Report A standard reference point for any discussion on corporate governance.

Prominent institutions in London concerned about audit and regulatory

issues following a number of company collapses in the 1980s, set up a

committee chaired by Sir Adrian Cadbury. To keep under control over-

powerful chief executives or overenthusiastic executive management,

the committee’s 1992 report advocated various checks and balances at

the board level. These included:

Wider use of independent non-executive directors;

Establishment of an Audit Committee;

Separation of the posts of Chairman and CEO;

Use of a remuneration committee; and

Adherence to a detailed code of best practice.


Capacity Expansion Growing an existing business often involves expansion of capacity in

terms of plant, human resources, technological infrastructure, R&D fa-

cilities, etc. Any major capacity expansion is a strategic decision that

involves significant resource commitment, and is often difficult to re-

verse. So such a decision has to be made carefully.

Capacity expansion is often narrowly applied to manufacturing. But

in many businesses, there is little or no manufacturing. So capacity

needs also to be understood in terms of the investments made in the most

critical area of the value chain. Thus in the pharmaceutical industry, ca-

pacity has to be defined in terms of scientific manpower and sales force.

In a software development company, capacity has to be understood in

terms of the number of programmers employed. In a business school,

capacity may be defined as the number of professors available to teach

students.

Capac ity E XPA NS ION 49

According to Michael PORTER, the decision to expand capacity has to

take into account various factors. Some of these are:

Future demand.

Future input prices.

Likelihood of technological obsolescence.

Probable capacity expansion by competitors.

Future industry capacity and individual market shares.

The main risk in capacity expansion is the creation of excess capacity.

When there is excess capacity, competition intensifies as players try to

increase capacity utilization and profits come down. Excess capacity

may result because of various reasons:

Capacity often has to be added in lumps, not in incremental fashion.

Economies of scale or significant learning curve can prompt indis-

criminate capacity expansion.

Long lead times in adding capacity may motivate firms to add ca-

pacity even when future demand is uncertain.

Changes in production technology may attract new firms even as

older plants continue to operate due to exit barriers.

Equipment suppliers, through price cutting and attractive credit

schemes, can lure manufacturers into buying their products.

Large buyers, by promising more business in future, can tempt their

suppliers to add capacity.

In some industries, such as airlines, the firm which has the largest

capacity may be able to grab a disproportionately large chunk of the

market.

When there are several players in the market, they may all try to in-

crease market share by increasing capacity.

Firms often build more capacity than is needed in the initial stages

when future prospects look favorable.

Excess capacity often results when firms overestimate the potential

of their competitors and want to preempt them by adding more ca-

pacity.

Many manufacturing firms do not like to be left behind by competi-

tion and embark on a regular process of capacity expansion.

Tax incentives sometimes motivate manufacturers to over-invest in

plant and equipment.

50 Cap i ta l S TRUC TURE

Capacity expansion can be used as a pre-emptive strategy to lock up

a major share of the market and to both discourage competitors from

expanding and potential rivals from entering the industry. According to

Porter, a preemptive strategy is risky. It tends to succeed only under the

following conditions:

The expansion of capacity is large relative to market size.

There are substantial economies of scale and learning curve ad-

vantages.

The firm’s strategy looks credible in terms of availability of re-

sources, technological capabilities, past track record, etc.

The firm announces its plans before competitors develop even a rea-

sonable degree of commitment to the process.

A preemptive strategy is unlikely to succeed when competitors pur-

sue non-economic goals, consider the business to have strategic im-

portance and are prepared to give up profits in the short run, or have

equal or better staying power.

Capital Structure The relative proportion of debt and equity used by a company to run its

business. Debt is borrowed capital and has to be returned to the lenders

in the short or medium term. Debt costs less but the mandatory interest

and principal payments can cause strain on cash flows, especially in a

company’s early or difficult days. Equity is more expensive. But it has to

be returned to investors only under exceptional circumstances. Compa-

nies must arrive at the appropriate capital structure after making appro-

priate trade offs. For example, in technology businesses where the mar-

kets tend to be volatile and the business risk high, it may be necessary to

reduce FINANCIAL RISK by having a larger proportion of equity.

Cartel An illegal arrangement in which different market players come together

and collude to fix the price or share the market suitably by voluntarily

limiting competition. One of the most famous cartels in business history

has been the Organization of Petroleum Exporting Countries (OPEC).

(See also: OLIGOPOLY)

Chandle r , A LF RE D DUPO NT 51

Cash Cow A business that generates more cash than is required to maintain its earn-

ing power. Such a business is expected to continue to generate cash

without providing significant opportunities for growth through reinvest-

ment of profits. Cash flows from such a business can be pumped into

more promising ventures.

(See: BCG GROWTH-SHARE MATRIX)

Chandler, Alfred DuPont One of the best-known business historians of our times, Chandler ex-

plored the relationship between strategy and structure. He realized that

the overload in decision making at the top was indeed the reason for

creating a new structure. This overload resulted not from the larger size

of an enterprise per se, but from the increasing diversity and complexity

of decisions that senior managers had to make.

Chandler argued that growth without structural adjustment could lead

only to economic inefficiency. As he wrote, “Unless new structures are

developed to meet new administrative needs which result from an ex-

pansion of a firm’s activities into new areas, functions, or product lines,

the technological, financial, and personnel economies of growth and size

cannot be realized.”

Chandler’s book, Scale and Scope, which was published in 1990,

provides several insights on the evolution of the modern industrial enter-

prise. Chandler pointed out that major industrial corporations clustered

in industries in which high-technology production processes made it

possible to exploit the cost advantages of economies of scale and scope.

These tended to be capital intensive rather than labor intensive. In these

industries, large-scale, low-cost producers operated at a much greater

cost advantage than smaller, labor intensive producers. As these capital

intensive producers grew in scale (volume), scope (diversification) and,

consequently, complexity, they also began to invest in their own distri-

bution networks. Over time, scale and scope demanded suitable changes

in structure for effective management.

(See also: ECONOMIES OF SCALE, ECONOMIES OF SCOPE, ORGANIZA-

TIONAL DESIGN, ORGANIZATIONAL STRUCTURE)

52 Change MA NA G E ME NT

Change Management In a rapidly changing business environment, organizations must learn to

adapt themselves quickly. Change is necessary to ensure survival,

growth and profitability of any business enterprise. But change is diffi-

cult for many reasons. Change requires effort and a new mindset. People

find it difficult to adjust to changing status and power relationships.

There is also a tendency to avoid change as it might be interpreted as a

tacit admission of the failure of past policies.

As Michael PORTER mentions*, change is extraordinarily painful and

difficult for any successful organization. The past strategy becomes in-

grained in organizational routines. Information that would modify or

challenge it is either not sought or simply filtered out. As the past strate-

gy becomes rooted in company culture, suggesting change is equated

with disloyalty. Successful companies often seek predictability and sta-

bility. They become preoccupied with defending what they have. Sup-

planting or superseding old advantages to create new ones is not consid-

ered until the old advantages are long gone. Change often involves a

sacrifice in financial performance, and unsettling organizational adjust-

ments.

A clear corporate vision is the starting point in any major change

management initiative. It helps employees to understand why change is

needed. Change can then be introduced proactively instead of being in-

troduced as a fire fighting measure. Symbolic gestures tend to reinforce

change by telling employees that management means business. To bring

about change, it is also essential that responsibilities are clearly allotted.

Accountability puts pressure on individuals to move fast. Metrics are

also needed to track performance. Change initiatives must focus on a

few critical areas in order to prevent resources from being spread too

thin.

Culture plays an important role in change management. Culture re-

fers to the beliefs and values of employees. People have set notions

about what is to be done and how it should be done on the basis of these

beliefs and values. Culture is built up over a period of time and it cannot

* Porter, Michael E., The Competitive Advantage of Nations, The Free Press,

1990.

Chri stensen , C LA YT ON M. 53

be changed overnight. But strong leadership which sends out the right

signals can hasten the process.

Christensen, Clayton M. Best known for his book, The Innovator’s Dilemma, Christensen’s writ-

ing reflects highly insightful thinking on innovation and is a marked de-

parture from conventional wisdom. Christensen’s main argument is that

successful companies lose their competitive edge over time because they

try to pamper existing customers by adding more features, instead of

looking at new customer segments which are looking for something

simpler or cheaper that has necessarily to be delivered by a new business

model. But it is not easy for successful companies to take actions which

threaten their existing business model. This is what gives rise to the IN-

NOVATOR’S DILEMMA.

Based on his research in a variety of industries, including computers,

retailing, pharmaceuticals, automobiles, and steel, Christensen shows

how truly important, break-through innovations — or disruptive tech-

nologies — are initially rejected by mainstream customers because they

cannot currently use them. This makes it difficult for firms with a strong

focus on existing customers to find new markets for the products of the

future. Even as they let go these opportunities, the more nimble entre-

preneurial companies emerge to catch the next great wave of industry

growth.

The Innovator’s Dilemma presents useful insights for dealing with

disruptive innovation. These insights can help managers determine when

it is right not to listen to customers, when to invest in developing lower-

performance products that promise lower margins, and when to pursue

small markets at the expense of seemingly larger and more lucrative

ones. The Innovator’s Dilemma, together with The Innovator’s Solution

and Seeing What is Next, form a trilogy that is compulsory reading for

companies serious about innovating and creating value for their share-

holders.

(See also: INNOVATION, INNOVATOR’S DILEMMA, S-CURVE, TECHNOLOGY

RISK)

54 Cluste rs

Clusters Michael PORTER

* uses the term “clusters” to describe geographical con-

centrations of interconnected companies and institutions in a particular

business. In a globalized economy, companies can access capital, goods,

information and technology from all parts of the world. Thanks to faster

methods of transportation and communications, physical location has

become less important. Yet, there are geographic concentrations of in-

dustrial activities. For example, Silicon Valley in California is reputed

for its cluster of computer hardware and software companies. Even

though it is a very expensive location, many tech companies continue to

perform their key value adding activities in this region.

Clusters include suppliers of components, machinery, services and

institutions which provide specialized infrastructure. Sophisticated, de-

manding customers who keep companies on their toes can also be con-

sidered a part of the cluster. So can the local government, universities,

research centers and think tanks who play a vital role in encouraging

innovation and creating suitable conditions for more efficient value addi-

tion.

Due to the superior quality of the local infrastructure, clusters help in

improving productivity. Other aspects which give a location a head start

over other centers include a high quality transportation network, which

facilitates fast and efficient movement of goods, availability of skilled,

educated and trained manpower, a sound legal system and favorable tax

rates.

Many leather goods, footwear, apparel and accessories companies

operate out of Italy because of the country’s reputation for fashion and

design. France is an important country for cosmetics, since it has highly

sophisticated customers. In a location with well-established marketing

networks, companies can also take advantage of referrals. Clusters help

companies improve as competition with rivals keeps them on their toes.

The presence of companies engaged in related value chain activities,

both downstream and upstream, facilitates effective coordination even

without vertical integration. Proximity also builds a greater degree of

trust among the various players.

* Porter, Michael E., “Clusters and the New Economics of Competition” Har-

vard Business Review, November-December 1998, pp. 77-90.

Commod it i zat ion 55

The presence of demanding customers in a cluster motivates compa-

nies to innovate, while the presence of competent suppliers and partners

helps in bringing innovations to the market faster. A company within a

cluster can source what it needs much faster, closely involve suppliers

and partners in the product development process and obtain relevant

technical and service support.

(See also: COMPARATIVE ADVANTAGE, GLOBAL VALUE CHAIN CONFIGU-

RATION, STRATEGIC ADVANTAGE)

Coase, Ronald A British economist and the Clifton R. Musser Professor Emeritus of

Economics at the University of Chicago Law School, Coase is best

known for two articles, “The Nature of the Firm” (1937), which intro-

duced the concept of transaction costs to explain the size of firms, and

“The Problem of Social Cost” (1960), which suggested that well defined

property rights can overcome the problems of externalities. A graduate

of the London School of Economics, Coase received the Nobel Prize in

Economics in 1991.

Code of Ethics The corporate code of ethics defines a company’s core values and guid-

ing principles and often describes how employees are expected to be-

have in different circumstances. Well managed companies take various

steps to enforce high ethical standards among employees. Through a

corporate code of ethics, a firm can publicly display its commitment to

high standards of moral excellence.

(See also: BUSINESS ETHICS)

Commoditization As industries mature, the scope to differentiate reduces. The offerings of

different players begin to look increasingly alike. Price-based competi-

tion intensifies. This phenomenon is called commoditization.

Companies can deal with commoditization in various ways. One way

is to wrap value added services around the core product. Differentiation

of the core product may be difficult but there may be scope to innovate

in packaging, delivery, customer experience or supply chain manage-

ment. In the highly commoditized PC industry, for example, Dell suc-

http://en.wikipedia.org/wiki/1991

56 Company PRO FI LE

ceeded largely because of its excellence in supply chain management.

Online auctions may look like a commodity business but ebay has done

astonishingly well by building a community and providing a great cus-

tomer experience. A second way of preventing, or reversing, commodi-

tization is to reposition the product. Repositioning both helps change the

perceptions of customers and also in differentiating the product.

(See also: BLUE OCEAN STRATEGY, DIFFERENTIATION)

Company Profile An explicit mapping of a company’s capabilities and expertise. A com-

pany which has a good understanding of its capabilities and expertise

can formulate effective strategies by accurately aligning its profile with

its corporate mission and environmental factors. One way to develop the

company profile is to critically examine each function, and the key com-

ponents under each function. An example of various functions and key

components of each is illustrated in the table below:

Marketing Product range, sales organization, distribution net-

work, pricing strategy, after sales services, etc.

Finance &

accounting

Fund raising capabilities, cost of capital, tax planning,

cost control, costing system, etc.

Operations Raw material availability and costs, supplier relation-

ships, inventory control systems, sub contracting, etc.

Personnel Employees’ skills, morale, industrial relations, man-

power turnover, specialized skills, etc.

General

management

Structure, communication systems, control systems, cul-

ture, decision making, strategic planning systems, etc.

(See also: ENVIRONMENTAL SCANNING, SWOT ANALYSIS)

Comparative Advantage The ability to cut costs by a suitable location of value chain activities.

Global companies can realize comparative advantages by locating

value chain activities in cheaper locations. Some automobile companies

have preferred to locate their assembly plants at cheaper locations in

Asia and Latin America, rather than North America or Europe. Many

companies trying to enter the European Union (EU), including Dell and

Intel, have preferred to locate their plants in Ireland, a cheaper location,

Compe t it ive A DV A NTA G E 57

compared to more developed countries, such as France and Germany.

Texas Instruments set up a software design subsidiary at Bangalore in

India to access the relatively low cost, highly skilled technical workers

available locally. Many global companies such as General Electric (GE)

and Citigroup are locating their back office operations in India.

(See also: STRATEGIC ADVANTAGE)

Competitive Advantage Competitive advantage is the key message in Michael Porter’s theory of

COMPETITIVE STRATEGY. Competitive advantage means that a firm must

be able to create a defendable position in an industry, in order to cope

successfully with competitive forces and generate a superior return on

investment. Superior performance within an industry can be achieved

through COST LEADERSHIP, DIFFERENTIATION, or FOCUS.

Cost leadership involves becoming the lowest cost producer in an

industry by pursuing strategies such as economies of scale, process

automation, supply chain efficiency, etc.

Differentiation means being unique in an industry along some dimen-

sions that are widely valued by buyers. Differentiation can be

achieved on the basis of product, distribution, sales, marketing, ser-

vice, image, etc.

Focus means being the best in a carefully chosen segment, or group

of segments.

Firms should pursue one of these strategies and take care not to get

stuck in the middle. But care must also be taken to maintain a proper

balance between cost leadership and differentiation. Thus a cost leader

should not be seen to be offering distinctly inferior products compared to

rivals who are competing on the basis of differentiation. Similarly, a

differentiator cannot afford to have a very high cost structure. The costs

should not exceed the price premium it receives from the buyers.

The sustainability of competitive advantage depends on three condi-

tions*. The first is the particular source of the advantage. There is a hier-

archy of sources of competitive advantage in terms of sustainability.

* From Porter, Michael E., “From Competitive Advantage to Corporate Strate-

gy”, Harvard Business Review, May-June 1987, pp. 43-59.

58 Compet i tor A NA LYS I S

Lower-order advantages, such as low labor costs or cheap raw materials

are relatively easy to imitate. Higher-order advantages, such as proprie-

tary process technology, product differentiation, brand reputation and

customer relationships are more durable. Higher-order advantages in-

volve more advanced skills and capabilities such as specialized and

highly trained personnel, internal technical capability and often close

relationships with leading customers. Such advantages also demand sus-

tained and cumulative investment in physical facilities and specialized

intangible assets.

The second determinant of sustainability is the number of distinct

sources of advantage a firm possesses. If there is only one advantage,

competitors can more easily nullify this advantage. Firms which sustain

leadership over time, tend to proliferate advantages throughout the value

chain.

The third, and the most important, basis for sustainability is constant

improvement and upgrading. A firm must keep creating new advantages

at least as fast as competitors can replicate existing ones. The firm must

improve its performance relentlessly against its existing advantages.

This makes it more difficult for competitors to nullify them.

In the long run, competitive advantage can be sustained only by ex-

panding and upgrading sources and by moving up the hierarchy to more

sustainable types. To sustain competitive advantage, a firm may have to

deliberately destroy old advantages to create new, higher-order ones. A

company must learn to exploit industry trends and close off the avenues

along which competitors may attack by making pre-emptive invest-

ments.

(See also: COST LEADERSHIP, COMPETITIVE STRATEGY, DIFFERENTIA-

TION, FOCUS)

Competitor Analysis Analyzing competitors is an integral part of strategic planning. Michael

Porter’s book, Competitive Strategy*, offers valuable insights in this re-

gard. In identifying current and potential competitors, firms must con-

sider several important variables:

* From the book, Competitive Strategy: Techniques for Analyzing Industries and

Competitors by Michael E. Porter, The Free Press, 1980.

Compe t itor A NA LYS I S 59

How do other firms define the scope of their market?

How similar are the benefits offered by the firm’s products and ser-

vices to those of other firms?

How committed are other firms in the industry?

What are the long-term intentions and goals of competitors?

Certain pitfalls must be avoided while doing competitor analysis.

These include:

Focusing on current and known competitors while ignoring potential

entrants.

Concentrating on large competitors while ignoring smaller players.

Assuming that competitor behavior will not change with time.

Misreading signals that may indicate a shift in the focus of competi-

tors, or a refinement of their present strategies or tactics.

Excessive focus on the tangible assets of competitors, while ignoring

their intangible assets.

Assuming that all the firms in the industry have the same constraints

and opportunities.

Getting too obsessed with outsmarting the competition, instead of

focusing on customer needs and expectations.

The first step in analyzing competition is to understand the goals of

competitors, whether they are satisfied with their current position or are

likely to change strategy, and also how they might react to a competi-

tor’s moves. Porter draws a distinction between threatening and non-

threatening moves. Moves are non-threatening if competitors do not no-

tice or are not concerned. In contrast, threatening moves are taken seri-

ously by rivals. Before making such moves, it is important to estimate

the likelihood, timing, effectiveness and extent of retaliation and assess

whether the retaliation can be countered effectively. The response of a

firm which gives importance to profitability is likely to be different from

another which emphasizes market share. Given their goals some strate-

gic moves can threaten certain competitors more than the others. In such

cases, there is greater likelihood of retaliation. The stated and unstated

financial goals, capabilities and psyche of a firm’s competitors in the

industry must be studied carefully.

Analysis of competitor’s goals helps a firm to avoid retaliatory

moves that can trigger off intense rivalry. For instance, a move to gain

60 Compet i tor A NA LYS I S

market share from a firm divesting its business would not provoke any

retaliation. On the other hand, rivalry may intensify if an attempt is made

to grab market share from a firm which is trying to build its business. A

low cost producer is likely to respond very aggressively to the price cut-

ting moves of a competitor. On the other hand, a firm which focuses on

differentiation and customer loyalty is less likely to retaliate.

It is important to thoroughly understand the capabilities and psyche of

competitors. These include a competitor’s beliefs about its relative posi-

tion, historical and emotional identification with particular products and

policies, cultural factors, organizational values, the extent to which a com-

petitor believes in conventional wisdom, etc. Historical information on the

competitor’s past financial performance, track record in the market place,

areas of success, past reactions to strategic moves, etc. can also be very

useful. It is also important to gain greater understanding about the top

management, the types of strategies that have worked for the management

in the past, other businesses with which the top management had been

earlier associated, events which have influenced top management in the

past, the technical background of the management, etc.

A company which is serious about a competitive move must clearly

communicate that it is committed to the move and has the necessary re-

sources to back it. Rivals are, then, more likely to resign themselves to

the new position. Similarly, if a firm says it loud and clear that it will

react strongly to moves by competitors, it may be able to deter them

from making competitive moves. The greater the certainty with which

the competitor sees the commitment being honored, the greater the de-

terrent value of the commitment. Competitors should understand that the

firm has both the resources and resolve to carry out the commitment

quickly.

A firm should select its strategy based on all these considerations. An

ideal strategy would prevent competitors from reacting. Such a situation

arises when the legacy of the past makes some moves very costly for

competitors to counter. Small and new firms often have little stake in the

strategies practiced by industry leaders. These challengers can benefit

substantially by pursuing strategies that penalize competitors for their

stake in such existing strategies.

(See also: COMPETITIVE STRATEGY)

Compe t it ive S TRA TE G Y 61

Competitive Strategy A coherent set of offensive or defensive actions to compete effectively

in an industry. Thanks to Michael PORTER, companies today have con-

siderable knowledge of competitive strategy. For Porter, the essence of

competitive strategy formulation is understanding the industry structure

and relating the company to its environment.

Industries differ widely both in the nature of competition and oppor-

tunities for sustained profitability. The structural attractiveness of an

industry depends on five factors, which form Porter’s famous FIVE FORC-

ES MODEL:

The Entry of Competitors. How easy or difficult is it for new entrants

to enter the business?

The Threat of Substitutes. How easily can the company’s product or

service be substituted?

The Bargaining Power of Buyers. How strong is the position of buy-

ers?

The Bargaining Power of Suppliers. How strong is the position of

sellers?

The Rivalry Among Existing Players. Is there intense competition

among the existing players?

The second central concern in strategy is a company’s position within

an industry*. Some positions are more profitable than others, regardless

of what the average profitability of the industry may be.

At the heart of positioning is COMPETITIVE ADVANTAGE. In the long

run, firms succeed relative to their competitors if they possess sustaina-

ble competitive advantage. There are two basic types of competitive

advantage: COST LEADERSHIP and DIFFERENTIATION. Cost leadership is

the ability of a firm to design, produce and market a comparable product

at a lower cost, i.e. more efficiently than its competitors. Differentiation

is the ability to provide unique and superior value to customers in terms

of product quality, special features, after-sale service, etc. Differentiation

allows a firm to command a premium price which leads to superior prof-

itability, provided costs are comparable to those of competitors.

* See: Michael Porter’s The Competitive Advantage of Nations, The Free Press,

1990.

62 Concen trat ion RA T IO

It is difficult, though not impossible, to achieve lower cost and differ-

entiation simultaneously relative to competitors. So a trade-off is in-

volved. However, any successful strategy must pay close attention to

both types of advantage while excelling in one. A low-cost producer

must offer acceptable quality and service to avoid having to give dis-

counts, while a differentiator’s cost position must not be so far above

that of competitors as to offset its price premium.

A key variable in positioning is competitive scope. A firm must

choose the range of product varieties it will produce, the distribution

channels it will employ, the types of buyers it will serve, the geographic

areas in which it will sell, and the array of related industries in which it

will also compete. Most industries are segmented, with distinct product

varieties, multiple distribution channels and several different types of

customers. These segments have frequently differing needs. Serving

different segments requires different strategies and, correspondingly,

calls for different capabilities. Competitive scope is also important be-

cause firms can sometimes gain competitive advantage by exploiting

interrelationships by competing in related industries through sharing of

important activities or skills.

Both industry structure and competitive position are dynamic. Indus-

tries can grow more or less attractive over time, as barriers to entry or

other elements of industry structure change. Industry attractiveness and

competitive position can also be shaped by a firm. Successful firms not

only respond to their environment but also attempt to influence it in their

favor.

Achieving competitive advantage requires a firm to make choices. If

a firm is to gain advantage, it must choose the type of competitive ad-

vantage it seeks to attain and the scope within which it can be attained.

(See also: GENERIC STRATEGIES)

Concentration Ratio A measure of the degree of competition in an industry. Thus the four-

firm concentration ratio is the percentage of the market accounted for by

the top four industry players.

(See also: HERFINDAL INDEX, OLIGOPOLY)

Cont rac t MA NU FA C TUR ING 63

Concentric Diversification Diversification into related areas. A less risky strategy compared to

CONGLOMERATE DIVERSIFICATION. The new business may be related to

the existing business in terms of product, technology — or both.

(See also: DIVERSIFICATION)

Conglomerate Diversification Diversification into unrelated areas. Firms sometimes enter a new busi-

ness simply because it represents the most promising investment oppor-

tunity available. The main concern here is the profit generating capacity

of the new venture and financial synergies. For instance, businesses with

sales patterns moving in opposite trends may balance each other. It is

widely accepted that related diversification is more likely to succeed

than conglomerate diversification. The key, of course, lies in understand-

ing what is related and what is not.


Contestability The degree to which firms can enter or leave an industry. Contestability

provides a measure of the effect of potential competition in an industry.

Perfect contestability implies there are no barriers to entry. In the early

1980s, the economist W. J. Baumol pointed out that perfect contestabil-

ity could yield the results of perfect competition in a market, even with-

out having a large number of small firms. The airline industry is general-

ly held up as an example of a reasonably contestable industry.

(See also: BARRIERS TO ENTRY)

Contingency Planning The development of a management plan comprising alternative strate-

gies to ensure the success of a project even in the event of things going

wrong. Essentially, it means preparing for highly uncertain situations.

(See also: ADAPTIVE PLANNING, ACKOFF, RUSSELL.)

Contract Manufacturing Production on behalf of a client who owns the design and brand name.

Contract manufacturing helps a company gain access to capacity in a

cost effective way. On the other hand, the contract manufacturer does

64 Co-opet i t ion

not have the burden of marketing the product and handling end custom-

ers.

(See also: LICENSING)

Co-opetition Co-opetition, a word coined by Ray Noorda (the founder of Novell), is

defined by Brandenburger and Nalebuff as a new mindset that combines

cooperation and competition. Cooperation generally leads to an expan-

sion of the cake and competition to a slicing up of the cake. Both coop-

eration and competition are necessary. An exclusive focus on competi-

tion ignores the potential for expanding the market or creating new prof-

itable forms of enterprise. A co-opetition mindset actively looks for

ways to change and expand the business, as well as newer and better

ways to compete.

(See also: DYNAMIC CAPABILITY BUILDING, PROCESS NETWORKS, STRA-

TEGIC ALLIANCES)

Core Competence A core competence is a bundle of skills and technologies that enable a

company to provide superior value to customers. A term coined by C. K.

Prahalad and Gary Hamel*, core competence is effectively a company’s

specialized capability to create unique customer value. This capability is

largely embodied in the collective knowledge of its people and the or-

ganizational procedures that shape the way employees interact. Over

time, investments made in facilities, people and knowledge that

strengthen core competencies create sustainable sources of competitive

advantage.

A core competence should not be equated with a single skill or dis-

crete technology. If a company identifies too many competencies, it is

probably referring to discrete skills. At the same time, if it identifies only

one or two competencies, the level of aggregation is too broad. Typical-

ly, a firm may have between five and fifteen core competencies.

Skills which are a pre-requisite for becoming an industry player,

should not be confused with core competencies. A core competence is

* Prahalad, C. K. and Hamer, Gary, Competing for the Future, Harvard Business

School Press, 1994.

Core C O MPE TE NC E 65

also not a physical asset. For instance, a factory, a distribution channel,

brand or patent cannot be referred to as a core competence. The ability to

manage these assets may, however, be a core competence.

A core competence should:

Provide significant and appreciable value to customers, relative to

competitor offerings;

Be difficult for competitors to imitate or procure in the market;

Enable a company to move into new markets or to develop new tech-

nologies.

Core competencies are not product specific. They can and should be

leveragable to create new products or services. Indeed, a core compe-

tence is truly core when it forms the basis for entry into new product

lines or businesses. Sony’s core competence in miniaturization has ena-

bled it to develop a range of popular consumer products. Reliance Indus-

tries’ core competence in project management has enabled it to complete

many complicated projects that span across industries ahead of schedule.

The Aditya Vikram Birla group has a similar competence.

By understanding core competencies, a firm can identify which busi-

nesses to strengthen and which to divest. Identification of core compe-

tencies can also lead to greater clarity on potential entrants into the in-

dustry who may be using similar core competencies to make other prod-

ucts.

To sustain competitive advantage, competencies need to score well

on four dimensions:

Appropriability: The degree to which the profits earned by a compe-

tence can be appropriated by someone other than the firm in which

the profits were earned. The lower the appropriability of the asset, the

more sustainable the profits.

Durability: How durable is the competence as a source of profit?

Shortening product and technology life cycles make most competen-

cies less durable than they were a decade earlier.

Transferability: The easier it is to transfer the core competencies and

resources, the lower the sustainability of its competitive advantage.

Replicability: If it is possible for a competitor, to construct a nearly

identical set of capabilities by appropriate investment or by purchas-

ing a similar asset, the competitive advantage is not sustainable.

66 Core IDE OL OG Y

The following are some examples of core competence:

Company Core Competency Products

Sharp / Toshiba Flat screen display Laptop computers,

Television; Videophone

Sony Miniaturization Personal audio

Federal Express Logistics management Courier services

Walmart Logistics management Discount retailing

Motorola Wireless communication Cellular phones

Ranbaxy Labs Reverse engineering Generic drugs

Honda Combustion engineering Motor cycles, cars,

generators

Gujarat Ambuja

Cements

Energy management Cement

Some management scholars feel that core competence has several

limitations. It is more useful in explaining why something has gone right

or wrong and less useful in predicting what will turn out right or wrong.

For instance, the innovation guru Clayton CHRISTENSEN feels that core

competence is too internally focused. Instead of asking what they are

good at, companies must ask what customers value. Accordingly, they

must develop new competencies when circumstances demand, instead of

continuing to exploit existing ones. Indeed, Prahalad himself has warned

of core competencies becoming core rigidities. A dramatic structural

change in an industry can substantially reduce the value of a core com-

petence. That is why it is important to assess the value of a core compe-

tency by the benefits it generates for customers rather than the techni-

calities underlying the core competence.


Core Ideology A term coined by Collins and Porras in their book, Built to Last. Core

ideology describes an organization’s identity that transcends all changes

Corporate G OV E RNA NC E 67

related to its relevant environment. Core ideology consists of two no-

tions:

Core Purpose — the organization’s reason for being; and

Core Values — the essential and enduring principles that guide an

organization, its behavior and actions.

(See also: CORPORATE PURPOSE)

Core Values Core values are the basic or central values of an organization. They

serve to guide the company and have a profound influence on how peo-

ple in that organization think and act. So long as actions are aligned with

core values, no external justification is required. These core values de-

fine the organization in terms of what it is and what it does, and give the

organization a unique identity. In other words, core values provide the

glue that holds an organization together. Core values are an organiza-

tion’s essential and enduring tenets that should not be compromised for

financial gain or short-term expediency. Even during hard times, core

values should not be diluted. These values should undergo modification

only in the most exceptional situations.

(See also: CORE IDEOLOGY, CORPORATE PURPOSE, CULTURE)

Corporate Governance Corporate governance is the subject that deals with the responsibilities of

senior managers, directors and shareholders. Directors are expected to

safeguard the interests of shareholders by monitoring the actions of

managers. But time and again, directors have not been able to impose

necessary checks and balances. That explains why boards have come in

for sharp criticism and independent directors have become so important.

In the United Kingdom, the importance of good corporate govern-

ance came into the public domain after a series of corporate collapses

and scandals in the 1980s and 1990s. The functioning of boards was

criticized and the importance of independent, impartial non-executive

directors was highlighted. Following the publication of the CADBURY

COMMITTEE REPORT in 1992, a code of best practices was established.

Although it is voluntary, all listed companies in UK are expected to

comply with it. Since the Cadbury Report, a number of other committees

have established best practices in specific areas, such as director’s pay.

68 Corpora te IMA G E

In the US, the Sarbanes Oxley Act 2002 (SOX) was framed to en-

hance and enforce corporate accountability, transparency and disclosure

in all the activities and transactions the company undertakes. SOX re-

quires the CEO and the CFO of a publicly listed company to certify in

the annual report that all the disclosures made are accurate and true.

In India, too, various codes of corporate governance have been for-

mulated through committees like the Kumara Mangalam Birla commit-

tee on corporate governance (2000). This report made various recom-

mendations, both mandatory and non-mandatory, for publicly listed

companies with respect to the structure and composition of the board,

the audit committee, the remuneration committee, accounting and finan-

cial reporting standards, functions of the management and shareholders’

rights. For instance, a company’s half-yearly declaration of financial

performance, including a summary of the significant events in last six

months, must be sent to each shareholder.

(See also: AGENCY THEORY)

Corporate Image Corporate image refers to the way the business of an organization is per-

ceived by its investors and customers. A positive corporate image repre-

sents a major intangible asset. For example, in India the Tatas have suc-

cessfully leveraged their positive image both to raise funds and enter

various businesses.

Corporate image is shaped by an organization’s history, its beliefs

and philosophy, its ownership, its people, the personality of its leaders,

its values and its strategies. Public relations play an important role in

building a company’s image by explaining to its stakeholders what the

organization stands for. A company’s advertisements, statements made

by its leaders, relations with stakeholders and the website all contribute

to image building. The financial community, business community, con-

sumers, other thought leaders, top managers, employees, shareholders

and the government must all be kept in mind, while shaping the corpo-

rate image.

Corporate Philanthropy The involvement of business firms in charitable activities through con-

tributions in the form of time, money, goods, or services. Corporate phi-

Corporate PU RPOS E 69

lanthropy is not merely about spending money. It is also about getting

the best returns and the best results for the money spent and involving

the larger community, especially NGOs. One of the best examples of

corporate philanthropy is the Bill Gates and Melinda Gates Foundation

which has taken up various laudable initiatives across the world, espe-

cially to improve healthcare in poor countries.

(See also: CORPORATE SOCIAL RESPONSIBILITY)

Corporate Purpose As defined by Collins and Porras in their book, Built to Last, corporate

purpose is the organization’s fundamental reason for existence. The pri-

mary aim of corporate purpose is to guide and inspire the company. The

corporate purpose should not be confused with specific goals or business

strategies. Two companies could have a very similar purpose but operate

in different ways in different businesses. A visionary company continues

to pursue, but never really reaches, its purpose. As Walt Disney once

remarked, “Disneyland will never be completed as long as there is imag-

ination left in the world.”

Unilever’s corporate purpose states*:

Unilever’s mission is to add vitality to life. We meet everyday needs

for nutrition, hygiene and personal care with brands that help people

feel good, look good and get more out of life.

Our deep roots in local cultures and markets around the world give us

our strong relationship with consumers and are the foundation for our

future growth. We will bring our wealth of knowledge and interna-

tional expertise to the service of local consumers — a truly multi-

local multinational.

Our long-term success requires a total commitment to exceptional

standards of performance and productivity, to working together ef-

fectively, and to a willingness to embrace new ideas and learn con-

tinuously.

To succeed also requires, we believe, the highest standards of corpo-

rate behavior towards everyone we work with, the communities we

touch, and the environment on which we have an impact.

* Adapted from Unilever website.

70 Corpora te RE NE WA L

(See also: CORE IDEOLOGY, MISSION, VISION)

Corporate Renewal Proactive change management that involves both tightening belts from

time to time, and inspiring employees with a powerful vision. Because

of organizational inertia and inflexibility, many companies continue to

bet on strategies that have worked in the past, taking customers and

competitors for granted. Leaders must set stretch targets for their em-

ployees and constantly encourage them to question the basic assump-

tions of the business. At the same time, they must move people in a clear

direction through an inspiring vision.

Organizations need to renew themselves continuously as the external

environment changes. But they often do not do so, persisting zealously

with what has succeeded in the past. Managers have a tendency to sup-

port structures, systems and decisions that have ensured a company’s

success in the past. This tendency is reinforced by a belief that custom-

ers are captive and competitors are weak.

Great organizations facilitate renewal by setting stretch targets and

articulating a powerful vision that encourages people not to see them-

selves in terms of the past, but in terms of the future potential. They go

beyond the task of ensuring ALIGNMENT of existing resources to provid-

ing new challenges. They create organizational disequilibrium. And,

most importantly, within the turmoil they are willing to make choices

and commitments to new options and opportunities.

(See also: CORPORATE RESTRUCTURING)

Corporate Restructuring The various actions involved in realigning the organization in the light

of emerging market trends. Over time, as industry structures change and

markets evolve, the internal profile of an organization may need a major

revamp. This may include a new organizational structure, divestment of

unviable businesses, alteration of capital structure, reduction of head-

count and outsourcing of non core activities. CHANGE MANAGEMENT is

often a key ingredient of corporate restructuring.

(See also: CORPORATE RENEWAL)

Corporate V E NTU R ING 71

Corporate Social Responsibility (CSR) A concept that a company has a responsibility to the society at large in

which it operates. For any medium sized or large company, society is an

important stakeholder. Though companies are primarily guided by the

profit motive, they cannot act without considering the larger interests of

society.

Several years ago, the famous economist Milton Friedman argued

that the social responsibility of a business is to make profits. Friedman

was clear that corporate actions motivated by anything other than share-

holder wealth maximization threatened the well being of shareholders.

Today that view is considered somewhat extreme. Most businesses ac-

cept that they have a responsibility towards society. A responsive corpo-

rate social policy may not only enhance a firm’s long-term viability but

also preempt restrictive government regulations.

Ardent supporters of CSR argue that, when a company behaves re-

sponsibly, there is a direct adverse impact on the bottom line. Some CSR

activities do have tangible economic benefits. Expenses incurred on

CSR are often tax deductible. Some socially responsible practices such

as recycling of water may even generate cost savings and, as a result,

increase profits. For example, recycling may reduce input costs and pol-

lution simultaneously. CORPORATE PHILANTHROPY can also lead to in-

tangible benefits such as goodwill. However, there is no guarantee that

CSR will automatically lead to an improvement in profitability, especial-

ly in the short run. At the same time, there is wide acceptance that CSR

will generate a positive impact in the long run.

Corporate Venturing A large firm investing in a smaller but promising venture. Corporate

venturing provides an alternative way of generating growth and tapping

expertise that would otherwise take time to develop. Corporate venturing

enables a company to develop products to expand its core business, to

enter new industries or markets, or to develop breakthrough technologies

that could substantially change the industry. Corporate venturing can be

done by taking a passive, minority position in an outside business, by

taking an active interest in an outside company, by building a new busi-

ness as a stand-alone unit, or by building a new business inside the exist-

ing firm but with independent management.

72 Cost LE A DE RS H I P

Cost Leadership A strategy that focuses on making the firm’s operations more efficient

and cutting costs wherever possible. It may result from scale / scope ef-

ficiencies, tight overhead control, careful selection of customers, stand-

ardization and automation. Cost leadership aims at achieving the lowest

costs in a market. This makes the company best placed to survive a price

war or generate the highest margins if a price war does not occur. Guja-

rat Ambuja Cement has pursued this strategy in the Indian cement indus-

try. The largest retail chain in the world, Wal-Mart also believes in cost

leadership. Tata Steel has been a cost leader* in the Indian steel industry.

Controlling costs systematically can lead to competitive advantage in

industries where price is an important factor. If a company offers a

standard product or service at a lower cost when compared to the indus-

try average, the company will earn higher profits. If required, low cost

can enable the company to compete on price. It can also generate profits

that can be reinvested to improve product quality while charging the

same price as the average in the industry. Low cost producers are more

likely to survive a price war. If suppliers hike prices, the low cost leader

will not be squeezed as much as the other players. The firm’s low cost

position may also act as an entry barrier, particularly if the potential en-

trant hopes to compete on price. A cost leader can also use price as a

weapon to ward off threats from substitute products.

There are also some risks associated with the cost leadership strategy:

If the buyer perceives the product to be cheap or of low quality, then

the company would have to reduce the price to sell it. In such a case,

cost leadership will not lead to superior profitability.

Too much focus on costs can lead to the firm losing touch with the

changing requirements of its customers.

Many routes to a low cost position can be easily copied. Competitors

can purchase the most efficient scale of plant. As industries mature,

the experience curve effect confers fewer benefits. But perhaps the

greatest threat comes from competitors who are able to price at mar-

* This term is taken from the book, The Essence of Strategic Management by

Clief Bowman, Prentice Hall of India, 1990.

Country R I S K 73

ginal cost in one industry because they have other, higher profit-

earning product lines to recover the fixed costs.

(See also: GENERIC STRATEGY, OFFSHORING, OUTSOURCING)

Cost of Capital The cost related to the capital needed to set up and run a business. The

capital employed by a firm must yield returns that exceed costs incurred

for it to create value for shareholders. So it is important to measure the

cost of capital and keep tracking it on an ongoing basis. Debt is a cheap-

er source of capital compared to equity. Within debt, there are various

instruments available. Corporate treasurers must choose the appropriate

mix of debt instruments and equity to achieve the targeted cost of capi-

tal.

(See also: CAPITAL STRUCTURE)

Counterparry A term coined by globalization guru, George Yip, to describe a firm’s

response to a competitive attack in one country by retaliation in another.

The retaliation is done in a country where the competitor will be hurt

most. To make a counterparry effective, a company needs strong pres-

ence in important markets, especially the home countries of its major

competitors. Kodak used this strategy against Fuji.

(See also: CROSS COUNTRY SUBSIDIZATION, GLOBAL LEVERAGE)

Country of Origin Effect The special preference given by customers to goods produced in certain

countries. Japan, for example, symbolizes quality and reliability in con-

sumer electronics business. Similarly, Switzerland represents excellence

in watch making, and Germany in precision engineering.

Country Risk The risk associated with a particular country, either because of an in-

vestment made there by the firm, a loan given or some other commit-

ment. Understanding and estimating country risk involves the examina-

tion of economic, political and geographical factors. Country risk is an

important factor to be considered in international business.

(See also: POLITICAL RISK)

74 Cr i t i ca l S UC C E S S FA C TOR (C S F )

Critical Success Factor (CSF) Those critical areas where things must go right for the firm in order for it

to flourish. For example, the ability to attract and retain talented people

is a critical success factor for Indian IT services companies such as In-

fosys, TCS and Satyam. Similarly, the ability to control freight costs is a

critical success factor for steel manufacturers. The ability to manage

R&D effectively is a critical success factor for global pharma companies

like Merck. Supply chain management is a critical success factor for

large retail chains.

Cross Country Subsidization Using profits from one country to subsidize losses in other countries.

This strategy is closely related to COUNTERPARRY. Global companies,

thanks to their presence across countries, have this capability.

Cross Holding The holding of equity shares by companies in each other. In countries

like India this is a common practice that enables promoters to retain

management control of a company with minimal investment. It also pro-

vides opportunities for tunneling, i.e. movement of funds across subsidi-

aries. Cross holding is considered bad for corporate governance because

there is an imbalance between control and cash flow rights. Cross hold-

ing also leads to unrelated diversification resulting in unwieldy con-

glomerates, which often generate less than satisfactory returns for share-

holders.

Customer Relationship Management (CRM) Efforts by companies to understand their customers and manage them in

the most profitable way. CRM is an age-old concept which has become

hot in recent times because of the rise of information technology. CRM

aims at improving customer retention, offering differentiated products

based on customer needs, smart customer acquisition and reward pro-

grams, and better customer service programs. CRM usually employs

information technology to manage large amounts of customer data and

automate various steps in order to prevent human error. Data collected

through CRM enables firms to serve target segments more effectively by

tailoring products to closely match customer needs. CRM also provides

Cusumano , M IC HA E L 75

data to educate employees, align their incentives, and make a company

better placed to profit from evolving market needs.

Customer Switching Costs The costs that tend to tie buyers to their current supplier. These costs

tend to be high when a product needs specialized inputs, when the cus-

tomer has invested a lot of time and energy in learning how to use the

product, or when the customer has made special-purpose investments

that cannot otherwise be used. Enterprise resource planning (ERP) soft-

ware falls in this category.


Cusumano, Michael Well known for his work on business strategy, especially in the comput-

er software industry, Cusumano has extensively studied tech companies

across the world, including Microsoft, Netscape, and Intel. Based on his

research, he has contributed valuable insights on the strategic manage-

ment of tech companies. Cusumano argues that strategic planning is im-

portant even in a fast changing industries such as information technolo-

gy. The only difference is the planning cycles have to be shorter. Among

the ideas for which Cusumano is famous are PLATFORM LEADERSHIP and

knowledge transfer across projects.

76 Deci s ion MA K ING

D

Decision Making Decision making is a key element in strategic management. Good deci-

sion making is as much about collecting hard data and doing painstaking

analysis as it’s about behavioral issues. According to Nobel laureate

Herbert Simon, decision making takes place in four stages:

Intelligence involves discovering, identifying and understanding the

problem.

Design includes identifying and exploring solutions to the problem.

Choice means choosing one of the alternatives.

Implementation means making the chosen alternative work.

These stages explain how decision making should logically take

place. In practice, the influence of various behavioral issues cannot be

overlooked. Moreover, the four steps, instead of occurring sequentially,

may overlap. And, in many cases, decision making takes place in itera-

tive fashion, accepting things that work and rejecting those that do not.

Three key factors that are an impediment to good decisions are in-

formation quality, human filters, and resistance to change. Thus, infor-

mation may not be accurate, complete, consistent or available on a time-

ly basis. Managers have selective attention, various biases and focus on

some dimensions of the problem while ignoring others. Last, but not the

least, people are resistant to change. So, decisions often tend to be a bal-

ancing of the firm’s various interest groups rather than the most optimal

solution.

The way people think, both as individuals and in groups, affects the

decisions that they make*. Bad decisions take place when the alterna-

tives are not clearly defined; the right information is not collected and

the costs and benefits are not accurately weighed. Sometimes the fault

* Hammond, John S. III, Keeney, Ralph L. and Raiffa, Howard, “The Hidden

Traps in Decision Making” Harvard Business Review, 24 June 2006.

Deming , W I L L IA M E D WA RDS 77

lies not in the decision making process, but in the mind of the decision

maker. Managers often do not realize the various traps that exist while

taking decisions. Some common traps include:

The Anchoring Trap: Managers tend to give disproportionate weight

to the first piece of information they receive.

The Status quo Trap: People like to maintain the status quo, even

when better alternatives exist.

The Sunk Cost Trap: Companies often perpetuate the mistakes of the

past because they have invested so much in an approach or decision

that they find it difficult to alter course.

The Confirming Evidence Trap: Managers tend to seek information to

support an existing tendency and discount opposing information.

The Overconfidence Trap: Most people have an exaggerated belief in

their ability to understand situations and predict the future.

The Framing Trap: People’s roles in an organization influence the

way problems are framed. So often a problem or situation is incor-

rectly stated.

Deming, William Edwards* An American engineer who is regarded as the founder of total quality

management. It was under Deming’s stewardship that Japan became

renowned for producing innovative high quality products. In times, the

Japanese have named their premier quality award after him.

Deming’s Key Ideas

Deming understood that technology was not enough to tackle quality

problems. The people best equipped to resolve such problems were

those who worked with the system on a daily basis, and who knew it

best. Insights into the system and useful ideas for changing it had to per-

colate up from the bottom of the organization. So management had to

shake up the hierarchy, drive fear out of the workplace and foster the

intrinsic motivation of its employees.

Deming emphasized the systems approach, namely, the interdepend-

ence of all the organizational units that work to accomplish the goals of

* Adapted from www.wikipedia.org.

78 Deming , W I LL IA M E DWA R DS

an organization. Strongly opposed to traditional performance appraisal

and merit pay, Deming argued that merit rating encouraged short-term

performance and undermined long-term planning, built fear, destroyed

teamwork and fueled rivalry and politics. Deming argued that pay for

performance was intrinsically unfair because it ascribed to the people in

a group differences that might actually be caused by the system they

were working in. If management did its job well in terms of hiring, de-

veloping employees, and keeping the system stable, most employees

would perform as well as the system permitted.

Deming believed that the desire for achievement was fundamental to

human nature. Employees wanted to be given the chance to demonstrate

their abilities and exploit their potential. The greatest competitive ad-

vantage would accrue to companies that helped employees achieve their

full potential. Deming contended that within a stable system, most fluc-

tuations in individual performance over time would be attributable to

natural variations in the system. Moreover, it was almost impossible to

measure the contribution of a single individual within a system that was

subject to the vagaries of numerous other variables.

Deming emphasized that by embracing appropriate principles of

management, organizations could increase quality and simultaneously

reduce costs — by reducing waste, rework, staff attrition and litigation

while increasing customer loyalty. The key lay in practicing continual

improvement and viewing manufacturing as a system, not as bits and

pieces.

Principles for Successful Business Transformation

Deming articulated various principles for successful business transfor-

mation, some of which are:

Reduce dependence on mass inspection to achieve quality. Instead,

improve the process and build quality into the product in the first

place.

Build leadership capabilities for managing people, recognizing their

unique abilities, capabilities, and aspirations. Leaders should help

people, machines, and gadgets do a better job.

Drive out fear and build trust so that everyone can work more effec-

tively.

Diamond 79

Break down barriers between departments. Abolish competition and

build a win-win system of cooperation within the organization.

Eliminate slogans, exhortations, and targets asking for zero defects or

new levels of productivity. Such exhortations only create adversarial

relationships, as the bulk of the causes of low quality and low

productivity lie in the system and thus lie beyond the power of the

work force.

Remove barriers that rob people of joy in their work. Abolish the

annual rating or merit system that ranks people and creates competi-

tion and conflict.

Involve people at all levels.

(See also: TOTAL QUALITY MANAGEMENT)

Demographic Environment Comprises factors such as age, population, immigration, marital status,

sex, education, religious affiliations and geographic dispersion. Based on

these characteristics, demand forecasts can be made and the market ap-

propriately segmented. Unlike many other trends, demographic trends

are generally stable and easy to predict. Also, they are unlikely to change

suddenly. So market forecasts can be made with a fair degree of accura-

cy. One of the important demographic trends of recent times, the ageing

of Japan and Europe, for example, has major implications for marketers

and pension fund managers.

(See also: ENVIRONMENTAL SCANNING)

Devil’s Advocacy A way of improving the decision making process. When a proposal is

being discussed, someone can act as a devil’s advocate and argue why

the proposal should not be accepted. By examining the downside, the

risks associated with the proposal can be better understood and man-

aged. Creativity guru Edward De Bono calls this black hat thinking.

However, if taken too far devil’s advocacy may be equated with cyni-

cism or obstructionism.

Diamond A term coined by Michael Porter to describe the COMPETITIVE AD-

VANTAGE an industry derives from the national diamond, i.e. four differ-

80 D iamond

ent determinants which are created within the nation state: factor condi-

tions, demand conditions, related and supporting industries, and firm

strategy, structure and rivalry.

Factor Conditions

Factors can be grouped into a number of broad categories:

Human Resources: the quality, skills and cost of personnel.

Physical Resources: land, water, mineral or timber deposit, hydro

electric power sources, fishing grounds and other physical traits.

Knowledge Resources: scientific, technical and market knowledge.

Capital Resources: the amount and cost of capital available.

Infrastructure: the transportation system, the communications sys-

tem, mail and parcel delivery, payments or funds transfer, health

care, and so on.

A nation’s firms gain competitive advantage if they possess factors

that are significant for competing in a particular industry.

Basic factors are either unimportant to national competitive ad-

vantage or the advantage they provide for a nation’s firms is unsustaina-

ble. Advanced factors are more significant for competitive advantage.

They are scarcer because their development demands large and often

sustained investments in both human and physical capital.

Generalized factors, such as the highway system, a supply of debt

capital, or a pool of well motivated employees with college education

support only rudimentary types of competitive advantage. These are

usually available in many nations and tend to be more easily nullified,

circumvented, or sourced through global corporate networks. Special-

ized factors involve narrowly skilled personnel, infrastructure with spe-

cific properties, knowledge in particular fields, and other factors with

relevance to a limited range of industries or even to just a single indus-

try. Specialized factors which provide a more decisive and sustainable

bases for competitive advantage require a more focused, and often riski-

er, private and social investment.

The most significant and sustainable competitive advantage results

when a nation possesses advanced and specialized factors needed for

competing in a particular industry. Nations must also be good at upgrad-

ing the needed factors.

Diamond 81

Demand Conditions

The composition of home demand, the size and pattern of growth of

home demand, and the mechanisms by which a nation’s domestic pref-

erences are transmitted to foreign markets shape the rate and character of

improvement and innovation by a nation’s firms.

A nation’s firms are likely to gain competitive advantage in global

segments that represent a large or highly visible share of home demand

but account for a less significant share in other nations. Small nations

can be competitive in segments which represent an important share of

local demand but a small share of demand elsewhere, even if the abso-

lute size of the segment is greater in other nations.

A nation’s firms are likely to be globally competitive if domestic

buyers are among the world’s most sophisticated and demanding buyers

for the product or service concerned. Such buyers put pressure on local

firms to meet high standards in terms of product quality, features and

service. A nation’s firms gain a competitive advantage if the needs of

home buyers anticipate those of other nations and become an early indi-

cator of global buyer needs.

Related and Supporting Industries

National advantage is also determined by the presence in the nation of

supplier industries, or related industries, that are internationally competi-

tive. For example, Japanese machine tool producers draw on the exper-

tise of world-class suppliers of numerical control units, motors and other

components. Sweden’s fabricated steel products (like ball bearings and

cutting tools) industry leveraged the country’s strength in specialty

steels. Japan’s global competitiveness in facsimile machines owed much

to the country’s strength in copiers.

The presence of globally competitive suppliers creates advantages in

downstream industries in several ways — efficient, early, rapid and

sometimes preferential access to the most cost-effective inputs, superior

coordination, and faster innovation and upgrading. Competitive ad-

vantage emerges from close working relationships between world-class

suppliers and the industry.

82 D i f ferent iat i on

Firm Strategy, Structure and Rivalry

The way in which firms are created, organized and managed as well as

the nature of domestic rivalry determine global competitiveness.

Nations will tend to succeed globally in industries where manage-

ment practices and modes of organization prevalent in the country are

well suited for generating competitive advantage. Italian firms, for ex-

ample, are world leaders in a range of fragmented industries, such as

lighting, furniture, footwear, woolen fabrics and packaging machines, in

which economies of scale are either modest or can be overcome through

networks of loosely affiliated companies. Italian companies tend to pur-

sue focus strategies, avoiding standardized products and operate in small

niches with their own particular style or customized product variety.

These firms do not have depth of management talent. Indeed, they are

often dominated by a single individual. Yet these firms can take quick

decisions, rapidly develop new products, and adapt to market changes

with great flexibility.

Competition is possibly the biggest driver of improvisation and inno-

vation. Rivalry increases the pressure to lower costs, improve quality

and service, and create new products and processes. Active pressure

from rivals stimulates innovation as much from fear of falling behind as

the inducement of getting ahead. Intense rivalry also puts pressure on

domestic firms to sell abroad in order to grow. Particularly when there

are economies of scale, rivalry increases the pressure to globalize.

Toughened by intense rivalry, stronger domestic firms also become

equipped to succeed abroad.

(See also: CLUSTERS)

Differentiation A strategy that lays emphasis on offering a product that is superior, on

some dimension(s), compared to what competitors are providing. Differ-

entiation is possible along one or more of various dimensions — product

features, quality, customer service, guarantee, distribution, delivery,

product customization, etc.

Discovery DR IV E N P LA NNING 83

A successful differentiation strategy emphasizes uniqueness in ways

that are valued by buyers*. If buyers are willing to pay for these unique

features and the firm’s costs are under control, then the price premium

will lead to higher profitability. The CRITICAL SUCCESS FACTOR in dif-

ferentiation is sound understanding of the buyer’s needs. A differentiator

needs to know what buyers value, deliver that particular bundle of at-

tributes, and charge accordingly. By effectively serving a sub-group of

buyers who will not consider other firms’ offerings as substitutes, the

company can effectively lock up the segment.

A successful differentiation strategy reduces the head-to-head rivalry

witnessed in price based competition. If suppliers raise prices, loyal cus-

tomers who are not price conscious are more likely to accept the higher

price that the differentiator passes on. Customer loyalty also acts as a

barrier to new entrants and as a hurdle that potential substitute products

have to overcome.

However, the differentiation strategy is not without its risks:

If the basis for differentiation is easily imitated, it will not lead to a

sustainable advantage. Rivalry within the industry is the likely to

switch to price-based competition.

Broad based differentiators may be outmaneuvered by specialist

companies who target one particular segment.

If the strategy is based on continual product innovation, the company

runs the risk of exploiting risky territory merely for followers to ex-

ploit the benefits.

If a firm ignores the costs of differentiating, the premium prices

charged may not lead to superior profits.

(See also: GENERIC STRATEGY)

Discovery Driven Planning A term coined by Rita Gunther McGrath and Ian C. MacMillan, it refers

to planning in the case of highly uncertain ventures where new data and

assumptions are incorporated on an ongoing basis and plans revised on

the basis of new information flowing in from the market. This technique

can be really useful for a multinational corporation entering an emerging

* Abstracted from The Essence of Strategic Management by Clief Bowman,

Prentice Hall of India, 1990.

84 D ise conomies O F S C A LE

market. It is also useful in the case of a new technology when it is diffi-

cult to make market forecasts based on the past. If past assumptions

change, sales and cost projections and also investment plans need to be

altered.

(See also: STRATEGIC PLANNING)

Diseconomies of Scale Factors which increase unit costs with increasing scale of operations. For

example, the costs of coordinating activities tend to be high when the

scale of operations is unwieldy. Large firms have many layers of hierar-

chy. Communication can get distorted as it is typically done through

memos, reports or written requests. Worse still, written messages are

often impersonal and less motivating than conversation. In small firms,

decisions are usually made by the proprietor, or a small group of people

at the top. One person taking the decisions ensures coordination of the

firm’s strategy and actions. Large firms are typically organized as busi-

ness units. Different units may head in different directions. So regular

meetings involving senior managers are required to ensure coordination.

This drives up costs significantly. While all these coordination and ad-

ministration costs go up, the scale economies that come as a result of

using large plant and equipment may disappear after a certain size. As a

result of all these reasons, costs may actually go up as the scale of opera-

tions increases beyond a point.

(See also: ECONOMIES OF SCALE)

Disruptive Technology A term coined by Clayton CHRISTENSEN to describe a technology that is

not only quite different from an existing one but also offers a totally new

price-value proposition.

A disruptive technology may have fewer features but it may be

cheaper and more user friendly. Such a technology tends to attract new

customers for whom existing products are either too expensive or too

sophisticated. It is often newcomers and not established players who

succeed in developing disruptive technologies. For example, the PC was

a disruptive technology in relation to mainframe and mini computers.

Despite being inferior to a mainframe in terms of performance capabili-

ties, the PC was cheaper and easier to use for most people and led to a

Diversi f i ca t ion 85

revolution that put computers on every executive’s desks and in millions

of homes and schools.

(See also: INNOVATOR’S DILEMMA, INNOVATION, TECHNOLOGY RISK)

Diversification A strategy that involves going beyond the current line of business into a

new one for various reasons:

Opportunities to grow may be limited in the existing business.

What starts out as a technology for one product may soon become a

whole family of technologies generating a range of products targeted

at different markets.

Tired of doing the same type of work, managers may think actively

in terms of entering a new business.

Diversification may be prompted by the need for vertical integration

to get greater control over the value chain.

Most tax legislation incorporate incentives for reinvestment of prof-

its. Firms may find it tempting to invest the surplus capital in a tax-

advantaged new business.

The strategic challenge in diversification is to determine whether

there is a fit between the old and the new businesses. In general, the

least risky form of diversification is offering a new product to existing

customers. Then comes offering the existing product to a new market.

The highest degree of risk is involved while introducing a new product

in a new market. Companies which embark on diversification in re-

sponse to the poor performance of their existing business usually fail.

This is because such a diversification tends to be opportunistic rather

than strategic and does not take into account the fundamental strengths

of the organization. Moreover, if a business is not doing well, it makes

more sense to first structure and streamline it rather than take on the

added responsibility of a new business.

There are numerous instances of both successful and unsuccessful

diversification. Among the successful diversified conglomerates are

General Electric, Siemens, Hoechst and ICI. On the other hand, there

have been some classic failures, like the Ruias of the Essar group in

India and Metal Box (India) Ltd.; the latter went into a terminal de-

cline following its ill-advised diversification into bearings.

86 D ivers i f icat i on

In general, the less complex a business is the easier it is to manage

it and lower the probability of things going wrong. Highly diversified

businesses tend to have more layers of management and more compli-

cated structures and control systems. The top management has to de-

pend on reports, figures and other quantitative data rather than a fun-

damental understanding of the customers and technology. So before

diversifying, a firm must critically examine whether the move can cre-

ate value for its shareholders that they cannot create on their

own by diversifying their investment portfolio. A small checklist is

given below:

Core Competencies: These are the value creating skills which can be

extended to new products or markets. A company can create value

for its shareholders by leveraging its core competencies.

Market Power: By becoming larger through diversification, a busi-

ness might be able to gather extra market power vis-a-vis competi-

tion, buyers, suppliers and substitutes.

Sharing of Infrastructure: Infrastructure represents tangible resources

such as production facilities. There may be scope to leverage this in-

frastructure and enter a newer business.

Financial Stability: A diversified business portfolio can balance cash

flows across businesses effectively. For instance, businesses in grow-

ing markets may need more cash than they have while those in ma-

ture markets may have more cash than they need.

Growth: Diversification can provide opportunities for fast growth.

Risk: When different businesses respond differently to economic cy-

cles, diversification can reduce business risk.

Peter Drucker’s insights on diversification though articulated several

years ago, are still useful. The diversified company must have a common

core of unity to its businesses. The different businesses, technologies,

products and activities could be united within a common market. Alterna-

tively, the markets, products and activities must be linked together by a

common technology. In general, market diversification based on common

technology is more difficult than technological diversification based on a

common market. Expertise in technology can be readily identified and

acquired whereas expertise in markets is in the form of tacit knowledge

which comes from experience and is rather more difficult to assimilate.

Diversi f i ca t ion 87

Under what circumstances does diversification work? Milton Lauen-

stein* argues that well-managed conglomerates do not tolerate mediocre

performance of unit managers. On the other hand, in focused firms the

CEO is rarely sacked unless the performance is disastrous. Moreover,

well managed conglomerates tend to have a corporate staff who go

through the annual budgets and long range plans of the operating units

with a microscope. In contrast, directors of a focused company often do

not spend enough time going into details. If a conglomerate selects able

unit managers, energizes them with a strong corporate purpose, monitors

their progress and provides guidance and support when needed, it can

outperform the boards of many independent companies. This is exactly

what GE, the most successful large diversified company in corporate

history, seems to have done under the leadership of Jack Welch.

However, diversified corporations must avoid heavy bureaucracy.

They must focus on basic governance using a small corporate staff. As

Lauenstein puts it: “If it begins trying to coordinate the activities of vari-

ous units, it will be drawn into operating management functions. The

corporate office will expand and begin making decisions which would

be better made by executives in operating units. It then becomes an easy

mark for a well managed independent competitor.”

Lauenstein also points out that in focused firms, the top manage-

ment’s role is to understand the industry, make the key operating deci-

sions and run the business. In a conglomerate, the top management must

govern, not run operations. Its focus must be on selecting, motivating

and mentoring the general managers of individual units.

At GE, Jack Welch killed bureaucracy, encouraged innovation and

selected extraordinarily talented managers to manage each of the com-

pany’s diverse businesses. Welch was also ruthless with non-performers.

In India, JRD Tata successfully built a portfolio of diverse businesses.

Even though his management style was quite different, Tata like Welch

had the extraordinary knack of selecting some truly outstanding manag-

ers to run the different companies.

(See also: CONCENTRIC DIVERSIFICATION, CONGLOMERATE DIVERSIFI-

CATION)

* Lauenstein, Milton C., “Diversification — The Hidden Explanation of Suc-

cess,” Sloan Management Review, Fall 1985, pp. 49-55.

88 D ivest i tu re

Divestiture A divestiture strategy involves the sale of a business or part of a business

for various reasons. One could be its lack of fit with the core business. A

second reason could be that the business has entered the decline phase of

its life cycle. The third might be an urgent need for cash. A fourth could

be government antitrust action when a corporation is perceived to mo-

nopolize or unfairly dominate a particular market.

Divisional Structure A type of ORGANIZATIONAL STRUCTURE in which the grouping is done

either on the basis of product or geographic segments. The famous Japa-

nese company, Matsushita has been one of the pioneers in the use of the

divisional structure, as was General Motors under Alfred Sloan. The

idea is to empower managers who have an intimate understanding of the

individual businesses. At the same time some functions, such as finance,

are centralized and tightly controlled. The divisional structure creates a

sharper focus on different market segments. But duplication of functions

makes it less efficient, when compared to the functional structure.

Moreover, when capabilities — especially knowledge — are spread

across divisions, pooling them together for the benefit of the organiza-

tion as a whole can be a major challenge.

(See also: ORGANIZATIONAL DESIGN, ORGANIZATIONAL STRUCTURE)

Downsizing In the face of slowing or declining sales, companies often reduce the size

or scope of their business, usually accompanied by a cut in manpower

strength. Downsizing can cut costs but it may also result in lower em-

ployee morale and a sense of uncertainty across the organization. Crea-

tive ways to avoid downsizing include hiring freezes, salary cuts, short-

ened work weeks, restricted overtime hours, unpaid vacations, and tem-

porary plant closures. When downsizing becomes unavoidable, the aim

should be to eliminate non-essential company resources while minimiz-

ing the negative impact on the remaining organization. This calls for a

frank and free explanation of the circumstances and transparent commu-

nication with employees.

Due to the negative connotation of the term, companies now often

use the term rightsizing.

Drucker , P E TE R F . 89

Drucker, Peter F. Widely considered the father of modern management, Drucker was ar-

guably the most popular and influential management philosopher of the

20th century. Writer, management consultant and teacher, Drucker high-

lighted the importance of the corporation as the defining social institu-

tion of our time before anyone else did so, and more clearly than anyone

else. Drucker’s contention that management was as decisive a factor in

economic growth as capital and labor firmly placed the practice of man-

agement as a central factor of economic and growth. Equally, his prolific

writings did yeoman service in laying the groundwork for codifying a

body of knowledge about management.

Drucker published his first book, The End of Economic Man, in

1939. He then joined New York University’s Graduate Business School

as Professor of Management in 1950. In 1971, he became Clarke Profes-

sor of Social Science and Management at the Claremont Graduate Uni-

versity in Claremont, California. In 1987 the university named its man-

agement school after him.

Drucker wrote several books on management, including the land-

mark The Practice of Management and The Effective Executive. In the

former, Drucker introduced the enduring concept of MANAGEMENT BY

OBJECTIVES. His other books include Management Challenges for the

21st Century, Managing for Results, Management: Tasks, Responsibili-

ties, Practices, Innovation and Entrepreneurship, The Age of Disconti-

nuity, and The New Realities. Drucker also served as a regular columnist

for The Wall Street Journal from 1975 to 1995 and contributed essays

and articles to numerous publications, including the Harvard Business

Review, The Atlantic Monthly, and The Economist. He served as a con-

sultant to various organizations.

Drucker’s writings cover a wide range of areas. Drucker’s great

strength was his ability to absorb vast amounts of information, to see

patterns in what would appear as a jumble of chaotic events, trends, and

economic indicators, and to anticipate trends. Though some academics

consider Drucker no more than a “journalist”, his admirers consider him

to be one of the most perceptive observers of all time.

Drucker’s interest in nonprofit organizations was a logical evolution

of both his commitment to the importance of organizations and his

recognition that many corporations had failed to live up to expectations

http://www.amazon.com/-New-Realities/dp/0765805332/sr=1-17/qid=1156921020/ref=sr_1_17/104-6851975-6233508?ie=UTF8&s=books

90 Due D I L IG E NC E

in discharging social responsibility. Drucker’s most compelling argu-

ment may be that for capitalism and democracy to survive, society must

find a way to mitigate the social costs of a free market economy.

Due Diligence The examination of the books of accounts of a company which has been

identified as a takeover target by the acquiring company. Due diligence

is important because the financial statements may not tell the complete

story. Many skeletons may be hidden in the cupboard by the company

being acquired. If these are not taken into consideration, the bidder may

end up paying an excessively high price. Due diligence can play an im-

portant role in identifying specific problem areas, such as overvalued

assets, window dressed financial statements or wrong market projec-

tions.

Dynamic Capability Building Strengthening existing capabilities and building new ones smartly in a

dynamic environment. John Hagel III and John Seely Brown in their

book, The Only Sustainable Edge define capability as the recurring mo-

bilization of tangible and intangible resources for the delivery of distinc-

tive value in excess of cost. They emphasize that companies must take a

more dynamic view of capabilities to stay ahead of competitors. Sustain-

able competitive advantage will ultimately come from a firm’s institu-

tional capacity to rapidly strengthen its distinctive capabilities and to

accelerate learning across enterprise boundaries. As Hagel and Brown

put it, “. . . the primary role of the firm should be to accelerate the

knowledge and capability building of its members so that all can create

even more value. This perspective broadens managerial attention from

the tasks of allocating existing resources to the tasks of deepening

knowledge and capability in an increasingly uncertain environment.”

Hagel and Brown suggest three mechanisms to accelerate capability

building:

1. Processes can be outsourced or offshored to gain access to special-

ized capabilities.

2. Distributed networks of specialized companies can also help in mobi-

lizing resources.

Dynamic S PE C IA L I ZA T ION 91

3. People with diverse backgrounds and skills can be brought together

to solve business problems.

(See also: PROCESS NETWORKS, STRATEGIC ALLIANCES)

Dynamic Specialization A term introduced by John Hagel III and John Seely Brown in their

book, The Only Sustainable Edge. It implies eliminating resources and

activities that no longer act as differentiators and focusing on capabilities

that can truly distinguish the firm in the market place. Such firms are

more focused, have a greater sense of urgency and are more responsive

to the potential threats and opportunities unfolding in their environment.

Within the area they choose, firms with dynamic specialization can serve

a broader range of customers. Senior executives in such companies have

a deeper understanding of the operational details of their business and

can therefore encourage and facilitate innovations more effectively.

(See also: CORE COMPETENCE)

92 Earn ings B E F ORE INTE RE S T A ND TA XE S ( E B IT )

E

Earnings Before Interest and Taxes (EBIT) The profits earned by a company before deducting interest and taxes. It

is a measure of how profitable the company is, without taking into ac-

count the impact of its capital structure and tax planning.

Economic Value Added (EVA) The excess of present value of future cash flows over what is required to

service the cost of capital. EVA has become an increasingly popular way

of financially evaluating both new and existing business strategies. It can

also be used both to identify businesses for disposal and closure and any

new acquisition or alliance.

EVA is based on cash flows rather than conventional accounting

method of profit measurement. Cash flows are a better indicator of the

economic worth of a business than are accounting profits which are of-

ten distorted by many non-cash adjustments. EVA also takes into ac-

count longer-term cash flows whereas accounting profit is by and large

shorter term oriented. Also, using EVA it is possible to trade off long

and short term cash flows thereby avoiding short-termism in economic

valuation of strategic decisions. EVA analysis helps firms to understand

how best to increase shareholder value: reinvesting in existing business-

es, investing in new businesses, or returning cash to stockholders. By

making the cost of capital visible to executives, EVA encourages in-

vestment in projects that increase shareholder value.

EVA analysis consists of three steps. The income generated by a

business is first determined. Then the return required by investors, i.e.

the cost of capital is estimated. For some businesses, one cost of capital

is sufficient. However, if business units have vastly different situations

or levels of risk, separate costs of capital may need to be calculated. The

EVA of each business is determined by subtracting the expected return

to shareholders from the value created by the firm or business unit.

Emotional INTE LL IG E NC E 93

Firms with positive EVA generate profits above that expected by share-

holders.

Economies of Scale Cost savings that a company can achieve due to a larger scale of opera-

tions. When the volume of production increases, the average unit cost

tends to decline. In other words, doubling the output results in a less than

double the increase in costs, as factor inputs can be used more efficient-

ly. The fixed costs can be spread over many units of output. A large

scale of operations can also lead to job specialization and consequently

higher labor productivity. Bulk buying may reduce input costs. Larger

firms also enjoy a lower cost of capital. Banks may charge lower rates of

interest and equity investors may be more willing to accept low dividend

yields from bigger firms if they feel a large firm is less risky.

(See also: DISECONOMIES OF SCALE)

Economies of Scope Economies of scope arise when a company can reduce the average unit

cost for each product by widening the product range. It occurs when

highly specialized inputs or expensive infrastructure such as a logistics /

distribution network can be shared by different goods. For instance,

firms can hire specialist computer programmers, designers and market-

ing experts, or leverage their skills across the product range, thereby

spreading their costs and lowering the average total cost of production of

each of the products. FMCG companies such as Unilever and ITC can

generate economies of scope by pushing a wide range of products

through the existing distribution network.

Emotional Intelligence An increasingly popular concept in leadership, pioneered by Daniel

Goleman. There is growing evidence that emotional balance and maturi-

ty play a far more critical role than does intelligence per se in the suc-

cess of professionals in their careers.

There are five components of emotional intelligence — self-

awareness, self-regulation, personal motivation, empathy, and social

skills.

94 End-game S TRA TE G I E S

Self-awareness means having a deep understanding of one’s emo-

tions, strengths, weaknesses, needs, and drives. Self-regulation means

the ability to control one’s feelings. A high level of personal motivation

is another trait of emotionally intelligent leaders. Empathy means a

thoughtful consideration of the feelings of employees along with other

factors in the process of making intelligent decisions. Social skills imply

the ability to develop relationships with people and get the work done.

Stephen Covey* has explained the relationship between emotional

intelligence and the seven habits of highly effective people as follows.

Self-awareness: An awareness of self, of the freedom and power to

choose, is the core of Covey’s habit labeled “Be proactive”. Human

beings are aware of the environmental forces around them and can

make wise choices.

Self-regulation: This is another way of expressing what Covey calls,

“Put first things first” and “Sharpen the saw”. People must decide

what their priorities are and live by them. They must master what

they intend to do, live by their values and constantly renew them-

selves.

Personal Motivation: Personal motivation is the basis for choices.

People must decide what their highest priorities, goals and values are.

That’s essentially what Covey’s mantra “Begin with the end in mind”

is all about.

Empathy: Empathy is the first half of “Seek first to understand, then

to be understood”. It’s learning to understand the viewpoints and

emotions of other people and becoming socially sensitive and aware

of the situation before attempting to influence others.

Social Skills: Covey’s “Think win-win”, “Seek first to understand,

then to be understood” help build social skills.

(See also: LEADERSHIP, PERSONAL EFFECTIVENESS)

End-game Strategies Plans for dealing with the decline phase of a product or industry life cy-

cle. It is wrongly believed that the only way to respond to declining sales

is to cut prices or prune marketing spending. Other options may be

*Covey, Stephen R., The 8th Habit: From Effectiveness to Greatness, The Free

Press, 2005.

Enterp r ise R I S K MA NA G E ME NT ( E R M ) 95

available to reverse the decline phase and create a new growth trajectory.

For example, products can be repositioned, or new market segments

identified.

(See also: PRODUCT LIFE CYCLE)

Enterprise Resource Planning (ERP) Information systems that integrate and automate many of the business

processes across the various functions of an organization, such as manu-

facturing, logistics, distribution, inventory, shipping, invoicing, and ac-

counting. ERP facilitates better control of many business activities, like

sales, delivery, billing, production, inventory management, quality man-

agement, and human resources management by providing real time in-

formation. ERP systems are often called back office systems indicating

that customers and the general public are not directly involved, unlike

front office systems, such as CUSTOMER RELATIONSHIP MANAGEMENT

(CRM) systems that deal directly with the customers.

Enterprise Risk Management (ERM) Enterprise risk management (ERM) involves the identification, meas-

urement and control of various risks an organization faces, in a systemat-

ic and integrated manner.

In a fast changing environment, business risks are many and diverse.

So risk management is becoming an increasingly important discipline.

By considering the interrelationships that exist among different risks and

all the risk mitigation mechanisms available, risk can be managed more

effectively.

The essence of ERM is changing the way decisions are made by sys-

tematically collecting and processing information. ERM should not be

viewed as a defensive tool. Rather, it is about creating conditions which

encourage managers to achieve the right balance between minimizing

risks and exploiting new opportunities. Indeed, the ultimate aim of ERM

is to make available a steady stream of cash flows that can be utilized to

maximize shareholders’ wealth.

(See also: RISK)

96 Ent repreneurship

Entrepreneurship Entrepreneurship is the practice of starting a new business. Since many

new businesses fail, it is widely believed that entrepreneurship is risky.

However, if the risks involved are carefully understood and managed

well, there is no reason an entrepreneurial venture cannot succeed. An-

other point to be noted is that entrepreneurship can also be displayed by

professional managers in the way they identify and pursue opportunities.

Our understanding of entrepreneurship owes a lot to the work of the

famous economist, Joseph Schumpeter. Schumpeter viewed an entrepre-

neur as a person, willing and able to convert a new idea or invention into

a successful innovation. According to Schumpeter, entrepreneurship

forces “creative destruction” across markets and industries, creating new

products and business models while eliminating inefficient ones. Crea-

tive destruction is largely responsible for the dynamism of industries and

long-run economic growth.

There are different views of entrepreneurship. Entrepreneurs are per-

sons who are willing to put their career and financial security on the line

for an idea, spending their time and capital, working on it in an uncertain

venture. An entrepreneur can also be described as a person who excels in

discovering, evaluating and exploiting opportunities. Another way of

viewing an entrepreneur is as “someone who acts without regard to the

resources currently under his control in relentless pursuit of opportuni-

ty”* (Robert Simons).

Environmental Scanning Systematic collection of information about various environmental fac-

tors that have an impact on business to identify threats and opportunities

and formulate appropriate responses. These include:

Political Political parties in power, anti-trust legislation, regula-

tory framework, etc.

Economic Availability of credit, interest rates, inflation, GNP

growth rate, etc.

Social Beliefs, attitudes, values, opinions, lifestyles of cus-

*Simons, Robert, Leverages of Organization Design, Harvard Business School

Press, 2005

Experience C URV E 97

tomers, etc.

Technological Degree of obsolescence, speed of innovation, etc.

Competitive

position

Market share, breadth of product line, distribution net-

work, raw material costs, operational efficiency, R & D

capabilities, etc.

Customer

profile

Geographic, demographic, psychographic segmenta-

tion, consumer behavior, etc.

Understanding the environment is the starting point of strategic plan-

ning. There are three ways of scanning the business environment. Ad-

hoc scanning involves short term, infrequent examinations, often in re-

sponse to a crisis. Regular scanning involves studies done according to a

regular schedule. Continuous scanning involves structured data collec-

tion on an ongoing basis and processing with respect to a wide range of

environmental factors. In today’s turbulent business environment, con-

tinuous scanning is necessary to enable firms to act quickly, take ad-

vantage of opportunities before competitors do, and respond to threats

effectively.

(See also: SWOT ANALYSIS)

Experience Curve As companies accumulate experience, people learn to do their jobs more

efficiently and effectively because of accumulated learning. So costs

come down significantly over time. That puts the firm in a position to

cut price and further expand the market. One strategy which firms can

pursue is to start with a relatively high price and bring down the price

progressively over time.


98 Fayol , HE NR I ( 1 841 - 1 925 )

F

Fayol, Henri (1841-1925) A French management pioneer who focused on the problems of organi-

zational structure within large firms at the turn of the last century.

Whereas his contemporary, F. W. Taylor, concentrated on efficiency of

shop-floor labor, Fayol looked at senior management. Fayol played a

key role in developing the concepts of CHAIN OF COMMAND, ORGANIZA-

TIONAL CHART, and SPAN OF CONTROL.

First Mover Advantage The COMPETITIVE ADVANTAGE realized by a company by entering a

market first. First movers are usually better placed to reap economies of

scale, to reduce costs through cumulative learning, to establish brand

names and customer relationships, to control distribution channels and to

obtain the best locations for facilities or the best sources of inputs. The

danger with the first mover strategy is that the company may end up

creating a market which may be better exploited by a later entrant offer-

ing a superior product. First mover strategies seem to work best when

both technology and market conditions remain reasonably steady, econ-

omies of scale are significant and customers are conservative about

switching suppliers. When both technology and market are changing

rapidly, later entrants have ample opportunities to uproot the first mover.

As Michael PORTER* has mentioned, to succeed first movers must

correctly anticipate industry changes. American companies were early

entrants into electronic watches. However, they bet heavily on light

emitting diode (LED) displays. This technology proved inferior to liquid

crystal displays (LCD) for less expensive watches and traditional (ana-

log) displays combined with quartz movements for watches in higher

price ranges. The introduction of LCD and quartz enabled Japanese

firms to become industry leaders in watches targeted at the mass market.

*The Competitive Advantage of Nations, The Free Press, 1990.

Five FORC E S MO DE L 99

Often the wise strategy is to be an early mover, not necessarily the

first mover. Just like in a marathon race, a company can be in the front

but not necessarily at the top of the pack. That way it can learn from the

first mover and yet move fast when necessary and reach the winning

line. The global software giant Microsoft has succeeded by pursuing this

kind of a strategy in many of its markets.

(See also: FREE RIDER)

Five Forces Model Probably the most widely used tool in business strategy which helps

analyze the attractiveness of an industry. It can be seen as one of two

dimensions in maximizing corporate value creation. The other dimen-

sion, value creation is how well a company performs relative to its com-

petitors. Here the VALUE CHAIN framework and the COMPETITIVE AD-

VANTAGE concept, both developed by Porter come in handy. The five

forces are:

Barriers to Entry: The barriers to entry are high or low, depending

upon factors such as economies of scale, brand image, capital re-

quirements, access to distribution channels, government policies, etc.

Higher the barriers to entry, the more attractive the industry.

Bargaining Power of Buyers: This is influenced by buyer volume, buy-

er information, buyer profits, substitute products available, etc. The

lower the bargaining power of buyers, the more attractive the industry.

Bargaining Power of Suppliers: This is affected by various factors

such as switching costs, differentiation of inputs, supplier concentra-

tion, presence of substitute inputs, threat of forward / backward inte-

gration, etc. The lower the bargaining power of suppliers, the more

attractive the industry.

Threat of Substitutes: The threat of substitutes is high if there are

alternative products with lower prices or better performance parame-

ters for the same purpose. The lower the threat of substitutes, the

more attractive the industry.

Rivalry: This refers to the intensity of competition among existing

players in an industry. Competition among existing players is likely

to be high when there exists a large number of companies, slow mar-

ket growth, high fixed costs, and high exit barriers. The lower the de-

gree of rivalry, the more attractive the industry.

100 F l at ORG A NIZA T I ON

Some scholars argue that the model emphasizes an outside-in ap-

proach and underemphasizes the importance of the (existing) strengths

of the organization (inside-out). That is the main argument behind a

competing school of strategy, RESOURCE BASED THEORIES. Notwithstand-

ing this criticism, the five forces model remains a conceptually elegant

way of analyzing the structural attractiveness of an industry.

(See: BARRIERS TO ENTRY, BARGAINING POWER OF BUYERS, BARGAIN-

ING POWER OF SUPPLIERS, INDUSTRY, THREAT OF SUBSTITUTES, RIVALRY)

Flat Organization An organization with only a few layers of management between the

highest and the lowest levels. It presents a stark contrast to the classic

hierarchical organization which has several layers of managers, each of

whom supervises a lower layer. The basic premise behind the flat organ-

ization is that trained, empowered workers with assigned goals, who are

encouraged to work innovatively, will be more productive than workers

who are closely supervised by managers. A flat organization is more

transparent, less bureaucratic and improves communication. One prob-

lem with a flat organization is that opportunities for career advancement

may be limited.

(See: ORGANIZATIONAL DESIGN, SPAN OF CONTROL)

Focus A strategy which believes in concentrating on a small segment defined

either in terms of customer segment or geographical territory. A focus

strategy means carefully choosing the arena to compete in and narrow-

ing the competitive scope. By selecting carefully*a segment and meeting

the needs of that segment better than can competitors who target more

broadly defined segments, companies can gain competitive advantage. A

focus strategy takes advantage of the differences between the target

segments and other segments in the industry. It is these differences that

result in a segment being poorly served by the broad-scope competitor.

The firm that focuses on cost may be able to outperform the broad-based

firm through its ability to strip out frills not valued by the segment. Al-

* This term is taken from the book The Essence of Strategic Management by

Cliff Bowman, Prentice Hall of India, 1990.

Force F I E L D A NA LYS I S 101

ternatively, the product or service itself can be differentiated taking into

account the unique needs of a segment.

The obvious danger with the focus strategy is that the target segment

may shrink or disappear over time for some reason. A new player may

“outfocus” the firm. Alternatively, shifting from broad to narrow target-

ing usually means a dramatic reduction in volumes. This can raise unit

costs if the overheads have not been trimmed to match the smaller out-

puts demanded by the narrower customer base.

(See also: GENERIC STRATEGY)

Follett, Mary Parker One of the earliest and strongest advocates of collaborative, participative

approaches to management and cross-functional problem solving. Follett

argued that true authority and leadership were a function of the

knowledge and experience of people, not their rank in a corporate hier-

archy. If Taylor was the father of scientific management, Follett pio-

neered a behavioral, post-scientific approach to managing human organ-

izations. She pioneered ideas such as constructive conflict resolution,

participative management, and flatter organizations. According to Fol-

lett, the proper response to conflict was “integration” of different points

of view to reflect multiple viewpoints. Collaboration and cooperation

with labor, she argued, were the only rational ways to run a business.

Follett can be considered an early advocate of organizational learning

through she never used those words explicitly.

Force Field Analysis Developed by Kurt Lewin, force field analysis is a useful technique for

diagnosing situations, especially when planning and implementing a

change management program.

In any situation, both driving and restraining forces operate. Take the

example of productivity. Driving forces include pressure from a supervi-

sor, incentive earnings, and competition. Restraining forces may include

apathy, hostility, and poor maintenance of equipment. Equilibrium is

reached when the sum of the driving forces equals the sum of the re-

straining forces.

The level of productivity can be raised, or lowered, by changing the

balance between the driving and restraining forces. Suppose a new man-

102 Fo rward INTE G RA T ION

ager takes over a work group in which productivity is high but the

maintenance of equipment has been ignored. The earlier manager had

increased the driving forces to increase output in the short run. By doing

this, however, new restraining forces developed, such as machine break-

down. When the new manager takes charge, the restraining forces may

have begun to increase, resulting in repeated breakdowns and frequent

maintenance. The new manager now faces a new equilibrium at a signif-

icantly lower productivity.

The new manager may decide not to increase the driving forces but

to reduce the restraining forces by spending more time on maintenance

and modernization. In the short run, output will tend to come down still

further. In the long run, however, the new driving forces will move the

plant towards a higher level of output.

Managers often have to strike the right balance between short term

and long term goals to ensure sustained performance in the long run. The

force field analysis is a useful framework for doing so.

Forward Integration Forward integration means moving into downstream activities, i.e. get-

ting closer to customers. Such a strategy can help a firm to differentiate

its product more effectively by controlling a larger number of elements

of the value chain. For example, forward integration into retailing can

allow the firm to control areas such as customer interactions, store ambi-

ence, etc. Forward integration can also solve the problem of access to

distribution channels.

Forward integration can help a company understand the market bet-

ter. Since the forward stage determines the size and composition of de-

mand for the upstream stages of production, the firm can determine the

demand for its products quicker. The firm might also gain first hand in-

formation about market trends and competitive developments. This can

be very useful in an environment of cyclical, erratic and changing de-

mand. Forward integration may also allow prices to be better matched to

market conditions. By setting different prices for different customers,

forward integration may facilitate higher overall price realization.


Func t ional S TRA TE G Y 103

Franchise A business in which one entity (the franchisee) operates a business in

conformance to the name, logos and trading method of an existing, suc-

cessful business (the franchiser). Various restrictions may be placed on

the franchisee in terms of facility design, inputs used, processes and the

training of manpower. A franchising arrangement enables the franchiser

to avoid heavy investments and penetrate a new geographic region

quickly. For the franchisee, the risks are limited. The trading strategy

and methods have been tried and tested elsewhere. The franchiser’s

name and logos may have wide customer recognition and loyalty, ensur-

ing adequate demand for the product or service from day one.

(See also: LICENSING)

Free Rider A player who moves into an industry later, after learning from the expe-

riences of the first mover and avoiding similar mistakes. Sometimes, it

does not make sense to be the first mover. In the Internet browser market

for instance, Netscape moved first but it was Microsoft which ultimately

turned out to be the winner.

(See also: FIRST MOVER ADVANTAGE).

Full Costing A budgeted method which attempts to allocate all costs incurred in an

organization to various cost centers. Both direct and indirect costs are

considered and the possibility of losses by under pricing is avoided. Di-

rect labor and material costs can be easily allocated to an activity or a

product. Some direct overheads may also be easy to allocate. But indi-

rect overheads cannot be allocated easily. An example of full costing

would be allocating 35 per cent of the overhead cost of rent to the ma-

chine shop if it occupies 35 per cent of the factory space. ACTIVITY

BASED COSTING (ABC) is a better technique for allocating overheads.

ABC would look at the actual pattern of usage of the machine shop, in-

stead of just going by the space occupied.

Functional Strategy Strategies pursued by various individual functions such as marketing,

finance, operations and human resources. Functional strategies facilitate

104 Funct ional S TRUC TURE

the implementation of corporate strategy in the sub-units of a company

and must be aligned with the long-term corporate strategy. Thus, func-

tional strategies in marketing may deal with product, price, place and

promotion. Those in finance may deal with capital mobilization, capital

allocation, cash flow management, working capital management, etc.

Those in operations may be concerned with facilities, purchasing, opera-

tions planning and control. Human resources strategies span employee

recruitment, selection and orientation, career development and counsel-

ing, performance evaluation, compensation, labor relations, etc.

(See also: OPERATING STRATEGIES)

Functional Structure A type of ORGANIZATIONAL STRUCTURE wherein the managers of each

major function — such as marketing, production, research and develop-

ment, and finance — report to the chief executive, who provides overall

direction and coordination. The same logic can be extended to sub func-

tions. In a functionally organized marketing department, for example,

the managers of various marketing functions, such as sales, advertising,

marketing research, and product planning, report to the marketing man-

ager. A functional structure emphasizes specialization and increases ef-

ficiency. But such a structure lacks the overall perspective and the

sharper market focus which the divisional structure can bring. Functions

often work in silos and do not leverage the knowledge and expertise

available in the organization, creating serious problems in activities,

such as new product development, which need excellent coordination

across functions. Such problems have led to the concept of cross-

functional teams.

Generi c S TRA TE G Y 105

G

Game Theory A branch of applied mathematics that is useful in analyzing situations

where players choose different actions in an attempt to maximize their

returns. First developed as a tool for understanding economic behavior,

game theory is now used in many diverse fields, including biology, psy-

chology, sociology and philosophy. Game theory is relevant in strategy

formulation in that it studies decisions under circumstances where vari-

ous players interact. In other words, game theory studies choice of opti-

mal behavior when costs and benefits of each option are not fixed, but

depend upon the choices exercised by other individuals. Porter’s com-

petitive strategy seems to draw heavily from game theory.

(See also: COMPETITIVE STRATEGY, OLIGOPOLY)

Garbage In, Garbage Out A concept which holds that the quality of inputs into any process deter-

mines the quality of output. If incorrect data is entered for processing,

the output will be garbled. Similarly, if incompetent people are recruited,

the organization will under-perform.

Generic Strategy A concept associated with Michael Porter, which holds that a company

must be committed to one of three generic strategies in order to compete

effectively in the market place:

Cost Leadership: Here the firm lays great emphasis on improving its

cost competitiveness. Cost leadership is facilitated by efficient-scale

facilities, tight overhead control, careful selection of customers and

standardization of activities. Gujarat Ambuja has pursued this strate-

gy in the Indian cement industry. Maruti has done the same in the In-

dian car industry. The largest retail chain in the world, Wal-Mart is

also a cost leader. So is Dell in the context of the global PC industry.

106 Ghosha l , S UMA NTRA

Differentiation: A business strategy which attaches more importance

to providing value to customers in some unique way, that competitors

cannot easily imitate. Different methods can be employed to achieve

differentiation: design or brand image, technology, features, and cus-

tomer service. In the process of differentiation, the firm cannot afford

to ignore costs. But cost cutting is not the primary focus here. The

emphasis is on creating unique value and charging a premium for it.

A good example is Mercedes Benz.

Focus: A means of gaining competitive advantage by concentrating

on one particular aspect of a product / service / market / geographic

region that is important to a particular type of customer. In this way,

a firm can be more effective than the other players in that chosen

segment.

(See also: COST LEADERSHIP, DIFFERENTIATION, FOCUS, COMPETITIVE

STRATEGY)

Ghoshal, Sumantra One of the best-known management gurus of our times, Ghoshal gradu-

ated from Delhi University and worked for Indian Oil Corporation, ris-

ing through the management ranks before moving to the United States

on a Fulbright Fellowship in 1981. There, he produced simultaneously

two Ph.D. dissertations at the MIT Sloan School of Management and

then at Harvard Business School. He joined INSEAD Business School

in France and later moved to the London Business School. His book,

Managing Across Borders: The Transnational Solution, coauthored with

Christopher Bartlett, is considered as one of the most influential man-

agement books ever written and has been translated into nine languages.

Ghoshal’s extensive research for the book led to the conclusion that

global companies need to combine three capabilities — global standard-

ization to cut costs, local customization where necessary to suit the

needs of national markets, and knowledge sharing across business units.

Ghoshal is also well known for his PURPOSE-PROCESS-PEOPLE DOC-

TRINE. Instead of concentrating on strategy, structure and systems, top

management must articulate a purpose, redefine management processes

and show a high degree of commitment to the development of people.

Global LE V E RA G E 107

Global Corporations An organization with a global network of subsidiaries across the world.

When used in the strict sense of the term, a global company is one which

emphasizes uniform products and policies across the world. It does not

take into account the need to customize its products and services to suit

the needs of specific markets. In contrast, a multinational corporation

(MNC) lays great emphasis on being sensitive and responsive to differ-

ences in national environments around the world. An MNC is organized

as a portfolio of several national entities. Operations in different coun-

tries are managed on a stand-alone basis, without any serious attempts to

integrate them. Till recently, the Dutch multinational, Philips, followed

this model. Unilever is another good example. The problem in MNCs is

that the firm may lose valuable opportunities for cutting costs, improv-

ing efficiency and leveraging organizational knowledge due to weak

global integration. According to GHOSHAL and BARTLETT, today’s busi-

ness environment demands both global standardization and local cus-

tomization, giving rise to a new breed of MNCs called the transnational

corporation. Such a company strikes the right balance by standardizing

those activities where scale and efficiency are important and customiz-

ing where responsiveness to customer needs is the priority.


Global Industry An industry in which strategic moves in one country have to be made

after taking into account their global implications. Typically, these are

industries where there are significant economies of scale and the need

for local customization is minimal. In a global industry, the strategic

positions of competitors in major markets are fundamentally affected by

their overall global positions and firms have to coordinate their activities

worldwide to emerge as global leaders.

(See also: GLOBAL VALUE CHAIN CONFIGURATION, MULTI DOMESTIC

INDUSTRY)

Global Leverage The advantage a global corporation is able to realize due to scale effi-

ciencies, co-ordination and integration of worldwide operations, and the

ability to transfer good ideas and best practices across the world. For

108 G lobal V A LUE C HA IN C ONFIG UR A T ION

example, a GLOBAL CORPORATION can defend itself against an attack by

a competitor in its home country with a counter attack in the competi-

tor’s home country. A global company can also leverage its world wide

pool of talent and capabilities. Global leverage results when cost and

strategic advantages are combined.

(See also: COMPARATIVE ADVANTAGE, STRATEGIC ADVANTAGE)

Global Value Chain Configuration A highly sophisticated and well-coordinated approach to global value

chain management. Firms can be in business only if the activities they

perform add value for their customers. If they can add value efficiently

and effectively and charge a price which is more than the total cost of

the activities, they can make a profit. The value chain, a concept devel-

oped by Michael PORTER, is a useful tool for analyzing the value adding

activities of a company. While the value chain is important for all com-

panies, in the case of global companies it becomes critical. This is be-

cause global companies must carefully locate different activities in dif-

ferent countries to optimize the effectiveness of the value chain as a

whole.

Global value chain configuration increases competitive leverage by

helping a company access global resources and capabilities. In a multi

domestic company, each subsidiary’s competitive position is determined

locally. On the other hand, by taking an integrated view of their world-

wide activities, global companies are better equipped not only to cut

costs but also to generate value. At the same time, managing a network

of activities spread across the world poses major challenges.

(See also: COMPARATIVE ADVANTAGE, GLOBAL LEVERAGE, PROCESS

NETWORKS, STRATEGIC ADVANTAGE, VALUE CHAIN)

Globalization A very commonly used term, globalization can mean different things to

different people. At a broad level, globalization refers to the growing

economic interdependence among countries, reflected in the increasing

cross border flow of goods, services, capital and technical know how.

The booming business process outsourcing (BPO) business in India is a

reflection of this trend. At the level of a specific company, it refers to the

degree to which competitive position is determined by the ability to lev-

Global i za t ion 109

erage physical and intangible resources and market opportunities across

countries.

There are a number of factors driving globalization. More and more

countries across the world are embracing free market philosophy and

dismantling trade barriers. Better and cost effective ways of communica-

tion are making the world a smaller place. Due to the heavy R&D costs

involved in developing new products, the pressure is increasing on com-

panies to look for global markets to quickly recoup their investments.

Satellite television is playing an important role in creating global mar-

kets by promoting uniform tastes among customers across the world.

Globalization has created major opportunities for poor countries. In

the past, poor countries remained poor and rich countries remained rich

for generations. Now societies can develop skills and wealth in a much

shorter time. In less than 40 years, Singapore went from developing

country to developed country status. Taiwan and South Korea are also

good examples. Globalization has leveled the playing ground for smaller

companies. What matters in the global economy is not simply size; it is

other intangible factors such as nimbleness, reputation and the ability to

innovate.

At the same time, the more global we become, the more tribal is our

behavior. John Naisbitt, author of Global Paradox, has argued that the

more we become economically interdependent, the more we become

possessive about our core basic identity. Fearing globalization and, by

implication, the imposition of a western (predominantly American) cul-

ture, many countries have become paranoid about preserving their dis-

tinctiveness and identity.

Typically, in the process of globalization of companies evolves

through distinct stages.

In the first stage, companies normally tend to focus on their domestic

markets. They develop and strengthen their capabilities in some core

areas.

In the second stage, companies begin to look at overseas markets

more seriously but the orientation remains predominantly domestic. The

various options a company has in this stage are exports, setting up ware-

houses abroad and establishing assembly lines in major markets. The

company gets a better understanding of overseas markets at low risk, but

without committing large amounts of resources.

110 Goa ls

In the third stage, the commitment to overseas markets increases. The

company begins to take into account the differences across various mar-

kets to customize its products suitably. Different strategies are formed

for different markets to maximize customer responsiveness. The compa-

ny may set up overseas R&D centers and full-fledged country or region

specific manufacturing facilities. This phase can be referred to as the

multinational or multi-domestic phase. The different subsidiaries largely

remain independent of each other and there is little coordination among

the different units in the system.

Finally, the transnational corporation emerges. Here, the company

takes into account both similarities and differences across different mar-

kets. Some activities are standardized across the globe, while others are

customized to suit the needs of individual markets. The firm attempts to

combine global efficiencies, local responsiveness and sharing of

knowledge across different subsidiaries. A seamless network of subsidi-

aries across the world emerges. It is very difficult to make out where the

home country or headquarters is.

(See also: COMPARATIVE ADVANTAGE, GLOBAL LEVERAGE, STRATEGIC

ADVANTAGE)

Goals Goals represent desired future states of organizations. Goals should not

be confused with objectives. Since goals represent the end state, they are

more long term oriented. Objectives represent the building blocks of the

goal and are more short term oriented.

(See also: LONG TERM OBJECTIVES)

Golden Handcuffs Golden handcuffs refer to deferred compensation, incentives and attrac-

tive retirement plans to boost employee loyalty and motivation levels

especially among senior level positions. Retaining good employees has

become one of the major concerns of any organization and golden hand-

cuffs is one way of doing so. A good example is employee stock options.

(See also: GOLDEN HELLO, GOLDEN KEY)

Govindarajan , V I JA Y 111

Golden Handshake Refers to a large cash sum, part of which may be tax free, paid to em-

ployees who are forced to leave before the end of a service contract. It is

a method to reduce the number of employees in the organization and

reduce salary expenses.

Golden Hello A payment made to a senior executive as an incentive to join a company.

This payment is meant to compensate for the benefits forgone by leaving

the previous employer and for the additional risks the executive is tak-

ing.

Golden Key The key, which unlocks golden handcuffs, in order to pay off people not

thought to be worth keeping.

(See also: GOLDEN HANDCUFFS)

Golden Parachute A provision that enables senior managers to exit from a company with

handsome separation packages in case of events such as a hostile takeo-

ver.

Govindarajan, Vijay Well known for his pioneering book, Strategic Cost Management coau-

thored with John K Shank. Govindarajan has also done cutting-edge

work in the areas of learning, innovation and globalization. His most

recent book, Ten Rules for Strategic Innovators — From Idea to Execu-

tion co-authored with Chris Trimble in 2005, provides a blueprint for

business innovation.

(See also: STRATEGIC COST MANAGEMENT, STRATEGIC INNOVATION)

112 Handy , C HA RLE S

H

Handy, Charles One of the most respected gurus in business history, Handy was one of

the first to forecast the rise of outsourcing and a decline in the numbers

of people employed as permanent workers. He is also the author of

many business books, notably Understanding Organizations and Inside

Organizations.

Hedgehog Principle A term coined by Jim Collins in his book, Good to Great. The fox

knows many things, but the hedgehog knows only one big thing, namely

survival. This principle avers that a company should be like a hedgehog,

not like a fox.

In this context, a company must answer three questions:

(a) What can we be the best in the world at?

(b) What can we be passionate about?

(c) What is our one economic driver?

Thinking like a hedgehog can help to bring a lot of focus into a com-

pany’s plans and thinking.

Herfindahl Index A measure of how concentrated an industry is, or how intense is the ri-

valry within it. The Herfindahl index is calculated as:

where s is the market share of firm i in the market, and n is the num-

ber of firms.

The Herfindahl Index (H) has a value that is always smaller than one.

A small index value indicates intense competition with no dominant

Herzbe rg , FRE DE R IC K 113

players. If all firms have an equal share, the reciprocal of the index

shows the number of firms in the industry. When firms have unequal

shares, the reciprocal of the index indicates the “equivalent” number of

firms in the industry.

The major benefit of the Herfindahl index, compared to the CONCEN-

TRATION RATIO is that it gives more weight to larger firms because of the

squaring. Take, for instance, two cases in which the six largest firms

produce 90% of the output: We will assume that the remaining 10% of

output is divided among 10 equally sized producers.

Case 1: All six firms produce 15%.

Case 2: One firm produces 80% while the five others produce 2%

each.

The six-firm CONCENTRATION RATIO would equal 90% in both cases,

but in the first case competition would be fierce while in the second case

we have a monopoly for all practical purposes. The Herfindahl index

captures this important information. In case 1, H = 0.1350 and in case 2,

H = 0.6420.

(See also: OLIGOPOLY)

Herzberg, Frederick Well-known for his two-factor theory of job satisfaction. According to

Herzberg, every organization has a set of hygiene factors like working

conditions, salary, etc. The absence of hygiene factors creates employee

dissatisfaction but their presence does not improve satisfaction. Her-

zberg found five factors in particular that were strong determinants of

job satisfaction: achievement, recognition, the work itself, responsibility

and advancement. Motivators (satisfiers) are associated with a long-term

positive impact on job performance. In contrast, hygiene factors produce

only short-term changes in job attitudes and performance which quickly

fall back to their previous level.

Although Herzberg has been criticized for drawing conclusions about

workers as a whole based on a study of accountants and engineers, his

theory has proved very robust. Many firms have successfully put his

methods into practice. Part of the reason for the popularity of his theory

is that Herzberg has offered a practical approach to improving motiva-

114 H ie rarchi ca l O RG A NIZA T ION

tion through job enrichment by redesigning workplaces and work

systems.

(See also: MOTIVATION)

Hierarchical Organization A traditional organization in which authority flows from the person in

charge through various levels of supervision, while information and re-

quests for approval travel upward through the same channels. As the size

of operations increases, top managers become the bottlenecks. Today,

many business organizations are trying to become flat by delegating

considerable decision making to lower levels of management. This dele-

gation is facilitated by information technology and better methods of

communication that make it possible to operate with much wider spans

of control than was possible earlier.

(See also: BUREAUCRACY, FLAT ORGANIZATION)

Hostile Bid A bid for taking over a company despite resistance by the takeover tar-

get. Hostile bids can lead to acrimony, a war of words and unpleasant

situations where sentiments run high and unreasonably high bids often

get made. Another problem with hostile bids is that key employees may

feel unhappy. Hostile bids are particularly avoidable in high tech indus-

tries, where acquisitions are often made to get access to a ready pool of

talent.

(See also: ANTI-TAKEOVER STRATEGY)

Human Capital The degree of skill and training embodied in labor as a factor of produc-

tion. The value of human capital can be increased by careful recruitment

and investment, typically in education and training. Human capital is a

major asset in knowledge based industries such as computer software

and pharmaceuticals.

Hygiene Factors Elements of the work environment that have the potential to cause dis-

satisfaction, if not adequately provided. These include salary and work-

ing conditions. These aspects are taken for granted. By providing them,

Hygiene FA C TO RS 115

motivation levels will not increase. But if they are not provided, em-

ployees will be unhappy.

(See also: HERZBERG, FREDERICK, MOTIVATION)

116 Independent D IRE C TO R

I

Independent Director An outside, or non-executive, director who does not have interests that

affect the exercise of independent judgment while taking decisions on

behalf of the company. A sufficiently large number of independent di-

rectors on the board is considered desirable from the point of view of

corporate governance. In the US, institutions like New York Stock Ex-

change and the Securities and Exchange Commission have prescribed

various tests of independence. But independence alone does not guaran-

tee good corporate governance. Many of the American companies which

collapsed at the turn of the 20th century, including Enron, had a large

proportion of independent directors. The real issue is the willingness and

ability of independent directors to impose checks and balances on a

company’s top managers. That calls for both competence and the right

mental predisposition.


Industry A collection of firms that offer similar products or services, namely

products that customers perceive to be direct alternatives for one anoth-

er*. A strategically distinct industry encompasses products where the

sources of competitive advantage are similar. Many discussions of com-

petition are based on very broad industry definitions, which are not

meaningful definitions because the nature of competition and the sources

of competitive advantage vary a great deal within them. Consider a firm

in the PC industry. Does the industry include printers? Color monitors?

Modems? These are the kinds of questions that executives face in defin-

ing industry boundaries.


1990.

Indust ry 117

Defining industry boundaries enables executives to determine the

arena in which their firm is competing, and the key success factors —

and address some important questions:

Which part of the industry corresponds to the firm’s goals?

What are the key success factors in that part of the industry?

Does the firm have the skills needed to compete effectively? If not,

can it build those skills?

Does the company have the skills to exploit emerging opportunities

and counter future threats?

The industry structure may change over time because of the follow-

ing reasons:

Demand patterns may change due to demographic factors, changes in

lifestyle, tastes, social conditions, substitutes, complementary prod-

ucts, market penetration, product innovation, etc. New buyer seg-

ments may emerge while existing segments may disappear.

As buyers become more knowledgeable, the scope for differentiation

reduces and products tend to become commodities.

The uncertainties with regard to technology, buyer segments, indus-

try growth and industry size may reduce over time. Simultaneously,

there is a great degree of imitation as successful strategies are imitat-

ed and failed ones abandoned.

Because of diffusion of knowledge, proprietary advantages tend to

erode over time. The rate of diffusion of proprietary technology,

however, depends on the particular industry.

Accumulation of experience can often result in declining unit costs.

An early mover may be able to reap significant benefits.

Changes in cost or quality of inputs can affect industry structure.

Product innovations can expand the market, promote industry growth

and create opportunities for product differentiation. They can also

create mobility barriers.

Marketing innovations can influence industry structure. New adver-

tising media and distribution channels can facilitate the targeting of

new customers and increase the scope for differentiation. Sometimes,

marketing innovations may also cut costs drastically.

118 Indust ry S HA K E OUT

Process innovations may influence the economies of scale, propor-

tion of fixed costs and the degree of vertical integration. This can

make the industry more or less capital intensive.

Changes in suppliers and customers’ industries can result in changes

in industry structure.

(See also: BLUE OCEAN STRATEGY, FIVE FORCES MODEL, INDUSTRY

SHAKEOUT, VALUE INNOVATION)

Industry Shakeout A discontinuity or turning point, as the industry goes through a major

upheaval. Some of the greatest risks which companies face are during

times when an industry is witnessing a shakeout. George S Day* has

provided some useful insights on industry shakeouts. Day refers to two

kinds of shakeout: the boom-and-bust syndrome, and the seismic-shift

syndrome.

The boom-and-bust syndrome typically applies to emerging markets

and cyclical businesses. The dot com industry in the late 1990s is a good

example. During the boom, many companies entered the industry lead-

ing to excess capacity. As competition intensified and prices fell, many

players found the going tough. The successful companies focused on

operational excellence and cut costs ruthlessly.

The seismic-shift syndrome is more applicable to mature industries.

Such industries enjoy prosperity for years together in a protected envi-

ronment, with minimal competition and decent margins. A seismic shift

takes place when these factors disappear. Deregulation, globalization

and technological discontinuities are some of the factors that can cause a

seismic shift. A good example is the pharmaceutical industry before the

emergence of managed health care. In a physician driven environment,

price was not an important factor. Physicians did not hesitate to pre-

scribe expensive medicines which drug companies gleefully marketed.

The emergence of health maintenance organizations† (HMOs) has re-

duced the importance of physicians. HMOs recommend the use of ge-

* Day, George S., “Strategies for Surviving a Shakeout,” Harvard Business

Review, March-April 1997, pp. 92-102.

† Health maintenance organizations provide health insurance coverage through

hospitals, doctors, and other providers with which the HMO has a contract.

Indust ry S HA K E OUT 119

nerics wherever possible and control costs wherever they can. Drug

companies are struggling to adjust to this new environment.

Managers need to develop antennae that can sense a shakeout before

their competitors do so. SCENARIO PLANNING can focus attention on

change drivers and force the management team to imagine operating in

markets which may bear little resemblance to the existing ones. Studying

other markets which have already seen a shakeout, and which are similar

in terms of structure and are susceptible to the same triggers, can also be

of great help. Examining how the same industry is evolving in other

countries and regions can also provide useful insights.

Day refers to survivors from a boom and bust shakeout as adaptive

survivors and those from a seismic shift syndrome as aggressive amal-

gamators.

Adaptive survivors impose discipline in operations and respond effi-

ciently to customer needs and competitor threats. Dell is a good example

of an adaptive survivor. During the initial shakeout in the PC industry in

the 1980s, Dell survived due to its lean build-to-order direct selling

model. In the early 1990s, Dell stumbled when it entered the retail seg-

ment and its notebook computers failed to get customer acceptance.

Founder Michael Dell did not hesitate to make sweeping changes in the

organization. He put in place a team of senior industry executives to

complement his intuitive and entrepreneurial style of management. Dell

became the largest manufacturer of PCs in the world, emerging as an

adaptive survivor in an industry, which saw the exit of several players.

Aggressive amalgamators show an uncanny ability to develop the

right business model for an evolving industry. They usually make one or

more of the following moves: rapidly acquire and absorb smaller rivals,

cut operating costs and invest in technologies that increase the minimum

scale required for efficient operations. Mittal Steel is a good example.

The company’s appetite for acquisitions and global consolidation is leg-

endary.

For companies which find it difficult to become adaptive survivors or

aggressive amalgamators, there are alternative strategies to survive a

shakeout. These include becoming niche players, joining hands with

other small players through strategic alliances, and, finally, selling out

and getting the best price possible.

(See also: STRATEGIC INFLECTION POINT)

120 Innovat i on

Innovation “The effort to create purposeful focused change in an enterprise’s eco-

nomic or social potential” (Peter Drucker).

The most effective way to compete in a changing environment is to

churn out new products and services rapidly according to the needs of

the market. Innovation helps a company to stay ahead of the pack and

move into less crowded areas. No wonder increasing attention is now

being paid to innovation in today’s era of global competition. Very often

innovation is misunderstood as invention. Invention is creating new

things. But innovation is all about taking new ideas to the market place.

History is full of examples of many companies that developed a new

technology or product but failed to take it to the market. For example,

Xerox developed many of the concepts associated with the modern day

PC but failed to make a commercial proposition out of them.

Innovation must begin with an analysis of opportunities in a system-

atic and organized way. The starting point in innovation is identifying

the scope for improvement with respect to customers, suppliers, and in-

ternal processes. Innovations must be market focused.

Opportunities to innovate are provided by:

New customer segments which are just emerging;

Customer segments that existing competitors are neglecting or not

serving well;

New customer needs which are emerging; and

New ways of producing and delivering products to customers.

In his book Innovation and Entrepreneurship, Drucker has listed

seven sources of opportunity for innovative organizations. Four are in-

ternal to the enterprise and three external. In order of increasing difficul-

ty and uncertainty, they are as follows:

Unexpected Success or Failure

Understanding the reasons for the unexpected success or failure of a

product generates opportunities to innovate. Take the case of IBM which

wanted to sell accounting machines to banks but discovered that it were

libraries that wanted to buy them. IBM’s Univac, designed for advanced

scientific work, became popular in business applications such as payroll.

Innovat ion 121

Unexpected product failures can also give companies new ideas that

may help them to come up with something that the market likes.

Incongruity between What Actually Happens and What was Sup-

posed to Happen

If things are not happening as they should, there is scope to innovate.

For example, in industries which are growing but where margins are

falling, there is tremendous potential for innovation. Similarly, when

companies continue to work at improving something in order to reduce

costs but fail to do so, an innovator can look at other options to cut costs.

This is exactly how container ships emerged — by focusing on the

ship’s turnaround time rather than its fuel efficiency.

Deficiencies in a Process That are Taken for Granted

If a process is inefficient or suffers from a big gap, there is scope to in-

novate. Sometimes a process that is widely used may have certain defi-

ciencies. By thinking out of the box, an innovator may come up with a

new idea that removes this deficiency. Pilkington’s float glass manufac-

turing process, for example, paved the way for the development of glass

with a smooth finish.

Changes in Industry or Market Structure That Catch Everyone by

Surprise

The emergence of new, fast-growing segments provides scope for inno-

vators to serve their needs. The success of the small floppy disk drive

manufacturers had much to do with the emergence of new customer

segments who wanted smaller and lighter disk drives. According to

Drucker*, “New opportunities rarely fit the way the industry has always

approached the market, defined it, or organized to serve it. Innovators

therefore have a good chance of being left alone for a long time.”

Demographic Changes

Demographic changes result in new wants and new lifestyles that call for

new products. The Japanese pioneered robotics because they anticipated

* Drucker, Peter F., “The Discipline of Innovation”, Harvard Business Review,

November-December 1998, pp. 149-157.

122 Innovator ’ s D I LE MMA

the rising levels of education and the consequent shortage of blue-collar

workers. In recent years, the ageing of Japan and Europe has put pres-

sure on governments there to control health care expenses. This has

fuelled the rise of generic drugs. Demographic changes provide innova-

tion opportunities that are the most rewarding and the least risky, as such

trends are easier to predict.

Changes in Perception

New needs can be created by changing the common perception of peo-

ple. For example, a booming industry has emerged for exercise and jog-

ging equipment by capitalizing on people’s concern for health and fit-

ness.

Changes Brought About by New Knowledge

New knowledge can be used to develop innovative products. Innova-

tions of this sort usually combine many sorts of knowledge. The devel-

opment of the computer, for example, was facilitated by a combination

of binary arithmetic, calculating machine, punch card, audion tube, sym-

bolic logic and programming. Such innovations are also risky because

there is usually a gap between the emergence of new knowledge and its

conversion into usable technology and another gap before the product is

launched in the market. Drucker has underlined*, “Contrary to almost

universal belief, new knowledge is not the most reliable or most predict-

able source of successful innovations. For all the visibility, glamour and

importance of science-based innovation, it is actually the least reliable

and least predictable one.”

(See also: INNOVATOR’S DILEMMA)

Innovator’s Dilemma A term coined by the innovation guru, Clayton Christensen. Many suc-

cessful companies fail not because they neglect customers but because

they take them too seriously and continue to pamper them by adding

more features. An excessive focus on satisfying existing customers pre-

vents the current market leaders from creating new markets and from

* Drucker, Peter F., Innovation and Entrepreneurship, Harper Business Publica-

tions, 1986.

In trap reneursh ip 123

finding new customers for the products of the future. In the process of

adding new features to please existing customers, the product or service

becomes overpriced, going beyond the reach of customers who might be

looking for a simpler, cheaper product.

According to Christensen, many successful companies face the inno-

vator’s dilemma. Keeping close to existing customers may make sense

in the short run. But long term growth and profitability need a totally

different approach. When successful players are not prepared to embrace

a new business model, they lose market share to more nimble or entre-

preneurial companies, which are not encumbered by any baggage.

For example, when PCs entered the market, they were not superior to

minicomputers. But mini computer manufacturers like Digital Equip-

ment lost market share rapidly when standalone workstations and net-

worked desktop computers emerged and successfully targeted a totally

new customer segment.

(See also: CHRISTENSEN, CLAYTON M., INNOVATION)

Institutional Investor A financial institution with shareholdings in listed companies. Institu-

tional investors include pension funds, investment trusts, mutual funds

(or unit trusts), insurance companies and banks managing investment

portfolios for clients. Institutional investors across the world play an

increasingly important role in equity markets. Through the buying and

selling decisions they make, institutional investors not only move mar-

kets but also have an impact on corporate governance.


Intrapreneurship Intrapreneurship is the practice of developing entrepreneurial skills and

approaches by or within a company. In companies which encourage in-

trapreneurship, employees are encouraged to behave as entrepreneurs by

being given enough freedom and resources to experiment with new ide-

as.

(See also: ENTREPRENEURSHIP)

124 Japanese S TY LE OF MA NA G E ME NT

J

Japanese Style of Management The success of Japanese companies in the 1970s and 1980s drew

world‘s the attention towards their management practices. In many

ways, the Japanese style of management is different from the western

style. and has various distinctive elements:

A long term perspective in which establishing a strong market posi-

tion is more important than short-term profit.

A highly educated, highly trained workforce that is encouraged and

empowered to improve production methods and quality.

Lean production, eliminating wastage of materials and time.

Continuous improvement.

Decision making by consensus.

(See also: KAIZEN, KANBAN, LEAN THINKING, MCKINSEY 7-S FRAME-

WORK)

Joint Venture A joint venture involves two or more parties coming together to under-

take an economic activity. The parties typically agree to create a new

entity together by jointly contributing equity capital and share the reve-

nues and expenses. The venture can be only for one specific project, or

for a continuing business relationship. Multinationals often enter emerg-

ing markets by forming joint ventures. Such an arrangement not only

helps them to benefit from the expertise of the local partner in managing

the local environment but also minimizes risk, especially political risk.

(See also: POLITICAL RISK, STRATEGIC ALLIANCE)

Judo Strategy A term coined by David Yoffie of Harvard Business School judo strate-

gy effectively means avoiding direct confrontation and leveraging the

strength of the opponent to create space for oneself. Judo strategy can

help small companies enter new markets and defeat stronger rivals.

Just – I N- T I ME 125

Through speed, flexibility, and leverage, new players can occupy uncon-

tested ground and turn the strengths of dominant players against them.

Consider Netscape, which was set up in 1994 and became the hottest

company in the tech world. Netscape’s flagship product, the Navigator

Web browser, dominated its market from day one. And Netscape made a

highly successful IPO in August 1995, just sixteen months after its

founding. But Netscape’s fall was equally spectacular and precipitous

when it decided in favor of a head-to-head confrontation with Microsoft.

In late 1995, Microsoft launched aggressive moves against Netscape.

Under relentless attack, Navigator’s market share soon began an irre-

versible decline. By the end of the decade, Microsoft had started to dom-

inate the browser business and Netscape survived only as a division of

AOL. In contrast, Palm Computing which first shipped the Pilot, a

handheld electronic organizer in April 1996, succeeded for much longer

by avoiding head-to-head battles with entrenched leaders.

In many competitive battles the answer is not to oppose strength with

strength, as Netscape ruinously chose to do. Instead, the challenger

should study the competition carefully, avoid head-to-head battles and

use the opponent’s strength to its advantage. This is the essence of judo

strategy.

Challengers can be at a severe disadvantage when entering a market

where a powerful incumbent holds sway. Judo strategy can come in

handy in such circumstances.

Just–in-Time See LEAN MANUFACTURING.

126 Kai zen

K

Kaizen A Japanese term meaning continuous improvement. In the 1960s, Japa-

nese car makers were far behind their Western counterparts in quality.

Through slow but ongoing improvements in their manufacturing tech-

niques, the Japanese improved their quality and operational efficiency

and became global leaders in various industries. The basic thinking be-

hind Kaizen is that small, ongoing improvements over a period of time,

can lead to a significant competitive advantage.

(See also: JAPANESE STYLE OF MANAGEMENT, LEAN MANUFACTURING)

Kanban A technique for controlling the flow of inventory through a manufactur-

ing system, which is closely linked to the just-in-time system. The term

in Japanese means a card or signal. In its simplest form, the technique

may be viewed as a card used by operators for instructing their suppliers

to provide more material. Kanban “pulls” inventory through the manu-

facturing process and forms the core of a just-in-time production system.

(See also: JAPANESE STYLE OF MANAGEMENT)

Kaplan and Norton Robert S. Kaplan* and David P. Norton† are famous for developing the

BALANCED SCORECARD‡ in 1992. They emphasize the importance of not

focusing over much on financial measures of performance.

Instead, the balanced score card has four perspectives:

* Robert Kaplan is the Marvin Bower Professor of Leadership Development at Har-

vard Business School.

† David Norton is a cofounder, president, and CEO of BSCol.

‡ Kaplan, R. S. and Norton, D. P., Balanced Scorecard: Translating Strategy

into Action, Harvard Business School Press, 1996.

Khanna , TA RUN 127

Customer perspective;

Process perspective;

Innovation and learning perspective;

Financial perspective.

The main idea of the balanced scorecard is that one needs to measure

and manage all of these indicators in a balanced way instead of focusing

solely on financial performance. Kaplan and Norton have also developed

the concept of ACTIVITY BASED COSTING.

Keiretsu A form of organization in Japan in which a group of companies work

closely together, effectively becoming a vertically integrated enterprise.

The companies may be held together by cross-ownership, long term

business dealings, directorship on each other’s board, as well as social

ties. These vertical ties improve trust and facilitate the smooth flow of

goods and services across the different entities of a Keiretsu. In recent

times, as companies have restructured themselves and tried to become

leaner and more focused, Kirietsu ties in Japan have weakened, while

arm’s length market based relationships have become stronger.


Kepner-Tregoe* Matrix

A structured methodology for identifying and ranking all factors critical

to a decision. The aim is to minimize the influence of conscious and un-

conscious biases. This methodology can be applied to nearly all deci-

sions, ranging from product marketing to selection of the site for a new

plant. The analysis helps in evaluating alternative courses of action and

optimizing the ultimate results based on explicit objectives.

Khanna, Tarun A professor at the Harvard Business School who has done extensive

research in corporate strategy, focusing particularly on business houses

* Kepner-Tregoe provides consulting and training services to organizations

throughout the world. Kepner-Tregoe specializes in using systematic process approaches to resolve business issues and achieve peak people and project per-

formance.

128 Knowing-Doing G A P

and conglomerates in emerging markets. He seeks to understand how to

build world-class companies from emerging markets worldwide. Much

of his work is focused on China and India, and involves identifying best

practices for local entrepreneurs and multinationals operating in each of

these two countries.

Khanna’s work has been published extensively in academic journals,

including the Journal of Finance, the European Economic Review, the

Strategic Management Journal, the Academy of Management Journal,

Organization Science and Management Science. He has also been pro-

filed in newsmagazines around the world, including The Wall Street

Journal, The Economist, the Far Eastern Economic Review, and numer-

ous newspapers in China, India and elsewhere in Asia and Latin Ameri-

ca. He has been a frequent commentator on China and India and has

featured on several television programs.

Khanna’s two articles written jointly with another Harvard Business

School professor, Krishna Palepu, “The Right Way to Restructure Con-

glomerates in Emerging Markets” and “Why Focused Strategies May Be

Wrong for Emerging Markets” are widely cited in all strategy literature.

(See also: PALEPU, KRISHNA G.)

Knowing-Doing Gap A concept which holds that knowing amounts to little without doing.

According to Jeffrey Pfeffer and Robert Sutton, who teach at Stanford,

the gap between knowing and doing is more important than the gap be-

tween ignorance and knowing. Today there are entities such as consult-

ing firms who specialize in collecting and disseminating knowledge

about management practices. Knowledge workers are also mobile and

move from one organization to another. So better ways of doing things

cannot remain secret for long. In most cases, however, the knowledge

that is successfully transferred in various ways is not used for taking

action. According to Pfeffer and Sutton, the ability to minimize the

knowing-doing gap is the defining characteristic of well managed com-

panies.

(See also: WILLPOWER)

Know ledge MA NA G E ME NT (K M) 129

Knowledge Management (KM) A discipline which is becoming increasingly important in today’s

knowledge economy. It refers to the retention, exploitation and sharing

of knowledge in an organization in order to generate sustainable compet-

itive advantage. The crux of knowledge management is the leveraging of

knowledge which resides in individuals for the benefit of the organiza-

tion as a whole. The biggest challenges arise in the case of tacit

knowledge which is often difficult to extract from individuals. KM has

to strike the right balance between information technology and human

intervention. The key to effective KM is to get into an action mode by

actually using knowledge to create value. This calls for embedding

knowledge into business processes wherever possible. KM really takes

off when knowledge flows in as and when knowledge workers need it.

While many sophisticated KM tools are available today, the key to suc-

cessful KM is an enabling culture that encourages learning and

knowledge sharing.

(See also: BIAS FOR ACTION, KNOWING-DOING GAP)

130 Latera l TH INK ING

L

Lateral Thinking Lateral thinking, a term coined by the Maltese psychologist Edward de

Bono, effectively means solving problems by approaching them indi-

rectly from diverse angles instead of concentrating on any one approach

at length. Lateral thinking involves reasoning that is not immediately

obvious and ideas that may not be obtainable by using only traditional

step-by-step logic. Lateral thinking also implies shifting of thinking pat-

terns away from entrenched or predictable thinking to new, or unex-

pected, ideas.

(See also: BRAINSTORMING, INNOVATION)

Law of Conservation of Profits A principle coined by Clayton CHRISTENSEN of Harvard Business School

which holds that the total profit along an industry value chain does not

change. What happens is that profit moves along the value chain. Some

parts of the value chain become more attractive and others less so over

time as both technology and markets undergo a change. Smart compa-

nies understand the industry dynamics and occupy the sweet spot on the

value chain. This is the place where there is still scope to improve the

performance of the product or service, differentiate it from competitors,

and charge a premium. In the PC industry, for example, Microsoft and

Intel have occupied sweet spots on the value chain. They have kept com-

ing up with improved versions of their products (software and chips,

respectively) and the market buys them as they deliver enhanced fea-

tures and better performance.

(See also: VALUE MIGRATION)

Law of Unintended Consequences Things do not often happen the way we expect them to. Leaders frame

policies with good intentions but at the end of the day, the consequences

of these policies are very often unintended. Leaders should appreciate

Law O F UN INTE N DE D C ONS E Q UE NC E S 131

this when they take a decision or frame a policy. A few examples will

illustrate the point.

One of the most important decisions in corporate finance relates to

capital structure. Managers often prefer equity to debt as equity is per-

ceived to be less risky. Debt involves mandatory principal and interest

payments. In the case of equity, on the other hand, there is no compul-

sion to pay dividends. And rarely, if ever, is equity capital (except for

small portions which are bought back) returned to investors. But as equi-

ty is less risky, managers tend to take things easy and do not use the cap-

ital efficiently, often landing the company in trouble. Indeed, this is why

many dotcoms folded up in the early 2000s. On the other hand, because

debt is more risky companies tend to be more careful with the debt they

raise. Consequently, debt often brings in quite a bit of discipline and

leads to better financial performance.

Inventory is another good example. Managers routinely keep inven-

tory as a buffer against uncertainty. Inventory comes in handy if a sup-

plier is late in delivering parts or delivers defective parts, or if a machine

in the plant breaks down. In just-in-time (JIT) production systems, very

little inventory is maintained. The entire plant comes to a stand still if

something goes wrong. So it is potentially risky. But companies like

Toyota are aware of the possible consequences of things going wrong in

a JIT system. So they make sure that suppliers always make delivery in

time, always maintain quality and ensure all the machines are main-

tained well. On the other hand, in companies which hold a lot of inven-

tory, quality control tends to be slack, vendor management highly inef-

fective and maintenance of machines very poor. In other words, holding

inventory undermines the effectiveness of the plant. Instead of acting as

a buffer, the inventory creates problems.

In short, decisions have to be made after carefully considering vari-

ous implications. Things give a certain appearance on the surface

but, deep down, matters could be different. If the deeper issues are

overlooked, the most logical decisions will lead to unintended conse-

quences.

(See also: DECISION MAKING)

132 Leadership

Leadership A much discussed and widely written about term. A good definition of

leadership is offered by W. C. H. Prentice* in his 1961 article in Har-

vard Business Review: “Leadership is the accomplishment of a goal

through the direction of human assistants. The man who successfully

marshals his human collaborators to achieve particular ends is a leader.

A great leader is one who can do so day after day and year after year in a

wide variety of circumstances.”

According to Stephen COVEY, “Leadership is communicating people’s

worth and potential so clearly that they come to see it in themselves.

People must feel an intrinsic sense of worth — that is, that they have

intrinsic value — totally apart from being compared to others and

that they are worthy of unconditional love, regardless of behavior or

performance. Then when you communicate their potential and create

opportunities to develop and use it, you are building on a solid founda-

tion.” †

As Covey points out that various leadership theories emerged in the

twentieth century. One of the early theories was the Great-Man theory of

leadership which dominated any discussion of leadership prior to 1900.

History and social institutions are shaped by the leadership of great men

and women. Dowd (1936) maintained that there is nothing like leader-

ship by the masses. Individuals in every society possess different de-

grees of intelligence, energy, and moral force. They are always led by

the superior few. Leaders are endowed with superior traits and character-

istics that differentiate them from followers. Research of trait theories

addresses the following two questions:

1. What traits distinguish leaders from other people?

2. What is the extent of those differences?

According to the situational theories, leadership is the product of sit-

uational demands. Situational factors rather than a person’s heritage de-

termine who will emerge as a leader. The emergence of a great leader is

* W.C.H. Prentice is a former president of Bryant and Stratton Business Institutes in

Buffalo, New York, former president of Wheaton College in Norton, Massachu-

setts, and a former dean of Swarthmore College in Swarthmore, Pennsylvania. † Covey, Stephen R., The 8th Habit: From Effectiveness to Greatness, The Free

Press, 2004.

Leadership 133

the result of time, place and circumstances. Later, theorists began to

place a strong emphasis on situational and environmental factors. Sub-

sequently, theories of integration have been developed around persons

and situations, psychoanalysis, role attainment, change, goals and con-

tingencies.

Robert J. House* and Terence R. Mitchell† describe four styles of

leadership‡:

Supportive Leadership: The leader believes in considering the needs

of his followers, showing concern for their welfare and creating a

friendly working environment. The leader focuses on increasing

the self-esteem of people and making their jobs more interesting.

This approach works best when the work is stressful, boring or haz-

ardous.

Directive Leadership: A directive leader tells followers what needs to

be done and gives them appropriate guidance along the way, often

including schedules of specific work to be done at specific times.

Rewards may also be increased as needed and role ambiguity re-

duced. Such an approach may be used when the task is unstructured

and complex, and the follower is inexperienced.

Participative Leadership: Consulting with followers and taking their

ideas into account when making decisions and taking particular ac-

tions. This approach works best when the followers are experts, their

advice is needed and they want to give it.

Achievement Oriented Leadership: Setting challenging goals, both in

work and in self-improvement. High standards are demonstrated and

expected. The leader shows faith in the capabilities of the follower.

This approach works best when the task is complex.

* Robert J. House is a professor of management at the Wharton School of the

University of Pennsylvania, formerly of University of Toronto. His expertise lies in the area of leadership,

† Terence R. Mitchell is currently professor of Management & Organization in UW

Business School.

‡ House, R.J., Mitchell, T.R., “A Path-Goal Theory of Leadership”, Journal of

Contemporary Business, Vol. 3, 1974, pp. 81-97.

134 Leadership

According to Daniel Goleman*, executives use six leadership styles†.

The most effective leaders switch flexibly from one style to another,

depending on the circumstances.

1. Coercive leaders pursue a top down high handed approach and are

the least effective in most situations. The extreme top down decision

making kills new ideas. People don‘t feel respected. Their sense of re-

sponsibility evaporates. Unable to act on their own initiative, they lose

their sense of ownership and feel little accountability for their perfor-

mance. The coercive style should be used only with extreme caution and

in the few situations when it is absolutely imperative, such as during a

turnaround or when a hostile takeover is looming.

2. Authoritative leaders mobilize and motivate people by making it

clear to them how their work fits into a larger vision for the organization.

When the leader gives performance feedback, the main criterion is

whether or not that performance furthers the vision. The standards for

success are clear to all. Authoritative leaders give people the freedom to

innovate, experiment, and take calculated risks. The authoritative style

tends to work well in many business situations but fails when the team

consists of experts or peers who are more experienced than the leader.

3. Affiliative leaders create emotional bonds and harmony, strive to

keep employees happy and to increase loyalty by building strong emo-

tional bonds. Affiliative leaders give people the freedom to do their job

in the way they think is most effective. Affiliative leaders are likely to

take the people who report to them out for a meal or a drink, to see how

they’re doing. They will take out the time to celebrate a group accom-

plishment. They are natural relationship builders. The affiliative style is

effective in many situations but it is particularly suitable when trying to

build team harmony, increase morale, improve communication, or repair

broken trust. One problem with the affiliative style is that because of its

exclusive focus on praise, employees may perceive that mediocrity is

tolerated. And because affiliative leaders rarely offer constructive advice

* A world renowned expert in the area of Emotional Intelligence. He has written

the international best-seller book “Emotional Intelligence”.

†Goleman, Daniel., “Leadership That Gets Results”, Harvard Business Review,

March-April 2000, pp. 78-90.

Leadership 135

on how to improve, employees must figure out how to do so on their

own.

4. Democratic leaders build consensus through participation and in-

crease flexibility and responsibility by letting workers themselves have a

say in decisions that affect their goals and how they do their work. By

listening to employee’s concerns, the democratic leaders learn what to

do to keep morale high. People have a say in setting their goals and per-

formance evaluation criteria. So they tend to be very realistic about what

can and cannot be accomplished. But the democratic style can lead to

endless meetings and postponement of crucial decisions in the hope that

sufficient discussion and debate will eventually yield a great outcome.

The democratic style does not make sense when employees are neither

competent nor informed enough to offer sound advice. Such an approach

also does not make sense during a crisis.

5. Pace-setting leaders expect excellence and self-direction and set

extremely high performance standards. They are obsessive about doing

things better and faster, and demand the same from everyone around

them. If poor performers don’t rise to the occasion, these leaders do not

hesitate to replace them with people who can. The pacesetter’s demands

for excellence can overwhelm employees and their morale drops. Such

leaders also give no feedback on how people are doing. They jump in to

take over when they think people are lagging. When they leave, people

feel directionless as they’re so used to “the expert” setting the rules.

6. Coaching leaders develop people for the future. They help employ-

ees identify their unique strengths and weaknesses and consider their

personal and career aspirations. They encourage employees to establish

long-term development goals and help them conceptualize a plan for

attaining them. Coaching leaders excel at delegating, give employees

challenging assignments, are willing to put up with short-term failure,

and focus primarily on personal development. When employees know

their boss watches them and cares about what they do, they feel free to

experiment. People know what is expected of them and how their work

fits into a larger vision or strategy. The coaching style works particularly

well when employees are already aware of their weaknesses and would

like to improve their performance. By contrast, the coaching style makes

little sense when employees, for whatever reason, are resistant to learn-

ing or changing their ways. And it fails if the leader is inept at coaching.

136 Lean MA NU FA C TUR ING

In his book Good to Great Jim Collins has introduced the concept of

Level 5 leadership. This represents the highest level of leadership, and is

exhibited by an individual who blends humility with intense professional

will. Level 5 leaders are typically modest, talk little about themselves

and like to talk more about the company and the contributions of other

executives. The Level 5 leader sits on top of a hierarchy of capabilities.

Four other layers lie below. Individuals do not need to proceed sequen-

tially through each level of the hierarchy to reach the top, but to be a

full-fledged Level 5 leader requires the capabilities of all the lower lev-

els, plus the special characteristics of Level 5. Level 5 leaders are also

good at changing their style of leadership from situation to situation.

Thus, they can be extremely democratic at times. On other occasions,

they can be authoritative. Level 5 leaders are very particular about the

quality of people in their team. People in such organizations are self-

driven and the CEO does not have to spend much time trying to moti-

vate them.

(See also: EMOTIONAL INTELLIGENCE, PERSONAL EFFECTIVENESS)

Lean Manufacturing A management philosophy which focuses on reduction of the seven

wastes (over-production, waiting time, transportation, processing, inven-

tory, motion and scrap) in manufactured products. By eliminating waste

(muda), quality is improved, production time is reduced and cost is low-

ered. Lean “tools” include constant process analysis (KAIZEN), “pull”

production (KANBAN) and mistake-proofing (POKA YOKE). Lean manufac-

turing is relentlessly focused on eliminating inventory.

The key lean manufacturing principles include:

Perfect First-time Quality — quest for zero defects, revealing and

solving problems at the source.

Waste Minimization — eliminating all activities that do not add value

and safety nets, maximize use of scarce resources (capital, people and

land).

Continuous Improvement — reducing costs, improving quality, in-

creasing productivity and information sharing.

Pull Processing — pulling products from the consumer end, not push-

ing from the production end.

Lean TH INK ING 137

Flexibility — producing different mixes or greater diversity of prod-

ucts quickly, without sacrificing efficiency at lower volumes of pro-

duction.

Long Term Relationship with Suppliers — building and maintaining a

long term relationship with suppliers through collaborative risk shar-

ing, cost sharing and information sharing arrangements.

Lean Thinking Lean thinking is a broader concept compared to lean manufacturing. It is

basically about getting the right things, to the right place, at the right

time, in the right quantity while minimizing waste and waiting time and

being flexible and open to change. A term coined by James P. Womack

and Daniel T. Jones, lean thinking provides a way to specify value, se-

quence value-creating actions in the best way, conducting such activities

without interruption whenever someone requests them, and performing

them more and more effectively. Lean thinking means doing more and

more with fewer and fewer resources while providing customers with

exactly what they want.

Lean thinking is the antidote to muda. Muda means “waste”, specifi-

cally any human activity which absorbs resources but creates no value:

Mistakes which require rectification;

Production of items no one wants;

Processing steps which aren’t actually needed;

Movement of employees and transport of goods from one place to

another without any purpose;

Groups of people remaining idle because an upstream activity has not

delivered on time;

Goods and services which don’t meet the needs of the customer.

Lean thinking also improves job satisfaction by providing immediate

feedback to employees on their efforts to convert muda into value. Un-

like process reengineering, it provides a way of creating new work rather

than simply downsizing in the name of efficiency.

138 L icensing

Licensing Licensing involves the transfer of some intellectual property right from

the licensor to a licensee. The right could be a patent, trademark, or

technical know-how for which the licensee pays a royalty. Multinational

companies often use licensing to lower the risk of entry into foreign

markets. Licensing is also a handy tool for companies which want to

focus managerial efforts on intangible assets such as design and brands

and outsource other non core activities.

Two major problems exist with licensing. One is the possibility that

the partner will gain experience and become a major competitor over

time. The other is that the licensor may lose control on production, mar-

keting and general distribution of its products. So a key success factor is

how the licensing agreement should be structured and implemented

carefully.

A special form of licensing is franchising, which allows the franchi-

see to sell a product or service using the principal’s brand name or

trademark in conformance with policies and guidelines laid down by the

franchiser. The franchisee pays a fee to the parent company, typically

based on the volume of sales of a defined market area.

(See also: FRANCHISE)

Long Term Objectives These are the objectives a firm would like to achieve in the long run in

terms of profitability, productivity, competitive position, employee de-

velopment, employee relations, technological leadership and public re-

sponsibility. Long term objectives should be carefully framed, consistent

with the company’s mission, understandable to employees and accepta-

ble to them, flexible enough to be modified in the light of changes in the

environment and measurable. To be able to motivate employees, these

objectives should be challenging but not impossible to achieve. The per-

formance evaluation criteria should be made clear.

(See also: GOALS, STRATEGIC PLANNING)

Loss Leader A product sold at or below cost in the hope of generating sales of other

profitable items. The method is most commonly used in retailing. Thus,

a store may heavily advertise a loss leader in order to entice customers.

Loss LE A DE R 139

The hope is that customers will probably buy other, full-priced items as

well. The term loss leader can also be used to describe a manufacturer

who prices a lead item low, knowing that the usage of the item requires

further, full-priced purchases.

140 MBO ( MA NA G E ME NT B Y OB JE C T IV E S )

M

MBO (Management By Objectives) Peter Drucker first started popularizing the term management by objec-

tives in 1954, in his book, The Practice of Management.

It involves setting objectives and then breaking them down into more

specific goals, or key result areas. MBO is a systematic and organized

approach that allows management to focus on achievable goals and to

attain the best possible results from available resources. The principle

behind MBO is to make sure that employees have a clear understanding

of the aims, or objectives, of the organization, as well as awareness of

their own roles and responsibilities in achieving those objectives.

But in recent years, this style of management has been receiving

some criticism. It has been reported that MBO triggers unethical em-

ployee behavior of distorting the system or financial figures to achieve

the targets set by their short-term, narrow bottom-line, and completely

self-centered thinking*.

Managerial Grid Model Managerial grid is a management and leadership tool introduced in 1964

by Robert R. Blake and Jane S. Mouton. The grid evaluates managers on

two dimensions:

1. The task function, or concern for production.

2. The relation function, or Concern for People.

* Castellano, Joseph F.; Kenneth Rosenzweig, and Harper A. Roehm (Summer, 2004). How corporate culture impacts unethical distortion of financial numbers:

managing by Objectives and Results could be counterproductive and contribute to a climate that may lead to distortion of the system, manipulation of account-

ing figures, and, ultimately, unethical behavior, Management Accounting Quar-terly. Retrieved on 13 November 2006. ** Blake, R. and Mouton, J., The Managerial Grid: The Key to Leadership Ex-cellence. Houston: Gulf Publishing Co., 1964.

Market DE FE NS E 141

As shown in the figure, the model is represented as a grid with con-

cern for production as the X-axis and concern for people as the Y-axis.

Each axis ranges from 1 (Low) to 9 (High). The grid comprises a 9 x 9

matrix, capturing 81 different leadership styles, e.g. country club man-

agement, team management, organizational management, impoverished

management, and authority-obedience management, etc.

The five major leadership styles are:

The impoverished style (1.1)

The country club style (1.9)

The produce or perish style (9.1)

The middle-of-the-road style (5.5)

The team style (9.9).

(See also: LEADERSHIP)

Market Defense Strategic moves that attempt to minimize or deter threatening actions by

existing or potential competitors.

142 Ma rket FO R C ORPORA TE C ONTRO L

Deterrence strategies include:

Signaling intentions to defend;

Building barriers to entry or mobility; and

Reducing market attractiveness by lowering prices.

If challengers cannot be deterred, then market defense moves can

attempt to contain them and minimize the damage.

(See also: MARKET SIGNALS)

Market for Corporate Control This refers to the market where mergers and acquisitions take place. A

well functioning market for corporate control puts pressure on manage-

ments to perform since failure to perform results in takeover bids. In

countries like USA, where the financial system and legal framework are

well developed, this market functions very effectively. Hostile takeovers

are quite common. But in many parts of the world, including Europe,

due to the intervention of the government / regulatory authorities, the

market for corporate control does not function very efficiently.

Marketing Mix How a firm implements its marketing strategy. Also known as the four

Ps:

Product (including range of pack sizes and / or flavors or colors);

Price (long-term pricing strategy and pricing method);

Place (choosing distribution channels and seeking shop distribution);

and

Promotion (branding, advertising, packing and sales promotions).

The relative importance of the different Ps is highly contextual. A

company must arrive at the optimum marketing mix to strengthen its

competitive position. In the case of services, three more Ps can be added

— people, process, physical evidence. This leads to the 7 Ps of marketing.

Market Power The degree to which a firm exercises control over its market. Wal-Mart,

for instance, has considerable market power which it leverages while

Market S IG NA LS 143

negotiating with suppliers. In India, Hindustan Lever has a similar ad-

vantage while dealing with distributors and dealers.

Market Signals Market signal refers to an action by a competitor that provides an indica-

tion of its intentions, motives, goals or internal situation. Market signals

may be a bluff, or warning, or an expression of earnest commitment.

Correct interpretation of market signals is important to compete effec-

tively. Michael PORTER has given an excellent account of market signals

in his book, Competitive Strategy:

A player can make a prior announcement of its moves to preempt

competition, to threaten a competitor who is going ahead with an ear-

lier planned move, or to elicit competitor reaction.

A firm can announce sales figures, addition to plant capacity, etc., to

influence the behavior of other firms. Often misleading data may also

be announced as part of a preemptive strategy.

A firm may openly discuss the industry, demand and price forecasts,

future capacity projection, estimates of future raw material prices,

etc. Through such announcements, a firm can try to influence the as-

sumptions of its competitors.

A firm may discuss / explain the logic of a move to its competitors. It

may also communicate its seriousness and earnestness about what it

is doing and what it is planning to do. This way the firm may be able

to preempt competition, or prevent retaliation.

It is often useful to examine the historical relationship between a

firm’s announcements and its actual moves to understand whether the

firm is a serious player or is only trying to bluff its way. Among the oth-

er issues which need careful examination are competitors’ tactics rela-

tive to what they could have done, the divergence from past goals, in-

dustry precedent, etc. Strategy formulation is usually based on implicit

and explicit assumptions about competitors. Market signals can add

greatly to a firm’s knowledge of its competitors.

(See also: COMPETITIVE MOVES, GAME THEORY, MARKET DEFENSE)

144 Maslow , A B RA HA M

Maslow, Abraham Well-known for his needs hierarchy theory of motivation. Unlike many

other behavioral scientists of his time, Maslow did not analyze and study

mental dysfunction. Instead, he tried to seek out and probe the healthiest

minds and best-balanced personalities he could find. Maslow believed in

the innate potential of human beings for goodness and recognized the

importance of developing the human capacity for compassion, creativity,

ethics, love, and spirituality. All people are born with such basic needs

as food and shelter, as well as the emotional yearnings for safety, love,

and self-esteem. But these needs are only the foundation of a pyramid of

higher aspirations. Man yearns for bread when there is no bread. But

when there is plenty of bread and the stomach is full, higher needs

emerge. And when these in turn are satisfied, new and still “higher”

needs emerge, and so on. Maslow believed altruism resulted when lower

order needs have been largely fulfilled in childhood, leading to the de-

velopment of a healthy character.


Matrix Structure A type of organizational structure which attempts to combine the best of

functional and divisional structures. The main advantages of a FUNC-

TIONAL STRUCTURE are technical specialization and efficiency. The main

advantage of a DIVISIONAL STRUCTURE is sharp business focus. A matrix

structure creates dual reporting relationships. Subordinates are assigned

both to a functional area and a project or product group. Some matrix

structures can be more complicated. For example, in a global corpora-

tion a three dimensional matrix structure might involve a functional

manager reporting to the business unit head, country head and the global

head of the function simultaneously. Because of multiple reporting rela-

tionships, the matrix structure is inherently more difficult for managers

to handle. So in recent times, companies like ABB have considerably

simplified the complex matrix structures they followed earlier.

(See also: DIVISIONAL STRUCTURE, FUNCTIONAL STRUCTURE, ORGANI-

ZATIONAL STRUCTURE)

Mayo , E LTON A N D ROE TH LI S B E RG E R , FR ITZ 145

Mayo, Elton and Roethlisberger, Fritz* Best-known for suggesting that psychological techniques and social in-

teraction hold the key to managing the relationships within social sys-

tems and to improve employee morale and productivity.

Roethlisberger and Mayo insisted that behavior of employees was

influenced as much by their role in a work group and their relationship

to their colleagues as by the promise of economic gain. They were

among the first to draw attention to the power of the informal organiza-

tion.

Mayo traced the root of many problems in the work place to the shift

from the skilled trades of the nineteenth century with their strong com-

munity ties, to the rise of unskilled, migrant laborers. Industry had effec-

tively destroyed the self-esteem of skilled tradesmen and was ill-

equipped to deal with the alienation and disaffection of blue-collar

workers, most of whom had been uprooted from their communities.

Together, Mayo and Roethlisberger conducted the famous Haw-

thorne experiments to study human motivation. The experiments ex-

posed the inadequacy of the piecework system and challenged the as-

sumption that there was a neat correlation between pay levels and

productivity. The experiments also exposed the complex way in which

the relationships between supervisors and workers could affect output.

In the first set of tests, known as the “illustration experiments”,

workers were divided into two groups — a test group in which the

workers were submitted to increasing amounts of light and a control

group, which worked under a constant light intensity. Contrary to expec-

tations, productivity increased in both groups. The workers seemed to be

responding more to the attention they were receiving from management

than to any actual change in working conditions. This response of the

workers was called “the Hawthorne Effect”.

In the last set of investigations, known as the Bank Wiring Observa-

tion Room experiments, the room was staffed with 14 workmen, paid

according to a group piecework system. The more components they

turned out, the more money they made. So it was logical to expect that

the most efficient workers would put pressure on the slower workers to

* From the book The Essence of Competitive Strategy by David Faulkner and


146 McGregor , DOUG LA S

maintain a high level of output. This did not prove to be the case. In-

stead, the group established an unofficial output norm based on what

was considered a “fair” production quota. Workers who violated the

norm, by producing either too much or too little, were looked down up-

on by their coworkers. The informal organization dictated the output of

each worker based on its own standards of fairness and the position each

worker occupied within the work group.

In many smaller organizations, many of the rules of the work place

remained implicit, not only the operating rules and standards of perfor-

mance, but also the rules of communication, that is, to whom one was

supposed to go for help. People were bound together by relations that

had nothing to do with what they were supposed to be doing. These rela-

tions seemed to be important, not only for achieving the objectives of the

organization but also for obtaining the cooperation of people.


McGregor, Douglas An American psychologist whose book The Human Side of Enterprise

categorized managers into two types: Theory X and Theory Y. Many

managers assume people to be work-shy and motivated primarily by

money. These are Theory X managers. In contrast, Theory Y managers

assume that workers look to gain satisfaction from employment. If

achievement levels are low, managers must ask whether they are provid-

ing the right work environment. In other words, the Theory Y manager

assumes that the blame for poor workforce performance lies with the

management rather than the workers themselves.

The Theory X manager assumes the following:

Workers are motivated by money.

Unless supervised closely, workers will under-perform.

Workers will only respect a tough, decisive boss.

Workers have no wish or ability to help make decisions.

The Theory Y manager assumes the following:

Workers seek job satisfaction no less than managers.

If trusted, workers will behave responsibly.

Low performance is due to dull work or poor management.

People have the desire and right to take part in decision making.

McKinsey 7- S FRA ME WORK 147

McGegor was also against the traditional pay-for-performance con-

cept. He was convinced that money could not substitute an environment

that was conducive to motivation. McGregor recognized the tremendous

improvements in working conditions since the turn of the century at all

levels of the corporation. Drawing on Maslow’s hierarchy of needs, he

argued that by satisfying the safety and security needs of its employees,

companies had created higher-order needs. The focus had to shift to sat-

isfying those higher needs.

McGregor’s work is not completely original. Theory X is derived

from the work of F. W. Taylor and from Adam Smith’s notion of “eco-

nomic man”. Theory Y stems clearly from Mayo’s human relations ap-

proach and Maslow’s work on human needs.

(See also: MOTIVATION, MAYO, ELTON AND ROETHLISBERGER, FRITZ)

McKinsey 7-S Framework* An analytical framework developed by Mckinsey consultants, Richard

Tanner Pascale and Anthony G Athos based on their study of well man-

aged Japanese companies, which looks at seven key aspects of an organ-

ization:

1. Strategy: The path chosen by a company to achieve its goals. How

the organization allocates its resources to achieve its aims.

2. Structure: Describes the hierarchy of authority and accountability in

an organization. These relationships are frequently indicated in or-

ganizational charts and include organization structure, level of cen-

tralization, authority and responsibility arrangements.

3. Skills: The core competences and capabilities of the firms that allow

them to compete in the market.

4. Systems: Processes used to manage the organization, such as cus-

tomer satisfaction monitoring system, management information sys-

tems, budgetary and other control mechanisms.

5. Staff: The quality of a firm’s human resources. It refers to how peo-

ple are developed, trained and motivated.

* Tanner Pascale, Richard; and Athos, Anthony G., The Art of Japanese Man-

agement: Applications for American Executives, Warner Books, 1982.

148 McNamara , ROB E RT S .

6. Style: The leadership and operational approach adopted by the man-

agement. It also refers to the way in which a company projects itself

to the outside world.

7. Shared Values: Also known as super-ordinate goals. The fundamental

ideas around which a business is built and the things that influence a

group to work together towards a common goal.

(See also: PURPOSE-PROCESS-PRINCIPLE DOCTRINE)

McNamara, Robert S. Presided over the restructuring of Ford, the US defense department, and

World Bank, and championed a new approach to management that em-

phasized sophisticated quantitative skills and financial controls.

McNamara did more to advocate a rationalist, quantitative approach to

management than perhaps any single individual since Taylor.

McNamara’s vision encompassed both the need for financial disci-

pline and a belief in the corporate social contract. He was an earnest ad-

vocate of safety, environmental responsibility, utility, function, coopera-

tion with government, and accountability to labor.

Thanks to McNamara, systems analysis became a popular late-

twentieth century tool of scientific management. It aimed at providing

transparency by making both the analysis, and the underlying assump-

tions and calculations, available to all interested parties. Yet, as applied

by McNamara, it concentrated power in the hands of a few analytical

experts. McNamara’s bean counters wrested control of planning

from operating executives in both auto manufacturing and the armed

forces.

As time passed, it became clear that tools and techniques could not

make up for poor human judgment. Long after the Vietnam War had

ended, McNamara admitted: “We failed to recognize that in internation-

al affairs, as in other aspects of life, there may be problems for which

there are no immediate solutions.”

Merger Refers to the combination of two companies into one larger company.

Some mergers involve a cash deal while others involve exchange of

shares. A combination of the two is also possible. In many instances

a merger resembles a takeover but results in a new company name

Mintzberg , HE NRY 149

(often combining the names of the original companies) and in new

branding.

There can be various types of mergers:

Horizontal Mergers take place where the two merging companies

both produce similar products in the same industry.

Vertical Mergers occur when two firms, each working at different

stages in the production of the same product, combine together. This

is some kind of a vertical integration.

Conglomerate Mergers take place when the two firms operate in dif-

ferent industries.

Mergers must be carefully planned and implemented. Many mergers

fail to create value for shareholders because synergies identified before

the merger fail to materialize.

(See also: ANTI-TAKEOVER STRATEGY, VALUATION)

Mintzberg, Henry A leading researcher in the area of strategy, Mintzberg is a professor of stra-

tegic management at McGill University, Canada, and also holds a chair at

INSEAD. His philosophy is based on how managers actually create and

implement strategy, rather than how they should supposedly do so.

Mintzberg’s first major input came from studying managers at an

everyday level. He found that whilst the theory was that managers

should be reflective thinkers, the reality was that they were caught up in

action most of the time.

Mintzberg has been a prolific writer with more than 140 articles and

13 books to his name. His seminal book, The Rise and Fall of Strategic

Planning, criticized some contemporary practices of strategic planning

and is recommended reading for anyone who seriously wants to consider

taking on a strategy-making role within an organization. Mintzberg ar-

gues that conventional planning processes are inappropriate to the more

fluid decision-making processes characteristic of most organizations.

Along with Joseph Lampel and Bruce Ahlstrand, Mintzberg co-

authored Strategy Safari, which likens the various schools of strategy to

the different kinds of animals which one would literally see, if one were

on a safari.

150 Mi ss ion

Mintzberg’s recently published book, Managers Not MBAs, outlines

what he believes to be wrong with management education today and

how obsession with numbers and viewing management as a science ac-

tually can damage the discipline of management.

Mission The fundamental purpose that sets a firm apart from other firms of its

type and identifies the scope of its operations in product and market

terms. Mission embodies the business philosophy of the firm, conveys

its corporate image, indicates the firm’s principal product or service are-

as, and the primary customer needs the firm will attempt to satisfy. In

short, the mission statement describes the firm’s business in product,

market, and technological terms.

According to King & Cleland*, a well-designed company mission

must accomplish the following:

1. Ensure unanimity of purpose within the organization.

2. Provide a basis for using the organization’s resources.

3. Establish a general tone or organizational climate.

4. Serve as a focal point for those who can identify with the organiza-

tion’s purpose and direction and weed out people who cannot do so.

5. Facilitate the translation of objectives and goals into a work structure

involving the assignment of tasks to responsible people within the

organization.

6. Specify the organizational purpose, and the translation of this pur-

pose into goals in such a way that cost, time and performance param-

eters can be assessed and controlled.

A mission statement ensures that all employees are working towards

a common purpose, enables employees to identify better with the organ-

ization, and serves to state explicitly or implicitly the organization’s be-

liefs, values and aspirations.

In contrast, a VISION is a broad indication of the organization’s inten-

tions. The ideas and ideals embodied in the vision are often too lofty.

* See John A. Pearce and Richard Robinson Jr., Strategic Management — For-

mulation, Implementation and Control, McGraw-Hill International Edition,

2002.

Motiva t ion 151

Vision is also often unwritten. A vision becomes tangible when it is ex-

pressed in the form of a mission statement.

(See also: CORPORATE PURPOSE)

Motivation Defined variously as the will to work due to enjoyment of the work itself

or anything that leads people to achieve more than they would otherwise

do. Motivation theories hold that a motivated workforce is the key to any

organization’s success. Probably the best known theory of motivation is

the one developed by Abraham MASLOW, a behavioral scientist who pro-

posed the Hierarchy of Needs theory in 1954. According to Maslow,

human beings are motivated by unsatisfied needs. Lower needs need to

be satisfied before the higher ones become important. When “deficiency

needs” are met, other higher needs emerge and when these in turn are

satisfied, new (and still higher) needs emerge, and so on.

Physiological Needs: Physiological needs are basic needs such as air,

water, food, and sex. When these are not satisfied, we feel pain and

discomfort.

Safety Needs: Comfort and security come next. After the basic re-

quirements of survival are met, we naturally want to preserve and en-

hance what we have. We think of the security of home and family.

Social Needs: Love and belongingness follow. All of us have a desire

to belong to groups; clubs, work groups, religious groups, family, etc.

We want to be loved and accepted by others.

Esteem Needs: There are two types of esteem needs. First is self-

esteem, which results from competence or mastery of a task. Second

is the need for attention and recognition from others. Holding senior

posts in organizations and an opportunity to lead initiatives are some

sources of self-esteem for most people.

Self Actualization: In this stage, people seek knowledge, peace, self-

fulfillment and salvation.

The basic problem with Maslow’s model is that people may simulta-

neously have different kinds of needs, instead of moving sequentially

from one to the next. Moreover for many people caught in poverty, es-

pecially in third world countries, lower order needs may not be satisfied

during an entire lifetime. So the question of self-actualization simp-

152 Mu lt i D OME S T IC INDUS TRY

lydoes not arise. Then there are people who are always greedy for more

money, despite being very wealthy!

In 1969, Clayton Alderfer improvised on Maslow’s hierarchy of

needs, with his ERG theory (Existence, Relatedness and Growth). Alder-

fer put the lower order needs, physiological and safety, into the existence

category. He fit Maslow’s interpersonal love and esteem needs into the

relatedness category. The growth category contained the self actualiza-

tion and self esteem needs. According to the ERG theory, more than one

need may be operational at the same time. People can move on to a

higher order need even without substantially satisfying their lower order

needs. For instance, an artist may want to satisfy his basic needs like

hunger and shelter, but may be simultaneously interested in his growth

as an artist. If a higher-order need is frustrated, an individual may re-

gress towards a lower-order need which appears easier to satisfy. This is

known as the frustration-regression principle. Thus if social needs are

not satisfied, an employee might start concentrating on making more

money. This might happen, for example, if a deserving middle manager

is denied a promotion for a long time. Another landmark in the body of knowledge about motivation is Her-

zberg’s two-factor theory of job satisfaction. Every organization has a set

of HYGIENE FACTORS like working conditions, salary, etc. The absence of

hygiene factors creates employee dissatisfaction but their presence does

not improve satisfaction. HERZBERG found five factors in particular that

were strong determinants of job satisfaction: achievement, recognition, the

work itself, responsibility, and advancement. Motivators have a long-term

positive impact on job performance. In contrast, hygiene factors produce

only short-term changes in job attitudes and performance.

Another theory proposed by Vroom is that motivation depends on

employee expectations about the outcome of their efforts. If people

know what they want from an outcome, and believe they can achieve it,

they will be highly motivated to work towards the goal. This theory con-

trasts with Maslow and Herzberg’s emphasis on people’s needs.

Multi Domestic Industry An industry in which the competition within the industry is essentially

segmented from country to country. Competitive strategies in one coun-

try are largely independent of those in other countries. Typically, these

Murphy ’ s LA W 153

are industries where economies of scale are less important and the need

for local customization is more critical, or where freight costs are signif-

icant. The cement industry is a good example.

(See also: GLOBAL INDUSTRY)

Murphy’s Law A popular maxim most commonly formulated as “Anything that can go

wrong will go wrong”. The law is named after Major Edward A. Mur-

phy, Jr., a development engineer who worked for a brief period of time

on rocket sled experiments conducted by the United States Air Force in

1949.

154 Nearshoring

N

Nearshoring The practice of outsourcing activities to locations which may not be the

cheapest but are reasonably close so that coordination is easier. Eastern

Europe is a nearshoring destination for many companies in the US.

(See also: OFFSHORING, OUTSOURCING)

Net Present Value (NPV) A standard tool used in capital budgeting. According to the NPV meth-

od, a potential investment project should be undertaken if the present

value of all cash inflows minus the present value of all cash outflows

(which equals the net present value) is greater than zero. The discount

rate used is the shareholder’s required rate of return. Managers should

undertake only those projects that have an NPV greater than zero. If two

projects are mutually exclusive, they should choose the one with the

higher NPV.

(See also: ADJUSTED PRESENT VALUE)

Nine-Cell Planning Grid A planning framework developed by General Electric (GE), the nine-

cell planning grid to some extent, overcomes the limitations of the BCG

GROWTH-SHARE MATRIX. In the GE grid, each business is rated low, me-

dium or high on two major dimensions — market attractiveness and

business strength. There are nine cells into which businesses can be

grouped based on these two dimensions.

Not- Invented-He re 155

Not-Invented-Here A phrase used to describe the difficulties managers have in accepting an

idea or a concept or a product developed by another department or or-

ganization. It is a term used to describe a culture that finds it difficult to

accept that outsiders can either be better or know more.

156 Of fshor ing

O

Offshoring The increasing trend towards locating non-core activities in distant loca-

tions to take advantage of lower costs and skilled manpower. This theme

has been well covered in Thomas Friedman’s much talked-about book,

The Earth is Flat. John Hagel III* and John Seely Brown† have identi-

fied four broad waves in the evolution of offshoring:

Locating operations offshore to facilitate cost arbitrage.

Locating operations offshore to gain access to distinctive skills.

Locating operations offshore to target the unique and demanding

needs of emerging markets.

Using emerging markets as a base from which innovative products

and services can be developed for the global markets.

Two strategic challenges are involved in offshoring. The company

must be able to define clearly the scope and contours of its business. The

company must also develop the capabilities and master the techniques

needed to access and leverage the expertise of partners.

(See also: NEARSHORING, OUTSOURCING)

Ohmae, Kenichi A former Mckinsey consultant, well known for his work on strategy in

general, and globalization in particular. Ohmae’s famous books include

Mind of the Strategist, Borderless World, End of the Nation State, and

The Next Global Stage: Challenges and Opportunities in Our Borderless

World. Ohmae has also published several thought provoking articles in

leading journals, such as Harvard Business Review.

* John Hagel III is an independent Management consultant and an author. He

has written several famous management books.

† John Seely Brown was formerly the Chief Scientist of Xerox Corporation and the

director of its Palo Alto Research Center (PARC).

Oligopoly 157

Oligopoly A market which is dominated by a small number of sellers. The word is

derived from the Greek for few sellers. As there are few participants,

each seller is aware of the actions of others. The decisions of one seller

influence, and are influenced by, the decisions of other sellers. Strategic

planning by oligopolists must take into account the likely responses of

the other market participants. An oligopoly can be quantified using the

four-firm concentration ratio which calculates the percentage of market

share accounted for by the four largest firms in an industry. Using this

measure, an oligopoly may be defined as a market in which the four-firm

concentration ratio is above, say, 40%. The HERFINDAL INDEX is another

useful measure.

In industrialized countries, oligopolies are found in many sectors of

the economy such as cars, consumer goods and steel. In regulated mar-

kets such as wireless communications, the state often licenses only two

or three providers of cellular phone services, effectively creating an oli-

gopoly. The well-known marketing scholar, Jagdish Sheth* has coined

the rule of three which holds that in many industries, equilibrium is

reached when there are three main players.

Oligopolistic competition can result in various outcomes. Firms may

collude to raise prices and restrict production in the same way as a mo-

nopoly. In some industries, there may be an acknowledged market leader

who informally sets prices to which other producers respond. In other

situations, competition between sellers can be fierce, with relatively low

prices and high production. This can lead to an efficient outcome ap-

proaching perfect competition. Competition would be less if the firms

are regional and do not compete directly with each other.

Oligopsony by contrast is a type of market in which the number of

buyers are small while the number of sellers is large. A small number of

firms compete to control the inputs of production.

(See also: GAME THEORY)

* Sheth, Jagdish and Sisodia, Rajendra, The Rule of Three: Surviving and Thriv-

ing in Competitive Markets, The Free Press, 2002.

158 Operat ing S TRA TE G I E S

Operating Strategies Day to day actions that need to be aligned with the firm’s long term ob-

jectives. These may include sales planning, production scheduling,

working capital management, inventory management, etc.

(See also: FUNCTIONAL STRATEGY)

Opportunity Cost Cost of the opportunity foregone. Most decisions involve an opportunity

cost. When resources are committed somewhere, some other area is

starved of them. Opportunity costs must be considered while taking de-

cisions.

Optimizing Planning An approach which believes in achieving the best possible outcome,

using mathematical models. An optimizer tries to either minimize the

resources required for a given level of performance or to maximize the

performance given a certain level of resources, or to obtain the best bal-

ance between resources consumed and performance.

(See also: ACKOFF, RUSSELL)

Organic Growth Expansion from within the firm, i.e. not as a result of acquisitions. Or-

ganic growth is likely to be steady, even slow, but very secure. That is

why some CEOs consider it the most “precious” form of growth. In con-

trast, growth by acquisitions tends to be risky and often fails to add value

for shareholders.

Organizational Behavior Organizational behavior is the study of what people think, feel and do in

and around organizations. It explores individual emotions and behavior,

team dynamics and the systems and structures of organizations. Organi-

zational behavior attempts to provide an understanding of the factors

necessary for managers to create an organization that is more effective

than its competitors.

(See also: ORGANIZATIONAL DEVELOPMENT)

Organi za t ional C UL TURE 159

Organizational Chart A visual representation of an organization structure. It identifies the or-

ganizational unit and indicates each position in relation to others. Posi-

tions are usually represented by squares or rectangles (although circles

or ovals are sometimes used) that contain the position title. They may

show the name of the incumbent as well. Each position is connected by a

solid line running to the immediate supervisor and to positions super-

vised, if any. Broken or dotted lines may be used to show other than re-

porting relationships, e.g. advisory or functional.

(See also: ORGANIZATIONAL DESIGN, ORGANIZATIONAL STRUCTURE)

Organizational Culture Accepted and important beliefs and values of people within an organiza-

tion. Culture tells employees what is accepted and what is not, what is

important and what is not. Culture implicitly makes employees set prior-

ities. Culture develops over time, as people get exposed to problems and

160 Organi zat iona l C ULTURE

find ways to solve them. Leadership plays an important role in shaping

culture.

Culture is the knowledge used by people to interpret experiences, set

priorities and guide their behavior. The beliefs and values of employees

form the core of organizational culture. Culture is acquired by learning

and experience and is shaped by various organizational influences. For

example, in some companies employees are encouraged to take risk,

while playing safe is the accepted norm in others. In some companies,

the work environment may be very informal with people operating on a

first name basis, while in others it can be very formal with great im-

portance being attached to seniority, designation, etc. Some cultures lay

a premium on getting the work done while others attach equal, if not

more, importance to how the work is done. For example, giving bribes to

government officials, something very common in a country like India to

get work done, is strictly prohibited in India’s Tata group.

Geert Hofstede, the famous Dutch scholar has identified four well-

known dimensions of culture:

1. Power Distance: The extent to which employees feel that power is

unevenly distributed across various levels of the organization from

the top to the bottom. Power distance tends to be less in knowledge

intensive industries such as computer software. In such industries,

individual expertise is as important as seniority and designation.

2. Uncertainty Avoidance: The extent to which people feel threatened by

uncertainty.

3. Individualism: The tendency of people to be self-centered as opposed

to collectivism where people care for each other. Individualism is a

typical cultural trait found in investment banks. Americans are con-

sidered to be more individualistic as compared to the Japanese.

4. Masculinity: Refers to a strong emphasis on success, money and ma-

terial objects as opposed to femininity, which emphasizes caring for

others and quality of life. For example, academic institutions have a

feminine culture. Scandinavian countries in general have a feminine

culture. Japan has a masculine culture where the desire to be a high

performer in the work place often leads to burn out, or Karoshi.

Organi za t ional DE S IG N 161

Organizational Design How individuals are grouped and their tasks structured within the organ-

ization. Designing organizations is a complex exercise. According to

Harvard Business School professor Robert Simons*, organization design

must take into account the company’s strategy, its competitive environ-

ment, stage of the lifecycle and various other factors. In short, it is a fine

balancing act.

Organizational design receives little attention in the early days of a

firm. But over time, problems emerge as the charisma of the founders

becomes insufficient to manage a larger enterprise. Systems and pro-

cesses become important. This is when a functional structure is typically

chosen. When the functional structure becomes inadequate to respond to

needs of the market place because of centralized decision making, a di-

visional structure becomes necessary. But with time, a divisional struc-

ture leads to fiefdoms. Coordination becomes difficult, resources are

wasted, knowledge sharing does not happen effectively and profitability

declines. Often at such a juncture, headquarters may take control. But

this leads to red tape, decision making slows down and pressure builds

for simplifying the organization, divesting non-core businesses and re-

moving red tape. In short, organizational design is a dynamic concept.

The design should change in line with the company’s circumstances.

Designing organizations that can adapt over time effectively means

learning to reconcile the tensions between:

Strategy and structure;

Accountability and adaptability;

Ladders and rings; and

Self-interest and mission success.

Managers must design organizations to implement the current strate-

gy and also allow new ideas to flow that will feed into tomorrow’s strat-

egies. Structure determines how information from the market is pro-

cessed and acted upon. Thus structure determines strategy and strategy

determines structure in an interdependent fashion. Accountability is at

the heart of organization design. While people must be answerable for

performance on some measured dimension, they should not be discour-

aged from experimenting and working on new ideas. An effective organ-

* Simons, Robert, “How Risky is Your Company?”, Harvard Business Review,

May-June 1999, pp. 85-94.

162 Organi zat iona l DE V E LOP ME NT (O D)

ization structure must not only take into account the ladders (vertical

hierarchy) but also the rings (horizontal networks). Human behavior is a

critical design variable. Organization design must promote the kind of

behavior that strikes the right balance between aspirations of employees

and organizational needs.

The basic building blocks of any organization structure are market

facing units and core operating units. Market facing units gather market

data about customers, competitors, opportunities and threats. Respon-

siveness must drive the design of market facing units. This responsive-

ness must be balanced by efficiency elsewhere. It is the job of the back

office functions to do just that. Managers of these functions are respon-

sible for standardizing work processes, applying best practices to the

firm’s internal operations and ensuring efficiency through economies of

scale and scope. Scarce resources must be distributed optimally between

the market facing and operating core units.

Till recently, organization design essentially amounted to a trade-off

between responsiveness and efficiency. Information technology (IT) is

facilitating higher efficiency with an acceptable level of responsiveness

as IT can forge very close links with customers. Dell is a good example

of this.

(See also: ORGANIZATIONAL STRUCTURE)

Organizational Development (OD) The field of organizational development (OD) is concerned with the per-

formance, development, and effectiveness of human organizations. Ac-

cording to Warren Bennis, OD aims at changing the beliefs, attitudes,

values, and structure of organizations so that they can better adapt to

new technologies, markets, and challenges. OD involves organizational

reflection, system improvement, planning, and self-analysis. OD helps

an organization to develop its internal capacity to be the most effective

with respect to its chosen line of business and to sustain itself over the

long term.

(See also: ORGANIZATIONAL BEHAVIOR)

Organizational Inertia Inability to change and adapt to the external business environment is

called organizational inertia. Many organizations struggle to cope with

Organi za t ional MA PP I NG 163

the pace of change. They do not recognize that competition has in-

creased, or that the company’s products are no longer as distinctive or

superior or as much in demand as in the past. Inertia is dangerous under

the following circumstances.

Competing or substitute products have come onto the market.

Technology is changing rapidly.

Customer preferences are undergoing a major change.

Substitute products are driving down prices and threatening to take

current and potential customers.

Products are maturing, resulting in reduced prices, market saturation

and risk to brand reputation.

Social upheavals are taking place.

Political developments are leading to regulatory changes, lowering

the barriers to entry.

A significant new competitor has arrived.

Rising exit barriers have resulted in intensifying competition, in the

face of falling sales.

The company is no longer strong either in product differentiation or

cost leadership.

(See also: CHANGE MANAGEMENT)

Organizational Learning Continuous modification of behavior by an organization in line with

changes in its environment. Learning begins with observation, reflecting

on the observation and assessing the underlying factors that drive behav-

ior. Learning is a continuous process. Reflection and action combine to

produce learning. A learning organization is good at creating and acquir-

ing knowledge, and at modifying its behavior to reflect new knowledge

and insights. Learning organizations make conscious attempts to im-

prove productivity, effectiveness and performance on an ongoing basis.

The greater the uncertainties in the external environment, the greater the

need for learning.

Organizational Mapping A well-known technique for understanding how people, departments,

customers and other functions in the organization interact. Mapping al-

lows us to examine a business process clearly. It uncovers weaknesses in

164 Organi zat iona l S TRUC TURE

structure that may need to be resolved. It identifies bottlenecks, barriers

and errors and creates a map of the ideal process to put in place and im-

plement improvement plans. Process mapping is particularly effective in

determining breakdowns in communication and information sharing.

Process mapping helps in improving existing processes and identifying

new processes that will increase efficiency and effectiveness.

(See also: BUSINESS PROCESS REENGINEERING)

Organizational Structure The way activities are grouped in an organization. Structure promotes

specialization, defines roles more clearly, and facilitates efficient execu-

tion of day-to-day tasks. However, a rigid structure may reduce flexibil-

ity and create watertight compartments that stand in the way of

knowledge sharing and innovation. The organizational structure should

be sufficiently flexible so that people from different departments can

come together to discuss new ideas and solve complex problems. In-

deed, the ability to form and dismantle cross-functional task forces at

short notice can be a key competitive advantage in a dynamic environ-

ment.

(See also: ORGANIZATIONAL DESIGN)

Outsourcing Essentially the delegation of non-core operations or jobs to an external

entity, such as a subcontractor, that specializes in that operation. Out-

sourcing often aims at lowering costs or sharpening the focus on compe-

tencies. A related term, OFFSHORING, means transferring work to another

country. Outsourcing has taken off in a big way in recent times thanks to

the availability of information and communications technology that fa-

cilitates effective coordination of geographically dispersed activities.

(See also: DYNAMIC SPECIALIZATION, NEARSHORING, PROCESS NET-

WORKS)

Overheads The costs incurred in addition to the direct costs of manufacturing or of

providing services. As organizations grow in size, overheads tend to

increase. Attacking overheads is usually an integral part of most corpo-

rate restructuring activities.

Overheads 165

(See also: ACTIVITY BASED COSTING)

166 Pa lepu , K R I S HNA G .

P

Palepu, Krishna G. A well-known faculty at the Harvard Business School, Palepu’s research

and teaching activities have focused on strategy and governance. He has

published numerous academic- and practitioner-oriented articles and

case studies on these issues. His recent focus has been on the globaliza-

tion of emerging markets, particularly India and China. In the area of

corporate governance, Palepu’s work focuses on how to make corporate

boards more effective, and on improving corporate disclosure. Palepu

has been on the editorial boards of leading academic journals, and has

served as a consultant to a wide variety of businesses. Two articles

written jointly with Tarun Khanna, “The Right Way to Restructure

Conglomerates in Emerging Markets,” and “Why Focused Strategies

May be Wrong for Emerging Markets” are widely cited in the literature.

(See also: KHANNA, TARUN)

Pareto’s Principle The Pareto principle (also known as the 80-20 rule, the law of the vital

few and the principle of factor sparsity) states that for many phenomena,

80% of the consequences stem from 20% of the causes. What Pareto’s

Principle tells us is that we must focus on the right areas to get results.

The principle is named after Italian economist Vilfredo Pareto who

observed that 80% of income in Italy was received by 20% of the Italian

population. In marketing, 20% of clients are responsible for 80% of sales

volume. In many processes, 80% of the resources are typically used by

20% of the operations. Sometimes, 80-20 may even become 90-10.

Thus, in software engineering, 90% of the execution time of a computer

program is spent executing 10% of the code.

Pareto’s Principle helps focus management attention on critical areas.

It is the basis for the Pareto chart, one of the key tools used in TOTAL

QUALITY CONTROL and SIX SIGMA. The Pareto Principle serves as a base-

http://en.wikipedia.org/wiki/Total_quality_management

http://en.wikipedia.org/wiki/Total_quality_management

http://en.wikipedia.org/wiki/Six_sigma

Personal E FFE C T IV E NE S S 167

line for ABC-analysis and XYZ-analysis, widely used in logistics and

procurement for the purpose of optimizing inventory and order quantity.

The principle of TIPPING POINT, coined by Malcolm Gladwell can be

considered to be an extreme version of the 80-20 principle.

Parkinson’s Law A startlingly insightful formulation which states that “work expands so

as to fill the time available for its completion”. A more succinct phrasing

also commonly used is that “work expands to fill the time available”.

First articulated by C. Northcote Parkinson in an article published in The

Economist in 1955 and later reprinted together with other essays in his

book Parkinson’s Law: The Pursuit of Progress, it was based on the

author’s extensive experience in the British Civil Service. In many offic-

es, work expands and fills up the time available for its completion. Thus,

people look busy even when they are not doing any useful work.

Parkinson’s Law could be even more generalized as: “The demand

upon a resource always expands to match its available supply.”

Personal Effectiveness Not just a measure of practical knowledge or skills in a functional area

such as human relations, marketing, or information and communications

technologies. Personal effectiveness is also about soft issues such as

time management, stress management and inter personal skills. Personal

effectiveness separates the men from the boys in the workplace.

Stephen Covey’s seven habits provide a simple-easy-to-understand-and-

use framework of personal effectiveness.

Be Proactive: People are responsible for their own choices and have

the freedom to make decisions based on principles and values rather

than on moods or conditions.

Begin with the End in Mind: Individuals, families, teams and

organizations must have a clear purpose in mind. They must identify

and commit themselves to the principles, relationships and purposes

that matter most to them.

Put First Things First: Putting first things first means focusing on the

most important priorities. Whatever the circumstances, living and be-

ing driven by values and key principles is important.

168 PEST A NA LYS I S

Think Win-win: Thinking win-win is a frame of mind and heart that

seeks mutual benefit and mutual respect in all interactions. Instead of

thinking selfishly or like a loser, people should learn to think in terms

of “we”, not “me”.

Seek First to Understand, then to be Understood: Listening with the

intent to understand others is the essence of communication and rela-

tionship building. Opportunities to speak openly and to be understood

come much more naturally and easily. Seeking to understand takes

consideration; seeking to be understood takes courage. Both consid-

eration and courage are important.

Synergize: Synergize means realizing that a third way is better than

what each party can come up with individually. It’s the fruit of re-

specting, valuing and even celebrating one another’s differences. It’s

about solving problems, seizing opportunities and working out dif-

ferences. Synergy is also the key to any effective team or relation-

ship.

Sharpen the Saw: Sharpening the saw means constant renewal in the

four basic areas of life: physical, social / emotional, mental and spir-

itual.

PEST Analysis A framework, introduced by Steiner and Andrews, for analyzing an or-

ganization’s external environment. Various political, economic, social

and technological trends are identified to formulate and implement strat-

egies:

Political factors include government regulations and legal issues per-

taining to tax, employment, environment, trade, etc.

Economic factors include economic growth, interest rates, exchange

rates, inflation rates, etc.

Social factors include health consciousness, population growth rate,

age distribution, career attitudes, emphasis on safety, attitudes to for-

eign products and services and average life of human beings.

Technological factors include R&D activity, automation, rate of

technological change, etc.

(See also: ENVIRONMENTAL SCANNING)

Platfo rm LE A DE RS H I P 169

Peter PrincipleAccording to Dr. Laurence J Peter*, in any hierarchy

employees tend to rise to their level of incompetence. Thus, excellent

motor mechanics after being promoted become second-rate foremen and

fine teachers become incompetent school heads. Peter pointed out that

the main criterion for gaining promotion is success. So competence is

rewarded with promotion until the individuals rise to a hierarchy level

where they can no longer cope. On arriving at this level of incompe-

tence, the employees become frustrated, stressed and ineffective. The

key message is that promotions should not only take into account current

performance but also the potential for performance in a future role.

Platform Leadership† A strategic concept introduced by Annabelle Gower and Michael Cusu-

mano‡. In the initial phase of many industries, the early movers tend to

develop most of the components necessary to make the products. But

later, specialized firms typically emerge to develop different compo-

nents. Along with components, evolve platforms, which consist of vari-

ous components made by different companies. Some companies become

platform leaders. They ensure the integrity of the platform by working

closely with other firms to create initial applications and then new gen-

erations of complementary products.

Platform leaders create interfaces to entice other firms to use them to

build products that conform to the defined standards and therefore work

efficiently with the platform. It is in the interest of a platform leader to

stimulate innovation on complementary products. The more people who

use these complements, the more incentives there are for producers of

complements to introduce such products. This in turn motivates more

* Laurence Peter (1919 - 1990) was an educator and “hierarchiologist”, best

known to the general public for the formulation of the Peter Principle.

† Cusumano, Michael A. and Gawer, Annabelle, Platform Leadership: How

Intel, Microsoft, and Cisco Drive Industry Innovation, HBS Press, 2002.

‡ Michael A. Cusumano is the Sloan Management Review Distinguished Pro-

fessor at the Massachusetts Institute of Technology's Sloan School of Manage-ment. He specializes in strategy, product development, and entrepreneurship in

the computer software industry, as well as automobiles and consumer electronics.

170 P la t form LE A DE RS H I P

people to buy or use the core product, stimulating more innovation, and

so on.

Wars about standards are an integral part of platform strategies. What

matters is overall performance. The platform need not be superior to the

competition in all product features. Windows, particularly the early ver-

sions, wasn’t technically superior to the Macintosh, nor were Matsushi-

ta’s VHS video recorders superior to Sony’s Betamax. But in each case

the network as a whole delivered more.

Defining the architecture of a system product is a powerful way of

raising entry barriers for potential competitors. A potential competitor to

Intel not only has to invent a microprocessor with a better price-

performance ratio but also rally complementors and original equipment

manufacturers (OEMs) to adapt their designs to this component. This

would obviously involve huge switching costs. Platform leaders must

also be able to maintain architectural control over its platform, by mak-

ing an ongoing assessment of their existing capabilities and the direction

in which the industry or technology is evolving.

Platform leaders need to pursue at least two objectives simultaneous-

ly:

First, they must try to obtain consensus among key complementors

with regard to the technical specifications and standards that make

their platforms work with other products.

Second, they must control critical design decisions at other firms that

affect how well the platform and complements continue to work to-

gether through new product generations.

A platform leader must play the role of industry enabler by encourag-

ing innovations that improve the platform. The platform leader some-

times has to make decisions that might hurt some partners, even if they

have been complementors in the past.

To gain the trust of third parties, platform leaders must act and be

seen to act fairly. They need to establish credibility in technical areas

where they want to influence future designs or standards. They must

make potential complementors feel comfortable that the decisions are

being taken in the interest of the whole industry.

Platform leaders usually emerge through the mechanisms of the mar-

ketplace, rather than through some magical process. A high market share

Porte r , M IC HA E L E . 171

and a high degree of innovative capabilities alone do not suffice. A plat-

form leader must have the vision and the organizational capabilities to

engage complementors to innovate and improve the platform. Such a

vision is grounded in the belief that the power of a system is greater than

the sum of its parts.

Poison Pill An ANTI-TAKEOVER STRATEGY in which the threatened company does

things that would represent a long-term drain on the resources of the

bidder. As a consequence, the bidder may decide against swallowing up

the poisoned pill (company), and give up the bid. An example of a poi-

son pill is giving staff employment contracts with a three-year notice of

termination clause. This would significantly increase the cost of taking

over and restructuring the firm for a bidder.

Policies Rules and guidelines to supplement functional strategies. Policies guide

the thinking and decisions of managers while implementing the firm’s

strategies. Policies serve as specific guides for lower level managers in

taking operating decisions.

(See also: FUNCTIONAL STRATEGY)

Political Risk A term typically used to describe the possibility of loss when investing

in a foreign country, because of various factors — changes in the coun-

try’s political structure or policies, such as tax laws, tariffs, expropriation

of assets, restrictions imposed on repatriation of profits, tightened for-

eign exchange repatriation rules, or increased credit risk due to changes

in government policies.

(See also: COUNTRY RISK)

Porter, Michael E. Arguably the most famous contemporary strategy guru in the world.

Porter’s FIVE FORCES MODEL and GENERIC STRATEGIES, COST LEADERSHIP

DIFFERENTIATION and FOCUS have become the standard reference point

for management students, research scholars and practitioners world

wide.

172 Po rter , M IC HA E L E .

Porter’s approach to STRATEGIC PLANNING has been referred to as the

positioning school which holds that a firm’s performance is largely de-

termined by how it is positioned vis-à-vis various forces in the external

environment. Porter has also written about the competitive advantage of

nations and the linkages between corporate strategy and corporate

philanthrophy. Porter’s writings carry deep insights. Though researchers

have pointed out the limitations of Porter’s work from time to time,

many of the principles developed by Porter remain as relevant as ever. In

terms of ability to put together a body of knowledge based on a concep-

tually elegant framework, few scholars in the area of strategy have been

able to rival Porter so far.

Porter’s five forces model addresses the question of why some indus-

tries are more attractive than others. The five forces identified by Porter

are:

1. The bargaining power of the buyers.

2. Entry barriers.

3. Competitive rivalry.

4. Substitutes.

5. The bargaining power of the sellers.

The model guides companies in:

Prioritizing markets according to their inherent attractiveness.

Understanding the critical success factors in the market.

Providing insights for the criteria by which a company can judge it-

self against competitors.

Generating ideas for changing the rules of the game.

Porter has also developed the concept of value chain. The VALUE

CHAIN splits a company operations into various components:

In-bound logistics.

Manufacturing.

Service.

Sales and marketing.

Administration.

Out-bound logistics.

Essentially, the value chain concept explains how value is created in

a business. It draws attention to the internal choices which a company

Posi t i oning 173

makes in determining how it is going to compete. In recent years this has

begun to be called “the business model” — to indicate that it is specific

to a particular business.

According to Porter, companies must compete on one of three

planks: differentiation, cost leadership, and focus. Porter calls these ge-

neric strategies.

DIFFERENTIATION means a company sets out to add more value to

target customers (perceived and real) than competitors do.

COST LEADERSHIP means a company achieves parity of value with

competitors, but at a lower cost.

A FOCUS strategy involves concentrating only on a small segment of

target customers and their specific needs. Such a strategy aims at lever-

aging the advantage of specialization, either through cost control or su-

perior customization while serving a narrowly defined customer seg-

ment.

A company must choose one generic strategy, otherwise it will get

stuck in the middle.

(See also: COMPETITIVE ADVANTAGE, COMPETITIVE STRATEGY, VALUE

CHAIN)

Positioning The process of creating and maintaining a distinctive place in the market

for an organization and / or its individual brands. The aim is to steal a

march on competitors by offering something different. This is also often

called unique selling proposition.

To be effective, the differences must be important, relevant, noticed

and understood by consumers. The perceptions of consumers play a key

role in the positioning process. Positioning may erode over time as com-

petitors copy or improve upon the points of difference, or as the needs of

the target audience change. In such circumstances, an organization may

have to reposition itself. Positioning is all too often defined very narrow-

ly, with a sole focus on distinctive product attributes that offer benefits

to consumers. What is forgotten is that many organizations and / or

brands succeed in the market place because of advantages other than

those based on product differences, such as supply chain and organiza-

tional capabilities. Repositioning can be done on these planks as well.

174 Pr ice / E A RN ING S RA T IO ( P / E )

Price / Earnings Ratio (P / E) The ratio of the market price of a company’s share to its earnings per

share. It is an indication of how the market expects the company to per-

form in the future. A high P / E generally implies the company is ex-

pected to do well.

Process Innovation A process can be viewed as a set of activities designed to produce a

specified output for a particular customer or market. Thus a manufactur-

ing firm has various processes such as product development, customer

acquisition, procurement, manufacturing, logistics, after sales service,

information management, human resources management and planning.

Process innovation implies creating a significant improvement in one or

more of these processes. Process innovation begins with a good

understanding of who the customers are and what they expect from it.

Process innovation must not be confused with process improvement

which is incremental in nature. Process improvements take the existing

process as given, but process innovations question its basic assumptions.

Michael Hammer* uses the term operational innovation which for all

practical purposes refers to process innovation. As he puts it, “Opera-

tional innovation should not be confused with operational improvement

or operational excellence. These terms refer to achieving high perfor-

mance via existing modes of operation ensuring that work is done as it

ought to be to reduce errors, costs and delays but without fundamentally

changing how that work gets accomplished. Operational innovation

means coming up with entirely new ways of filling orders, developing

products, providing customer service or doing any other activity that an

enterprise performs.”

Successful process innovations typically demand technological and

organizational enablers. While information technology has driven many

process innovations in recent times, there are various other drivers that

must not be ignored. For example, the concept of LEAN MANUFACTURING

pioneered by Toyota, is driven more by common sense and a new mind-

set than by technology.

* Hammer, Michael. “Deep Change”, Harvard Business Review, April 2004,

pp. 84-93.

Process INNOV A T ION 175

Process innovation must begin with the identification of processes

that are ripe candidates for innovation. Focusing on those processes

which require immediate improvement makes sense because, as in any

other change initiative, quick results will build the momentum. If the

company is striving for incremental improvement, it is sufficient to work

with many narrowly defined processes. But when the objective is radical

process change, a process must be defined as broadly as possible. A

company like Toyota has been able to get well ahead of competitors by

ongoing improvements in all aspects of operations including procure-

ment, manufacturing, vendor management and logistics.

According to Davenport*, four criteria can be used to guide process

selection:

1. Centrality of the Process: The processes that are most central to ac-

complishing the organization’s goals must be selected.

2. Process Health: Processes that are currently problematic and in obvi-

ous need of improvement must be chosen.

3. Process Qualification: The cultural and political climate of a target

process must be guaged. Only processes that have a committed spon-

sor and exhibit a pressing business need for improvement must be se-

lected.

4. Manageable Project Scope: The process must be defined in such a

way that the project scope is manageable.

Information can play a number of supporting roles in a company’s

efforts to make processes more efficient and effective. Just the addition

of information to a process can sometimes lead to radical performance

improvements. Information can also be used to measure and monitor

process performance, integrate activities within and across processes,

customize processes for particular customers, and facilitate longer-term

planning and process optimization. Information can also be used to bet-

ter integrate process activities both within a process and across multiple

processes.

Davenport* has listed nine different ways of supporting process in-

novation with information technology (IT):

*Devenpart, Thoms H., Process Innovation — Reengineering Work through

Information Technology, Harvard Business School Press, 1993.

176 Process L I FE C YC LE

1. Automational: IT can be used to automate several processes.

2. Informational: IT can be used within a process to capture information

about process performance and to improve it.

3. Analytical: In processes that involve analysis of information, IT can

make the decision-making process more efficient and effective.

4. Sequential: IT can enable changes in the sequence of processes or

transform a process from sequential to parallel in order to reduce pro-

cess cycle-time.

5. Tracking: Effective execution of some process designs, notably those

employed by firms in the transportation and logistics industries, re-

quires a high degree of monitoring and tracking. IT can play a key

role here.

6. Geographical: A key benefit of IT is the ability to overcome geo-

graphical barriers.

7. Integrative: More and more companies are finding it difficult to radi-

cally improve process performance for highly segmented tasks split

across many jobs. IT can help integrate various aspects of a product

or service delivery process.

8. Intellectual: Many companies are increasingly using IT to capture

and disseminate knowledge.

9. Disintermediating: In some industries, human intermediaries are inef-

ficient for passing information between parties. This is particularly so

in case of transactions such as stock brokerage or parts location. IT

can play a key role here.

(See also: INNOVATION, PRODUCT INNOVATION)

Process Life Cycle Just like the product life cycle, there is also a process life cycle. During the

formative period of a new product, the manufacturing processes are usual-

ly crude and inefficient. Typically, such processes employ skilled labor

working with general-purpose machinery and tools. There are no special-

ized tools or machines. It is the product itself at this point that matters. But

processes tend to improve as the rate of product innovation decreases.

Finally, when an industry standard is determined, products are likely to

become similar in terms of functions and features. Incremental changes in

products made by competitors will tend to be copied rapidly. Under these

circumstances, processes hold the key to stealing a march on competitors.

Product INNOV A T IO N 177

(See also: PRODUCT LIFE CYCLE)

Process Networks A useful mechanism for facilitating knowledge transfer across organiza-

tions. According to John Hagel III and John Seely Brown*, world class

companies leverage such networks to gain more flexible access to spe-

cialized capabilities on a global scale. Process networks seek to coordi-

nate activities across multiple tiers of enterprises within a business pro-

cess. These networks attempt to ensure that resources are flexibly pro-

vided in response to specific market demand. Such networks are charac-

terized by loose coupling and require formal orchestrators to function

effectively. Relatively independent modules of activity are designated,

with clear ownership and accountability for each module. The perfor-

mance levels that each module must meet at the interfaces connecting it

with other modules are defined. Module owners can make improve-

ments so long as they comply with the performance requirements. Pro-

cess networks are not only more scalable but are also more effective in

tapping the knowledge of a large number of specialized participants in a

flexible way to provide more value to customers.

(See also: DYNAMIC CAPABILITY BUILDING, OFFSHORING, OUTSOURC-

ING)

Product Innovation Developing and launching new products that appeal to customers. It in-

volves:

Finding out and anticipating what customers might need or want;

Generating ideas;

Developing and launching a product;

Providing various support services to keep customers happy.

A stream of successful product introductions can generate rapid sales

and profit growth. A good example is Sony which came out with 170

new models of the original Walkman during the period, 1981-89. Simi-

larly, Intel’s market leadership has been facilitated by the launch of a

*The Only Sustainable Edge: Why Business Strategy Depends on Productive

Friction and Dynamic Specialization, Harvard Business School Press, 2005.

178 Produc t INNOV A T ION

series of microprocessors, each with greater capabilities. Microsoft,

which has introduced several versions of its PC operating systems and

applications software, is another good example.

Companies which are good at product innovation have some com-

mon attributes:

An intuitive understanding of what customers need and want. They

do not depend excessively on formal market research.

The discipline, skills, methods and processes to optimize product

design and manufacturing.

Effective and optimal use of resources.

Short lead times to out-innovate competitors. They renew and expand

product lines faster.

Willingness to cannibalize their own products.

Leaving people free and encouraging creativity by eliminating bu-

reaucratic procedures.

In short, product innovation calls for a culture that encourages indi-

vidual initiative, a good understanding of the market, and disciplined

execution. Product innovation is all about generating new ideas, devel-

oping products and selling it in the market. So the biggest challenge in

product innovation is often not technology, but marketing.

According to Deschamps and Nayak*, a well-designed product de-

velopment process is made up of six interlocking and mutually reinforc-

ing sub processes:

Idea management;

Intelligence development;

Technology and resource development;

Product / Technology strategy development and planning;

Project and program management;

Product support.

* Deschamps, Jean-Philippe and Nayak, Ranganath, Product Juggernauts:

How Companies Mobilize to Generate a Stream of Market Winners, Harvard

Business School Press, 1995.

Product INNOV A T IO N 179

Ideas are important for any business. But they need to be tapped effi-

ciently. High performance businesses develop a structured process for

idea management. They continually generate, collect, evaluate, screen,

and rank ideas. They also have mechanisms to explore and validate ideas

in the market and in the labs before they are commercialized and scaled

up.

The intelligence development process facilitates the collection of

relevant data and trends on customers, competitors, and technologies.

This process transforms such data into information and insights and uses

that intelligence to seed other processes. Most successful companies

cultivate intelligence development as their secret competitive weapon.

Technology and resource development facilitate the development

within the company of a range of new technologies, skills, and compe-

tencies for future product generations. Not all resources, however, have

to be internal to the corporation. Establishing strategic alliances and

close relationships with suppliers is also a part of this process.

Product and technology strategy development and planning deter-

mine where, how, and with what frequency the company intends to

launch new products. It is an integrative process, combining product

plans and technological development plans. It should lead to plans de-

termining which new products will be introduced, and when and how the

company’s developmental capacity will meet the new demands of prod-

ucts.

Project and program management is where unresolved problems such

as deficiencies in market insight, know-how, strategies, and plans show

up.

Product support starts at the launch of the product and typically ends

only when the product is withdrawn. In industries that depend on tech-

nical service or applications engineering to add value to customers, this

process is vital to success. Application-intensive industries such as per-

formance chemicals, resins and polymers devote a significant portion of

their total technical resources to supporting their products.

Product development demands major resource commitments. So re-

sources must be managed carefully. If too few new products are being

developed, the solution is not necessarily increased spending. Compa-

nies that are committed to innovation must employ an investment portfo-

lio approach, with the right mix of incremental improvements, and

breakthrough ideas that will deliver consistent returns in the long run.

180 Produc t L I FE C YC LE ( PLC )

They should also pursue a disciplined approach. Only products with real

potential for specific markets should make it to the launch stage. And

once they have reached that stage, they need marketing campaigns that

are aligned with their sales potential. Companies must aim at getting the

right product to the right consumer at a cost that is in line with the prod-

uct’s sales potential. Keeping the breakeven point low is crucial to the

success of most innovation.

Well-managed companies have a disciplined approach to dealing

with new ideas*. Great ideas are often hard to sell early on, and prema-

ture demand for numbers and analysis can kill creativity. Nevertheless,

an explicit process of business justification is desirable. The key lies in

identifying specific points in the concept-to-launch process, where a

project that is not showing promise can be stopped. Perhaps the quickest

way to avoid the problem is to call for a “go-no-go” decision at three

specific stages in the product launch process.

The first stage must appear early on after concept development. At

this time, the target market for the product should be clearly identified,

along with a realistic marketing plan and a rough estimate of marketing

costs for different scenarios. The next stage can come after the commer-

cialization model has been developed. The product manager must

demonstrate that the product can realistically deliver on its claim. The

company should be confident about creating sufficient excitement

among the customers. The last vetting can come at the time of large-

scale commercial launch, when it should be clear that there is a compel-

ling marketing plan in place to reach targeted sub-segments, a plan for

meeting all channel requirements, and if it is a consumer product, a plan

for merchandizing the product (if it is a consumer product) so that it

stands out among competing brands in the store.

(See also: INNOVATION, PROCESS INNOVATION)

Product Life Cycle (PLC) A theory that describes the four stages that a new product goes through

from birth to death. These four stages are:

* Dalens Francois, Gell Jeff, Rutstein Carl and Birge, Robert, Winning The New

Product War, www.bcg.com

Product P LA TF ORM 181

1. Introduction: The slow sales growth that follows the introduction of

a new product;

2. Growth: The rapid sales growth that accompanies product ac-

ceptance;

3. Maturity: The plateauing of sales growth when the product has been

accepted by most potential buyers; and

4. Decline: The decline of sales that results as the product is

replaced (by a substitute) or becomes increasingly unappealing to

customers.

Different strategies are required at different stages of the life cycle.

An important implication of the product life cycle (PLC) theory is

that every product eventually declines and dies. So it is necessary for

firms to launch new products from time to time. Ideally, new products

should be financed from the cash flows generated by mature brands, and

should be launched before maturity turns to decline. During the devel-

opment phase, there is substantial negative cash flow on account of

R&D, market research, and setting up a production line. As demand

grows, more cash must be ploughed into expanding factory capacity.

Once sales have stabilized, the firm can reap the cash rewards from their

success in the decline phase. Brands with a high market share can pro-

vide the cash for developing replacement products.

Whether products do indeed go through these stages in any systemat-

ic, predictable way is still debated. The PLC concept is primarily appli-

cable to product forms, less to product classes, and even less to

individual brands. If the item need be bought only once then market sat-

uration can hit demand. If the item’s sales have grown because of fash-

ion, it is likely that they will die quite quickly for the same reason. A

product may also go out of existence quickly because of rapid techno-

logical obsolescence.

(See also: BCG GROWTH-SHARE MATRIX, PROCESS LIFE CYCLE)

Product Platform Building blocks that form the foundation for a series of closely related

products. Product platforms generate ECONOMIES OF SCOPE by reuse of

components and knowledge. In the automobile Industry, several individ-

ual car models may share the same basic frame, suspension and trans-

182 Prospect THE OR Y

mission even if the shape, look and feel are important. The Sony Walk-

man had 160 variations and four major technical innovations between

1980 and 1990, all of which were based on the initial platform. Black &

Decker rationalized its hundreds of products into a set of product fami-

lies, using a platform approach. The platform approach may not be ef-

fective when rapid changes in technology, customer needs or competi-

tors’ offerings can demand discontinuous new products rather than in-

cremental change.

(See also: PLATFORM LEADERSHIP, PRODUCT INNOVATION)

Prospect Theory Developed in 1979 by Daniel Kahneman and Amos Tversky, prospect

theory helps to describe how people make choices in situations where

they have to decide between alternatives that involve risk. It is a more

realistic alternative to the well-known expected utility theory. Starting

from empirical evidence, prospect theory describes how individuals

evaluate potential losses and gains. Kahneman and Tversky found that

behavioral issues significantly influence decision making. Their research

indicates that people do not always follow the rules of rational choice.

Examples of such behavior include:

1. The Certainty Effect: People over-weight outcomes that are certain,

relative to outcomes that are merely probable. Thus, there is a prefer-

ence for a sure gain over a larger gain that is merely probable. “A

bird in hand is worth two in the bush.”

2. The Reflection Effect: There is a risk-seeking preference for a loss

that is merely probable, compared to a smaller loss that is certain.

This can be seen in the way people buy insurance packages or in the

way they respond to product pricing and promotions.

3. The Isolation Effect: People simplify problems by disregarding the

components that are common to alternatives and focus only on the

differences. So inconsistent preferences are obtained when choices

are presented in different ways. This can be seen in the ways con-

sumers make decisions. Functionally similar products might have the

same price, but if one brand presents the price in a distinctive way, it

may be seen very differently.

(See also: DECISION MAKING)

Pygmal i on E F FE C T 183

Purpose-Process-People Doctrine A doctrine which holds that the main task of top management is to shape

the behavior of people and create an environment that enables them to

take initiative, cooperate and learn. This is unlike the traditional STRATE-

GY-STRUCTURE-SYSTEM doctrine in which senior managers concentrate on

allocating resources, assigning responsibilities and controlling efficient

execution.

The purpose-process-people doctrine, on the other hand, holds that

the top management must change its role from being the designer of

corporate strategy to being the shaper of a broader institutional purpose,

from being the architect of a formal structure to being the builder of or-

ganizational processes and from managing systems to developing and

molding people.

Top management must infuse the company with an energizing pur-

pose — a sense of ambition, a set of values, an overall identity. Rather

than trying to formulate strategy, top management must attempt to shape

the organizational context. Structure is the framework within which

companies can develop the organizational processes, and management

roles and relationships that support their competitive capability. But

structure is only the organization’s anatomy. A thorough understanding

of the organization’s physiology, the processes and relationships that are

the company’s lifeblood and its psychology, the culture and values of

employees, is also vital. Instead of regularly intervening with corrective

action, top executives need to find ways to encourage self monitoring,

self correcting behavior.

According to Sumantra GHOSHAL and Christopher BARTLETT, the

strategy paradigm is shifting away from strategy-structure-systems to

purpose-process-people.

(See also: BARTLETT, CHRISTOPHER; CORPORATE PURPOSE; GHOSHAL,

SUMANTRA)

Pygmalion Effect Postulate which holds that if people start believing in themselves, they

prove to be effective. Constant praise by the superior makes

subordinates start believing they are good. Soon they become highly

productive. On the other hand, if they are regularly reminded about their

shortcomings, they become de-motivated and ineffective.

184 Pygmal i on E F FE C T


Quinn , JA ME S B R IA N 185

Q

q-theory A theory of investment behavior which suggests that firms tend to invest

so long as the value of their shares exceeds the replacement cost of the

firm’s physical. Developed by economist James Tobin, q-theory encom-

passes other theories of investment in a simple framework. q is the ratio

of the value of a firm to the replacement cost of the assets of the firm,

including machines, buildings, etc. If q is greater than 1, the firm should

expand. If q is less than 1, it will make sense to sell off the assets rather

than try to use them.

Quinn, James Brian A well known scholar in the area of strategic management, Quinn has

suggested that strategic management is not primarily an analytical or

rational activity. Strategic decisions typically evolve in part random —

or erratic — and part logical way. In 1980, Quinn coined the expression

“logical incrementalism” to capture this idea. Quinn’s view is that man-

agers tend to make strategic decisions according to perceptions of in-

cremental opportunities which appear to add to what they already have.

(See also: STRATEGIC PLANNING)

186 Rea l OPT IONS

R

Real Options Real options build on the basic theory of financial options, by putting a

value on the various options available in a new project subjected to vari-

ous uncertainties. Thus, a timing option, in the form of a delayed expan-

sion in capacity can create value in a situation of uncertain demand. Put-

ting up a plant in an overseas market currently fed by exports may gen-

erate new growth options. An exit option in the form of a plant closure

increases the value of the investment decision. Viewing strategic deci-

sions as options and then using information from financial markets to

value these options can greatly enhance the quality of strategic planning.

Traditional valuation tools like NET PRESENT VALUE have limited flex-

ibility. This is a handicap in an uncertain environment in which various

outcomes which demand a range of strategic responses are possible.

Thinking of an investment in terms of options allows uncertainty to be

taken into account. Managers can identify the embedded options, evalu-

ate the conditions under which they may be exercised, and finally judge

whether the aggregate value of the options compensates for any shortfall

in the present value of the project’s cash flows. This ensures that good

projects are not rejected because of excessive caution on the part of

managers.

Regulatory Capture A situation where a regulator sometimes might support the interests of

the industry it is supposed to be regulating. This may be so because the

regulator recognizes that its own self-interest requires a healthy industry

to regulate, or because the social context within which the regulator op-

erates is highly supportive of the industry. Or, because the regulator does

not want to become controversial by raising tough questions.

Resource -based THE OR I E S 187

Resource-based Theories Focus on the resources of the firm, unlike Michael Porter’s positioning

school that looks at how the firm is placed vis-à-vis other players in the

industry. During the 1980s and early 1990s, numerous writers were crit-

ical of the market-based view of strategy. If a firm’s position in an in-

dustry was the key determining criterion for success, why did firms in

the same industry with similar market positions differ considerably in

their performance? The resource-based view of strategy suggests that a

firm’s competitive advantage is dependent on its ability to develop and

acquire competencies.

Assets and capabilities are the building blocks for distinctive compe-

tencies. Tangible assets include production facilities, raw materials, fi-

nancial resources, real estate, and computers. Intangible assets include

brand names, company reputation, technical knowledge, patents and

trademarks and accumulated experience within an organization. Organi-

zational capabilities are the skills needed to transform inputs into output.

Once managers identify their firm’s resources, they must examine

which of those resources represent real strengths. Resources must be

broken down into more specific competencies. Organizational processes

and combinations of resources must be considered, not only isolated

assets or capabilities. The VALUE CHAIN must be analyzed to uncover or-

ganizational capabilities, activities, and processes that are valuable, po-

tential sources of competitive advantage. Some guidelines can be useful

here:

Competitive Superiority: Does the resource help fulfill a customer’s

need better than those of the firm’s competitors?

Resource Scarcity: Is the resource in short supply?

Replication: Is the resource easily copied or acquired?

Value Capture: Who actually gets the profit created by a resource?

Durability: How rapidly will the resource depreciate?

Following a systematic assessment of internal resources, these re-

sources can be deployed in an optimal way.

(See also: CORE COMPETENCE)

188 Responsiveness P LA NN ING

Responsiveness Planning A term coined by Russell ACKOFF to describe the designing of an organi-

zation so that deviations from the expected can be quickly detected and

suitable responses can be made. Obviously, some future events are diffi-

cult to anticipate. Examples include catastrophes and technological

breakthroughs. Here, companies can use responsiveness planning. Re-

sponsiveness planning, a conceptually elegant way of identifying and

managing risks, essentially consists of building responsiveness and flex-

ibility into the organization.

Reverse Engineering A process of disassembling a product of another company to find out

how it works, with the intention of replicating some or all of its functions

in another product. Some tinkering is done with the design to avoid viola-

tion of intellectual property rights. India’s leading pharma companies like

Ranbaxy and Dr. Reddy’s have been masters of reverse engineering, as

indeed were the Japanese in the 1960s. The practice for a while won them

the dubious reputation of being cheap imitators. The Japanese, however,

built on what they learnt from reverse engineering to gradually build

global leadership in consumer electronics, automobiles, etc.

Risk Threat to a firm’s survival, stability or profitability. Risks have multi-

plied in today’s fast changing environment. Risks can be broadly divided

into two categories: business and financial:

Business Risk is the uncertainty associated with the ability to sell the

company’s product(s) at an appropriate price.

Financial Risk arises from the use of debt in the capital. The higher

the debt component in the capital structure, more the risk.

The Economist Intelligence Unit divides risks into four broad

categories:

1. Hazard Risk is related to natural hazards, accidents, fire, etc. that can

be insured.

2. Financial Risk has to do with volatility in interest rates and exchange

rates, defaults on loans, asset-liability mismatch, etc.

Rivalry 189

3. Operational Risk is associated with systems, processes and people

and deals with succession planning, human resources, information

technology, control systems and compliance with regulations.

4. Strategic Risk stems from an inability to adjust to changes in the en-

vironment, such as changes in customer priorities, competitive condi-

tions and geopolitical developments.

From the perspective of corporate strategy, Peter DRUCKER probably

offers the best risk management perspective. In his book, Managing for

Results, Drucker identified four types of risk at a macro level:

1. The risk that is built into the very nature of the business and which

cannot be avoided.

2. The risk one can afford to take.

3. The risk one cannot afford to take.

4. The risk one cannot afford not to take.

(See also: ENTERPRISE RISK MANAGEMENT)

Rivalry The term refers to the intensity of competitive behavior within an indus-

try. The degree of rivalry determines the attractiveness of the industry. In

general, the higher the rivalry, the lower the profit margins. Rivalry gen-

erally increases when there are many competitors who are more or less

equally strong. In an industry dominated by one or a few firms, rivalry

tends to be less.*

Rivalry is high when firms are continuously trying to outsmart their

rivals, especially through price cuts. Rivalry is low when firms are con-

tent with the status quo, happy with their market shares, and are unwill-

ing to upset the balance of the industry by instigating a price war.

Various factors influence the intensity of rivalry:

When an industry is growing slowly, the intensity of competition

increases. On the other hand when an industry is growing fast, just

keeping up with the industry increases the sales volume. Further, in a

growing industry the focus is on exploiting growth opportunities ra-

ther than countering competitors.

*From the book The Essence of Competitive Strategy by David Faulkner and


190 Riva lry

When fixed costs are high relative to value added, there is tremen-

dous pressure to utilize capacity. This can lead to price cutting and,

consequently, intense rivalry.

When a product is perishable or difficult to store, price cutting may

be necessary to reduce stocks. This can intensify competition.

Product differentiation builds customer loyalty and tends to reduce

the intensity of competition. Where scope for differentiation is mini-

mal, rivalry tends to be intense.

SWITCHING COSTS are costs incurred by the buyer in moving from

one supplier to another. If switching costs are low, buyers are able to

switch between suppliers without any penalty. This increases rivalry.

When capacity can be added only in large increments, there are fre-

quent situations of overcapacity, leading to intense rivalry.

When firms consider the industry to be strategically important for

them, they may be prepared to give up profits and compete vigorous-

ly. This intensifies competition.

High exit barriers can increase rivalry.

(See also: FIVE FORCES MODEL)

Scenar io P LA NN ING 191

S

Satisficing Concept which holds that managers do not take optimal decisions after

considering all relevant factors. Instead, they tend to take what they con-

sider to be the most sensible decision under the circumstances, based on

the information available.

Herbert A. SIMON coined the term “satisficing planning” to describe

efforts to attain some level of satisfaction, not necessarily the maximum

level. Satisficing means doing well enough, which may not necessarily

be the best. Satisficers argue that it is better to produce a feasible plan

than an optimal plan that is not feasible. But as ACKOFF has pointed out,

this is based on a wrong belief that consideration of feasibility cannot be

incorporated into the consideration of optimality. It is always possible to

seek the best feasible plan.

Scenario Planning The construction of a number of scenarios, each describing a possible

future state. Scenario planning enables firms to plan for the future by

visualizing different ways in which the external environment may

evolve. It can help organizations deal with uncertainty more effectively.

Scenario building stimulates creative thinking and helps identify major

opportunities and threats in the future by taking into account various

political, social, economic and technological factors. By contemplating a

range of possible futures, better informed decisions can be taken and

linkages between apparently unrelated factors identified.

Scenarios allow discussions to be more uninhibited, help challenge

established views and enable new ideas to be tested. Seeing reality from

different perspectives reduces the risk of increasing commitment to fail-

ing strategies.

Formal scenario planning emerged during the Second World War

when it was used as a part of military strategy as countries prepared

themselves for different contingencies. Since then the use of scenario

192 S-Curve

planning has become increasingly popular. One company which has

used scenario planning very effectively is Royal Dutch Shell.

The basic premise behind scenario planning is that reacting in ad hoc

fashion to external events is not desirable. Understanding long-term

trends enables companies to prepare for different future scenarios. It also

helps a company to identify the scenarios for which its strengths and

competencies are particularly suited. At the same time, by identifying

the scenarios for which it is least prepared, a company can invest in

building the required competencies. In extreme cases, it can even divest

businesses, which do not look promising in the long run.

(See also: DISCOVERY DRIVEN PLANNING, STRATEGIC PLANNING)

S-Curve Commonly used to describe the product life cycle in technology evolu-

tion, S-curve also a useful tool for managing TECHNOLOGY RISK. Foster*

describes the S curve as the relationship between the effort put into im-

proving a product or process, and the results one gets back for that in-

vestment. As technological limits are reached, the cost of making pro-

gress accelerates dramatically. Eventually, a point is reached beyond

which no meaningful gains in performance can be achieved by improv-

ing technology. Thereafter, other factors — such as the efficiency of

marketing, purchasing and manufacturing — begin to determine the suc-

cess of the business.

(See also: TECHNOLOGY RISK)

Senge, Peter Famous for the concept of the learning organization, which effectively

implies a shift from thinking about strategic issues as part of a formal,

bureaucratic process to its being completely infused with organizational

learning throughout the organization.

In his bestseller, The Fifth Discipline (1990), Senge explains how

organizations can achieve success by mastering five disciplines:

1. Personal Mastery or self-discipline on the part of all members;

2. Continual Challenge of stereotypical mental models;

* Foster R., The S-Curve: A New Forecasting Tool, Innovation: The Attacker’s

Advantage, Summit Books, Simon and Schuster, 1996.

Simple S TRUC TU RE 193

3. The creation of a shared vision;

4. Commitment to team learning rather than conflict; and

5. Systems thinking, a holistic way of looking at problems.

Systems thinking is a philosophy which realizes it is not possible to

understand complexity by breaking the whole down into parts. The dy-

namic system has to be understood as a whole. Senge identifies a num-

ber of systems archetypes to illustrate this. For example, if a successful

group is given more resources at the expense of other, less successful

groups, the latter are even less likely to succeed.

(See also: INNOVATOR’S DILEMMA, ORGANIZATIONAL LEARNING)

Service Level Agreement (SLA) Agreements that establish the dimensions of service and relationship

between two or more departments of an organization. Some organiza-

tions formalize the internal customer concept by insisting on service

level agreements (SLAs), considering these useful in establishing

boundaries of responsibility and facilitating inter departmental collabo-

ration, especially if there have been coordination problems or inter de-

partmental conflicts in the past.

Shareholder Value The primary goal of any listed company is to increase the wealth of its

shareholders. For this to happen, the returns to shareholders should out-

perform certain benchmarks such as the cost of capital. In essence,

shareholders’ money should be used to earn a higher return than they

could earn themselves, for example by investing in risk free bonds.

Simple Structure A structure used by organizations in their early days. When the organi-

zation is small and activities are easy to track and monitor, all functions

can report directly to the CEO or the business owner. Such a structure,

however, becomes increasingly inappropriate as the size of an organiza-

tion increases.


194 S imon , HE RB E RT A .

Simon, Herbert A. One of the few Nobel Prize winners till date in the field of management.

Simon’s insights about how the limitations of the human brain affect the

functioning of organizations are truly landmark. Managers are bombard-

ed with choices and decisions but they possess only finite information

storage and processing capabilities. They tend to compensate for the

inability to consider and evaluate all the available choices by selecting

“good enough” options, rather than the “optimal” solutions.

Simon’s theory of the firm is based on four main ideas:

First, organizations are not the abstract, one-dimensional entities of-

ten depicted by economists. They are complex entities, made up of

diverse individuals and interests, all of which are held together by a

variety of “deals” and coalitions, ranging from explicit contracts to

implicit agreements.

Second, organizations do not have a complete list of alternatives. Nor

do they have complete knowledge about the consequences of their

decisions and actions.

Third, rather than searching for optimal solutions, organizations dis-

tinguish between outcomes that are “good enough” and those that are

not.

Fourth, much human behavior involves following rules, rather than

rationally evaluating the expected consequences of a given action.

(See also: DECISION MAKING, SATISFICING)

Six Sigma A disciplined, data driven approach that eliminates waste, improves

productivity and helps to develop and deliver products and services of

high quality. The word sigma is a statistical term that measures how far a

given process deviates from perfection. The central idea behind six sig-

ma is to measure how many defects there are in a process, and systemat-

ically figure out how to eliminate them and get as close to zero defects

as possible. A six sigma quality level means only 3.4 defects per million

opportunities. Six sigma tries to analyze the root cause of business prob-

lems and solve them. The methodology used in six sigma is popularly

called DMAIC.

Sloan , A L FRE D P . 195

D — Define the goals and customer (internal and external) requirements.

M — Measure the current performance.

A — Analyze the performance and determine the root causes of defects.

I — Improve the process by eliminating the root causes of defects

C — Control the vital factors and implement process control systems.

The six sigma concept was developed by Motorola in 1979. Within

15 years, Motorola was operating at Six Sigma in many of its manufac-

turing units. Motorola saved billions of dollars earlier spent correcting

defects on the production line and recalling products from the market.

Since then many other companies, such as GE, have embarked a Six

Sigma. Many of India’s leading software companies have also enthusias-

tically embraced six sigma.

Skimming A strategy for pricing a new product at such a high level that it is only

purchased by a small segment consisting of trend-setters, enthusiasts, or

the very rich. High pricing helps in establishing an up-market image for

the product and ensures that the initial buyers are charged the high price

they are willing to pay. The price is later lowered to attract the mass

market. But the risk is that a high price may make it easy for a competi-

tor to launch a successful, lower priced imitation. By failing to maximize

sales at the start, the firm may not be able to hold on to a viable market

share when competitors arrive.

(See also: STRATEGIC PRICING)

Skunk Work A covert research project undertaken by a small, independent group,

away from the mainstream operations of an organization. Increasingly,

companies are realizing that the key to attracting and retaining the best

scientists lies in offering freedom to experiment. The idea of skunk

works is to allow initiative to blossom by shielding it from the bureau-

cracy of the mainstream organization.

Sloan, Alfred P. One of the greatest management practitioners in business history. Sloan

led General Motors in its formative years, pioneered the DIVISIONAL

STRUCTURE of a business organization. He set up a number of centralized

196 S lywotzky , A DR IA N J .

functions and framed policies to help rationalize the work of the various

divisions and to achieve synergy within the corporation. Sloan attempted

to create a deliberate tension between “maximized decentralization” and

“proper control”. The new structure left the broad strategic decisions as

to the allocation of existing resources and the acquisition of new ones in

the hands of a top team of generalists. Divisional executives could run

the business, while general officers set the goals and policies and pro-

vided overall appraisal. Sloan’s book, My Years at General Motors is a

business classic, and a must read for any practicing manager.


Slywotzky, Adrian J. Famous for the idea of value migration, which means that businesses

often need to reinvent how they add value as industries and their markets

change. This might, for example, involve:

Getting rid of activities which add little value, dilute value, or destroy

value;

Exploiting new ways of distribution; and

Rebundling or unbundling existing products or services.

In a sense, Slywotzky emphasizes the importance of business model

innovation, i.e. changing the very rules of the game by coming up with a

new way of doing business.

(See also: BUSINESS MODEL, INNOVATION)

Span of Control The range of resources for which a manager is given decision rights and

held accountable for performance. In more simple terms, it is the number

of subordinates answerable directly to a manager.

The span of control is “wide” if the manager has many direct subor-

dinates and “narrow” if there are few.

A wide span of control has several advantages. The boss has less

time for each subordinate and is effectively forced to delegate. Fewer

layers of hierarchy are needed, thereby improving vertical communica-

tion.

On the other hand, a narrow span of control is useful when tighter

management supervision may be necessary. There is less stress involved

Stakeholde rs 197

for each employee as the scope of each job is limited. Moreover, as there

are more layers of hierarchy, there are more frequent promotion oppor-

tunities, i.e. the career ladder has more rungs.

The actual span of control chosen depends on what is more im-

portant, customer responsiveness or cost control. For example, when

customers are price sensitive, the span of control must be wide for man-

agers of internal operating functions to supply inputs to market facing

units efficiently and cost effectively. Market facing managers usually

want a wide span of control to maximize customer responsiveness.

When the basis for competing is tailoring products and services to suit

the tastes and needs of customers in particular geographic regions, a sig-

nificant portion of value creation must be located close to the customer.

So regional managers have a wide span of control.

(See also: ORGANIZATIONAL DESIGN)

Spender, J. C. Famous for his concept of “strategic recipes”, the taken-for-granted rules

of strategic decision making. Strategic recipes are founded on things that

have worked, or not worked, in the past. These recipes relate back to a

past group, or individual, strategic situations. When a new leader is ap-

pointed, particularly from the outside, these are likely to change or be

challenged.

Stakeholders Groups including shareholders, employees, managers, creditors, suppli-

ers, contractors, agents, distributors, customers and the local community

whose interests are directly or indirectly impacted by the company’s

activities. Different stakeholders wish to influence the decision making

within the organization to serve their own interests. For example, cus-

tomers will want lower prices, suppliers will want prompt payments,

employees will want higher wages, shareholders will want a return from

their investment of capital and the society will expect the environment to

be protected. Corporations have to try and balance these different expec-

tations.

(See also: CORPORATE SOCIAL RESPONSIBILITY)

198 Strateg i c A DV A NTA G E

Strategic Advantage A term popularly used in the context of globalization. Global companies

try to leverage two kinds of advantage while competing — comparative

and strategic. COMPARATIVE ADVANTAGE results when VALUE CHAIN activi-

ties are performed in cheaper locations. Beyond a point, however, an

obsession with comparative advantage may be counter productive. Stra-

tegic advantages must not be overlooked. Any advantage which will

accrue in the long run, but which cannot be easily quantified in monetary

terms immediately can be considered a strategic advantage. In other

words, if comparative advantages help in cutting costs in the short run,

strategic advantages help in adding value in the long run.

The US is a strategically important market for products such as in-

vestment banking, computer software, pharmaceuticals and automobiles.

France is an important country for cosmetics and perfumes, while Japan

is the world leader in consumer electronics. These are not the cheapest

locations in the world but a presence in these markets is important to

keep in touch with highly sophisticated customers and leverage the in-

novations that are going on.

In some cases, while generating strategic advantages, comparative

disadvantages such as expensive labor can be circumvented through in-

genuity and meticulous planning. Nicholas Hayek*, CEO of Switzerland

based SMH which makes the world famous Swatch watches, once ar-

gued that if a company is determined to develop low cost methods of

manufacturing, it can do so no matter what the location. Hayek’s conten-

tion was that in watch manufacturing, as long as direct labor accounts

for less than 10% of the total costs, Switzerland would remain an attrac-

tive place for manufacturing.

(See also: GLOBAL LEVERAGE)

Strategic Alliance An agreement between two or more organizations to do business togeth-

er in a mutually beneficial way. Through a strategic alliance, the compa-

nies involved can gain access to each other’s resources, including mar-

kets, technologies, capital and people. Alliances can facilitate geograph-

* Taylor, William, “An interview with Swatch Titan, Nicolas Hayek,” Harvard

Business Review, March-April 1993, pp. 99-110.

Strateg i c C HO IC E 199

ic expansion, cost reduction and generation of manufacturing and other

supply chain synergies. Alliances can also accelerate learning and in-

crease market power.

There are some general criteria that differentiate strategic alliances

from conventional alliances. An alliance can be considered strategic if it

is critical to the success of a core business goal or objective, blocks a

competitive threat, or mitigates a significant risk to the business.

Strategic alliances usually succeed when the partners involved see a

mutual benefit and trust each other. In any alliance, mechanisms must be

put in place to resolve tensions as and when they surface. Top manage-

ment commitment and selection of capable executives to manage the

alliance are key success factors.

(See also: JOINT VENTURES)

Strategic Architecture A top management action plan which indicates the new competencies

which will be needed in the coming years, how existing competencies

have to be strengthened, how business processes have to be reoriented

and relationships with external entities, especially customers have to be

reconfigured.

Strategic Business Unit (SBU) A variation of the DIVISIONAL STRUCTURE, an SBU is an operating unit or

division of a corporate group that determines its own strategy largely

independent of the corporate center. Usually, the SBU will have its own

distinct set of products and services, either for a customer segment or a

geographical region. The terms SBU and profit center are often used

interchangeably. In general, SBUs in Indian companies are far less em-

powered than the term would suggest. They are heavily dependent on

headquarters for key resources and approval of important decisions.


Strategic Choice Strategy is all about making trade offs. A company must avoid compet-

ing in some segments while strengthening its presence in others in line

with its strategic vision. The choices which the company makes must

address three questions:

200 Strateg i c C ONTRO L

1. Who are the customers?

2. What are they looking for?

3. How can these products / services be offered most efficiently?

These questions look simple but have profound implications for the

viability of a strategy.

Strategic Control Linking operations to strategic goods. A strategic control system does so

by using appropriate financial and non-financial information. It is con-

cerned with tracking the strategy as it is being implemented, identifying

problems or changes in underlying assumptions and making necessary

adjustments. It involves controlling and guiding efforts as the action is

taking place. To be effective, a strategic control system needs to be bro-

ken down into operational control systems which evaluate the progress

in meeting annual objectives. For example, the company can identify

key success factors like improved productivity, high employee morale,

high product quality, increased EPS, growth in market share, etc. Per-

formance standards can be established and deviations from standards

evaluated as the strategy is implemented and the causes identified. Cor-

rective action can then be taken.

(See also: STRATEGY IMPLEMENTATION)

Strategic Cost Management A holistic approach to managing costs, using a cross-functional perspec-

tive. A systematic approach to understanding cost drivers can create var-

ious benefits. Companies must have a good understanding of what activ-

ities add value and what do not. Accordingly, they must cut costs in

some areas while increasing spending in others.

(See also: ACTIVITY BASED COSTING)

Strategic Fit A term, which is commonly used in the context of diversification and

mergers and acquisitions. Strategic fit refers to the extent to which the

activities of two units of a business or two organizations complement

each other. A good strategic fit exists when there is scope for cost reduc-

tion due to rationalization of activities or economies of scale. Strategic

fit may also exist if there are cross selling opportunities, or if market

Strateg i c INF LE C T ION P O INT 201

power can be increased. In general, it is easier to quantify the impact on

costs, compared to that on the bottom line.

Strategic Groups* Groups of companies within an industry that have similar business mod-

els or similar strategies. Strategic groups is a concept that helps to bring

sharper focus into strategy formulation. Strategic groups† are essentially

companies who are aware of each other as competitors in a particular

market, and who are collectively separated from other such groups by

mobility barriers, such as scale economies, proprietary technology, pos-

session of government licences, control over distribution, marketing

power, and so forth. Such barriers vary widely in nature from group to

group. Different companies within a group may relate to them to varying

degrees. The number of groups within an industry and their composition

depends on the dimensions used to define the groups. Strategists often

use a two dimensional grid to display the position of each company

along the two most important dimensions. The term was coined by Hunt

(1972). Michael Porter (1980) developed the concept and explained stra-

tegic groups in terms of “mobility barriers” or entry barriers.

(See also: BARRIERS TO ENTRY, INDUSTRY)

Strategic Inflection Point A term coined by Andrew Grove, a former CEO of Intel to describe a

dramatic change in competitive forces. At such times, the leaders must

give up the past, see closely how the industry is evolving and find new

ways of competing. Such a point of dramatic change in the industry is

known as strategic inflection point.

For example, the arrival of containers marked a strategic inflection

point in the shipping industry. The introduction of the IBM PC was a

strategic inflection point in the computer industry. The emergence of

large discount store chains such as Giant and Big Bazaar may well turn

out to be a strategic inflection point in the Indian retailing industry. The

rise of virtual book stores like Amazon has also marked a point of severe

* http://en.wikipedia.org/wiki/Strategic_group

From the book, The Essence of Competitive Strategy by David Faulkner and


202 Strateg i c INF LE C T ION PO IN T

discontinuity. The entry of low cost airlines like Air Deccan represents a

strategic inflection point in the airline industry in India.

In his fascinating book, Only the Paranoid Survive, Grove calls a

very large change in one of the competitive forces in an industry, a

“10X” change, suggesting a sudden tenfold increase in the force. The

business no longer responds to the company’s actions as it used to in the

past. Put another way, a strategic inflection point marks a shift from the

old ways of doing business to new ones.

Grove offers some useful insights to cope with such situations. When

a technology break or other fundamental change comes their way, com-

panies must grab it. Only the first mover has a true opportunity to gain

time over its competitors. Companies must also show discipline by set-

ting a price that the market will bear and then work hard to cut costs so

that they can make money at that price. Cost plus pricing will not work

in such cases.

When is a change really a strategic inflection point? Most strategic

inflection points, instead of coming with a bang, appear slowly. They are

often not clear until we can look at the events in retrospect. So how do

we know whether a change signals a strategic inflection point? Grove

suggests managers must ask a few basic questions. Are we no longer

clear about who the key competitors are? Does the company that in past

years mattered the most to us and our business seem less important to-

day? Does it look like another company is about to eclipse them? Are

people, who for years have been very competent, suddenly becoming

ineffective?

The best way of identifying a strategic inflection point is to engage in

a broad and intensive debate involving employees, people outside the

company, customers and partners who not only have different areas of

expertise but also have different interests. Such a debate can consume a

lot of time and intellectual energy. It also takes courage to enter a debate

the top management may lose, and which may expose weaknesses and

encounter the disapproval of people.

(See also: DISRUPTIVE TECHNOLOGY)

Strateg i c INNOV A T IO N 203

Strategic Innovation A term introduced by Vijay GOVINDARAJAN and Chris TRIMBLE

* to differ-

entiate innovation which goes beyond process or product innovation.

Strategic innovation addresses three fundamental questions:

Who is the customer?

What is the value the company offers to the customer?

How does the company deliver that value?

Strategic innovation must not be left to chance. It must be viewed as

the outcome of strategic experiments. These are deliberately planned

strategic moves, which have ten common characteristics:

1. They have high revenue growth potential.

2. Typically, they target emerging or poorly defined industries.

3. Such experiments are launched before any other competitor and be-

fore any profit making formula has been established.

4. They depart from the company’s proven business definition and its

assumptions about how the business will succeed.

5. These experiments leverage some of the corporation’s existing ca-

pabilities and assets in addition to capital.

6. They need some new knowledge and capabilities.

7. They involve discontinuous rather than incremental value creation.

8. They involve greater uncertainty across multiple functions.

9. They may remain unprofitable for several quarters or more.

10. Such experiments give no clear picture of performance early on.

Strategic innovations involve unproven business models. Companies

that are good at strategic innovation change the rules of the game and

delight investors with sustained growth. Their business models are diffi-

cult to imitate.

Govindarajan and Trimble have explained in great detail the chal-

lenges involved in implementing innovations. Typically, three stages are

involved in any innovation. Creativity dominates the beginning of the

innovation process. Efficiency is important towards the end of the inno-

vation process. The middle involves unique challenges — a forgetting

challenge, a borrowing challenge and a learning challenge.

* From the book, Ten Rules for Strategic Innovators: From Idea to Execution by Vijay Govindarajan, Chris Trimble, Harvard Business School Press, 2005.

204 Strateg i c INTE NT

It is in the middle where companies often stumble. The new initiative

must forget the parent company’s business definition, assumptions,

mindsets and biases to develop new competencies in order to exploit

new business possibilities. The new initiative must learn how to borrow

assets from the parent company. These may include manufacturing ca-

pacity, expertise, sales relationships, distribution channels, etc. The new

initiative must learn and constantly improve its predictions of business

performance. It must be able to resolve various critical unknowns in its

business plan and put in place a working business model as quickly as

possible.

(See also: INNOVATION, PROCESS INNOVATION, PRODUCT INNOVATION,

VALUE INNOVATION)

Strategic Intent An ambitious organizational goal that is disproportional to existing re-

sources and capabilities. The top management articulates a desired lead-

ership position and then establishes the criteria that the organization will

use to chart its progress. The management must motivate people by

communicating the value of the target, sustain enthusiasm by providing

new operational definitions as circumstances change, and make the in-

tent the basis for resource allocations.

Strategic intent can be viewed as an animating dream that energizes a

company by setting STRETCH targets, providing a sense of direction and

conveying a sense of destiny to the company’s employees.

For example, Dabur’s intent states: “We intend to significantly accel-

erate profitable growth. To do this, we will*:

“Focus on growing our core brands across categories, reaching out to

new geographies, within and outside India, and improve operational ef-

ficiencies by leveraging technology.

“Be the preferred company to meet the health and personal grooming

needs of our target consumers with safe, efficacious, natural solutions by

synthesizing our deep knowledge of ayurveda and herbs with modern

science.

“Provide our consumers with innovative products within easy reach.

* www.dabur.com

Strateg i c MA NA G E ME NT 205

“Build a platform to enable Dabur to become a global ayurvedic

leader.

“Be a professionally managed employer of choice, attracting, devel-

oping and retaining quality personnel.

“Be responsible citizens with a commitment to environmental protec-

tion.

“Provide superior returns, relative to our peer group, to our share-

holders.”

(See also: BHAG)

Strategic Management Strategic management is concerned with the formulation and implemen-

tation of strategies to achieve the objectives of an organization.

The major areas of strategic management are:

1. Articulating the corporate mission.

2. SWOT analysis.

3. Identifying various strategic options like capacity expansion, vertical

integration and diversification.

4. Selecting the desired option(s).

5. Formulation of long term objectives and strategies consistent with the

desired options.

6. Formulation of short term objectives and strategies consistent with

the long term objectives and strategies.

7. Implementation.

8. Control.

The term strategic implies heavy, irreversible resource commitments,

long term implications and organization wide consequences. But strate-

gic management is not only about the long term. Short term strategies

and objectives must be aligned with the long term objectives to facilitate

effective implementation.

Strategic management leads to those crucial decisions which effec-

tively determine the future of the firm. Indeed, the outcome of strategic

management can make or break a firm. Consider the examples of Metal

Box (India) Ltd, Asian Paints and Microsoft. Metal Box diversified into

bearings manufacture with disastrous consequences. Asian Paints, on the

other hand, successfully pursued a strategy of backward integration to

206 Strateg i c MA RK E T

become self sufficient in critical raw materials such as pentaerythrytol.

Today, Asian Paints is far ahead of other leading paint manufacturers in

the country including the MNCs. In the early days of the global comput-

er industry, Microsoft decided to bet on software unlike many other

companies which emphasized hardware or a combination of hardware

and software. Microsoft also decided to focus on capturing the desktop.

By setting its targets right, Microsoft went on to become one of the most

successful companies in business history. In contrast, others like Apple

struggled.

(See also: MISSION, ENVIRONMENTAL SCANNING, STRATEGIC PLANNING,

SWOT ANALYSIS, VISION)

Strategic Market A market, which scores high on either market potential or learning po-

tential, or both, for a global company. By competing in such a market, a

company can gain strategic advantages. The US is a strategic market for

a wide range of goods and services, especially for information technolo-

gy, pharmaceuticals and biotech. So, most European and Japanese

MNCs have a major presence there. A strategic market demands signifi-

cant commitment of human and material resources. Usually, such a mar-

ket calls for a long-term orientation, i.e. making necessary investments

and waiting patiently for results to come. The Japanese car makers like

Toyota have succeeded globally by targeting the strategic US market.

(See also: GLOBALIZATION, STRATEGIC ADVANTAGES)

Strategic Options* Based on a careful analysis of the external environment and the compa-

ny’s profile, various strategic options are available for a company. The

company must choose one or more of these and commit resources ac-

cordingly. A few are listed below:

Concentration: The firm can continue to allocate resources for mak-

ing more of the current products with the existing technology.

* For more detailed account refer to Strategic Management: Formulation, Im-plementation & Control by John A. Pearce and Richard B. Robinson, Irwin,

1995.

Strateg i c OPT IO NS 207

Market Development: Existing products can be modified slightly and

sold to customers in related market areas. Alternatively, sales can be

boosted by adding new distribution channels or by changing the

promotion mix.

Product Development: Existing products can be modified significant-

ly and new related products created. They can then be sold to current

customers through established channels.

Innovation: A firm may decide to keep launching new products.

Even if new players enter the market and increase rivalry, the firm

can stay ahead by moving on to a new product.

Horizontal Integration: The company can acquire one or more simi-

lar businesses which are operating at the same stage of production /

marketing.

Vertical Integration: The firm can enter businesses that either provide

inputs or that serve as consumers for the firm’s output.

Joint Ventures: Two or more business partners may get together if

each of them is lacking in some competencies or resources which are

necessary for the success of the project.

Concentric Diversification: Entry into a new business which is related

to the existing business in terms of technology, markets or products is

called concentric diversification.

Conglomerate Diversification: The firm can enter an unrelated busi-

ness based primarily on profit or growth considerations.

Turnaround: By cutting costs, divesting assets and improving asset

utilization, the firm tries to strengthen itself and restore profitability.

Divestiture: The firm can sell the business or a major chunk of the

business. This is the last resort, often considered after the failure of a

turnaround strategy.

Liquidation: The business may be sold (in parts or as a whole) for its

tangible asset value and not as a going concern.

The above options need not be mutually exclusive. Based on the

company MISSION and the SWOT ANALYSIS, one or more of the above

options may be selected. Techniques which help in arriving at a desira-

ble option include the BCG matrix and the GE 9 cell planning grid.

(See also: BCG GROWTH-SHARE MATRIX, NINE-CELL PLANNING GRID,

SWOT ANALYSIS)

208 Strateg i c P LA NN ING

Strategic Planning* The determination of the basic long-term goals and objectives of an or-

ganization, the adoption of courses of action, and the allocation of re-

sources necessary to achieve these goals.

Strategic planning involves several steps.

The first step is to establish objectives, the results expected, what is

to be done and where the primary emphasis is to be placed.

The second step is to establish planning premises, i.e. assumptions

about the anticipated environment.

These premises can be classified as external and internal, quatative

and quantitative, controllable, and non-controllable.

External premises can be classified into: general environment, (eco-

nomic, technological, political, social and ethical conditions); the prod-

uct market; and the factor market, (location of factory, labor, and materi-

als, etc).

Internal premises include capital investment, sales forecast and or-

ganization structure. Some premises can be quantified while others may

be qualitative. Some premises are controllable, such as expansion into a

new market, adoption of a research program or a new site for the head-

quarters. Non-controllable premises include population growth, price

levels, tax rates, business cycles, etc. The semi controllable premises are

the firm’s assumptions about its share of the market, labor turnover, la-

bor efficiency, and the company’s pricing policy.

The third step in planning is to identify alternative courses of action.

The fourth step is to evaluate them by weighing the various factors in

the light of premises and goals.

The fifth step is adopting the plan.

The final step is to give meaning to plans by putting in numbers and

preparing budgets.

* See Mintzberg, Henry., The Rise and Fall of Strategic Planning: Reconceiving

Roles for Planning, Plans, Planners, Simon & Schuster, 1993 and Mintzberg, Henry. “The Fall and Rise of Strategic Planning”, Harvard Business Review,

January-February 1994, pp. 107-114.

Strateg i c P LA N N ING 209

Henry MINTZBERG has identified ten schools of strategic planning*:

The Design School: Aims at creating a fit between internal strengths

and weaknesses and external threats and opportunities.

The Planning School: Strategic planning is viewed as an intellectual,

formal exercise using various techniques.

The Positioning School: The company selects its strategic position

after thoroughly analyzing the industry.

Entrepreneurial School: The focus here shifts to the chief executive

who largely relies on intuition to formulate strategy. The emphasis

moves away from precise designs, plans or positions to vague visions

or broad perspectives.

Cognitive School: The focus here is on cognition and cognitive bias-

es.

Learning School: Strategies evolve as the organization learns more

about the environment and the business.

Power School: Strategy making is rooted in power.

Cultural School: Views strategy formulation as a process rooted in cul-

ture.

Environment School: The focus here is on coping with the environ-

ment.

Configuration School: Integrates the claims of other schools.

The three broad approaches to strategic planning can be summarized

as follows:

Rational Planning involves identifying and understanding gaps be-

tween previously established goals and past performance, identifying

the resources needed to close these gaps, distributing those resources,

and monitoring their use in moving the organization closer towards its

goals. This approach assumes the environment is predictable and the

organization can be effectively controlled. Clearly, such an approach is

not advisable if the business environment is complex and unpredicta-

ble.

Incrementalism means moving from one strategy to the next, de-

pending on the unfolding of events beyond the control of managers.

* From the book, Strategy Safari: A Guided Tour through The Wilds of Strategic Management by Henry Mintzberg, Joseph Lampel, and Bruce Ahlstrand, The

Free Press, 2005.

210 Strateg i c PR IC ING

Incrementalism assumes that managers cannot forecast or enforce the

developments essential to developing a pre-ordained strategy and

therefore must continually adjust. Future developments are likely to

be random so that there is little scope to learn from past experiences.

Thus, in contrast to rational planning which emphasizes intended

strategies, incrementalism is based on emergent strategies.

Organizational Learning also emphasizes the need for making contin-

uous adjustments. However, these adjustments need not be random.

Rather, managers must keep making incremental adjustments to ra-

tional plans as they attempt to move the organization toward its

goals. Though they may be unable to foresee the future, managers

must not allow their organization to drift aimlessly. The role of top

management is to encourage all employees to continuously challenge

the status quo, generate ideas for improving the status quo, conduct

experiments to see which of these ideas are most fruitful and then try

to disseminate knowledge gained from these experiments throughout

the organization.

(See also: DISCOVERY DRIVEN PLANNING, ENVIRONMENTAL SCANNING,

SCENARIO PLANNING, STRATEGIC MANAGEMENT)

Strategic Pricing Aligning the pricing strategy with corporate strategy. Pricing is a key

factor in business innovation and the price must be chosen carefully after

considering various scenarios and possible implications. Is the price at-

tractive enough to capture the mass of target buyers? Can the company

make the offering at the target cost and still earn a healthy profit margin?

Can the company profit at a price that is affordable to the target buyers?

Strategic pricing is a key component of BLUE OCEAN STRATEGY pioneered

by Chan Kim and Renee Mauborgne.

In a competitive market, cost plus pricing does not work. Costs must

be controlled so that profits can be generated at the price the market can

take. At the same time, in the process of cost cutting the company should

not reduce utility, i.e. the value customers perceive in its product or ser-

vice.

To hit the cost target, companies can look at various options. They

can streamline operations and introduce cost innovations from manufac-

turing to distribution by addressing relevant questions such as:

Strateg i c PR IC ING 211

Can the currently used raw materials be replaced by unconventional,

less expensive ones?

Can high-cost, low-value added activities in the value chain be re-

duced or outsourced?

Can the physical location of the product or service be shifted from

prime real estate locations to lower-cost locations?

Can the number of parts or steps used in production be truncated by

changing the way things are made?

Can activities be digitized or automated?

As goods become more knowledge intensive, product development

costs rather than manufacturing costs start becoming dominant. So

achieving high volumes quickly becomes the need of the hour. Moreo-

ver, to a buyer, the value of a product or service increases as more peo-

ple start using it. As a result of this phenomenon, called network external-

ities, either millions of units are sold at once, or nothing at all. So it is

increasingly important to know from the start what price will quickly

capture the mass market. That is why STRATEGIC PLANNING is gaining in

importance.

The main challenge in strategic pricing is to understand the price sen-

sitivity of people who will be comparing the new product or service with

a host of products which on the surface look different, but offer the same

benefits to the customers. So companies must list competing products

and services that fall into two categories: those that take different forms

but perform the same function, and those that take different forms and

functions but fulfill the broad objective. The exact price will be guided

by two principal factors — the extent of patents or copyrights protection,

and the ease of imitation.

Sometimes there may be little scope to cut costs but there could be

scope to come up with an innovative pricing model. Take telecom. In

developing countries, public call offices in rural areas, by eliminating

fixed monthly rentals, significantly reduce the price of the service. An-

other pricing innovation is small packs. Offering products or services in

small quantities makes them more affordable to the masses.

(See also: VALUE INNOVATION)

212 Strategy E V A LUA T ION

Strategy Evaluation Assessing whether the strategy is working. Since results are not usually

available for considerably long periods of time, other indicators become

necessary. The degree of consensus which exists among executives re-

garding corporate goals and policies, the extent to which major areas of

managerial choice are identified, and the degree to which resource re-

quirements are anticipated well in advance, are all pointers to the worka-

bility of the strategy.

To ensure that it is workable, any strategy needs to be evaluated care-

fully with respect to the following:

Internal Consistency: A corporation may have many policies. If the

strategy is sound, the policies should mesh well with each other.

External Consistency: The strategy must make sense with respect to

events in the external environment, both current and anticipated.

Availability of Resources: It is resources taken together which repre-

sent the capacity of an organization to respond to environmental op-

portunities and threats. Resources include cash, competence, facili-

ties, etc. A key issue in strategy formulation is achieving a balance

between strategic goals and available resources. The company must

decide how much resources to commit to opportunities currently

available and how much to keep in reserve to take care of unantici-

pated demands.

Degree of Risk Involved: The degree of risk inherent in a strategy

depends on the uncertainty about the availability of resources, the du-

ration for which resources are committed, and the proportion of re-

sources committed to a single venture.

Time Horizon: A viable strategy has to indicate the time frame in

which goals are to be achieved. The greater the time horizon, the

wider the range of STRATEGIC CHOICES available. The larger the or-

ganization, the longer the time horizon, since adjustment time is larg-

er. Large organizations change slowly and need time to make signifi-

cant modifications in their strategy. While it is useful to have a cer-

tain consistency of strategy over long periods of time, flexibility is

important in a rapidly changing environment.

Strategy IMP LE ME N TA T ION 213

Strategy Implementation The ability to execute strategy. This is often the difference between mar-

ket leaders and other players in any industry is Effective strategy imple-

mentation involves getting people’s buy-in, choosing the right metrics

and tracking performance on an ongoing basis. Much of strategy imple-

mentation involves managing change. So the behavioral issues involved

can hardly be overlooked.

The following are useful guidelines for strategy implementation.

Unlearning the Past: Often past strategies stand in the way. So un-

learning is important.

Increasing Commitment at lower levels: People at lower levels in an

organization are often skeptical about the practical utility of a strate-

gic plan. Strategy implementation is difficult without taking lower

level employees along.

Avoiding over Ambitious Strategies: Functional managers are used to

a way of working. They may not be able to adjust suddenly to a new

strategy.

Identify Responsibilities and Milestones: The list of specific tasks

each function must perform, specific milestones and the names of the

individuals who accept responsibility for each major functional pro-

gram, must be identified.

Communicating Downward is as Important as Communicating Up-

ward: It is the functional and lower level operating managers who

hold the key to the successful implementation of a strategy. Half-

hearted commitment from functional managers can thwart the goals

set for the business.

ORGANIZATIONAL STRUCTURE, LEADERSHIP and culture play an im-

portant role in ensuring that strategy percolates into the day-to-day activ-

ities of the company. Structure divides tasks so that they can be per-

formed efficiently. Leadership must send out the right signals to facili-

tate smooth implementation. Culture is the set of important, often unstat-

ed assumptions that influence the opinions and actions of employees.

Culture becomes a weakness when the assumptions of employees inter-

fere with the needs of the business and its strategy.

The key to execution is shaping the attitudes and behavior of people.

A culture of trust and commitment motivates people to execute the

agreed strategy. People’s minds and hearts must align with the new

214 Stre tch

strategy so that they embrace it willingly, going beyond compulsory

execution to voluntary cooperation.

To build people’s trust and commitment, Chan Kim and Renee

Mauborgne* emphasize the importance of getting people’s buy-in, build-

ing trust and creating a perception that a level playing field exists. Only

then will people cooperate voluntarily in implementing strategic deci-

sions. This approach, called fair process, has three main components:

engagement, explanation and expectation clarity.

Engagement means involving individuals in strategic decisions by

asking for their inputs and encouraging them to critically examine the

merits of the ideas and assumptions of different people.

Explanation means that everyone involved and affected should un-

derstand why important decisions are made as they are. An explana-

tion of the thinking that underlies decisions makes people confident

that managers have considered their opinions and have made objec-

tive decisions in the overall interest of the company.

Expectation clarity requires that managers state clearly the new rules

of the game. Although the expectations may be demanding, employ-

ees should know up front what standards they will be judged by as

well as the penalties for failure. When expectations are clearly de-

fined, political jockeying and favoritism are minimized, and the focus

shifts to execution.

By organizing strategic planning around the principles of fair pro-

cess, execution can be built into strategy making from the start. People

will realize that compromises and sacrifices are necessary to achieve

organizational goals. The ensuing discipline and increased collaboration

levels will facilitate strategy execution.

(See also: CHANGE MANAGEMENT, POLICIES, STRATEGIC CONTROL)

Stretch A concept introduced by Sumantra GHOSHAL and Christopher BARTLETT

in their book, The Individualized Corporation which holds that employ-

ees must be given challenging goals to motivate them and exploit their

* Kim, W. Chan and Mauborgne, Renée. “Fair Process: Managing in the

Knowledge Economy”, Harvard Business Review, January 2003, pp. 127-136.

Success ion P LA NN ING 215

full potential. Stretch helps in moving people from satisfactory underper-

formance to high performance. Stretch encourages managers to see

themselves not in terms of the past but in terms of the future.

(See also: BHAG, PURPOSE-PROCESS-PEOPLE-DOCTRINE)

Stuck in the Middle* A term which describes a firm that is not clear about the way it is going

to do business. Michael PORTER suggests that a firm that has not made a

choice about pursuing cost leadership or differentiation runs the risk of

being “stuck in the middle”. Such a firm tries to achieve the advantages

of low cost and differentiation but in fact achieves neither. Poor perfor-

mance results because the cost leader, differentiator or focuser will be

better positioned to compete in their respective segments.

(See also: COST LEADERSHIP, DIFFERENTIATION, GENERIC STRATEGY)

Succession Planning The process of identifying and preparing people for assuming greater

responsibility, in order to ensure that positions likely to become vacant

are filled smoothly. While the human resources department can take care

of succession planning at lower levels, succession planning at higher

levels has strategic implications, often involving the CEOs themselves.

CEO-level succession planning is a challenging task that involves active

collaboration between the Board and the incumbent CEO. In companies

like GE and Unilever, succession planning is taken very seriously and

implemented with the help of elaborate mechanisms and processes. In

India, companies like Hindustan Lever Limited (HLL) have mastered

the art of succession planning. The biggest succession planning prob-

lems in India seem to be in the case of public sector enterprises because

of political interference, and in family owned businesses due to a lack of

professionalism.

* From the book, The Essence of Strategic Management by Clief Bowman,

Prentice Hall of India, 1990.

216 Supp ly C HA IN MA NA G E ME NT ( S C M)

Supply Chain Management* (SCM) Managing the various parties who come together to fulfill a customer

request. Manufacturers, suppliers, transporters, warehouses, distributors,

wholesalers, retailers and customers together make up the supply chain.

These entities are supported by various functions such as sales, product

development, operations, logistics, after sales service and finance. At the

heart of the supply chain lies the flow of information, products and cash

flows. Some of these flow towards and others away from the customer.

The main objective of any supply chain is to deliver value to customers

in optimal fashion. In simple terms, Value can be understood as the dif-

ference between the price the end customers are prepared to pay and the

costs incurred in meeting their needs.

Complicated outsourcing arrangements backed by information tech-

nology mean that supply chains are no longer linear but quite intricate,

taking the shape of a network. Several suppliers, factories and logistics

providers may be involved, making supply chain management (SCM) a

fairly challenging task.

SCM must be treated as an integral part of COMPETITIVE STRATEGY.

Indeed, SCM drives corporate strategy in the case of companies like

Dell. There must be a strategic fit between competitive strategy and

SCM, i.e. consistency between the customer needs that competitive

strategy focuses on and the capabilities that SCM is building.

A company must have a broad vision of how the supply chain will

function and evolve over time. Investment decisions must be made ac-

cordingly. These include manufacturing facilities, warehouses, transpor-

tation infrastructure and information technology. Supply chain design

decisions typically have long term implications, so they must be made

carefully, taking into account uncertainty and anticipated market condi-

tions over the next few years.

These strategic design decisions must be backed by appropriate me-

dium term planning decisions and short term operational decisions.

Planning may involve making forecasts typically for a year and breaking

it down into quarterly figures. Supply chain operations are more focused

on handling incoming customer orders in the best possible manner. The

* From the book, Supply Chain Management: Strategy, Planning and Opera-tions by Sunil Chopra and Peter Meindl, Prentice Hall, 2006.

Supply C HA IN MA NA G E ME NT ( S C M) 217

design, planning and operation of a supply chain can have a major im-

pact on a company’s overall success in many industries. The computer

manufacturer Dell, the Spanish retailer, Zara and the Hong Kong trader,

Li & Fung are good examples.

Efficiency and responsiveness make up the two conflicting demands

of a supply chain. Depending on the market realities, SCM must arrive

at a suitable trade-off. Usually costs tend to go up as investments are

made to improve responsiveness to market needs. Similarly, as efforts

are made to cut costs, responsiveness often suffers. Of course, there are

situations where intelligent supply chain configuration can simultane-

ously improve responsiveness and lower costs. Thus, in the computer

industry. Dell builds-to-order thereby cutting the costs associated with

inventory obsolescence. But Dell has also cut down response time and

increased the opportunities to customize so that responsiveness to cus-

tomer needs has not been compromised.

The effectiveness of a supply chain depends critically on how differ-

ent activities are coordinated. Coordination problems arise because of

conflicting objectives or poor information flows. These challenges have

increased in recent times on account of both multiple ownership of the

supply chain and increased product variety. One manifestation of this

problem is the bullwhip effect. Fluctuations in orders get amplified as

they move backwards along the supply chain from retailers to wholesal-

ers to manufacturers to suppliers.

Suppose there is a random increase in customer demand at the retail-

er level. Interpreting this rise in demand as a growth trend, retailers may

order more than the observed increase in demand to cover anticipated

future growth. Similarly, wholesalers may, in turn, also up their orders.

This phenomenon extends right down to the suppliers. The bullwhip

effect can be minimized by greater coordination across the supply chain

by streamlining information flows, by aligning incentives, and by im-

proving trust.

Another challenge today in SCM is mass customization, the ability to

execute small customized orders without sacrificing the cost advantages

of a mass production system. A key tool here is the principle of post-

ponement, which holds that companies must delay the final configura-

tion of a product till an order is received. In general, the demand for in-

termediate products and components is more stable than that for finished

goods. Take the example of paints. The only difference between two

218 Swi tch ing C OS TS

shades of a paint could be the addition of a small quantity of pigment.

This can always be done at the retail outlet. By only keeping a few pri-

mary colors as the core inventory and generating new shades based on

actual customer demand, there is scope to simultaneously reduce inven-

tory and improve customer responsiveness. The demand for primary

colors fluctuates less than that for individual shades.

Information technology (IT) has a key role to play in SCM. Inventory

is nothing but a hedge against uncertainty. Uncertainty arises due to poor

information flows. So by streamlining the flow of information, IT can

significantly improve the functioning of a supply chain. However, it is

wrong to equate SCM with IT as many computer software companies

do. The essence of SCM is managing relationships among the different

entities involved both within and outside the organization, including

customers, suppliers and third party logistics providers. Trust and fair

play are the key ingredients for good relationships.

(See also: VALUE CHAIN, VALUE SYSTEM)

Switching Costs Costs incurred by buyers in changing products, services or suppliers due

to various factors. A buyer’s product specification may tie it to particular

suppliers. The buyer may have invested heavily in specialist ancillary

equipment. The new product may require new learning or its production

lines may be connected to the supplier’s manufacturing facilities. In ad-

dition, the buyer may have developed routines and procedures for deal-

ing with a specific vendor. These routines will need to be modified if a

new relationship is established. All else being equal, a buyer will be mo-

tivated to continue existing relationships in order to minimize switching

costs.

(See also: BARGAINING POWER OF BUYERS, BARGAINING POWER OF

SELLERS, BARRIERS TO ENTRY)

SWOT Analysis A strategic planning tool used to evaluate the strengths, weaknesses,

opportunities, and threats to a company. The technique is credited to

Albert Humphrey, who led a research project at Stanford University in

the 1960s and 1970s using data from Fortune 500 companies. Essential-

ly, SWOT analysis is a methodology for identifying areas where an or-

SWOT A NA LYS I S 219

ganization is strong, where it is weak, the major opportunities the com-

pany can explore, and the threats it faces.

SWOT analysis helps a company to know where it stands by explor-

ing key issues:

Strengths:

What do we do well?

How are we better than our competitors?

Weaknesses:

What could be done better?

What is being done badly?

Opportunities:

What are the opportunities that can be exploited?

What are the interesting trends?

Threats:

What obstacles do we face?

What is the competition doing?

Are the specifications for our products or services changing?

Is changing technology threatening our business?

(See also: COMPANY PROFILE, ENVIRONMENTAL ANALYSIS, STRATEGIC

PLANNING)

220 Tay lo r , FRE DE R IC K W. ( 18 56 - 19 15 )

T

Taylor, Frederick W. (1856-1915) An American engineer who invented work study and developed the sci-

entific approach to management. Taylor advocated division of labor,

specialized tools, piece-rate payments and tighter management control

for improving productivity. Taylor’s management principles had consid-

erable impact in America, the most visible being the mass production

system at Ford.

While Taylor’s system began as an attempt to develop the perfect

pay-for-performance formula, it quickly came to encompass broader

issues of “work” and “control”. Taylor realized the need for standardiz-

ing work, tools, and maintenance techniques to improve productivity.

Standardization, in turn, demanded a level of control over work that had

never been attempted before.

Taylor began by examining not just how long a particular task took to

complete but how long it should take. Taylor used a stopwatch and rec-

orded his observations in a notebook. He broke each job and work pro-

cess down into discrete parts, studying and timing the movements of

men and machines.

Taylor realized that while two machinists might be working on en-

tirely different products, such as a railroad tire and an engine part, the

“elementary” steps in the job were the same. The secret of improving

productivity was to improve and standardize the elementary steps and

apply them to a wide range of tasks. By breaking each job down into its

component parts, Taylor determined how production machinery could

be modified and individual operations improved or eliminated.

Taylor was eager to learn from the best of skilled workmen, especial-

ly machinists, and was prepared to promote them. But those who were

left to operate on the factory floor were stripped of their individual artist-

ry. By deskilling the foremen’s jobs, no single foreman needed to under-

stand the entire range of supervisory work. Taylor also introduced an

elaborate planning department that was responsible for coordinating the

Technology R I S K 221

work of the foreman, designing work flow and conducting cost-

accounting reviews.

The main limitation of Taylorism was that it failed to see a factory as

a social system. Today, Taylorism has fallen out of fashion. Knowledge

workers like to be left free and do not want to be micro managed as Tay-

lorism would advocate.

Technology Risk The vulnerability of a business to sudden or unanticipated changes in

technology. Technological changes can have a dramatic impact on in-

dustries. In making decisions regarding technological changes, compa-

nies err in two ways. They either commit themselves to a new technolo-

gy too fast and burn their fingers — or wait and watch while another

company comes up with a new technology that puts them out of busi-

ness. The issue of when and how to react to the emergence of a new

technology is a matter of judgment. However, this judgment need not be

based purely on intuition. By doing a systematic structured analysis of

developments in the technological environment and putting in place the

necessary organizational mechanisms, technology risk can be considera-

bly reduced.

How can managers identify the emergence of a disruptive technolo-

gy? Clayton Christensen’s research reveals that disruptive technologies

are often developed privately by engineers working for established

firms. When such technologies are presented to customers, they get a

lukewarm response. So established companies do not give much im-

portance to these technologies. The frustrated engineers consequently

join start-ups, which are prepared to look for new customers. Companies

must, thus, take note when talented scientists and researchers leave them

to join start-ups. Often they do so in order to work in an environment

where their innovative ideas are taken more seriously.

Companies must also learn to assess the impact of a new technolo-

gy*. The steam engine was developed for pumping water out of flooded

mines. It was years before a range of applications was developed in in-

dustries and for transportation. Marconi, the inventor of the radio, felt

* Read Nathan Rosenberg’s insightful article, “Why Technology Forecasts Of-

ten Fail,” The Futurist, July-August, 1995.

222 Te chnology R I S K

that it would mainly be used between two points where communication

by wire was impossible. So he targeted shipping companies, the navy and

newspapers. Marconi did not even consider the possibility of communi-

cating to several people at the same time. It was left to David Sarnoff, an

uneducated Russian who migrated to the US to understand the technolo-

gy’s potential in broadcasting news and entertainment programs. Bell

Labs did not think it necessary to apply for a patent covering the use of

laser in telecommunications. Only later did it realize what a powerful

combination laser and fiber optics made. Thomas Watson Sr. looked at the

computer as a tool for only rapid scientific and data processing calcula-

tions. Computers are today mostly used in commercial applications.

Very often new technologies tend to be primitive when first devel-

oped. The full potential of a new technology is sometimes recognized

only decades later. Even though the telephone has been around for more

than one hundred years, applications such as voice mail and data transfer

have emerged only recently. Aspirin, one of the world’s most widely

used drugs, has again been around for more than a hundred years but its

efficacy in reducing the incidence of heart attack, due to its blood thin-

ning properties, was discovered much later. So, while evaluating new

technologies a longer time horizon must be used than in the case for ex-

isting technologies.

To better appreciate the impact of a new technology, established

companies would do well to go beyond their existing customer base and

start talking to potential users whom they have not seriously targeted till

now. Conventional planning, budgeting and investment appraisal pro-

cesses can be counter-productive when applied to disruptive technolo-

gies. Creative ideas cannot be filtered through traditional financial

screens. Companies must be prepared to jump into the fray and go

through a process of learning, instead of waiting for the numbers to start

looking good, when the technology gains acceptance.

Companies must also note that technological performance often

overshoots market requirements. Consequently, today’s under-

performing technology may meet the needs of customers tomorrow. On

the other hand, technologies which perform satisfactorily today may

over-perform tomorrow, but customers may not be willing to pay for this

over-performance. According to Michael PORTER, the basic aim of dif-

ferentiation is to provide something extra that the customers value and

charge a premium for it. If customers do not value the additional fea-

Threat OF S UB S T ITUTE S 223

tures, differentiation as a competitive strategy will not be effective. So if

a new technology fares relatively low on some of the currently accepted

attributes but scores heavily on a new attribute, it has the potential to

unseat the older technology. Thus, in the disk drive industry capacity

became less important, and factors such as physical size and reliability

became the more important attributes.

To understand and work with new technologies, the critical require-

ment is a new mindset. Established players are not short of financial

muscle or talented manpower. But they usually have a mindset problem.

On the other hand, successful innovators often have fewer resources but

the right mindset. They worry less about what the technology can do

and, instead, look for markets which will be happy with the current per-

formance levels.

One way to encourage a new mindset is to create small, empowered

teams outside the main organization and allow them to try new technol-

ogies. Since entrenched processes and values stand in the way of change,

a separate organization is a more practical arrangement than grandiose

attempts to change the entire company’s culture.

(See also: INNOVATOR’S DILEMMA, S-CURVE)

Threat of Substitutes Industries are usually defined in terms of the products or services they

provide. However, if we define industries from the buyer’s point of

view, we might come up with a quite different set of firms which deal in

different products but who meet the same type of buyer needs. Substitute

products are alternative ways of meeting buyer needs. Substitutes lie

outside the traditional industry definition adopted by the firm. They can

be viewed in two ways.

Substitutes-in-kind are products that look alike and represent the

same application of a distinct technology to the provision of a distinct set

of customer functions.

Substitutes-in-use are products that have shared functionality based

on the customer’s perceptions of all the ways in which their needs can be

satisfied in a given usage or application situation. The attractiveness of a

substitute product depends on its initial price, customer switching costs,

post purchase costs of operation and the additional benefits the customer

perceives and values.

224 T ipp ing PO IN T

(See also: FIVE FORCES MODEL)

Tipping Point A sociological term that refers to that dramatic moment when something

unique becomes common, it is a phrase coined by Morton Grodzins. In

the early 1960s, Grodzins discovered that many white families in the US

would remain in a neighborhood so long as the comparative number of

black families remained small. But beyond a point the remaining white

families would move out en masse in a process known as white flight.

He called that moment the tipping point. The idea was expanded by No-

bel Prize-winner Thomas Schelling in 1972. More recently, Malcom

Gladwell has written a best selling book on this theme.

Around the principle of tipping point, management scholars W. Chan

Kim and Renee Mauborgne, have developed the concept of tipping point

leadership. In every company, there are people, acts, and activities that

exercise a disproportionate influence on performance. Launching a ma-

jor strategic initiative is not about launching huge initiatives which de-

mand heavy investments in time and resources. Rather, it is about con-

serving resources and cutting time by identifying and leveraging the fac-

tors of disproportionate influence.

Instead of mobilizing more resources, tipping point leaders attempt to

multiply the value of the resources they have. Instead of diffusing

change efforts widely, tipping point leaders focus on kingpins, fishbowl

management, and atomization. Kingpins are the key influencers in the

organization; well respected and persuasive leaders who have an ability

to unlock or block access to key resources. Kingpins can be motivated

into action by focusing attention on their actions in a repeated and highly

visible way. This is what Kim and Mauborgne refer to as fishbowl man-

agement, where the actions of kingpins become as transparent as fish in

a bowl of water. This way, the stakes of inaction are greatly raised. Fi-

nally, there is atomization which relates to the framing of the strategic

challenge. People must believe that the strategic challenge is attainable.

To overcome resistance to change, tipping point leaders focus on

three kinds of people:

Angels are those who have the most to gain from the strategic shift.

Devils are those who have the most to lose from it.

Tota l QUA L IT Y MA NA G E ME NT ( TQ M) 225

A consigliere is a politically adept but highly respected insider who

knows in advance all the potential stumbling blocks, including who

will support and also who will block the new initiative.

Total Quality Management (TQM) An integrated, cross-functional approach that attempts to facilitate con-

tinuous improvement in the quality of goods and services. TQM is a

systems approach that considers interactions between various subsys-

tems of an organization including design, planning, production, distribu-

tion, field service and various management processes. The TQM philos-

ophy believes that there is scope for continuous improvement in any

product, process or service. A basic notion of TQM is that quality is es-

sential in all functions, not just manufacturing. TQM also emphasizes

satisfaction of customers, both internal and external. Implementing

TQM involves a cultural shift and change in behavior of employees.

(See also: DEMING, WILLIAM EDWARDS)

226 U tterback , JA ME S

U

Utterback, James A pioneering scholar in the area of innovation. Though not as well

known as others like Peter DRUCKER and Clayton CHRISTENSEN, Utter-

back’s work is highly insightful and offers a lot of ideas on how innova-

tion takes place in different industries. Utterback has dealt with the rela-

tionship between product and process innovation, behavior of estab-

lished firms when a radical innovation enters the industry, factors that

prevent successful firms from transiting from current technologies to

new ones and how firms can cope with technological change.

(See also: INNOVATION, INNOVATOR’S DILEMMA, PROCESS INNOVATION,

PRODUCT INNOVATION)

Value C HA IN 227

V

Valuation A concept commonly used in the context of a merger. The value of the

company being acquired must be established carefully. There are various

ways to value a company — market price of shares, replacement cost of

assets, present value of the future expected cash flows, etc. Ultimately,

valuation is a subjective exercise that is as much art as science.

(See also: MERGER)

Value Chain A framework developed by Michael PORTER for analyzing the various

activities a firm performs in order to create value for its customers. By

analyzing the value chain, a firm can understand how it is adding value,

in which activities it is strong, where it is weak, and how it can further

streamline the value addition process.

The value chain* breaks down the firm into various activities in order

to understand the behavior of costs — and the existing or potential

sources of differentiation. A firm gains competitive advantage either by

performing these activities more cheaply, or doing them better than its

rivals.

Value is the amount buyers are willing to pay for what a firm pro-

vides them. A firm is profitable if the value created exceeds the costs

incurred. Creating value for buyers that exceeds the cost of doing so, is

the goal of any generic strategy.

Value chain activities can be categorized into primary and support.

Primary Value Chain Activities

Inbound logistics: Receiving, warehousing, and inventory control of

input materials.

* See: The Essence of Strategic Management by Cliff Bowman, Prentice Hall of

India, 1990.

228 Value C HA IN

Operations: Activities that transform the inputs into the final product.

Outbound Logistics: Comprise the activities that get the finished

product to the customer, including warehousing, order fulfillment,

etc.

Marketing and Sales: Activities that try to persuade buyers to pur-

chase the product, including channel selection, advertising, pricing,

etc.

Service: Activities such as customer support, after sales service, etc.

One or more of these primary activities may be vital in developing a

competitive advantage. For example, logistics activities are critical for a

retail chain. Marketing may be a critical activity for a company offering

branded consumer goods.

Support Activities

Procurement: Purchasing of raw materials and other inputs used in

the value-creating activities

Technology Development: Activities such as research and develop-

ment and process automation.

Human Resource Management: Activities like recruiting, develop-

ment, and compensation of employees.

Firm Infrastructure: Activities such as finance, legal services, and

management information systems

Porter emphasizes that a firm’s value chain must be viewed as an

interdependent system or network of activities, connected by linkages*.

Linkages occur when the way in which one activity is performed,

affects the cost or effectiveness of other activities. Linkages often create

trade-offs in performing different activities that must be optimized. For

example, more expensive components can reduce after-sale service

costs.

Linkages also require activities to be coordinated. Coordinating

linked activities reduces transaction costs, allows better information for

control purposes, substitutes less costly operations in one activity for

more costly ones elsewhere and can also reduce cycle time. For exam-


1990.

Value C HA IN 229

ple, dramatic time savings can be achieved through such coordination in

the design and introduction of new products and in order processing and

delivery.

The value chain can help managers understand the sources of cost

advantage. Many managers view cost too narrowly and concentrate on

manufacturing. They also need to look at product development, market-

ing and service and draw cost advantage from throughout the value

chain. Gaining cost advantage also usually requires optimizing the link-

ages among activities as well as close coordination with suppliers and

channels.

The value chain also helps identify the sources of differentiation.

Differentiation results, fundamentally, from the way a firm’s product,

associated services and other activities affect its buyer’s activities. The

various points of contact between a firm and its buyers offer scope for

differentiation.

The value chain allows a deeper look not only at the types of COMPET-

ITIVE ADVANTAGE but also at the role of COMPETITIVE SCOPE in gaining

competitive advantage. Scope shapes the nature of a firm’s activities, the

way they are performed, and how the value chain is configured. By se-

lecting a narrow target segment, a firm can tailor each activity more pre-

cisely and effectively to the segment’s needs compared to competitors

with broader scope. On the other hand, broad scope may lead to a com-

petitive advantage if the firm can share activities across industry seg-

ments or even when competing in related industries.

The current trend is towards smaller and more focused value chains.

The idea is to help companies focus on core competencies and leave the

remaining activities to partners with specialized expertise. What is be-

coming critical is excellent capability in a small section of the value

chain. Taiwanese semiconductor companies, for example, concentrate

on manufacturing. They do not generally get involved in design or mar-

keting. Nike concentrates on brand management and outsources most of

its manufacturing. In the PC industry, we have companies like Intel (mi-

croprocessors), Samsung (monitors), HP (printers), Microsoft (operating

systems) and Mitec (modems) offering specialized products.

As value chains fragment, the ability to coordinate value chain activi-

ties performed by different entities has also become important. The

chain as a whole must perform effectively and provide value to custom-

ers in a superior way. Effective coordination depends crucially on trust

230 Value M IG RA T ION

and relationships between the orchestrator and the different entities in-

volved. Information technology can facilitate coordination but cannot

take the place of trust.

(See also: PROCESS NETWORKS, SUPPLY CHAIN MANAGEMENT)

Value Migration Shifting of forces that create value. Companies are in business to create

value for the customer. They can do this by offering a product or service

that corresponds to customer needs. In a fast changing business envi-

ronment, the factors that determine value are constantly changing. As

Adrian SLYWOTZKY* put it, value migration is the shifting of value-

creating forces. Over time, value migrates from outmoded business

models to business designs that are better able to satisfy customer priori-

ties. That is when established players find it difficult to compete and the

circumstances become ripe for challengers.

Value System A term coined by Michael PORTER. A firm’s value chain is linked to the

value chains of upstream suppliers and downstream buyers. The result is

a larger stream of activities known as the value system. The develop-

ment of sustainable competitive advantage depends not only on the

firm’s value chain, but also on the value system of which the firm is a

part. In a manner of speaking, value system is equivalent to the supply

chain.

(See also: SUPPLY CHAIN MANAGEMENT, VALUE CHAIN)

Values The set of principles which a company regards as sacrosanct. These

principles are non-negotiable and cannot be compromised. Values may

refer to the company’s philosophy vis-à-vis its customers, suppliers, so-

ciety and investors. Values define what is right, what is wrong and what

are the priorities. Values guide employees while taking decisions.

(See also: CORE IDEOLOGY)

* In his book Value Migration: How to Think Several Moves Ahead of the Com-petition, Harvard Business School Press, 1995.

Vert ica l INTE G RA T ION 231

Vertical Integration The expansion of a business by acquiring or developing businesses en-

gaged in earlier, or later stages, of the VALUE CHAIN. For example, in

forward integration manufacturers might enter retailing; in backward

integration, on the other hand, retailers might enter manufacturing.

All firms are vertically integrated to some extent. Arriving at the op-

timum level of vertical integration involves examination of important

trade-offs. Outsourcing increases flexibility but vertical integration gives

the company a greater sense of control. The most important issue in out-

sourcing is deciding which resources or capabilities are core and strate-

gic. If such competencies are not developed in-house, the long-term

competitive position of the firm would be threatened. For example, the

research efforts of global pharmaceutical companies involve tremendous

risk, but cannot be outsourced. This is because research forms the basis

for competition in the pharmaceuticals business.

Thus, what a company does in-house and what it outsources has sig-

nificant strategic implications for the company. One of the best exam-

ples is IBM. In a bid to get its PC project going fast, the computer giant

decided to entrust the development of the operating system to Microsoft.

The rest, as they say, is history.

Michael PORTER has offered deep insights on vertical integration*.

Benefits of Vertical Integration

Economies of Integration: By combining technologically distinct

operations, there are opportunities for reducing the number of steps

in the production process, handling and transportation, and, conse-

quently, the costs of scheduling and co-ordinating. Integrated opera-

tions can reduce information gathering, marketing and purchasing

costs. Upstream and downstream stages can take a long term view

and develop specialized procedures for dealing with each other in ar-

eas such as logistics, packaging, record keeping and control. Vertical

integration also allows the upstream unit to tune its product to the ex-

act requirements of the downstream unit and for the downstream unit

to adapt itself more fully to the characteristics of the upstream unit.

* In his book, Competitive Strategy: Techniques for Analyzing Industries and

Competitors, The Free Press, 1998.

232 Vert ica l INTE G RA T ION

Technological Advantages: A unit may integrate forward to under-

stand the technology in the downstream business. Similarly, it may

integrate backwards to familiarize itself with the technology in the

upstream business.

Assured Supply / Demand: Vertical integration can hedge the firm

against fluctuations in supply / demand.

Offsetting Bargaining Power: Vertical integration can enable a firm to

reduce the bargaining power of powerful suppliers or customers. Fur-

ther, by gaining a better understanding of costs, the firm has opportu-

nities to improve its profitability.

Ability to Differentiate: By manufacturing proprietary items in-house

and exercising greater control on the channels of distribution, etc., a

firm can increase the scope for differentiation.

Creation of Entry Barriers: The more significant the net benefits of

integration, the greater the pressure on new entrants to integrate. As a

result, the entry barriers increase.

Entry into a High Returns Business: Integration may allow the com-

pany to enter a more profitable part of the value chain.

Costs of Vertical Integration

Exit Barriers: Integration often increases strategic interrelationships

and emotional ties to the business. Some commitments are irreversi-

ble. As a result, exit barriers are raised.

Increased Operating Leverage: Vertical integration increases fixed

costs. When an input is produced internally, the firm has to bear the

overheads even during downturns.

Reduced Flexibility to Change Partners: Technological changes, or

changes in product design involving components, etc. can create a

situation in which the in-house supplier may be providing a high cost,

inferior or inappropriate product. It is not easy to switch to an outside

supplier at short notice.

Capital Investment Requirements: Vertical integration consumes

capital resources which have an opportunity cost.

Foreclosure of Access to Supplier / Consumer Research: By integrat-

ing, a firm may risk cutting itself off from the flow of technology

from its suppliers or customers.

Vert ica l INTE G RA T ION 233

Imbalances: When the upstream and downstream units are not bal-

anced, potential problems arise.

Inefficiencies: Since buying and selling occurs through a captive rela-

tionship, the incentive to perform may be less for both the upstream

and downstream businesses, resulting in inefficiencies.

Different Managerial Requirements: Businesses can differ in struc-

ture, technology and management despite having a vertical relation-

ship. For example, manufacturing and retailing are fundamentally

different. Understanding how to manage these different activities can

be a major cost of integration.

John Hagel III and Marc Singer* offer a very useful framework for

resolving the vertical integration dilemma. They recommend examining

the coordination problems which arise when different players are in-

volved in a value chain activity. When the interaction costs can be re-

duced by performing an activity internally, a company will vertically

integrate rather than outsource. Reduction in interaction costs leads to a

shakeout in the industry and changes the basis for COMPETITIVE AD-

VANTAGE. The emergence of information technology in general, and the

Internet in particular, has dramatically lowered interaction costs. So, the

chances are that specialized players will hold the aces.

Hagel and Singer add that there are three different core processes

which are integral to any business. These are:

Customer relationship management;

Product innovation; and

Infrastructure creation.

The competencies needed to manage each one are quite distinct.

Customer relationship management focuses on attracting and retain-

ing customers. It involves big marketing investments that can be recov-

ered only by achieving economies of scope. A wide product range and a

high degree of customization to suit the needs of different customers are

the critical success factors in customer relationship management.

Product innovation aims at bringing out attractive new products and

services to the market in quick succession. Speed is important because

* Hagel III, John; Singer, Marc, “Unbundling the corporation”, Harvard Busi-

ness Review, March-April 1999, pp. 133-141.

234 Value INN OV A T ION

early mover advantages are often critical. Small organizations with an

entrepreneurial style of management are often better at innovation than

large bureaucracies.

Infrastructure creation (e.g. an information technology backbone) is

necessary to efficiently handle high volume repetitive transactions.

Economies of scale are vital for recovering fixed costs. Standardization

and reutilization are the essence of this process.

When these three processes are combined within a single corpora-

tion, conflicts are bound to arise. Scope, speed and scale cannot be

achieved simultaneously. So many industries such as newspapers, credit

cards and pharmaceuticals are splitting along these lines.

There are alternatives to vertical integration. A firm can resort to par-

tial integration. Independent suppliers can be used to bear the risk of

market fluctuation while in house suppliers maintain steady production

rates.

Another alternative is quasi integration. This refers to a relationship

between vertically related businesses that are somewhere in between

long term contracts and full ownership. There can be various forms of

quasi integration:

Minority equity investment.

Loans or loan guarantee.

Prepurchase credits.

Exclusive dealing agreements.

Co-operative R & D.

Quasi integration tends to reduce the costs associated with full inte-

gration. It also avoids the need to make major capital investments re-

quired for integration and eliminates the complexities involved in man-

aging other types of businesses. On the negative side, quasi integration

may fail to achieve the full benefits of integration, such as differentia-

tion.

(See also: BACKWARD INTEGRATION, FORWARD INTEGRATION)

Value Innovation A strategy wherein a firm creates new space by developing products or

services with value instead of competing head-on with its rivals. Value

innovation is a term coined by Chan Kim and Renee Mauborgne. Smart

Vision 235

companies focus on new markets which Kim and Mauborgne call blue

oceans, pursuing a strategy called value innovation. Instead of fighting

competitors, these companies try to make them irrelevant by creating a

leap in value for buyers and the company, thereby opening up new and

uncontested business opportunities called blue oceans.

Value innovation places equal emphasis on value and innovation.

Value without innovation tends to be incremental and does not give the

company a competitive edge in the marketplace. INNOVATION without

value tends to be technology-driven, market pioneering, or futuristic,

often shooting beyond what buyers are ready to accept and pay for. Val-

ue innovation occurs only when companies align innovation with utility,

price and cost positions. Companies that seek to create blue oceans, of-

ten pursue differentiation and low cost simultaneously.

Buyer value comes from the utility and price that a company offers to

its buyers. The value to the company is determined by the price and the

cost structure. So value innovation is achieved only when the utility,

price and cost activities are properly aligned. Such an integrated ap-

proach holds the key to the successful implementation of a BLUE OCEAN

STRATEGY.

Vision A guiding theme that articulates the nature of the business and its inten-

tions for the future.

These intentions are based on how the management believes the en-

vironment will unfold and what the business can and should be in the

future. A vision has the following characteristics:

1. Informed — rooted in a deep understanding of the business and the

forces shaping the future,

2. Shared and created through collaboration,

3. Competitive — creates an obsession with winning throughout the

organization, and

4. Enabling — empowers individuals to make meaningful decisions

about strategies and tactics.

A vision must be able to inspire people by making a powerful state-

ment in simple terms so that people at all levels can relate to it.

(See also: CORPORATE PURPOSE, MISSION)

236 Whi st le B LOWE R

W

Whistle Blower An employee, former employee, or member of an organization who re-

ports misconduct to people or entities that have the power to take correc-

tive action. A sense of moral outrage may prompt people to expose

wrong doing within an organization. Generally the misconduct is a vio-

lation of law, rule, regulation and / or a direct threat to public interest.

Fraud, health and safety violations and corruption are just a few exam-

ples. The vast majority of cases are based on relatively minor miscon-

duct. The most common type of whistleblowers are internal whistle-

blowers who report misconduct to a superior within their company. In

contrast, external whistleblowers report misconduct to outside persons or

entities such as lawyers, the media, law enforcement or watchdog agen-

cies, or to other local, state, or federal agencies.

(See also: BUSINESS ETHICS, CODE OF ETHICS)

White Knight An expression used to describe a company that comes to the rescue of a

firm facing a hostile take-over bid from a predator. The white knight

steps in with a counter-offer for the firm, thereby saving it from the

predator. The term comes from Lewis Carroll’s Through the Looking

Glass (1871) in which Alice is captured by a red knight but is then im-

mediately rescued by a white knight.

(See also: ANTI-TAKEOVER STRATEGY, HOSTILE BID)

Williamson, Oliver E. An American economist who has become closely associated with the

economics of transaction costs by building on the work of Nobel prize-

winner Ronald Coase. Transactions can take place through markets or

hierarchies. The mode chosen will depend on the amount of information

available and the degree of trust between buyer and seller. Transaction

cost theory has important implications for industrial organization, com-

Winner’ s C URS E 237

petition policy, corporate governance and employment relations. Trans-

action costs can affect make-or-buy decisions by companies.


Willpower That which enables a person to act even when beset by inertia or faced

with overwhelming odds.

Knowing is not enough. Unless managers get into action mode,

knowing is of little use. Heike Bruch and Sumantra GHOSHAL mention in

their book, A Bias for Action, that despite all their knowledge and com-

petence, and the influence and resources at their disposal, managers do

not grab the opportunities to achieve something significant. Purposeful

action requires energy and focus. Motivation alone cannot spur people to

purposeful action. What is needed is willpower. Willpower is what ena-

bles managers to take action even when they are not inclined to do

something. Managers with willpower overcome barriers, deal with set-

backs and persevere to the end. Just as defensive reasoning can block

learning, lack of will power can block action.

(See also: KNOWING-DOING GAP)

Winner’s curse A term often used in the context of a merger or acquisition. In their en-

thusiasm to close an M&A deal, companies may end up bidding too

high. Though the deal is clinched, the win effectively turns out to be a

curse as the high premium paid becomes difficult to justify. The end

result is that shareholder value gets eroded.

(See also: MERGER)

238 Zero B A S E B UDG E T ING

Z

Zero Base Budgeting Budgeting usually tends to be an incremental exercise. The current

year’s figures are adjusted suitably to arrive at the next year’s figures.

Zero based budgeting challenges basic assumptions and tries to arrive at

budget figures for the next year from scratch. This kind of an approach

to budgeting is useful for exposing and eliminating inefficiencies which

have accumulated over a period of time.

Bib l iog raphy 239

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