2. strategy concept

Dr. B. K. Mukherjee 1

Strategic ManagementThe Strategy Concept

The Strategy Concept

Opening Case: DELL COMPUTERSStarted in 1984 by Michael Dell in his dorm room at the Uni. Of Texas in Austin.

Sales in 2002 was USD 30 billion.• Direct selling strategy;• Customization of product over the Internet; and • Using the Web for Supply Chain Mgmt (JIT), resulting in lowest (5 days’)

Inventory on hand.


This area of management study was first developed in 1950s and 1960s by H. Igor Ansoff (Corporate Strategy. 1965) – rational and accurate ways by which organizations could both adjust to and exploit changes in their environment.Ansoff distinguished ‘corporate strategy’ (selection of what business/portfolio of businesses to be in) from ‘business strategy’ (how to compete or function in that business, once selected).

If a company’s strategy results in superior performance relative to other companies in the same business/industry, then it is said to have a competitive advantage.

Competitive AdvantageMajor authority currently is Prof. Michael E.

Porter of Harvard Business School (‘Competitive Strategy: Techniques for Analyzing Industries and Competitors’, 1980)

.According to Porter, competitive advantage grows fundamentally out of value a firm is able to create for its buyers that exceeds the firm’s cost of creating it. Value (Benefits/Cost)is what buyers are willing to pay, and superior value stems from offering lower prices than competitors for equivalent benefits or providing unique benefits that more than offset a higher price.

Today, every enterprise operates in a complex business environment, hence Strategy must necessarily change over time to fit the prevalent environmental conditions. However, to remain competitive, companies must focus on

• a) Core competence, • b) Synergy, and• c) Value creation.


Core Competence


Core competence: a business activity that an organization does particularly well in comparison to its competitors – should be 1) Distinctive – only for me / non-duplicable / based on culture (herbal - Dabur), relationship (ICICI Bank), etc. 2) Reproducible – in terms of Technology, Value (VFM), etc.SOME EXAMPLES OF CORE COMPETENCE BRITANNIA INDUSTRIES – real expertise lies in handling perishable goods. However, AMUL is one step ahead of Britannia in the value chain because of its own milk-producing unit. HINDUSTAN LEVER LTD.– Distribution of FMCGs, Toiletries, Food products, etc.- vast and efficient distribution network – long shelf life. LARSEN & TOUBRO LTD – Engineering, Design and fabrication/erection of complex plants/infrastructure projects, incl. Nuclear reactors. TOYOTA MOTORS, JAPAN : The Japanese have further promulgated this view by developing the “Five Zeros” and “Seven Wastes” concepts. Actually, Toyota’s core-competence lies not in making and selling cars, but in following the 5-zeros and 7-wastes strategies.

Toyota’s 5-zeros strategy


FIVE ZEROS STRATEGY:

1. Zero Customer feedback time – continuous customer feedback after sale.

2. Zero Product improvement time – ongoing R&D activities, prompt introduction of improved variants.

3. Zero Purchase time – JIT system, reduced inventory, lower costs.

4. Zero Set-up time – Flexible design of tools, jigs, robotics, processes.

5. Zero Defect – Frequent inspections, In-process QC, Flawless finish.

Toyota’s 7-wastes strategy


SEVEN WASTES TO BE AVOIDED:

1. Waste of time on hand (i.e, waiting time) – because men, m/c, raw materials, stocks are waiting, by proper planning and scheduling.

2. Waste in Transportation – by planned logistics and material movements.

3. Waste in over-productions – by proper production planning and estimations.

4. Waste in stocks-on-hand – by effective sales forecasts.

5. Waste in Processing – efficient use of technology.

6. Waste in movement – by detailed Work-study.

7. Waste in making defective products – state of mind

Core (Internal) Competences [Chaston]


Clearly defined Market Opportunity

Formal Plan to exploit identified opportunity

Adoption of appropriate Market PositioningStrategicCompetences

Financial Resources capable of supporting Plan

Resource Competences

INNOVATIONEffective or requiringimprovement?

WORKFORCEAppropriatestructure,motivated andcompetent or requiring Improvement?

PRODUCTIVITYAdequate,supported by ongoing invest-ment in Techno-logy or requiringimprovement

QUALITYAdequate andregularly assessed orrequiring improvement?

SYSTEMSInformation flows permit rapid problem resolution orrequiring Improvement?

Organizational competences

Core (Internal) Competences • STRATEGIC COMPETENCE: Complacency is dangerous in a world full of competition. An

organization’s strategic competence can be evaluated by testing whether the strategies are distinctive, appropriate, usable, measurable and sustainable.

• FINANCIAL RESOURCE COMPETENCE: may be achieved by way of conservative financial management rather than ambitious over-expansion through cavalier acquisitions of competitors’ businesses.

• INNOVATION: To prosper and grow all organizations need to continually innovate and improve their products and process technologies (eg. 3M)

• WORKFORCE: HRM practices within the organization often play a decisive role, because a motivated and appropriately structured workforce can contribute significantly towards building market competitiveness.

• QUALITY: In the 1970s, countries like Japan and Korea were able to penetrate global markets solely on the basis of superior quality of their products (concepts like TQM, Kaizen, etc). Over the years, it has been clearly demonstrated that companies whose products are perceived to be of a higher quality will enjoy higher profits and a larger market share.

• PRODUCTIVITY (measured as level of value-added activities per employee per number of hours worked): The secret of Japanese competitiveness lies in adoption of concepts such as lean production, concurrent engineering and JIT, thereby making them world leaders and, at the same time, generating very healthy profits.

• INFORMATION SYSTEMS: The advent of low-cost, extremely powerful computers offers opportunities through which to develop integrated Mgmt Information Systems.


Synergy


‘Synergy’ occurs when the various parts of an organization interact to produce a joint effect which is greater than the sum of the parts acting alone, i.e, 1+1+1+1>4. This involves a process of ‘Vertical Integration’ and also a strong psychological element. Examples are: OIL COMPANIES : Exploration(Crude oil, Natural gas) > Drilling(Technology) > Crude Transportation (Pipelines, Tank ships) > Crude Storage (Tank Farms) > Refining (Different fractions – CNG/LPG/ Petrol/Diesel/Kerosene/ATF/Naphtha/Lubes/Fuel Oil) > Product storage(Tanks) >Product Transportation > Retail pumps. This is an example of Forward Integration. RELIANCE INDS : Textiles(VIMAL) >Yarn(Polyester Filament Yarn/Partially Oriented Yarn, etc) > Petrochemicals(Purified Terephthalic Acid, MonoEthylene Glycol, PolyPropylene, etc) > Oil Refining (Naphtha) > Exploration (Crude). This is an example of Backward Integration.These are Integrated corporations who participate in the entire Value chain, right from Exploration to Retail Pumps or from Textiles to Oil Exploration.

Value Creation & Value Delivery


‘Value’ can be defined as the perception of benefits received against price paid by the customer, hence the term,”Value for money”. Value must be greater than the cost of resources for the business to be profitable. The task of any business is to deliver customer value at a profit. Traditional view was that a firm makes something and then sells it. The economy is marked by shortages and customers are not fussy about quality, features or style (eg. Henry Ford’s Model-T). However, this view will not hold in more competitive economies where people face abundant choices. The smart competitor must design and deliver offerings for well-defined target markets. This places Market at the beginning of the planning process and companies now have to develop a proper ‘Value-creation & Value- delivery’ sequence in order to remain competitive.

Value Creation & Delivery (contd.)


Traditional Physical process sequence

1.Make the product

Make/manufacture the product

Procure materials

Design the product

2.Sell the product Advertise / Promote

Sell the product

Price the product

Distribute

Service after sales

Value creation & Value delivery (contd)


Value Creation & Delivery sequence

Position the value

Focus Target audience

Customer Segmentation

2. Create the value Procurement/sourcing

Price

Product/Service developmt

Manufacturing

1. Select the value (“Homework” by Co.)

Distribution

3. Communicate the

valueSales process

Sales Promotion

Advertising

Servicing

Sales force

S-T-P Strategic Mktg

Tactical Mktg.

Emergent strategies: The case of Honda

According to Henry Mintzberg, emergent strategies are the unplanned responses to unforeseen circumstances, often arising from autonomous action by individual managers or from serendipitous discoveries or events. Mintzberg maintains that emergent strategies are often successful and may be more appropriate than intended strategies.

In 1959, Honda Motor Co. decided to enter the U.S. motorcycle market. A number of Honda executives arrived in Los Angeles from Japan to establish the U.S. operation. Their original aim (intended strategy) was to focus on selling 250-cc and 350-cc machines to confirmed motorcycle enthusiasts rather than the 50-cc Honda Cubs, which were a big hit in Japan. Their instinct told them that the Honda-50s were not suitable for the U.S. market where everything was bigger and more luxurious than Japan (eg, Harley-Davidsons, big sedans, etc).

However, sales of the 250-cc and 350-cc bikes were sluggish, and the bikes themselves were plagued by mechanical problems. It looked like Honda’s strategy was going to fail.

At the same time, the Japanese executives who were using the Honda-50s to run errands around Los Angeles were attracting a lot of attention.


The case of Honda (contd.)One day they got a call from Sears, Roebuck who wanted to sell

the 50-cc bikes to a broad market of Americans who were not necessarily already motorcycle enthusiasts. The Honda executives were initially hesitant to sell the small bikes for fear of alienating serious bikers, who might then associate Honda with “wimpy” machines. In the end, they were pushed into doing so by the failure of he 250-cc and 350-cc models.

Honda had thus stumbled onto a previously untouched market segment that was to prove huge: the average American who had never owned a motorbike.

Honda had also found an untried channel of distribution: general retailers rather than specialty motorbike stores. By 1964, nearly one out of every two motorcycles sold in the United States was a Honda.

In this case, the company’s meticulously planned intended strategy was a near disaster. What ultimately worked was the emergent strategy, not through planning but through unplanned action in response to unforeseen circumstances.


Serendipity and StrategyBusiness history is full of examples which suggest that many successful

strategies emerge not out of well-thought-out plans but out of serendipity, i.e, stumbling upon good things unexpectedly.

THE CASE OF THE MINNESOTA MINING & MANUFACTURING CO (3M) In the 1920s, 3M was a small manufacturer of sandpaper. Its best-selling

product, wet-and-dry sandpaper, was introduced in 1921 and was primarily sold to automobile companies for sanding auto bodies between paint coats. A problem with the paper, however, was that the grit did not always stay bound to the sandpaper and ended up damaging the paint surface.

To tackle the problem in the early 1920s, a young CEO, William McKnight, hired 3M’s first research scientist, Richard Drew, who was fresh out of college on his first job. While experimenting with adhesives, Drew happened to develop a weak adhesive that did not seem very promising. However, it had an interesting quality: when applied to paper, it would easily peel off from a surface without damaging it or leaving any adhesive residue. This led to the advent of “masking tape”, which would be extensively used in all auto paint shops and, years later, the product “Post-it” pads.

Sticky (“Scotch”) Tape subsequently became a major business for 3M and for 40 years McKnight and Drew together helped build 3M and shape its organizational culture: that of encouraging initiative and innovation.


Serendipity and Strategy (contd.)Another such example happened in the 1960s. At that time, 3M

was producing fluorocarbons for the air-conditioning industry. One day a researcher working with fluorocarbons in a 3M lab spilled some of the liquid on her shoes. Later that day when she spilled coffee on her shoes, she was surprised to notice that the coffee formed into little beads of liquid and ran off the shoes without leaving any stain.

Further research led to the development of ‘Scotch Guard’, a fluorocarbon-based product for protecting fabrics from liquid stains. Subsequently, Scotch Guard became one of 3M’s most profitable products and took the company into the fabric protection business, an area it had never planned to enter.

But some companies have missed out on profitable serendipitous opportunities because of strategic myopia. A century ago, the telegraph company Western Union turned down an opportunity to purchase the rights to an invention made by Alexander Graham Bell.

The invention was the telephone, a technology that subsequently made the telegraph obsolete.


Economy & Finance

2. strategy concept