CHAPTER 1 ENTRY STRATEGIES

Why go out?

Objectives ParametersDiversification Risk reduction

Fungibility InalienabilitySynergies

CorrelationEIC Analysis -. Environment / context. Industry analysis (5 forces). Company SWOT analysis

Poor performance here RetaliationRecoupment of lossesConversion of status Dog to Star

Attractiveness of other industries

ProfitabilityGrowth opportunities

Necessity of exit Relationship maintenanceLegal complianceLeast cost path

EIC analysis

Economy Industry (Five Forces) Country (S/W)DemographicsEconomic (Income levels, level of development and credit buoyancy)Natural (raw materials, laws and energy costs)Technology (obsolescence and new changes)Political (laws and regulations, taxation and politics)Social (cultural traits)

Threat of SubstitutesThreat of Entrants (entry barriers)Rivalry (size of the pie now /likely, number of rivals, existing nature of rivalry)Suppliers' powersBuyers' powers- demand analysis

Resources- People- Finances- Past history- Knowhow and

experience- Skills- Processes / methods- Systems (e.g.

distbn.)- Name and image

An alternative approach to EIC (viability of an investment)

Commercial - legal environment, rivalry, demand, supply, costs and pricesTechnological - processes, technologyFinancial - ROCE with funding mixPromoters - S/W analysis of the Company

How to enter?

A. LocationExport goods Export knowhow

Options AssembleManufacture

Risks HIGH: Tariff and Non Tariff barriersLOW: risk related to demandLOW: foreign exchange risk

HIGH: Capital outlay costsHIGH: Input sourcing risksHIGH: Capital import controls risksHIGH: Repatriation of returnsHIGH: Cultural differences, Managerial risk

Benefits Local capacity better usedFiscal incentivesLeveraging the local costs and strengths

Presence and proximityInside the Trade BarriersGovernment patronage likelier (FDI)Cost arbitrage (e.g. labour costs)

B. Status of the firmAcquisition of going concern Startup venture

Benefits

Using existing capacity - no risk of glutLesser capital costs (can pay for existing technology and capital rather than replacement value)Brand name leverageLow gestation periodExisting systems and resources

ControlTax benefits of a new industrial undertaking

C. ControlSolus Joint venture

Sharing of capital outlaysSharing of resources - technology, financing, personnel and systemsThe local touch - for a new environment

D. Scope of entry

Segments Whole marketGapsFlanksWeak links

Needs resourcesCreates impact and visibilityImmediate effectVolumes generated

CHAPTER 2 PROFITABILITY ANALYSIS

What is the CSF ??? And how is it operating ….

Measurement metric: ROCEReturns Capital EmployedRevenue Costs Fixed assets Working capitalPrice Volume Mix Varia

bleFixed

Drivers

3 C’s

Drivers

SupplyDemand

Drives

SynergiesStrategy

Capacity utilisationTechnology usedOff-balance sheet

Period held, for each item

Classified on the basis of function

Analysis of variances price / rate volume yield mix ( product / buyer / market ]Fixed costs Scale economies Production levels

CostsManufacturing Selling Administration Researcha. Procurementb. Inwards

logisticsc. Operations:

Materials/Labour /Conversion

a. Outbound logistics

b. Distributionc. Marketing

costsd. Sales

servicing

a. Salariesb. Soft costs

- Culture- Motivation- Recruitment

a. Salariesb. Materialsc. Capital

outlays

Price VolumeSold i.e. demand drivers Produced

a. Product type (differentiation v/s commodity)

b. Demand powerc. Market structure

(oligopoly, monopoly, competition)

a. Companyb. Customersc. Competition

3 C's model

a. Capacityb. Bottlenecks of

Labour / Technology / Inputs

c. Laws

The 3 C's modelCompetition Customers CompanyPricing strategiesProduct: differentiation v/s commodity

TastesNumber Switching costsIncomesTrendsDemographics

PriceProductPlacePromotion

Demand drivers1st classification: Systemic v/s Firm specific2nd classification: Price v/s Non price

Non price: Quality delivered, Season, Tastes, Loyalty, Switching costs and Substitutes availability

OPTIMISING PRODUCTION WITHIN LIMITED RESOURCES

The case: Machinery available .. product mix to be decided .. costs etc. givenApproach: maximise profits per unit resource – hence produce in decreasing order of the profitability per unit resourceConstraints: specificity of resources

minimum utilisation levelsminimum batch sizesavailability of ancillary resources (other resources may become

scarce and constraints)market demand availabilitypersonal preferences

Algo: if a minimum demand has to be met, meet it first out of all resources and then use the balance as per efficiency measure. If a maximum exists on a product, produce it to its maximum when its turn comes, and then proceed.

CHAPTER 3 PRICING - THE SECOND P

PRICING MODEL OUTLINE

a. Objective of pricing: strategic / tactical - cost recovery- market share b. Extent of pricing: - customers: demand curve, elasticities (simple / cross)- competitors: price wars and game theory- context: laws and regulations, cartelsc. Pricing is the distribution of value: cost to supplier as the minimum, value

to customer as maximum

The Pricing Decision

ObjectivesDemand determination

Cost estimation Benchm

arkingSurviveCost recoveryIncrease / maintain shareRepositionpush salesleadership role

demand curveelasticity (sensitivity of demand to prices)

operation distribution returns on outlay

with the rivals

Price and Demand Demand function and price elasticity Cross elasticity and substitutes Product differentiation and virtual monopoly The buyer's first criterion will be affordability, and value only second.

Strategic Pricing ModelsMU = MC / Price is the threshold for a buyer Perfect competition: Zero switching costs, free entry and exit, price = long

run average cost Monopolistic competition: Product differentiation, moderate switching

costs and reasonable price differences. Prices equal average costs Oligopoly: Limited firms, existence of entry and exit barriers, well

differentiated products with selling costs. Elastic demand curves, and higher possibility of price leadership and collusion increases

Monopoly: One firm and the entire industry demand curve. Price high and output restricted. Depends on the barriers to entry and on the contestability

Tactical Pricing Models Market skimming: High publicity financed through a high price, mainly for

a product for which the aim is short term profits. Penetration: A long term focus which seeks to gain first-time usage and

trial through attractive low prices, then raises prices and adds features and builds a brand and a strong monopolistic position.

Price Computation Markup / ROI based pricing: The typical pricing is based on a markup on

costs. Market pricing: Match average market price to the average brand, and

price after benchmarking for features, if the market price reflects the buyer's value perception

Target costing: A target price is set based on desired market share and the full product - design, configuration and delivery - is developed around the target price. This is useful in case of an entry strategy.

Adapting Pricing Cross subsidisation: For multiple products, strong brands will finance start-

up losses on entry brands which may have to go for penetration and predatory pricing.

Discounts: Basically reduce the costs borne by buyers, and are typically linked to seasons or events and result in a boost in sales. May dilute brand image.

Discriminatory pricing: Requires a substantial market power, and non arbitrage opportunities to the buyers, as also different elasticities in demand across buyers' segments (market power)

Two part pricing: A start-up / entry price as the price of use of the facility for using the product, accompanied by the actual usage charge. Very flexible especially in case of products which are not divisible by themselves but the use of which is divisible (e.g. car rentals)

Inflation: Inflation induces price changes as it cause an increase in costs and hence in the required returns.

Benchmarking of prices: Under collusion or cooperation, the firms may agree to benchmark prices against one another (price leadership, advance announcement of prices etc.)

New role of pricing – a Driver of the Marketing Mix Entry: As an entry tool, price attracts attention and trials Product: Pricing of rivals forces benchmarking and a lower price forces a

redesign, often eliminating features and offerings. Promotion: Price is a now strong promotion tool to differentiate products

amidst the clutter of value-added features. Place: Price acts as strong signal of value and hence influences the service

level perceived by the customer as also determines the nature of the outlets, their ownership, the dealership costs etc.

Managing the customer for strategic price marketing Stimulate customer's purchase decisions by rewriting the value equation

(psychological threshold, attention to the USP, redefining the substitutes and enticing inventory building)

Price triggers evoke comparison with different products, and tempt the buyer, attracted by a lower price, to make a replacement purchase before schedule.

Target price of buyer = f(urgency, estimates of future, the contextual environment and historical prices)

The downside risk of price-led marketing, is that volumes may not climb though margins drop and retracing out of the mass market up the price-ladder is impossible. The solution is to manage the customers mix, by avoiding discount-seekers. The discounts can be designed into a sliding structure with rate falling in proportion to the frequency of usage.

Strategic price marketing Match the value that the customer pays with the expectations he has

about its value, with different price expectations for each segment – balance the customer’s requirements and the firm’s requirements

Aim: right price-level for each segment, and then progressively moving through them.

High quality and low price are not a trade-off, they make a winning marketing strategy.

Price Marketing will not compensate for a diluted brand image, or poor penetration, or indifferent advertising or for the product offering.

The BARON Akai case in terms of models studied The consumer durables market is an oligopolistic market, but Baron

attempted commoditisation of the market with price cuts and exchange offers , which were clearly predatory with an intention of rapid sales, and no concern for sustained brand image. The pricing was supported by promotion schemes and cost cutting, which allowed the low prices to be sustained. The competition reacted by price cutting (oligopolistic model) or by distancing the products (product differentiation) through brand repositioning and advertising. The industry has migrated again towards brands and product differentiation. The price bubble, howsoever short-lived, has however had an impact as it demonstrated the price sensitivity of the customer. The customer loves value-for-money, whether value be heightened by product differentiation or money be reduced by price cutting is of no concern.

CHAPTER 4 PORTER AND HIS FIVE FORCES

Threat of entryDeterrents: Barriers to entry. These are however not static.

Economies of scale Joint resources/operationsVolume economies

Product differentiation Brand identificationSwitching costs of buyersRelationships

Resources required Ability to mobilise the resources and systems needed to replicate the setups of existing participantsE.g. plant, distribution, networks

Governmental policyPropreitary resources Knowledge

Learning curveContestability of markets

Exit barriers

Retaliation Depends on the rivalsThreat of Definition of the

substitutes subistituteChanges in technologyChanges in the tastes / needsPerformance / price ratio of the competing product

RivalryThe idea is that firms in the same industry interact with one another through decisionsChanges in rivalry: entry / exit, mergers

/alliances redefinition

of industry

The pie Size of the pieGrowth in the pie size

The pieces The number of rivalsSize of rivalsProduct nature (commodity …)CartelisationDiversity of rivals - goals, values etc.Exit barriersEntry barriers

Buyer's power and Vendor's power

The bargaining powers depend on the change in

needs and requirements

dependence and alternatives

information

Criticality To buyerTo seller

Integration threat Backward integration by buyerForward integration by seller

Costs Switching costsTransaction costs of lost sales

Elasticities Supply curveDemand curve

Market structure MonopolyOliopolyMonopolistic competitionPure competition

MonopsonyOligopsonyCompetition

Two approaches to using the Five forces model:a. Positioning the firm within the framework

b. Influencing in the forces themselves

COMPETITION ANALYSIS

Analysis of the competitor involves:a. his current strategyb. his future goalsc. assumptions he holds about

himself and about the industryd. competencies and strengths

Preparation of a response profile for:a. prediction of strategic changes

that competitors are likely to make

b. evaluate the defensive abilities and attacking threats

c. evaluate mismatches between the competitors in respect of goals and profiles

CHAPTER 5 GROWTH IN PROFITS

To grow in profits: one needs to

Grow in volumes Change the mix Grow in marginsIncrease sales implies:Capacity increase – methods (acquired / leased etc.)Demand increase – demand drivers

Mix includes:BuyersMarketsProducts

Raise pricesCut costs – Improve efficiency Reduce wastage Beter bargaining

Growth means:

Internal – Organic growth (on expansion)Systemic growth (market expanding)It is achieved through changes in business - product – market combinations

External – Through acquisitions (examine issues in acquisitions)

CHAPTER 6 RESTRUCTURING BUSINESSES

SELLING OFF A BUSINESS

To sell or not to sell

Why are profits fallingRemedies available – costly No remedies available, hence sell offLoss of embedded optionsLinkages with the existing business portfolio esp. contribution to a competitive positioning

What value to charge

Options pricing model, Valuation techniques, Competitive scenario (5 forces) etc.

VALUATION OF A BUSINESS

Stand Alone VenturesTypical case: tea shop / caféIssues: Traffic Time of the day Day of the week

Product mixCosts including Personal time involved (opportunity cost)

For M&A Purposes TO DO

TAKE OVER BIDS

Identifying targets (including evaluation)

McKinsey Pentagon FrameworkShare value - Intrinsic value - Internal changes - External changes - restructured value - Share value

Fending off bids

Who are we and Who are they

Why do they want us

HistoryBusinessResourcesLast few years

SynergyArbitrage (ability to use the resources better)

Avoiding the bid: Why?

MethodsRemove the incentive Reduce the value Increase the costImprove usage of resourcesGet rid of the inefficiency

Sources of synergy and arbitrage to be taken away

Increase the resources needed (price) e.g. Counter bidsIncrease the cost of resources required

ACQUISITIONS IN DIFFERENT BUSINESSES

a. Unrelatedb. Related: Downstream / Upstream / Byproducts / Complements /

Substitutes

Synergies What do we have in X What do we need from Y Can we bridge the two

Critical success factors5 Forces analysis

CHAPTER 7 CAPACITY DECISIONS

What capacity to buildExpansion of capacityHow to acquireUsing capacity – what levelSelling off capacity

EXPANSION OF CAPACITY

1st question: Why expand ? the objectives …

Impact of a change in capacitySupply potential increases

Economies of scale Learning curve

Demand pressures reduce

Product differentiation else price cutting

Game theory concepts such as early mover, commitment etc.

Nature of Rivalry changes

Impact on the 5 forces ?? Outlook of industry and potential for the future

Value of change in capacityRecovery of revenueDoes demand justify the expansionCan price be increasedImpact on costs

Payback horizonCross subsidisationBreak evenCost of resources usedSynergies

CHANGES IN CAPACITY UTILISATION

Utilisation = %ge of usage vis-à-vis capacityCapacity = installed v/s normal utilised v/.s actual utilisedCompare with industry standardsConstraints:a. Availability for use

Downtime BottlenecksCritical mass Batch processing

b. Requirement to useDemand & demand drivers Logistics and delivery / distributionInventory norms Smoothening

USING EXCESS CAPACITY

Capacity = Resources = Labour + Technology + MachineryQn: which of these is excess? Why?

a. Demand fall: not correctible (e.g. Government stops buying arms under defence budget cuts)

b. Increase in efficiency (e.g. breakthrough technology or innovation)

Using excess capacitya. Continue production- Same product- Different product-markets

b. Lease out

c. Sell out

To evaluate the profits from each – now and later, using the traditional 5 Forces model etc. for each model.

The other parameters to examine:Costs of modifying capacity Costs of altering the capacity mixOpportunity costs LawsExtent of reutilisation

CHAPTER 8 COST MANAGEMENT

Basic funda: Costs arise out of activities

WHAT IF VENDORS RAISE COSTS?

- UnderstandingWhere is the cost increase – which part of value chain?How is it likely to affect the operations of the firm ?How long is it likely to last ? (temporary v./s permanent)Whose costs are so affected ? (only oneself v/s many others)

- CopingPass on cost increase

Depends on price elasticity + 3 C’s model + market structure (eco fundae)What is the impact on volumes – now and laterStrategic impact

Retain cost increaseManage cost structure

WHAT IF COSTS ARE REDUCED

- UnderstandingWhere is the cost increase – which part of value chain?How is it likely to affect the operations of the firm ?How long is it likely to last ? (temporary v./s permanent)Whose costs are so affected ? (only oneself v/s many others)

- Coping Pass on cost decrease

Depends on price elasticity + 3 C’s model + market structure (eco fundae)

What is the impact on volumes – now and laterStrategic impact – drive out the competition

Retain cost decrease

Impact on image

Manage cost structure

Redeploy cost savings to alternative heads of costs e.g. R&D – impact …Capital expenditure

ESTIMATING COST STRUCTURES OF RIVALS

Areas of costs Logistics Production DistributionSelling Administration Development

Difference in costs can be linked to

Rate Logistics, Networks and relationships, Bargaining powerVolume Capacity, Utilisation achieved, DemandEfficiency Technology, Process designMix Marketing, Demand

REDUCING COSTS

What is the cost structure: - Now / then- Us / industryWhat is the composition of costsCost measurement and allocation v/s Actual costs burden (the ABC method)Source of costs - activities and Cost driversSources of over-cost - inefficiency / slack / wastage / buffer (e.g. inventories)

CHAPTER 9 OTHERS

LOCATION ANALYSIS

Comparing two locationsEvaluate the main drivers – whether these are location-specific

Product nature: design, target market

Delivery method Rivals

Demand drivers Cost drivers

SPRINKER v/s DRIP IRRIGATIONCustomisation v/s mas marketing

Customisation Mass marketinga. Better value propositionb. Better marginsc. Riding the demand curved. Needs identifiability of the targetse. Monitoring and managing the

targeting processf. Scale will be fragmentedg. Flexibility

a. Volumes, costs and diversification