sm session 4

8/22/2019 SM Session 4

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WELCOME TO SESSION 4OFSTRATEGIC MANAGEMENT

S G Raja Sekharan


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Direct Objectives of the course

To introduce to you concepts andmanagement practices at a strategiclevel.

To give you all a hands on experience ofstrategic level thinking that seniormanagers do everyday.


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Indirect Objectives of the course

To improve your learn_ability skillsTo make you think - think long term

To improve your team interaction skills

To build you up for success in life


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WELCOME TO SESSION 4OFSTRATEGIC MANAGEMENT

S G Raja Sekharan


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RECAP OF WHAT WE HAVEDONE LAST WEEK


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The Five Steps of theStrategy Making Process

Select the corporate v is ion,mission, and values(VMV)and the major corporate goalsand ob ject ives.

Analyze the external competitive environment (toidentify opportuni t iesand threats).

Analyze the organizations internal environment (toidentify its strengthsandweaknesses).

Select strategies that: Build on the organizations strengths and correct its weaknesses

in order to take advantage of external opportunities and counter

external threats Are consistent with organizations vision, mission, and values andmajorgoals and objectives

Are congruent and constitute a viable business model

Implement the strategies and evaluate/course correct.


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Macro Analysis of external environmentPest Analysis

A framework that assists inanalyzing the externalenvironment and helpsidentifying the existing

opportunities & threats


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Porters five forces model


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Porters Value

chain helps to

analyzespecificactivitiesthrough which

firms cancreate valueandcompetitive

advantage

This is part of internal analysisof any company


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This weeks agenda

Analyzing companys externalenvironment

Industry lifecycle analysis model

Internal analysis


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ANALYZING ACOMPANYS EXTERNALENVIRONMENT


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The Role of the Externalenvironment

Changes in the forcesin the externalenvironment candirectly impact:

The Five Forces

RelativeStrengths

IndustryAttractiveness


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Two facets of the companyssituation

The industry and the competitiveenvironment in which the companyoperates and the forces acting toreshape that environment;

The companys own market position andcompetitiveness.
http://www.autopulze.com/automobile/bajaj-auto-limited/bajaj-auto-records-its-highest-ever-exports-for-any-month-in-its-history/http://openmarkets.in/2894/hero-doing-great-with-rs-2575-crore-expansion-planshttp://www.autopulze.com/automobile/bajaj-auto-limited/bajaj-auto-records-its-highest-ever-exports-for-any-month-in-its-history/http://www.topnews.in/companies/tvs-motor-company


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One needs to answer these sevenquestions

1. What are the dominant economic features of theindustry in which the company operates

2. What kinds of competitive forces are industrymembers facing and how strong is each force?

3. What forces are driving changes in the industry andwhat impact will these changes have on competitiveintensity and industry profitability?
http://openmarkets.in/2894/hero-doing-great-with-rs-2575-crore-expansion-planshttp://www.autopulze.com/automobile/bajaj-auto-limited/bajaj-auto-records-its-highest-ever-exports-for-any-month-in-its-history/http://www.topnews.in/companies/tvs-motor-company


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One needs to answer these sevenquestions

4. What market positions do industry rivals occupywho is strongly positioned and who is not?

5. What strategic moves are rivals likely to make next?

6. What are the key factors for future competitive

success?7. Does the outlook for the industry present thecompany with sufficiently attractive prospects forprofitability?
http://www.autopulze.com/automobile/bajaj-auto-limited/bajaj-auto-records-its-highest-ever-exports-for-any-month-in-its-history/http://openmarkets.in/2894/hero-doing-great-with-rs-2575-crore-expansion-planshttp://openmarkets.in/2894/hero-doing-great-with-rs-2575-crore-expansion-planshttp://www.autopulze.com/automobile/bajaj-auto-limited/bajaj-auto-records-its-highest-ever-exports-for-any-month-in-its-history/http://www.topnews.in/companies/tvs-motor-company


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Industry Life Cycle Model analyzes the affects ofindustry evolution on competitive forces over time

and is characterized by five distinct life cycle stages

Industry Life Cycle Analysis


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Stages in the Industry Life Cycle

Strength and nature of five forces change as industry evolves

Embryonic stageHigh costs/lowsales/low profitsLittle or no

competitionfocus on productawarenessHave to be easy touse and sampleFocus ondistributionchannelsFocus on perfectingdesign and logistics

DNA mapping
http://www.mun.ca/biology/scarr/4241_RMC_Sequencing.htmlhttp://www.mun.ca/biology/scarr/4241_RMC_Sequencing.htmlhttp://www.manahotels.in/traveller/india/the-rapidly-growing-medical-tourism-in-india.htmlhttp://www.mun.ca/biology/scarr/4241_RMC_Sequencing.html


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Growth stageLowering ofcosts/increasing salesand profitsIncreasingcompetitionfocus on scaling upoperations manf.,distribution,manpower etc

CAT SCAN
http://www.brianjogrady.com/neurosurgicaltests.htmlhttp://www.brianjogrady.com/neurosurgicaltests.htmlhttp://www.brianjogrady.com/neurosurgicaltests.htmlhttp://www.brianjogrady.com/neurosurgicaltests.htmlhttp://www.brianjogrady.com/neurosurgicaltests.htmlhttp://www.brianjogrady.com/neurosurgicaltests.html


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Shakeout stageDemand close tosaturation

Very competitivemarket Excess productivecapacityFocus on cost/differentiationstrategyFocus on growingthe market

NephroPlus, the kidney care chainthat has announced plans to set up100 units in various States, will go forsecond round of venture capital

funds in 9-12 months.
http://jobsearch.naukri.com/job-listings-Dialysis-Technician-Staff-Nurse-NephroPlus-Kidney-Care-Dialsysis-Centre-Agra-Alappuzha-Alleppey-Delhi-NCR-Delhi-Dehradun-Bengaluru-Bangalore-0-to-5-110613001806


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Strength and nature of five forces change as industry evolvesMature stage Saturated marketwith low or nogrowth

Industryconsolidation dropping pricesand profitabilityFocus on cost /differentiationFocus on growingmarket or featurediversification
http://www.indianmirror.com/tourism/hospitals.htmlhttp://www.indianmirror.com/tourism/hospitals.htmlhttp://www.indianmirror.com/tourism/hospitals.htmlhttp://www.indianmirror.com/tourism/hospitals.htmlhttp://www.indianmirror.com/tourism/hospitals.htmlhttp://www.indianmirror.com/tourism/hospitals.htmlhttp://www.indianmirror.com/tourism/hospitals.htmlhttp://www.indianmirror.com/tourism/hospitals.htmlhttp://www.indianmirror.com/tourism/hospitals.htmlhttp://www.indianmirror.com/tourism/hospitals.htmlhttp://www.indianmirror.com/tourism/hospitals.html


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Decline stagenegative industrygrowthPrices andprofitability

diminishExit of playersdepending on exitbarriersFocus onoperationalefficiency
http://www.momgrocery.com/product/9909/dabur-chyawanprash-avalehahttp://www.momgrocery.com/product/9909/dabur-chyawanprash-avalehahttp://www.momgrocery.com/product/9909/dabur-chyawanprash-avalehahttp://www.momgrocery.com/product/9909/dabur-chyawanprash-avalehahttp://www.momgrocery.com/product/9909/dabur-chyawanprash-avalehahttp://www.momgrocery.com/product/9909/dabur-chyawanprash-avalehahttp://www.momgrocery.com/product/9909/dabur-chyawanprash-avaleha


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90% OF THE PRODUCTS WEUSE TODAY DID NOT EXIST IN

THE CURRENT FORM FIVEYEARS AGO


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90% OF THE PRODUCTS WEWILL BE USING FIVE YEARS

FROM NOW DOES NOT EXISTTODAY


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Limitations of Modelsfor Industry Analysis

Industry cycles do not always follow the life cyclegeneralization.

In rapid growth situations embryonic stage issometimes skipped, for example Apple iPad skippedthe embryonic stage

Industry growth revitalized through innovation orsocial change, for example Indian economic growth isrevitalizing growth in all Indian markets and it isdifficult to find a declining market in India

The time span of the stages can vary from industry to

industry eg- Automotive vs FMCG products.


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Innovation and Change1. Punc tuated Equi l ibr iumoccurs when an industrys long termstable structure is punctuated with periods of rapid changeby innovation.


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Punctuated Equilibriumand Competitive Structure

Periods of long

term stability

Periods of long

term stability

Industry

Structure

revolutionized

by innovation


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http://www.suchetadalal.com/?id=8656efb7-8319-e1c3-4b1d0045414c&base=sections&f


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Innovation and Change1. Punc tuated Equi l ibr iumoccurs when an industrys long term

stable structure is punctuated with periods of rapid changeby innovation.

2. Hypercom peti t ive industr iesare characterized by permanentand ongoing innovation and competitive change.
http://www.fmd.qut.edu.au/campus_services/cleaning/waste_disposal/mobile_phone.jsp


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Company Differences There can be significant variances in the profit rates ofindividual companies within an industry.

In addition to industry attractiveness, company resources andcapabilities are also important determinants of its profitability.

Models provide useful ways of thinking about competitionwithin an industry but be aware of their limitations.

Sales T/O20012-13

Netprofit

Totalassets

Marketcapitialisation

Bajaj Auto 19,997.25 3,043.57 6,138.55 52,955.61Hero

Motocorp23,768.11 2,118.16 5,284.68 32,468.19

TVS Motors 7,065.00 116.02 1,884.76 1,546.41


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INTERNAL ANALYSIS


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Internal Analysis

The purpose of internal analysis is to pinpoint thestrengths and weaknesses of the organization.Streng ths lead to superior performance.

Weaknesses lead to infer ior performance.

StrengthsOf the enterpriseare assets that

boostprofitability

WeaknessesOf the enterpriseare liabilities that

lead to lowerprofitability


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Internal Analysis includes an assessment of: Quantity and quality of a companys resources and

capabilities Ways ofbuilding unique skills and company-specific or

distinctive competencies

Internal Analysis


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Organized paint industry in India

Sales Turnover Net Profit Total Assets Market Cap.

Asian Paints 8,971.70 1,050.00 3,069.02 42,008.55

Berger Paints 3,024.21 209.8 1,015.30 8,401.28

Kansai Nerolac 2,856.60 292.2 1,346.47 6,284.07Akzo Nobel 2,231.98 218.83 1,441.00 5,319.28

Shalimar Paints 530.18 11.02 132.56 176.32

Jenson Nicholson 59.25 -5.84 -228.48 9.17

Asian paints consolidated revenue from 17 countryoperation is Rs. 12300 cr ($ 2.3 B)


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Internal Analysis:A Three-Step Process

1. Understand the process by which companiescreate value for customers and profit forthemselves. Resources

Capabilities

Distinctive competencies2. Understand the importance ofsuperiority in

creating value and generating high profitability. Efficiency

Quality

3. Analyze the sources of the companyscompetitive advantage. Strengthsthat are driving profitability

Weaknesses opportunities for improvement

Innovation

Responsiveness to Customers


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Strategy, Resources,Capabilities, and Competencies


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Resources Tangible (physical) and intangible (non-physical) Allow a company to create value for its customers

Must have skills to take advantage of the resources

Firm-specific and difficult-to-imitate resources

as well as valuable resources that create strong

demand for a companys products lead to

dist inct ive competencies

Has seven factories in India (largest capacity),

Has backward integration as cost of Rawmaterials fluctuatesHas Rs 4000 cr worth of financial resources athandFocus on Human resources and has been able toget and keep good people


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Capabilities Coordinating resources & putting to productive use

Skillsreside in the organizations rules, routines

and procedures

Product of its organization, processes & controls

Firm-specific capabilities to manage its resources

lead todist inct ive competencies

Asian Paints has the widest and deepest distribution in

paint markets in India. It has a strong brands in allsegments. It has very good processes for operations.It leads in innovation in the industry (small packs,home solutions, textured paints, signature stores, colourideas etc). It has JVs with PPG of US (world no 2) forIndustrial coatings (auto, road paints, floor coats, whitegoods etc )


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Distinctive CompetenciesFirm-specific strengths allow a company to

differentiate its products and/or achieve

substantially lower costs than its rivals in order to

gain a competitive advantage.

Superior market presence reach, availability,variety, good quality, competitive prices, homesolutions, colour ideas etcSuperior efficiency -lower cost due tostreamlined operations, backward integration,largest volume.More innovative than competitors.Perception of best quality.


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Three genericStrategiesCompanies can aim to have one the three

strategies

Low Cost strategy (not low price); orDifferentiation strategy; orBoth Low cost and differentiation

Asian Paints is looking at both Low

cost and differentiation strategy


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Four approaches to createSustainable Competitive advantage


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Efficiency Measured by the quantity of inputs it

takes to produce a given output:

Efficiency = Outputs / Inputs

Productivity leads to greater efficiencyand lower costs:

Employee productivity

Capital productivitySuperior efficiency helps a company

attain a competitive advantagethrough a lower cost structure.


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One efficiency measure


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One more efficiency measure


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Quality Reliable and

Differentiated by attributes that customersperceive to have higher value

The impact of quality on competitiveadvantage: High-quality products differentiate and increase

the value of the products in customers eyes.

Greater efficiency and lower unit costs are

associated with reliable products.

Superior quality = customer perception ofgreater value in a products attributes

Form, features, performance, durability, reliability, style, design

Quality products are goods and services that are:


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InnovationInnovationisthe act of creating new productsor new processes Product innovation

Creates products that customers perceive as more

valuable and Increases the companys pricing options

Process innovation Creates value by lowering production costs

Successful innovation can be a majorsource of competitive advantageby givinga company something unique, something its

competitors lack.


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Responsiveness to Customers Superior quality and innovation are integral to

superior responsiveness to customers.

Customizing goods and services to the uniquedemands of individual customers or customergroups.

Enhanced customer responsivenessCustomer response time, design,

service, after-sales service and support

Superior responsiveness to customersdifferentiates a companys products and servicesand leads to brand loyalty and premium pricing.

Identifying and satisfying customersneedsbetter than the competitors

C ti S t i bl C titi


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Creating Sustainable Competitiveadvantage


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Concept of Value Creation/unit

Basic Principle: the more utility that consumersget from a companys products or services, the

more pricing options the company has.


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Concept of Value Creation/unit

Basic Principle: the lower the cost of companysproducts and services, the more pricing options

the company has.

H d A i P i t t


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How does Asian Paints createSustainable Competitive advantage

By focusing both on Low cost and Differentiationstrategy in India and executing it well over the lastfew decades, Asian Paints has created SustainableCompetitive Advantage that is very hard to beat.


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Organized paint industry in India

Sales Turnover Net Profit Total Assets Market Cap.

Asian Paints 8,971.70 1,050.00 3,069.02 42,008.55

Berger Paints 3,024.21 209.8 1,015.30 8,401.28

Kansai Nerolac 2,856.60 292.2 1,346.47 6,284.07

Akzo Nobel 2,231.98 218.83 1,441.00 5,319.28Shalimar Paints 530.18 11.02 132.56 176.32

Jenson Nicholson 59.25 -5.84 -228.48 9.17

Wh th k t


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Where are the weak spots(internal) in Asian Paints?

3. Analyze the sources of the companyscompetitive advantage. Strengthsthat are driving profitability

Weaknesses opportunities for improvement

4. Research and Development and expertise in

chemicals most paint companies in the globeare chemical companies (DuPont, BASF, AkzoNobel)

5. Global expansion to markets where there arevolumesworlds no. 1 Akzo Nobel has a

revenue of $18 B as compared to Asian paintsrevenue of $ 2.29 B


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World top five paint brands

Akzo Nobel (Ned) $17.3 BPPG Industries (US) $ 13.6 B

Sherwin Williams (US) -$ 7.57 B

Du Pont (US) - $ 5.12 BBASF (Ger) $ 4.62 B

Asian paints does not figure in the topten in the world


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Porters Value Chain

A company is a chain of activities for transforminginputs into outputs that customers valueincluding the primary and support activities.


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Porters Value Chain

Asian Paints creates superior value through marketingand sales even though it is better in most otherparameters when benchmarked with Indian companies

Competitive Advantage:


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Competitive Advantage:The Value Creation Cycle

In Paint industry, it takes decades to create competitiveadvantage and superior profitability

Punctuated Equilibrium


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Periods of long

term stability

Periods of longterm stability

Industry

Structurerevolutionized

by innovation

Measuring Competitive


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Measuring CompetitiveAdvantage and Profitability

Competitive Advantage When a companies profitability is greater than the average of allother companies in the same industry that compete for the samecustomers

Benchmarking

Comparing company performance against that of competitors andthe companys historic performance

Measures of Profitability

Return On Invested Capital (ROIC) Net profit Net income after tax

Capital invested Equity + Debt to creditors

Net ProfitNet Profit = Total revenues Total costs

=ROIC=

Measuring Competitive


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Measuring CompetitiveAdvantage and Profitability

Competitive Advantage When a companies profitability is greater than the average of allother companies in the same industry that compete for the samecustomers

Benchmarking

Comparing company performance against that of competitors andthe companys historic performance

Net Profit Total Assets ROIC

Asian Paints 1,050.00 3,069.02 34.21%

Berger Paints 209.8 1,015.30 20.66%

Kansai Nerolac 292.2 1,346.47 21.70%

Akzo Nobel 218.83 1,441.00 15.19%

Shalimar Paints 11.02 132.56 8.31%

Jenson Nicholson -5.84 -228.48 2.56%


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Drivers of Profitability (ROIC)


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Ways to Increase ROIC

Increase Companys Return on Sales Increase sales revenue more than costs Reduce cost of goods sold

Reduce spending on SG&ASales, Marketing, General & Administrative Expenses

Reduce R&D expensesResearch & Development

Increase Capital Turnover Reduce the amount of working capital

Inventory, Accounts Receivable, Payables

Reduce the amount of fixed capitalPPE - Property, Plant & Equipment

The Durability of Competitive


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The Durability of CompetitiveAdvantage

1.Barriers to ImitationMaking it difficult to copy a companys distinctive competencies

Imitating Resources Imitating Capabilities

2.Capability of Competitors Strategic commitment

Commitment to a par t icu lar way of doing bu s iness

Absorptive capacityAb il i ty to ident i fy , value, assimilate, and us e know ledge

3.Industry DynamismAbi l i ty of an indu stry to change rapid ly

The DURABILITY of a companys competitive advantage overits competitors depends on:

Compet i tors are also seeking to develop dis t inct ivecompetenc ies that wi l l give them a compet i t ive edge.


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Why Companies Fail

Inertia Companies find it difficult to change their strategies and

structures

Prior Strategic Commitments Limit a companys ability to imitate and cause competitive

disadvantage

The Icarus Paradox A company can become so specialized and inner directed

based on past success that it loses sight of market realities

When a company loses its competitive advantage,its profitability falls below that of the industry. It loses the abi l i ty to attract and generate resources. Prof i t margin s and invested capital shrink rapid ly.

Avoiding Failure:


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Avoiding Failure:Sustaining Competitive Advantage

1. Focus on the Building Blocks of CompetitiveAdvantageDevelop distinctive competencies and superior performance in:

Efficiency Quality Innovation Responsiveness to Customers

2. Institute Continuous Improvement and LearningRecognize the importance of continuous learning within the organization3. Track Best Practices and Use Benchmarking

Measure against the products and practices of the most efficient globalcompetitors

4. Overcome InertiaOvercome the internal forces that are barriers to change


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Developing a sound andhealthy organ izat ion requ iresunderstand ing the env i ronment

as much as understand ing theorganization.

- Gary Hamel

Strategic management co rse plan


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Strategic management course plan

Session 1 Introduction and overview to SM

Session 2/3 External and Internal environment

Session 3/4 Building SCA though value chains

Session 5

Growth through Integration, Diversification,Outsourcing and M&A

Session 6 Change management

Session 7 Tailoring strategies to fit specific industry &

company situations

Session 8/9 Strategy Implementation and control

Session 10 Industry interaction

sm session 4

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