Letter J

Japanese Style of Management: The Japanese style of management has various distinctive elements:
• a long term perspective, in which establishing a strong market position 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 Kaizen, Kanban, Lean Thinking, Mckinsey 7S framework)

Joint Venture: A joint venture involves two or more parties coming together to undertake an economic activity. The parties typically agree to create a new entity together by jointly contributing equity capital and share the revenues and expenses. The venture can be for one specific project only, or for a continuing business relationship. Multinationals often enter emerging 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 Political Risk, Strategic Alliance)
Judo Strategy: A term coined by David Yoffie of Harvard Business School. Judo strategy effectively means avoiding direct confrontation and leveraging the strength of the opponent to create space. Judo strategy can help small companies to enter new markets and defeat stronger rivals. Through speed, flexibility, and leverage, new players can occupy uncontested ground and turn the strengths of dominant players against them.
Consider Netscape, which after being set up in 1994, became the hottest company in the tech world. Netscape’s flagship product, the Navigator Web browser, dominated its market from day one. And in August 1995, just sixteen months after its founding, Netscape made a highly successful IPO. But Netscape’s fall was equally spectacular 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 irreversible decline. By the end of the decade, Microsoft had started to dominate the browser business, and Netscape survived only as a division of AOL. In contrast, Palm Computing which 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 ultimately chose to do. Instead, the challenger should study the competition carefully, avoid head-to-head battles and use the opponents' 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

Letter Z

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.

Letter W

W

Whistle Blower: A sense of moral outrage may prompt people to expose wrong doing within an organization. A whistleblower is an employee, former employee, or member of an organization who reports misconduct to people or entities that have the power to take corrective action. Generally the misconduct is a violation of law, rule, regulation and/or a direct threat to public interest. Fraud, health & safety violations, and corruption are just a few examples. The vast majority of cases are based on relatively minor misconduct. The most common type of whistleblowers are internal whistleblowers, 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 agencies, or to other local, state, or federal agencies.
(See 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 then rescued immediately by a white knight.
(See Anti takeover Strategy)

Williamson, Oliver E: An American economist who, building on the work of Nobel prizewinner Ronald Coase, has become closely associated with the economics of transaction costs. 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, competition policy, corporate governance and employment relations. Transaction costs can affect make-or-buy decisions by companies.
(See Vertical Integration)

Willpower: 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 competence, their 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 enables managers to take action even when they are not inclined to do something. Managers with willpower overcome barriers, deal with setbacks and persevere to the end. Just as defensive reasoning can block learning, lack of will power can block action.
(See Knowing-Doing Gap)

Winner’s curse: A term often used in the context of a merger or acquisition. In their enthusiasm to close an M&A deal, companies may end up bidding very high. Though the deal is clinched, the win effectively turns out to be a curse. The high premium paid becomes difficult to justify. The end result is that shareholder value gets eroded.
(See Merger)

Letter V

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 Merger)

Value Chain: A framework developed by Michael Porter for analyzing the various activities a firm performs to create value for its customers. By analyzing the value chain, the 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 by performing these activities more cheaply or better than its rivals.

Value is the amount buyers are willing to pay for what a firm provides 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 & Support.

Primary Value Chain Activities include:

• Inbound logistics: Receiving, warehousing, and inventory control of input materials.

• 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 & Sales: Activities that try to persuade buyers to purchase the product, including channel selection, advertising, pricing, etc.

• Service: Activities like 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 include:

• Procurement: Purchasing the raw materials and other inputs used in the value-creating activities
• Technology Development: Activities like research and development and process automation.
• Human Resource Management: Activities like recruiting, development, 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 example, 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, marketing and service and draw cost advantage from throughout the value chain. Gaining cost advantage also usually requires optimizing the linkages 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 competitive 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 selecting a narrow target segment, a firm can tailor each activity more precisely and effectively to the segment’s needs compared to competitors with broader scope. On the other hand, broad scope may lead to a competitive advantage if the firm can share activities across industry segments 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 becoming 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 marketing. Nike concentrates on brand management and outsources most of its manufacturing. In the PC industry, we have companies like Intel (microprocessors), Samsung (monitors), HP (printers), Microsoft (operating systems) and Mitec (modems) offering specialized products.

As value chains fragment, the ability to coordinate value chain activities performed by different entities has also become important. The chain as a whole must perform effectively and provide value to customers in a superior way. Effective coordination depends crucially on trust and relationships between the orchestrator and the different entities involved. Information Technology can facilitate coordination but cannot take the place of trust.
(See Process Networks, Supply Chain Management)

Value Migration: 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 environment, the factors that determine value are constantly changing. As Adrian Slywotzky mentions 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 customers' priorities. That is when established players find it difficult to compete and the circumstances become ripe for challengers.
(See Adrian Slywotzky)

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 development 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 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 customers, suppliers, society and investors. Values define what is right, what is wrong and what are the priorities. Values guide employees while taking decisions.
(See Core Ideology)

Vertical Integration: The expansion of a business by acquiring or developing businesses engaged in earlier or later stages of the value chain. For example, in forward integration, manufacturers might enter retailing while, in backward integration, retailers might enter manufacturing.

All firms are vertically integrated to some extent. Arriving at the optimum 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 outsourcing is deciding which resources or capabilities are core and strategic. 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. What a company does in-house and what it outsources has significant strategic implications for the company. One of the best examples 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 we know is history.

Michael Porter has offered deep insights on vertical integration .

Benefits of vertical integration include:
A. 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 consequently the costs of scheduling and co-ordinating. Integrated operations 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 areas like logistics, packaging, record keeping and control. Vertical integration also allows the upstream unit to tune its product to the exact requirements of the downstream unit and for the downstream unit to adapt itself more fully to the characteristics of the upstream unit.

B. Technological advantages: A unit may integrate forward to understand the technology in the downstream business. Similarly, it may integrate backwards to familiarize itself with the technology in the upstream business.

C. Assured supply/demand: Vertical integration can hedge the firm against fluctuations in supply/demand.

D. Offsetting bargaining power: Vertical integration can allow the firm to reduce the bargaining power of powerful suppliers or customers. Further, by gaining a better understanding of costs, the firm has opportunities to improve its profitability.

E. Ability to differentiate: By manufacturing proprietary items in house and exercising greater control on the channels of distribution, etc., the firm can increase the scope for differentiation.

F. 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.

G. Entry into a high return business: Integration may allow the company to enter a more profitable part of the value chain.

Costs

A. Exit barriers: Integration often increases strategic interrelationships and emotional ties to the business. Some commitments are irreversible. As a result, exit barriers are raised.

B. Increased operating leverage: Vertical integration increases fixed costs. When an input is produced internally, the firm has to bear the overheads even during downturns.

C. Reduced flexibility to change partners: Technological changes, 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.

D. Capital Investment requirements: Vertical integration consumes capital resources which have an opportunity cost.

E. Foreclosure of access to supplier/consumer research: By integrating, the firm may cut itself off from the flow of technology from its suppliers or customers.

F. Imbalances: When the upstream and downstream units are not balanced, potential problems arise.

G. Inefficiencies: Since buying and selling occurs through a captive relationship, the incentive to perform may be less for both the upstream and downstream businesses, resulting in inefficiencies.

H. Different managerial requirements: Businesses can differ in structure, technology and management despite having a vertical relationship. 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, by examining the coordination problems which arise when different players are involved in a value chain activity. When the interaction costs can be reduced 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 advantage. 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 them are quite different.

Customer relationship management focuses on attracting and retaining customers. It involves big marketing investments that can be recovered 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 early mover advantages are often critical. Small organizations with an entrepreneurial style of management are often better at innovation than large bureaucracies.

Infrastructure creation (like an Information Technology backbone) is necessary to handle high volume repetitive transactions efficiently. 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 corporation, conflicts are bound to arise. Scope, speed and scale cannot be achieved simultaneously. So, many industries like newspapers, credit cards and pharmaceuticals are splitting along these lines.

There are alternatives to vertical integration. A firm can resort to partial 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.

i) Minority equity investment
ii) Loans or loan guarantee
iii) Prepurchase credits
iv) Exclusive dealing agreements
v) Co-operative R & D.

Quasi integration tends to reduce the costs associated with full integration. It also avoids the need to make major capital investments required for integration and eliminates the complexities involved in managing other types of businesses. On the negative side, quasi integration may fail to achieve the full benefits of integration such as differentiation.
(See Backward Integration, Forward Integration)

Value Innovation: A term coined by Chan Kim and Renee Mauborgne. Smart 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. Value innovation occurs only when companies align innovation with utility, price and cost positions. Companies that seek to create Blue oceans, often pursue differentiation and low cost simultaneously.

Buyer value comes from the utility and price that the company offers to 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 approach holds the key to the successful implementation of a Blue ocean strategy.
(See Blue Ocean Strategy).

Vision: A guiding theme that articulates the nature of the business and its intentions for the future. These intentions are based on how the management believes the environment 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 statement in simple terms so that people at all levels can relate to it.
(See Corporate Purpose, Mission)

Letter U

U

Utterback, James: He has done pioneering work in the area of innovation. Though not as well known as others like Peter Drucker and Clayton Christensen, Utterback’s work is highly insightful and offers a lot of ideas on how innovation takes place in different industries. Utterback has dealt with the relationship between product and process innovation, behavior of established 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 Innovation, Innovator’s Dilemma, Process Innovation, Product Innovation)

Letter T

T

Taylor, Frederick W (1856-1915) – An American engineer who invented work study and developed the scientific 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 considerable 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 standardizing 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 recorded his observations in a notebook. He broke each job and work process down into discrete parts, studying and timing the movements of men and machines.

Taylor realized that while two machinists might be working on entirely 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 the skilled workmen, especially machinists, and was prepared to promote them. But those who were left to operate on the factory floor were stripped of their individual artistry. By deskilling the foremen’s jobs, no single foreman needed to understand the entire range of supervisory work. Taylor also introduced an elaborate planning department that was responsible for coordinating the 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 Taylorism would advocate.

Technology Risk: Technological changes can wreak havoc on industries. In making decisions regarding technological changes, companies err in two ways. They either commit themselves to a new technology too fast and burn their fingers or wait and watch while another company comes up with a new technology that puts them out of business. 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 considerably reduced.

How can managers identify the emergence of a disruptive technology? 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 importance to these technologies. The frustrated engineers consequently join start-ups, who are prepared to look for new customers. Companies must take note when talented scientists and researchers leave them to join start-ups. Often, they do so, to work in an environment where their innovative ideas are taken more seriously.

Companies must also learn to assess the impact of a new technology . The steam engine was developed for pumping water out of flooded mines. It was years before a range of applications was developed in industries and for transportation. Marconi, the inventor of the radio felt 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 communicating to several people at the same time. It was left to David Sarnoff, an uneducated Russian who migrated to the US to understand the technology’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 only as a tool for rapid scientific and data processing calculations. Computers are today mostly used in commercial applications.

Very often, new technologies tend to be primitive when first developed. The full potential of a new technology is sometimes recognized only decades later. Even though the telephone has been around for more than 100 years, applications like voice mail and data transfer have emerged only recently. Aspirin, one of the world’s most widely used drugs, has been around for 100 years, but its efficacy in reducing the incidence of heart attack, due to its blood thinning properties, was discovered much later. So, while evaluating new technologies, a longer time horizon must be used, than for existing 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 processes can be counter-productive when applied to disruptive technologies. 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. Customers may not be willing to pay for this over-performance. According to Michael Porter, the basic aim of differentiation is to provide something extra that the customers value and charge a premium for it. If customers do not value the additional features, 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 requirement is a new mindset. Established players are not short of financial muscle or talented manpower. But, they have a mindset problem. On the other hand, the successful innovators often have less 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 performance levels.

One way to encourage a new mindset is to create small empowered teams, outside the main organization and allow them to try new technologies. 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 Innovator’s Dilemma, S Curve in Technology Evolution)

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, who 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.
(See Porter’s Five Forces Model)
Tipping Point: The phrase tipping point coined by Morton Grodzins, is a sociological term that refers to that dramatic moment when something unique becomes common. 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 very 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 Nobel 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 major strategic initiative is not about launching huge initiatives, which demand heavy investments in time and resources. Rather, it is about conserving resources and cutting time by identifying and leveraging the factors 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. These are 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 Chan Kim and Renee Mauborgne refer to as fishbowl management, where kingpins' actions become as transparent as fish in a bowl of water. This way, the stakes of inaction are greatly raised. Finally, 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. 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.
(See Chan Kim, Renee Mauborgne)

Total Quality Management (TQM): TQM is an integrated, cross functional approach that attempts to facilitate continuous improvement in the quality of goods and services. TQM is a systems approach that considers interactions between various subsystems of an organization including design, planning, production, distribution, field service and various management processes. The TQM philosophy believes that there is scope for continuous improvement in any product, process or service. A basic notion of TQM is that quality is essential 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 Deming, William Edwards)

Letter S

S
Satisficing: Managers do not take optimal decisions after considering all the relevant factors. Instead, they tend to take what they consider to be the most sensible decision under the circumstances, based on the information available. This is called satisficing.

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 mentioned, 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.
(See Herbert Simon, Russell Ackoff)

Scenario Planning: Scenario planning enables firms to plan for the future by visualizing different ways in which the external environment may evolve in the future. The construction of a number of scenarios, each describing a possible future state, 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 failing 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 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, the 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 Discovery Driven Planning, Strategic Planning)

S Curve in Technology Evolution: The S curve is commonly used to describe the product life cycle. But it is also a useful tool for managing technology risk. Foster describes the S curve as the relationship between the effort put into improving a product or process, and the results one gets back for that investment. As technological limits are reached, the cost of making progress accelerates dramatically. Eventually, a point is reached, beyond which no meaningful gains in performance can be achieved by improving technology. Thereafter, other factors (such as the efficiency of marketing, purchasing and manufacturing) begin to determine the success of the business.
(See Innovator’s Dilemma, Technology Risk)

Senge, Peter: Peter Senge is 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 best seller, The Fifth Discipline (1990), Senge explains how organizations can achieve success by mastering five disciplines: (a) personal mastery or self-discipline on the part of all members; (b) continual challenge of stereotypical mental models; (c) the creation of a shared vision; (d) commitment to team learning rather than conflict, and (e) 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 dynamic system has to be understood as a whole. Senge identifies a number 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 Innovator’s Dilemma, Organizational Learning)

Service Level Agreement (SLA): Some organizations formalize the internal customer concept by insisting on agreements that establish the dimensions of service and the relationship between two or more departments of an organization. Service Level Agreements (SLAs) are useful in establishing boundaries of responsibility and facilitating inter departmental collaboration, especially if there have been coordination problems or inter departmental 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 outperform certain benchmarks such as the cost of capital. In essence, shareholders’ money should be used to earn a higher return then they could earn themselves, eg. by investing in risk free bonds.
Simple Structure: A structure used by organizations in their early days. When the organization is small and activities are easy to track and monitor, all the functions can report directly to the CEO or the owner. But such a structure becomes increasingly inappropriate as the size of the organization increases.
(See Organizational Structure)

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 land mark. Managers are bombarded 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 often 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 distinguish 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 Decision Making)

Six Sigma: Six Sigma is 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 Sigma is to measure how many defects there are in a process, and systematically figure out how to eliminate them and get as close to zero defects as possible. A Six Sigma quality level means 3.4 defects per million opportunities. Six Sigma tries to analyze the root cause of business problems and solve them. The methodology used in Six Sigma is popularly called DMAIC.
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 the defects.
I: Improve the process by eliminating the root causes of the 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 manufacturing 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 like GE have embarked Six Sigma. Many of India’s leading software companies have also embraced Six Sigma enthusiastically.

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 and ensures that the initial buyers pay the high price they are willing to pay. Later on, the price is lowered to attract the mass market. But the risk is that a high price may make it easy for a competitor 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 Strategic Pricing)

Skunk Work: Increasingly, companies are realizing that the key to attracting and retaining the best scientists, lies in offering freedom to experiment. Skunk work is a covert research project undertaken by a small, independent group, away from the mainstream operations of an organization. The idea is to allow the initiative to blossom by shielding it from the bureaucracy of the mainstream organization.

Sloan, Alfred P: One of the greatest management practitioners in business history. Sloan who led General Motors in its formative years, pioneered the divisional structure. He set up a number of centralized functions and framed policies to help rationalize the work of the 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 the general officers set the goals and policies and provided overall appraisal. Sloan’s book “My years at General Motors” is a classic, a must read for any practicing manager.
(See Divisional Structure)

Slywotzky, Adrian J: Slywotzky is 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, ie changing the rules of the game by coming up with a new way of doing business.
(See Business Model Innovation)

Span of Control: Span of control can be viewed as 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 subordinates 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 communication. On the other hand, a narrow span of control is useful when tighter management supervision may be necessary. There is less stress involved for each employee, as the scope of each job is limited. Moreover, as there are more layers of hierarchy, there are more frequent promotion opportunities, i.e. the career ladder has more rungs.

The actual span of control chosen depends on what is more important, customer responsiveness or cost control. For example, when customers are price sensitive, the span of control must be wide for managers 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 significant portion of value creation must be located close to the customer. So regional managers have a wide span of control.
(See Organizational Design)

Spender J C: Spender is 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 appointed, particularly from the outside, these are likely to change or be challenged.

Stakeholders: Include shareholders, employees, managers, creditors, suppliers, contractors, agents, distributors, customers and the local community, whose interests are directly or indirectly affected by the company's activities. Different stakeholders wish to influence the decision-making within the organization to serve their own interests. For example, customers 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 expectations.
(See Corporate Social Responsibility)

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 activities are performed in cheaper locations. Beyond a point, however, an obsession with comparative advantage may be counter productive. Strategic advantages must not be overlooked. Any advantage which will accrue in the long run, 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 like investment 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 innovations that are happening.

In some cases, while generating strategic advantages, comparative disadvantages such as expensive labor can be circumvented through ingenuity and meticulous planning. Nicholas Hayek , CEO of Switzerland based SMH, which makes the world famous Swatch watches, once argued that if a company is determined to develop low cost methods of manufacturing, it can do so, no matter what the location. Hayek’s contention was that in watch manufacturing, as long as direct labor accounts for less than 10% of the total costs, Switzerland would remain an attractive place for manufacturing.
(See Comparative Advantage, Global Leverage)

Strategic Alliance: An agreement between two or more organizations to do business together, in a mutually beneficial way. Through a strategic alliance, the companies involved can gain access to each other's resources, including markets, technologies, capital and people. Alliances can facilitate geographic expansion, cost reduction and generation of manufacturing and other supply-chain synergies. Alliances can also accelerate learning and increase 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, it blocks a competitive threat or it 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 management commitment and selection of capable executives to manage the alliance are key success factors.
(See 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, for a customer segment or a geographical region. The terms SBU and profit centre are often used interchangeably. In general, SBUs in Indian companies are far less empowered than the term would suggest. They are heavily dependent on headquarters for key resources and approval of important decisions.
(See Divisional Structure, Organizational Structure)

Strategic Choice: Strategy is all about making trade offs. A company must avoid competing 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: Who are the customers? What are they looking for? 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: A strategic control system links operations to strategic goals, using appropriate financial and non-financial information. It is concerned 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 broken 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. Performance standards can be established and deviations from standards evaluated as the strategy is implemented and the causes identified. Corrective action can then be taken.
(See Strategy Implementation)

Strategic Cost Management: A holistic approach to managing costs, using a cross-functional perspective. A systematic approach to understanding cost drivers can create various benefits. Companies must have a good understanding of what activities add value and what do not. Accordingly, they must cut costs in some areas while increasing spending in others.
(See Activity Based Costing)

Strategic Fit: A term, which is commonly used in the context of diversification and mergers & acquisitions. Strategic fit refers to the extent to which the activities of the two businesses/organizations complement each other. A good strategic fit exists when there is scope for cost reduction due to rationalization of activities/economies of scale. Strategic fit may also exist if there are cross selling opportunities, or if market power can be increased. In general, it is easier to quantify the impact on costs, compared to that on the bottom-line.

Strategic Groups: Strategic Group is a concept that helps to bring sharper focus into strategy formulation. There are groups of companies within an industry that have similar business models or similar strategies. 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, possession 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 strategic groups in terms of "mobility barriers" or entry barriers.
(See Entry Barriers, Industry)

Strategic Inflection Point: A term coined by Andrew Grove, former CEO of Intel to describe a dramatic change in competitive forces. At that time, the leaders must give up the past, see closely how the industry is evolving and find new ways of competing. This 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 like 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 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 the situation. When a technology break or other fundamental change comes their way, companies must grab it. Only the first mover has a true opportunity to gain time over its competitors. Companies must also show discipline by setting 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 in 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 today? 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 can also take courage to enter a debate the top management may lose, in which weaknesses may be exposed and the disapproval of people may be encountered.
(See Disruptive Technology)

Strategic Innovation: A term introduced by Vijay Govindarajan and Chris Trimble . Strategic innovation, which goes beyond process or product innovation, addresses three fundamental questions:

a) Who is the customer?
b) What is the value the company offers to the customer?
c) 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:

a) They have high revenue growth potential
b) Typically, they target emerging or poorly defined industries
c) Such experiments are launched before any other competitor and before any profit making formula has been established.
d) They depart from the company’s proven business definition and its assumptions about how the business will succeed.
e) These experiments leverage some of the corporation’s existing capabilities and assets in addition to capital.
f) They need some new knowledge and capabilities
g) They involve discontinuous rather than incremental value creation.
h) They involve greater uncertainty across multiple functions
i) They may remain unprofitable for several quarters or more.
j) 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 difficult to imitate.

Govindarajan and Trimble have explained in great detail, the challenges 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 innovation process. The middle involves unique challenges - a forgetting challenge, a borrowing challenge and a learning challenge.

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 to exploit new business possibilities. The new initiative must learn how to borrow assets from the parent company. These may include manufacturing capacity, 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 Innovation, Process Innovation, Product Innovation, Value Innovation)

Strategic Intent: An ambitious organizational goal that is disproportional to current resources and capabilities. The top management articulates a desired leadership position and then establishes the criterion 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 intent 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 accelerate 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 efficiencies 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.
• Build a platform to enable Dabur to become a global ayurvedic leader.
• Be a professionally managed employer of choice, attracting, developing and retaining quality personnel.
• Be responsible citizens with a commitment to environmental protection.
• Provide superior returns, relative to our peer group, to our shareholders.
Source: www.dabur.com
(See Bhag)

Strategic Management: Strategic management is concerned with the formulation and implementation of strategies to achieve the objectives of an organization.

The major areas of strategic management are:
i) Articulating the Corporate Mission.
ii) SWOT analysis.
iii) Identifying various strategic options like capacity expansion, vertical integration
and diversification.
iv) Selecting the desired option(s).
v) Formulation of long term objectives and strategies consistent with the desired options.
vi) Formulation of short term objectives and strategies consistent with the long term objectives
and strategies.
vii) Implementation.
vii) Control.

The term strategic implies heavy, irreversible resource commitments, long-term implications and organization wide consequences. But strategic 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 effectively 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 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 computer 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 Mission, Environmental Scanning, Strategic Planning, SWOT Analysis, Vision)

Strategic Market: A market, which scores high on either market potential or learning potential 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 technology, pharmaceuticals and biotech. So, most European and Japanese MNCs have a major presence there. A strategic market demands significant commitment of human and material resources. Usually, such a market 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 Globalization, Strategic Advantages)

Strategic Options : Based on a careful analysis of the external environment and the company’s profile, various strategic options are available for a company. The company must choose one or more of these and commit resources accordingly. A few are listed below:

• Concentration: The firm can continue to allocate resources for making more of the current products with the existing technology.
• 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 significantly 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 similar 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 business 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 desirable option include the BCG matrix and the GE 9 cell planning grid.
(See BCG Matrix, GE 9 Cell Planning Grid, SWOT Analysis)

Strategic Planning : Strategic planning is the determination of the basic long-term goals and objectives of an organization and adoption of courses of action and the allocation of resources necessary to achieve these goals.

There are several steps in strategic planning.

• 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, qualitative and quantitative and controllable, non controllable. External premises can be classified into: general environment, (economic, technological, political, social and ethical conditions); the product market; and the factor market, (location of factory, labor, and materials etc). Internal premises include capital investment, sales forecast and organization 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 headquarters. 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, labor 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.

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 biases.
• 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 culture.
• Environment School: The focus here is on coping with the environment.
• 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 between 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 unpredictable.

Incrementalism means moving from one strategy to the next, depending on the unfolding of events beyond the control of managers. 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 continuous adjustments. However, these adjustments need not be random. Rather, managers must keep making incremental adjustments to rational 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 Discovery Driven Planning, Environmental Scanning, Scenario Planning, Strategic Management)

Strategic Pricing: Pricing is a key factor in business innovation. Strategic pricing involves aligning the pricing strategy with corporate strategy. The price must be chosen carefully after considering various scenarios and possible implications. Is the price attractive 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 the product or service.

To hit the cost target, companies can look at various options. They can streamline operations and introduce cost innovations from manufacturing to distribution by addressing relevant questions. 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 reduced 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 dominating. So achieving high volumes quickly has become the need of the hour. Moreover, to a buyer, the value of a product or service increases as more people start using it. As a result of this phenomenon, called network externalities, 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 sensitivity of those 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. Another pricing innovation is small packs. Offering products or services in small quantities makes them more affordable to the masses.
(See Blue Ocean Strategy, Value Innovation)

Strategy Evaluation: How do we know whether the strategy is working? Since results are not usually available for substantially long periods of time, other indicators become necessary. The degree of consensus which exists among executives regarding corporate goals and policies, the extent to which major areas of managerial choice are identified and the degree to which resource requirements are anticipated well in advance, are all pointers to the workability of the strategy.

To ensure that it is workable, any strategy needs to be evaluated carefully 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 represents the capacity of the organization to respond to opportunities and threats in the environment. Resources include cash, competence, facilities, etc. A key issue in strategy formulation is achieving a balance between strategic goals and available resources. The company must decide how much of resources to commit to opportunities currently available and how much to keep in reserve to take care of unanticipated demands.

Degree of risk involved: The degree of risk inherent in a strategy depends on the uncertainity about the availability of the resources, the length of the time periods to which resources are committed and the proportion of resources 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 organization, the longer the time horizon, since adjustment time is larger. Large organizations change slowly and need time to make significant modifications in their strategy. While, it is useful to have a certain consistency of strategy over long periods of time, flexibility is important in a rapidly changing environment.

Strategy Implementation: Often the difference between the market leaders and other players in the industry is the ability to execute strategy. Effective strategy implementation involves getting people’s buy in, choosing the right metrics and tracking performance on an ongoing basis. Much of strategy implementation involves managing change. So the behavioral issues involved, must not be overlooked.

The following are useful guidelines for strategy implementation.

Unlearn the past: Often past strategies stand in the way. So unlearning is important.

Increase commitment at lower levels: People at lower levels in an organization are often skeptical about the practical utility of a strategic plan. Without taking the lower level employees along, strategy implementation is difficult.

Avoid 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 program, must be identified.

Communicating downward is as important as communicating upward: 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 important role in ensuring that strategy percolates into the day-to-day activities of the company. Structure divides tasks so that they can be performed efficiently. Leadership must send out the right signals to facilitate smooth implementation. Culture is the set of important, often unstated assumptions that influence the opinions and actions of the employees. Culture becomes a weakness when the assumptions of the employees interfere 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 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, building trust and creating a perception that a level playing field exists. Only then will people cooperate voluntarily in implementing strategic decisions. 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 understand why important decisions are made as they are. An explanation of the thinking that underlies decisions makes people confident that managers have considered their opinions and have made objective 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, employees should know up front what standards they will be judged by and the penalties for failure. When the expectations are clearly defined, political jockeying and favoritism are minimized, and the focus shifts to execution.

By organizing strategic planning around the principles of fair process, execution can be built into strategy making from the start. People will realize that compromises and sacrifices are necessary to achieve the organizational goals. The ensuing discipline and increased collaboration levels will facilitate strategy execution.
(See Change Management, Policies, Strategic Control)

Stretch: A concept introduced by Sumantra Ghoshal and Christopher Bartlett in their book, “The Individualised corporation”. Employees must be given challenging goals to motivate them and exploit their full potential. Stretch helps in moving people from satisfactory underperformance to high performance. Stretch encourages managers to see themselves not in terms of the past but in terms of the future.
(See Bhag, Purpose-Process-People-Doctrine)

Stuck in the Middle : A firm should be clear about the way it is going to do business. Michael Porter suggests that the 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 performance results because the cost leader, differentiator or focuser will be better positioned to compete in their respective segments. (See Cost Leadership, Differentiation, Generic Strategy)

Succession Planning: The process of identifying and preparing people for assuming greater responsibility, to ensure that vacant positions are filled smoothly. While the human resources department can take care of succession planning at lower levels, at higher levels, it 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 problems seem to be in the case of our public sector enterprises because of political interference and in family owned businesses due to lack of professionalism. Witness the recent crisis in Reliance.

Supply Chain Management (SCM): A supply chain involves the various parties who came 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 some away from the customer. The main objective of any supply chain is to deliver value to customers in optimal fashion. Value can, in simple terms, be understood as the difference between the price the end customers are prepared to pay and the costs incurred in meeting their needs.

Complicated outsourcing arrangements backed by information technology 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. Accordingly, investment decisions must be made. These include manufacturing facilities, warehouses, transportation 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 conditions over the next few years.

These strategic design decisions must be backed by appropriate medium 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 design, planning and operation of a supply chain can have a major impact 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 as investments are made to improve responsiveness to market needs, costs tend to go up. Similarly, as efforts are made to cut costs, responsiveness often suffers. Of course, there are situations, where intelligent supply chain configuration can simultaneously 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 customer needs has not been compromised.

The effectiveness of a supply chain depends critically on how different activities are coordinated. Coordination problems arise because of conflicting objectives or poor information flows. These challenges have increased in recent times on account of multiple ownership of the supply chain and increased product variety. One manifestation of the problem is the bullwhip effect. Fluctuations in orders get amplified as they move backwards along the supply chain from retailers to wholesalers to manufacturers to suppliers. Suppose, there is a random increase in customer demand at the retailer 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 the wholesalers may order more than the observed increase in demand from the retailer. 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 improving 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 postponement. Companies must delay the final configuration of a product till the order is received. In general, the demand for intermediate products/components is more stable than that for finished goods. Take the example of paints. The only difference between two 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 primary colors as the core inventory and generating new shades based on actual customer demand, there is scope to reduce inventory and improve customer responsiveness simultaneously. 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, like customers, suppliers and third party logistics providers. Trust and fair play are the key ingredients for good relationships.
(See Value Chain, Value System)

Switching Costs: Costs incurred by buyers while 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 addition, the buyer may have developed routines and procedures for dealing 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 motivated to continue existing relationships to minimize switching costs.
(See Bargaining Power of Buyers, Bargaining Power of Sellers, Barriers to Entry)

SWOT Analysis: SWOT analysis is used for identifying those areas where an organization is strong, where it is weak, the major opportunities the company can explore and the threats. SWOT Analysis helps a company to know where it stands by exploring 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 are being faced?
. What is the competition doing?
. Are the specifications for the products or services changing?
. Is changing technology threatening our business?

(See Company Profile, Environmental Analysis, Strategic Planning)

Letter R

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 various uncertainties. Thus, a Timing Option, in the form of a delayed expansion in capacity can create value in a situation of uncertain demand. Putting up a plant in an overseas market currently fed by exports may generate new growth options. An Exit Option in the form of a plant closure increases the value of the investment decision. Viewing strategic decisions 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 flexibility. This is a handicap in an uncertain environment in which various outcomes which demand a range of strategic responses are possible. Thinking of the investment in terms of options, allows uncertainty to be taken into account. Managers can identify the embedded options, evaluate 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.
(See Net Present Value)

Regulatory Capture: Sometimes a regulator 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 operates, is highly supportive of the industry. Or, because the regulator does not want to become controversial by raising tough questions.

Resource-based Theories: These 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 critical of the market-based view of strategy. If a firm’s position in an industry 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 competencies. Tangible assets include production facilities, raw materials, financial resources, real estate, and computers. Intangible assets include brand names, company reputation, technical knowledge, patents and trademarks and accumulated experience within an organization. Organizational capabilities are the skills needed to transform inputs into output.

Once managers identify their firm's resources, they must examine which of those resources represents 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 organizational capabilities, activities, and processes that are valuable, potential 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 resources can be deployed in an optimal way.
(See Core Competence)

Responsiveness Planning: A term coined by Russell Ackoff. Some future events are difficult to anticipate. Examples include catastrophes and technological breakthroughs. Here, companies can use responsiveness planning. The focus here is on designing an organization so that deviations from the expected can be quickly detected and suitable responses can be made. Responsiveness planning, a conceptually elegant way of identifying and managing risks, essentially consists of building responsiveness and flexibility into the organization.
(See Russell Ackoff)

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 violation of intellectual property rights. India's leading pharma companies like Ranbaxy and Dr. Reddy’s have been masters of reverse engineering.

Risk: Risks have multiplied 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.
• Hazard risk is related to natural hazards, accidents, fire, etc. that can be insured.
• Financial risk has to do with volatility in interest rates and exchange rates, defaults on loans, asset-liability mismatch, etc.
• Operational risk is associated with systems, processes and people and deals with succession planning, human resources, information technology, control systems and compliance with regulations.
• Strategic risk stems from an inability to adjust to changes in the environment such as changes in customer priorities, competitive conditions and geopolitical developments.

From the point of view of corporate strategy, Peter Drucker probably offers the best risk management perspective. In his book, “Managing for results,” Drucker has identified four types of risk at a macro level:
• The risk that is built into the very nature of the business and which cannot be avoided.
• The risk one can afford to take
• The risk one cannot afford to take
• The risk one cannot afford not to take
(See Enterprise Risk Management)

Rivalry: The term refers to the intensity of competitive behavior within an industry. The degree of rivalry determines the attractiveness of the industry. In general, the higher the rivalry, the lower the profit margins. Rivalry generally increases when there are many competitors, who are more or less equally strong. When the industry is 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 content with the status quo, are happy with their market shares and are unwilling to upset the balance of the industry by instigating a price war.

Various factors influence the intensity of rivalry:
• When the industry is growing slowly, the intensity of competition increases. On the other hand when the 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 rather than countering competitors.
• When fixed costs are high relative to value added, there is tremendous 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 minimal, 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, overcapacity often results, 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 vigorously and forgo profitability. This intensifies competition.
• High exit barriers can increase rivalry.
(See Five Forces Model)