Letter P

Palepu, Krishna G: A well known professor at the Harvard Business School, Palepu’s research and teaching activities focus on strategy and governance. He has published numerous academic and practioner-oriented articles and case studies on these issues. His recent focus has been on the globalization of emerging markets, particularly India and China. In the area of corporate governance, Palepu's work focuses on how to make corporate boards more effective, and on improving corporate disclosure. Palepu has been on the Editorial Boards of leading academic journals, and has served as a consultant to a wide variety of businesses. Two articles written jointly with Tarun Khanna, “The right way to restructure conglomerates in emerging markets,” and “Why focused strategies may be wrong for emerging markets” are widely cited in the literature.
(See Tarun Khanna)
Pareto’s Principle: The Pareto principle (also known as the 80-20 rule, the law of the vital few and the principle of factor sparsity) states that for many phenomena, 80% of the consequences stem from 20% of the causes. What the principle tells us is that we must focus on the right areas to get results.
The principle is named after the Italian economist Vilfredo Pareto, who observed that 80% of income in Italy was received by 20% of the Italian population. In marketing, 20% of clients are responsible for 80% of sales volume. In many processes, 80% of the resources are typically used by 20% of the operations. Sometimes, 80-20 may even become 90-10. Thus, in software engineering, 90% of the execution time of a computer program is spent executing 10% of the code.
Pareto’s principle helps focus management attention on critical areas. It is the basis for the Pareto chart, one of the key tools used in total quality control and six sigma. The Pareto principle serves as a baseline for ABC-analysis and XYZ-analysis, widely used in logistics and procurement for the purpose of optimizing inventory and order quantity.
The principle of Tipping Point, coined by Malcolm Gladwell appears to be an extreme version of the 80-20 principle.
(See Tipping Point)

Parkinson’s Law: In many offices, work expands and fills up the time available for its completion. People look busy even when they are not doing any useful work.

Personal Effectiveness: Possibly, the most well known model, Stephen Covey’s seven habits provide a simple-to-understand-and-use framework of personal effectiveness.
• Be Proactive: People are responsible for their own choices and have the freedom to make decisions based on principles and values rather than on moods or conditions.
• Begin with the end in mind: Individuals, families, teams and organizations must have a clear purpose in mind. They must identify and commit themselves to the principles, relationships and purposes that matter most to them.
• Put First Things First: Putting first things first means focusing on the most important priorities. Whatever the circumstances, living and being driven by values and key principles is important.
• Think win-win: Thinking win-win is a frame of mind and heart that seeks mutual benefit and mutual respect in all interactions. Instead of thinking selfishly or like a loser, people should learn to think in terms of “we”, not “me”.
• Seek first to understand, then to be understood: Listening with the intent to understand others is the essence of communication and relationship building. Opportunities to speak openly and to be understood come much more naturally and easily. Seeking to understand takes consideration; seeking to be understood takes courage. Both consideration and courage are important.
• Synergize: Synergize means realizing that a third way is better than each party can come up with individually. It’s the fruit of respecting, valuing and even celebrating one another’s differences. It’s about solving problems, seizing opportunities and working out differences. Synergy is also the key to any effective team or relationship.
• Sharpen the saw: Sharpening the saw means constant renewal in the four basic areas of life: physical, social/emotional, mental and spiritual.

PEST (Political, Economic, Social and Technological Factors) Analysis: A framework, introduced by Steiner and Andrews, for analyzing an organization's external environment. Various political, economic, social and technological trends are identified to formulate and implement strategies.
• Political factors include government regulations and legal issues pertaining to tax, employment, environment, trade, etc.
• Economic factors include economic growth, interest rates, exchange rates, inflation rates, etc.
• Social factors include health consciousness, population growth rate, age distribution, career attitudes, emphasis on safety, attitudes to foreign products and services and average life of human beings.
• Technological factors include R&D activity, automation, rate of technological change, etc.
(See Environmental Scanning)
Peter Principle: According to Laurence Peter, in any hierarchy, employees tend to rise to their level of incompetence. Thus, excellent motor mechanics after being promoted become second-rate foremen and fine teachers become incompetent school heads. Peter pointed out that the main criterion for gaining promotion is success. So competence is rewarded with promotion until the individuals rise to a hierarchy level where they can no longer cope. On arriving at this level of incompetence, the employees become frustrated, stressed and become ineffective. The key message is that promotions should not only take into account current performance but also the performance in a future role.
Platform Leadership : A concept introduced by Annabelle Gower and Michael Cusumano. In the initial phase of many industries, the early movers tend to develop most of the components necessary to make the products. But later, specialized firms typically emerge to develop different components. Along with components, evolve platforms, which consist of various components made by different companies. Some companies become platform leaders. They ensure the integrity of the platform by working closely with other firms to create initial applications and then new generations of complementary products.

Platform leaders create interfaces to entice other firms to use them to build products that conform to the defined standards and therefore work efficiently with the platform. It is in the interest of a platform leader to stimulate innovation on complementary products. The more people who use these complements, the more incentives there are for producers of complements to introduce such products. This in turn motivates more people to buy or use the core product, stimulating more innovation, and so on.

Standards wars are an integral part of platform strategies. What matters is overall performance. The platform need not be superior to the competition in all product features. Neither was Windows, (particularly the early versions), technically superior to the Macintosh, nor were Matsushita’s VHS video recorders superior to Sony’s Betamax. But in each case, the network as a whole delivered more.

Defining the architecture of a system product is a powerful way to raise entry barriers for potential competitors. A potential competitor to Intel not only has to invent a microprocessor with a better price-performance ratio but also rally complementors and Original Equipment Manufacturers (OEMs) to adapt their designs to this component. This would obviously involve huge switching costs. Platform leaders must also be able to maintain architectural control over its platform, by making an ongoing assessment of their existing capabilities and the direction in which the industry or technology is evolving.

Platform leaders need to pursue at least two objectives simultaneously. First, they must try to obtain consensus among key complementors with regard to the technical specifications and standards that make their platforms work with other products. Second, they must control critical design decisions at other firms that affect how well the platform and complements continue to work together through new product generations.

A platform leader must play the role of industry enabler by encouraging innovations that improve the platform. The platform leader sometimes has to make decisions that might hurt some partners, even if they have been complementors in the past.

To gain the trust of third parties, platform leaders must act and be seen to act fairly. They need to establish credibility in technical areas where they want to influence future designs or standards. They must make potential complementors feel comfortable that the decisions are being taken in the interest of the whole industry.

Platform leaders usually emerge through the mechanisms of the marketplace, rather than through some magical process. A high market share and a high degree of innovative capabilities alone do not suffice. A platform leader must have the vision and the organizational capabilities to engage complementors to innovate and improve the platform. Such a vision is grounded in the belief that the power of a system is greater than the sum of its parts.
(See Michael Cusumano)

Poison Pill: An anti takeover strategy in which the company under threat does things that would represent a long-term drain on the resources of the bidder. As a consequence, the bidder may decide against swallowing up the poisoned pill (company), and give up the bid. An example of a poison pill is giving staff employment contracts with a three-year notice of termination clause. This would significantly increase the cost of taking over and restructuring the firm.
(See Anti takeover Strategy)

Policies: Policies are rules and guidelines to supplement functional strategies. Policies guide the thinking and decisions of managers while implementing the firm’s strategies. Policies serve as specific guides for lower level managers while taking operating decisions.
(See Functional Strategy)

Political Risk: A term usually used to describe the possibility of loss when investing in a foreign country, because of various factors - changes in a country's political structure or policies, such as tax laws, tariffs, expropriation of assets, restrictions imposed on repatriation of profits, tightened foreign exchange repatriation rules, or increased credit risk due to changes in government policies.
(See Country Risk)
Porter, Michael E: Porter is probably the most famous strategy guru in the world today. Porter’s Five forces model and the generic strategies, cost differentiation and focus have become the standard reference point for management students, research scholars and practitioners world wide. Porter’s approach to strategic planning has been referred to as the positioning school. A firm’s performance is largely determined by how it is positioned vis-à-vis various forces in the external environment. Porter has also written about the competitive advantage of nations and the linkages between corporate strategy and corporate philanthrophy. Porter’s writings carry deep insights. Though researchers have pointed out the limitations of Porter’s work from time to time, many of the principles developed by Porter remain as relevant as ever. In terms of ability to put together a body of knowledge based on a conceptually elegant framework, few scholars in the area of strategy have been able to rival Porter so far.
Porter's five forces model addresses the question of why some industries are more attractive than others. The five forces identified by Porter are:
• The bargaining power of the buyers.
• Entry barriers.
• Competitive rivalry.
• Substitutes.
• The bargaining power of the sellers.

The model guides companies in:
• Prioritizing markets according to their inherent attractiveness.
• Understanding the critical success factors in the market.
• Providing insights for the criteria by which a company can judge itself against competitors.
• Generating ideas for changing the rules of the game.

Porter has also developed the concept of value chain. The value chain splits a company operations into various components:
• In-bound logistics.
• Manufacturing.
• Service.
• Sales and marketing.
• Administration
• Out-bound logistics.

Essentially, the value chain concept explains how value is created in a business. It draws attention to the internal choices which a company makes in determining how it is going to compete. In recent years, it has been called 'the business model' - to indicate that it is specific to a particular business.

According to Porter, companies must compete on one of three planks: differentiation, cost leadership, and focus. Porter calls them generic strategies.

Differentiation means a company sets out to add more value to target customers (perceived and real) than competitors do. Cost leadership means a company achieves parity of value with competitors, but at a lower cost. A 'focus' strategy involves concentrating only on a small segment of target customers and their specific needs. Such a strategy aims at leveraging the advantage of specialization, either through cost control or superior customization while serving a narrowly defined customer segment.

A company must choose one generic strategy. If it does not, the company will get stuck in the middle. (See Competitive Advantage, Competitive Strategy, Five Forces Model, Generic Strategy, Value Chain)

Positioning: The process of creating and maintaining a distinctive place in the market for an organization and/or its individual brands. The aim is to steal a march on competitors by offering something different. This is often called unique selling proposition. To be effective, the differences must be important, relevant, noticed and understood by consumers. The perceptions of consumers play a key role in the positioning process. Positioning may erode over time, as competitors copy or improve upon the points of difference or as the needs of the target audience change. In these circumstances, an organization may have to reposition itself. Positioning is all too often defined very narrowly, with a sole focus on distinctive product attributes that offer benefits to consumers. What is forgotten is that many organizations and / or brands succeed in the market place because of non-product-based advantages like supply chain and organizational capabilities. Repositioning can be done on these planks as well.

Price/Earnings Ratio (P/E): The ratio of the price of the company’s share to the earnings per share. It is an indication of how the market expects the company to perform in the future. A high P/E implies the company is expected to do well.

Process Innovation: A process can be viewed as a set of activities designed to produce a specified output for a particular customer or market. Thus a manufacturing firm has various processes like product development, customer acquisition, procurement, manufacturing, logistics, after sales service, information management, human resources management and planning. Process innovation implies creating a significant improvement in one or more of these processes. Process innovation begins with a good understanding of who the customers are and what they expect from it.

Process innovation must not be confused with process improvement which is incremental in nature. Process improvements take the existing process as given, but process innovations question the basic assumptions. Michael Hammer uses the term operational innovation which for all practical purposes refers to process innovation. As he puts it, “Operational innovation should not be confused with operational improvement or operational excellence. These terms refer to achieving high performance via existing modes of operation ensuring that work is done as it ought to be to reduce errors, costs and delays but without fundamentally changing how that work gets accomplished. Operational innovation means coming up with entirely new ways of filling orders, developing products, providing customer service or doing any other activity that an enterprise performs.”

Successful process innovations typically demand technological and organizational enablers. While information technology has driven many process innovations in recent times, there are various other drivers that must not be ignored. For example, the concept of lean manufacturing pioneered by Toyota, is driven more by common sense and a new mindset than by technology.

Process innovation must begin with the identification of processes that are ripe candidates for innovation. Focusing on those processes which require immediate improvement, makes sense because, like in any other change initiative, quick results will build the momentum. If the company is striving for incremental improvement, it is sufficient to work with many narrowly defined processes. But when the objective is radical process change, a process must be defined as broadly as possible. A company like Toyota has been able to get well ahead of competitors by ongoing improvements in all aspects of operations including procurement, manufacturing, vendor management and logistics.

According to Davenport four criteria can be used to guide process selection:
 Centrality of the process: The processes that are most central to accomplishing the organization’s goals must be selected.
 Process health: Processes that are currently problematic and in obvious need of improvement must be chosen.
 Process qualification: The cultural and political climate of a target process must be guaged. Only processes that have a committed sponsor and exhibit a pressing business need for improvement must be selected.
 Manageable project scope. The process must be defined in such a way that the project scope is manageable.

Information can play a number of supporting roles in a company’s efforts to make processes more efficient and effective. Just the addition of information to a process can sometimes lead to radical performance improvements. Information can also be used to measure and monitor process performance, integrate activities within and across processes, customize processes for particular customers, and facilitate longer-term planning and process optimization. Information can also be used to better integrate process activities both within a process and across multiple processes.

Davenport has listed nine different ways of supporting process innovation with Information Technology (IT).

Automational. IT can be used to automate several processes.

Informational. IT can be used within a process to capture information about process performance and to improve it.

Analytical: In processes that involve analysis of information, IT can make the decision-making process more efficient and effective.

Sequential. IT can enable changes in the sequence of processes or transform a process from sequential to parallel in order to reduce process cycle-time.

Tracking. Effective execution of some process designs, notably those employed by firms in the transportation and logistics industries, requires a high degree of monitoring and tracking. IT can play a key role here.

Geographical. A key benefit of IT is the ability to overcome geographical barriers.

Integrative. More and more companies are finding it difficult to radically improve process performance for highly segmented tasks split across many jobs. IT can help integrate various aspects of a product or service delivery process.

Intellectual. Many companies are increasingly using IT to capture and disseminate knowledge.

Disintermediating. In some industries, human intermediaries are inefficient for passing information between parties. This is particularly so in case of transactions such as stock brokerage or parts location. IT can play a key role here.
(See Innovation, Product Innovation)

Process Lifecycle: Just like the product life cycle, there is also a process life cycle. During the formative period of a new product, the manufacturing processes are usually crude and inefficient. Typically, such processes employ skilled labor working with general-purpose machinery and tools. There are no specialized tools or machines. It is the product itself at this point that matters. But processes tend to improve as the rate of product innovation decreases. Finally, when an industry standard is determined, products are likely to become similar in terms of functions and features. Incremental changes in products made by competitors will tend to be copied rapidly. Under these circumstances, processes hold the key to stealing a march on competitors.
(See Product Lifecycle)

Process Networks: Process networks are a useful mechanism for facilitating knowledge transfer across organizations. According to John Hagel III and John Seely Brown , world class companies leverage such networks to gain more flexible access to specialized capabilities on a global scale. Process networks seek to coordinate activities across multiple tiers of enterprises within a business process. These networks attempt to ensure that resources are flexibly provided in response to specific market demand. Such networks are characterized by loose coupling and require formal orchestrators to function effectively. Relatively independent modules of activity are designated, with clear ownership and accountability for each module. The performance levels that each module must meet at the interfaces connecting it with other modules are defined. Module owners can make improvements as long as they comply with the performance requirements. Process networks are not only more scalable but are also more effective in tapping the knowledge of a large number of specialized participants in a flexible way to provide more value to customers.
(See Dynamic Capability Building, Offshoring, Outsourcing,)

Product Innovation: Product innovation is all about launching new products that appeal to customers. It involves:
• Finding out and anticipating what customers might need or want;
• Generating ideas;
• Developing and launching a product;
• Providing various support services to keep customers happy.

A stream of successful product introductions can generate rapid sales and profit growth. A good example is Sony which came out with 170 new models of the original Walkman during the period, 1981-89. Similarly, Intel’s market leadership has been facilitated by the launch of a series of microprocessors, each with greater capabilities. Microsoft, which has introduced several versions of its PC operating systems and applications software, is another good example.

Companies which are good at product innovation have some common attributes:
• An intuitive understanding of what customers need and want. They do not depend excessively on formal market research.
• The discipline, skills, methods and processes to optimize product design and manufacturing.
• Effective and optimal use of resources.
• Short lead times to out-innovate competitors. They renew and expand product lines faster.
• Willingness to cannibalize their own products.
• Leaving people free and encouraging creativity by eliminating bureaucratic procedures.

In short, product innovation calls for a culture that encourages individual initiative, a good understanding of the market, and disciplined execution. Product innovation is all about generating new ideas, developing products and selling it in the market. So the biggest challenge in product innovation is often not technology, but marketing.

According to Deschamps and Nayak , a well-designed product development process is made up of six interlocking and mutually reinforcing sub processes:
• Idea management;
• Intelligence development;
• Technology and resource development;
• Product/Technology strategy development & planning;
• Project and program management;
• Product support.

Ideas are important for any business. But they need to be tapped efficiently. High performance businesses develop a structured process for idea management. They generate, collect, evaluate, screen, and rank ideas continually. They also have mechanisms to explore and validate ideas in the market and in the labs before they are commercialized and scaled up.

The intelligence development process facilitates the collection of relevant data and trends on customers, competitors, and technologies. This process transforms that data into information and insights and uses that intelligence to seed other processes. Most successful companies cultivate intelligence development as their secret competitive weapon.

Technology and resource development facilitate the development within the company of a range of new technologies, skills, and competencies for future product generations. Not all resources, however, have to be internal to the corporation. Establishing strategic alliances and close relationships with suppliers is also a part of this process.

Product and technology strategy development and planning determines where, how, and with what frequency the company intends to launch new products. It is an integrative process, combining product plans and technological development plans. It should lead to plans determining which new products will be introduced and when and how the company’s developmental capacity will meet the new demands of products.

Project and program management is where unresolved problems like deficiencies in market insight, know-how, strategies, and plans show up.

Product support starts at the launch of the product and typically ends only when the product is withdrawn. In industries that depend on technical service or applications engineering to add value to customers, this process is vital to success. Application – intensive industries such as performance chemicals, resins and polymers devote a significant portion of their total technical resources to supporting their products.

Product development demands major resource commitments. So resources must be managed carefully. If too few new products are being developed, the solution is not necessarily increased spending. Companies that are committed to innovation must employ an investment portfolio approach, with the right mix of incremental improvements, and breakthrough ideas that will deliver consistent returns in the long run. They should also pursue a disciplined approach. Only products with real potential for specific markets should make it to the launch stage. And once they have reached that stage, they need marketing campaigns that are aligned with their sales potential. Companies must aim at getting the right product to the right consumer at a cost that is in line with the product's sales potential. Keeping the breakeven point low is crucial to the success of most innovations.

Well-managed companies have a disciplined approach to dealing with new ideas . Great ideas are often hard to sell early on, and premature demand for numbers and analysis can kill creativity. Nevertheless, an explicit process of business justification is desirable. The key lies in identifying specific points in the concept-to-launch process, where a project that is not showing promise can be stopped. Perhaps the quickest way to avoid the problem is to call for a “go-no-go” decision at three specific stages in the product launch process.

The first stage must appear early on, after concept development. At this time, the target market for the product should be clearly identified, along with a realistic marketing plan and a rough estimate of marketing costs for different scenarios. The next stage can come after the commercialization model has been developed. The product manager must demonstrate that the product can realistically deliver on its claim. The company should be confident about creating sufficient excitement among the customers. The last vetting can come at the time of large-scale commercial launch, when it should be clear that there is a compelling marketing plan in place to reach targeted sub-segments, a plan for meeting all channel requirements, and if it is a consumer product, a plan for merchandizing the product (if it is a consumer product) so that it stands out among competing brands in the store.
(See Innovation, Process Innovation)

Product Life Cycle: Describes the four stages that a new product goes through from birth to death: (1) introduction – the slow sales growth that follows the introduction of a new product; (2) growth – the rapid sales growth that accompanies product acceptance; (3) maturity – the plateauing of sales growth when the product has been accepted by most potential buyers; and (4) decline – the decline of sales that results as the product is replaced (by a substitute) or becomes increasingly unappealing to customers. Different strategies are required at different stages of the life cycle.

An important implication of the product life cycle (PLC) theory is that every product eventually declines and dies. So it is necessary for firms to launch new products from time to time. Ideally, new products should be financed from the cash flows generated by mature brands, and should be launched before maturity turns to decline. During the development phase, there is substantial negative cash flow on account of R&D, market research, and setting up a production line. As demand grows, more cash must be ploughed into expanding factory capacity. Once sales have stabilized, the firm can reap the cash rewards from their success in the decline phase. Brands with a high market share can provide the cash for the development of replacement products.

Whether products do indeed go through these stages in any systematic, predictable way is still debated. The PLC concept is primarily applicable to product forms, less to product classes, and even less to individual brands. If the item need be bought only once then market saturation can hit demand. If the item's sales have grown because of fashion, it is likely that they will die quite quickly, for the same reason. A product may also go out of existence quickly because of rapid technological obsolescence.
(See BCG Matrix, Process Life Cycle)

Product Platform: The building blocks that form the foundation for a series of closely related products. Product platforms generate economies of scope by reuse of components and knowledge. In the automobile Industry, several individual car models may share the same basic frame, suspension and transmission even if the shape, look and feel are important. The Sony Walkman had 160 variations and four major technical innovations between 1980 and 1990, all of which were based on the initial platform. Black & Decker rationalized its hundreds of products into a set of product families, using a platform approach. The platform approach may not be effective when rapid changes in technology, customer needs or competitors’ offerings can demand discontinuous new products rather than incremental change.
(See Platform Leadership, Product Innovation)

Prospect Theory: Behavioral issues significantly influence decision making. Research by behavioral scientists like Nobel prize winner, Daniel Kahneman and Amos Taversky indicate that people do not always follow the rules of rational choice. Examples of such behaviour include:

(1) The certainty effect. People over-weight outcomes that are certain, relative to outcomes that are merely probable. Thus, there is a preference for a sure gain over a larger gain that is merely probable.

(2) The reflection effect: There is a risk-seeking preference for a loss that is merely probable, compared to a smaller loss that is certain. This can be seen in the way people buy insurance packages or in the way they respond to product pricing and promotions.

(3) The isolation effect: People simplify problems by disregarding the components that are common to alternatives and focus only on the differences. So inconsistent preferences are obtained when choices are presented in different ways. This can be seen in the ways consumers make decisions. Functionally similar products might have the same price, but if one brand presents the price in a distinctive way, it may be seen very differently.
(See Hidden Traps of Decision Making)

Purpose-Process-People Doctrine: According to Sumantra Ghoshal and Christopher Bartlett, the paradigm is shifting away from strategy-structure-systems to purpose-process-people.

According to the Purpose-Process-People doctrine, the main task of top management is to shape the behavior of people and create an environment that enables them to take initiative, cooperate and learn. This is unlike the traditional Strategy-Structure-System doctrine in which senior managers concentrate on allocating resources, assigning responsibilities and controlling efficient execution.

The top management must change its role from being the designer of corporate strategy to being the shaper of a broader institutional purpose, from being the architect of a formal structure to being the builder of organizational processes and from managing systems to developing and moulding people.

Top management must infuse the company with an energizing purpose - a sense of ambition, a set of values, an overall identity. Rather than trying to formulate strategy, top management must attempt to shape the organizational context. Structure is the framework within which companies can develop the organizational processes and management roles and relationships that support their competitive capability. But structure is only the organization's anatomy. A thorough understanding of the organization's physiology, the processes and relationships that are the company's lifeblood and its psychology, the culture and values of employees, is also vital. Instead of regularly intervening with corrective action, top executives need to find ways to encourage self monitoring, self correcting behavior.
(See Christopher Bartlett, Corporate Purpose, Sumantra Ghoshal)

Pygmalion Effect: If people start believing in themselves, they prove to be effective. Constant praise by the superior makes subordinates start believing they are good. Soon they become highly productive. On the other hand, if they are regularly reminded about their shortcomings, they become de-motivated and ineffective.
(See Motivation)