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)