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Does diversification of market implies to hire totally whole new expertise?
Welcome to this course on Strategic Management. I am professor Srinivasan. I teach in the Department of Management Studies at the Indian Institute of Science.
What is this term, „strategy‟? The term „strategy‟ refers to long term decisions; they include objectives, goals and courses of action for an organization. As I mentioned to you, the term „strategy‟ was formally used by the gentle man Ansoff, in the year 1965.
When it came into India in 1974, the terminology that was adapted was corporate planning. It underwent change to strategy.
What was the defining parameter to go from corporate planning to strategy? This is the question which you might like to know. So, when a company like BHEL wanted to do corporate planning for its different divisions, and encompassing the company as a whole, what it wanted to do was - have a vision document or a planning document for the next 5 years; that is - what does BHEL wants to do in the next 5 years. So, for the first time in the country, you had a public sector unit like Bharat Heavy Electricals coming up with a plan of action for the next 5 years saying, “this is what we want to do”. Now, this was all right initially when the public sectors were holding sway.
What happened in the mid 80s? Mid 80s in the country saw competition being introduced. So, the first sector to face this competition was the sector of Telecom. So, the first public sector unit to be open to competition was the first public sector unit to be started in India, that is the Indian Telephone Industries in Telecom. So, ITI was thrown open to competition; that is what you mean by saying ITI was thrown open to competition. Some of the products which ITI was manufacturing were allowed to be manufactured by private sector players.
The result was - from 1984 onwards the Telecom Industry underwent a see change. You had a number of players coming into the Telecom Industry, manufacturing products which were earlier considered the monopoly of ITI.
Now, what did this influx or what did this entry of private players in to the public domain make? What difference did it make? The difference it made was - the companies started looking at shorter time horizons. Instead of looking at 5 years, they said, “why not we look at a shorter time horizons”. So, this is what competition can do in the market place.
Now came the liberalization in 1991. You had the IT revolution; you had the electronic revolution. This IT revolution and the electronic revolution, together what did they do? What they did was something absolutely dramatic. You had product life shrinking, you had number of products put into the market by different companies in terms of different models and variants of products - all those types of things. When so many things were happening, companies were forced to look at their planning horizons in more and more detail; that is, at a shorter planning horizons.
So, the term „corporate planning‟ as soon as this liberalization process started gaining momentum, started rechristening itself and it became Strategic Management. Now, organizations look at time horizons of 3 years for Strategic Management. So, instead of the usual 5 to 10 years, which the organizations were looking at for the corporate planning process, in the present set up, the organizations are looking at 3 years for a Strategic Management horizon. In fact, many of the IT companies look at even a smaller horizon; they look at a horizon of just 1 year.
You might have listened to many of the IT companies, the leaders of the IT companies when they present their annual reports, when they present reports of the performance of the companies making a mention, “our guidance suggests”- So, this is in fact one of the first terms to be coined by one of the leading IT companies that is Infosys. It coined this term „our guidance suggests‟.
What does this guidance suggest? So, the guidance - in essence, the company was looking at a shorter time horizon and was saying that the next quarter we may be like this and the next quarter we are likely to revise our values or the forecast to this level. So, this is how the whole industry of IT and Electronics have changed the domain of corporate planning and brought in this Strategic Management. Strategic Management which has been brought a name almost hold sway as of now.
With this, what does this term „Strategic Management‟ mean or the „Strategic Planning‟ mean?
I give you the formal definition of Strategic Planning. Strategic Planning or the long range planning in an organization refers to management processes in organizations through which the future impact of change is determined and current decisions to reach a desired future are made. What does it include?
It includes the entire process of major outside interest groups and their stakes; the expectations of dominant inside stock holders; the information present, past present and the production performance; the evaluation of the company‟s strengths and weaknesses; the formulation of organizational purpose, mission, objectives, policies and strategies.
Now, in other words, this process of Strategic Planning, in fact encompasses the entire gamete of all the relevant stake holders; it can be both inside the organization as well as outside the organization.
Now, the question that comes is - why are these decisions on Strategic Planning considered long term decisions? You may just wonder, why are they being called as long term decisions? because these are going to impact the organization for a considerable future time. So, suppose a wrong decision- whether it is investment or whether it is coming out with a new product or tapping a new market- is wrongly made, the organization will have to pay dearly for that. So, in other words, a Strategic Management decision is crucial to an organization.
What does that really mean? It really means that when an organization takes a Strategic Management decision, it has to keep on reviewing and reviewing, before it says, ”this is the decision which I am going to take”. In other words, it goes back many times and does lot of iterations before saying ”yes. This is the decision that we are going to have for this strategy for the next quarter”. So, the IT companies, our IT companies have become very adaptive doing and they have been able to demonstrate to the world again and again, why they are able to make very good performance yard sticks. This has been possible because of the wonderful strategies that they have been able to put in place every quarter.
Now, suppose we look at this term „Strategic Planning‟ and we want to explain this term „Strategic Planning‟ with respect to an organization. Let us look at a simple organization.
Let us say, we look at a simple organization say Basic Chemicals and Pharmaceuticals.
You may just ask, “What you understand by the term objective?” with respect to this organization. So, their objectives can be looked at from different angles; that is, the different yard sticks. One of the yard sticks on which you can look at the objective could be the return on investment. You may say, “the return on investment; that is, if I put 100 rupees, I should able to get 10 rupees back on that 100 rupees. My threshold is 10 percent, but the goal which I want to achieve is 15 percent”. Similarly, with respect to the sales growth rate, the organization might say, the threshold is 5 percent, but the goal they want to achieve is 10 percent.
Now, with respect this Basics Chemicals and Pharmaceutical industry, how can you draw the courses of action? That is, how can you draw this strategy? This can be drawn taking these four vector spaces.
What are these vector spaces? The vector spaces are: One: The product market scope: With respect to this product market scope, the industry that is being addressed is the Basic Chemicals and Pharmaceuticals.
The second vector could be the growth vector; the growth vector refers to product development and concentric diversification. We will come to what is concentric diversification, when we go along.
The third vector is the competitive advantage; here, we address the issues of patent protection and the superior research competence.
Then, the fourth vector is synergy; that is, the use of the firm‟s research capabilities.
In other words, Basic Pharmaceutical Chemicals and Pharmaceutical Industry has to be very strong in research. These are brought out in these four vector spaces and these four
vector spaces are crucial for determining these strategy of the organization. Now, if you look at the way we look at purpose and mission for an organization, so many times you wonder, what does purpose mean? What does mission mean? As I spent, you have to appreciate many times these terms purpose and mission are used interchangeably, that is one for the other. So, if you look at the first public sector which was started in the country back in 1948 - that is the Indian Telephone Industry. What was the purpose for starting Indian Telephone Industries?
The purpose for starting Indian Telephone Industries was basically to fulfill the telecommunication demand of the country. So, in other words, the telecommunication demand of the country was sort to be fulfilled through the products of ITI.
Now, where do we suppose we look in the present day context, what does the mission statement really mean? A mission statement which is a strategically revealing mission statement incorporates 3 elements; what are the 3 elements?
One: what customer need is being satisfied, who is being satisfied, how value is created and delivered to customers satisfying their needs. I repeat - what customer need is being satisfied, who is being satisfied, and how value is created and delivered to customers satisfying their needs.
I take the example of an organization; that is the Saturn Corporation. This Saturn Corporation is associated with General Motors. How does the mission statement of Saturn Corporation read?
The mission statement of Saturn Corporation reads like this - Market vehicles developed and manufactured in the United States that are world leaders in quality, cost and customer satisfaction through the integration of people, technology and business systems and to transfer knowledge, technology and experience throughout General Motors; in other words, a statement which is more or less addressing all the 3 elements which constitute a strategically revealing mission statement. Now, from this mission statement, we move on to what is called a Business Mission.
What is a Business Mission? An organization‟s Business Mission compliments its business definition; it reflects what is the vision of the management with respect to what it seeks to do; that is, it reflects the management‟s vision of what the organization seeks to do. In some cases, they may be general statements, but in others, they may be very specific, but if you have a clearly stated mission statement, it adds focus to the organization‟s efforts. I gave you another example; the example that I have taken is the Hallmark Company.
The Hallmark Company is well known for its greeting cards. Now, what are the needs and the wants do they fulfill?. So, you look at it with respect to the generic versus the product markets and what is the search for growth opportunities; then you look at the greeting cards verses the personal expression market. What does all this mean? You may just say, a greeting card is for an occasion, but how this company Hallmark capture this greeting called market? It used the greeting card with a personal touch; be it a birthday, be it a wedding anniversary or be it some other occasion, you had a personal touch attached to this greeting card. So, the result is, whenever this Hallmark company was put, the customer immediately identified it with the greeting card market. So, this is what a good Business Mission can do for a company.
Now, we move to the next. That is, how do we go from a mission statement to a stratergic vision?
A mission statement to strategic vision - these are the questions that must be answered: that is, what changes are occurring in markets and what are the implications for the directions we need to move? What new or different customer needs should we move and satisfy? What new or different buyer segment should we concentrate on? What new geographic or product markets should we be pursuing? What should the company‟s business make up look like in the next 5 years? and What is the kind of company should we be trying to become? In other words, we are looking at time horizon. So, in the first question, we are looking at the changes occurring in a market; we are looking at the applications for the directions we need to move, that is, a company needs to move; in the second question, we trying to find out what are the new or the different customer‟s needs which should be moved to satisfy, and like that we address the different 5, 6 questions that are there. So, the 6 questions that are addressed help an organization to formulate its strategic vision.
So, we move from the mission statement to strategic vision. So, just look at how we have moved. When we looked at the organization, we looked at long range planning; first the long range planning. When the time horizons started stringing, we came down to Strategic Management, largely due to the type of liberalization processes and the IT revolution that has set-in in the country. So, you are looking at a time horizon of 3 years or even less for formulating a Strategic Planning.
Now, when you are looking at that Strategic Planning, what we have seen is how do you really look at the courses of action for an organization, for a strategy. We took the example of a Basic Chemicals and Pharmaceuticals company; then we said how you really formulate a mission statement; then how does this mission statement help you to draw a Business Mission and now we are looking at how does a mission statement help you to draw strategic vision.
Now, when we look at all this, we move to the next part of the question that we address; that is, what do the goals of an organization do? Goals of an organization legitimize
organization. That is, what do you mean by legitimizing an organization? It gives it a legal entity; it makes it a legal entity. So, it identifies the inter organizational relationships; they have good public relations value. Suppose you have defined the goals in a clear manner, this will bring out a good public relations value; it will help in image building with suppliers, customers, public policy makers and the Government; it helps in co-ordination of multiplicity of tasks, managing of conflicts and standards of performance. In short, the goals help to act as motivators for the organization. So, in other words, goals help the employees to be motivated.
Now, the goals can be looked at from 3 different viewpoints. What do you mean by understanding or what do you mean by stating different viewpoints?
One is what is called the official goal. The official goal is the one which is described in the MOA. What is the MOA? The MOA stands for the Memorandum of Association or the charter or the annual report. This is the official goal.
The second one is what is called the operative goal; that is what organization is really attempting to do; How do we get to know this? This can be inferred from organizational policies. What does it do? It helps focus attention; it reduces uncertainties; it helps you to choose from organizational design alternatives; these are many times the OB experts call them as OD interventions in an organization. Suppose, you have to make different OD interventions in an organization, which is the type of intervention which is best suited to achieve the operative goal? So, this could be decided by that.
Now, what is the third goal? The third goal is what is called the operational goal.
The operational goal is the one which is used by the supervisory personal or managers to influence the behavior of subordinates and measure their performance. In other words, it is fairly quantified. So, the organizational goals are fairly quantified. So, what do the official goals do for an organization or what does it convey for the outside world? Many times, the official goals may be abstract; may be idealistic.
Then what about the operative goals? The operative goals are the actual goals in an organization. So, there is a difference between the official goals and the operative goals. The operative goals are the ones which are the actual goals, but these are not articulated, but what about the operational goals? These are detailed goals and these are measurable. These are measurable in an organization. You can measure the operational performance in an organization; you can set up quantified yardsticks for measurement of performance in an organization.
For those of you who are interested more into how to set these goals in an organization and what are all the things which should be going into policies for the organization, I
refer you to this wonderful book, the book which I just give you here is the Top Management Planning by George Steiner.
So, this pyramid which I am presenting here, is the pyramid of business policies; in fact, it is taken from his book, where he looks at the policies in these areas - the major policy areas, that is, the line of business or the code of ethics; the secondary policies with respect to geographical area; then the major cost to the products; then, the functional policies with respect to marketing, production, etc., Then, the procedures and standard operating plans with respect to customer order servicing; then, the rules - that is, the delay of payment of cheques, security etc., All these come under different policy pyramids. So, this is how the pyramid goes with respect to an organization.
Now, with respect to an organization, we can look at strategies in different ways. I present to you 1 or 2 such strategies, where which can be useful to an organization and which are grouped under different headings.
Now, the first one which I am going to present to you is what is called growth strategies; that is, an organization can look at growth strategies as an option. What could be the examples of growth strategies? I give here 6 such examples.
The first one: hold relative position in high growth product stroke market area. What do you mean by this? Suppose you are already a market leader in a particular segment, what to what will be the aim of that organization in that particular market segment? The aim of that organization in that particular market segment will be to hold on to its leadership position. So, you can name number of such organizations.
Take for example, the Hindustan Lever. Hindustan Lever is a leader in the detergent market. So, many of the products brought out by Hindustan Lever in the detergent market starting from Surf, now to the one which is going like the Surf ExcelMatic have made their own distinctive mark in market segments, to which they are addressing.
Now, what is the aim of Hindustan Lever? The aim of Hindustan Lever is to hold on to this leadership position in this market segment; that is, not allow its number one slot to be threatened, though its number one slot is sort to be threatened by number of other players.
The other growth strategy the company think of is - increase market share in high growth market. So, these are some of the strategies which the IT companies try to follow. You have a high growth market and in this high growth market, each player wants to increase its market share.
The third growth strategy a company can think of is - increase market share in mature markets. What do you mean by saying mature markets? In mature markets, the characteristic is - the demand has almost got saturated.
What do you mean by saying the demand has almost got saturated? It is almost fulfilled. Now, when the demand is almost fulfilled, what does it mean? The number of players who are there in mature markets are more. So, they are weighing for a space in the market share. So, if you are a leader in the market place, what would the company like to do in such a mature market?
It would like to use its leadership position to increase its market share; the same example of Hindustan Lever can be quoted, or the other example you can think of is the Colgate which holds a leadership position in the Dental market, that is, the tooth paste market.
The fourth example which I am going to give you for the growth strategy is - hold strong relative position in mature market, use excess cash flow funds to effect penetration with existing product line - that is the multinational market.
What does it mean? It means that you try to explore newer markets. Even if it means you are looking at international horizons, do not confine yourself to domestic horizon; look at international horizon also. So, this is what many of our Indian companies, especially the IT companies are now trying to do. If you are seeing, many of the leading IT companies are looking at expanding their international market horizons. You had Infosys focusing very heavily on the American market - that is US market. Now you have Infosys trying to come in the European market and trying to be a leading player in the European market as well; the same is the strategy that is being followed by Wipro.
What could be the fifth growth strategy? The fifth growth strategy which I am going to give you is the same as in fourth, but come out with new products, markets domestically. Suppose you find that there is a domestic market which is untapped and that the domestic market wants new products and the company can fulfill reasonably, then the company should go in for that.
So, a very good example could be the Telecom companies which were coming out earlier with different types of handsets; now the consumer wants slim handset; that is, he does not want a big type of a telephone; he wants a smaller type of telephone. So, in other words, the consumer tastes and preferences are undergoing change. When the consumer tastes and preferences are undergoing change, the Telecom companies, the production facilities of the telecom companies can be suitably altered or changed or made to satisfy these particular market changes which are emanating, may be due to large number of players or may be due to liberalization - whatever it may be.
Then, the sixth example of growth strategy which I am going to give you or which I am stating here is - hold strong relative position in diversified product line domestically and use excess cash flow funds capability and other resources to diversify markets.
What does that mean? It essentially means that the companies should not just depend on the markets which they are satisfying in the present scenario. That is, suppose you are trying to fulfill the needs of a particular market segment, you should not be confining yourself to that market segment for a long time; you should try to diversify markets. What do you mean by this? These are some things which we will explain when we go along. These are things which we call or which we refer to as product market development matrix, which we will take up when we go along. This is the growth strategies which we discussed.
So, what we have discussed here is - I have given you six different examples of growth strategies which a company can follow. We will discuss the dependency reduction strategies when we go along in the next class. So, for this class, we stop here for this session and we come back to discuss this dependency reduction strategies in the next session.
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