We all know of the famous concept of Physics: “To every action there is always an equal and opposite reaction”. For me this concept finds a real time application while formulating a strategy in day to day life. I take this concept in a way that whenever we formulate a strategy we should keep in mind the consequences or the after effects of it. This concept finds its application both in personal life as well as in the corporate life. In personal life whenever we plan to do something we should first look for the after effects of that action. For example if I plan to change my behaviour and want to be now more critical about the other’s work rather than just appreciating the efforts at all times (which I used to do previously) in order to make my presence felt. Then in this case I should also keep in mind the negative consequences of this change in behaviour, rather than just looking into the positive aspects. I should analyze how most of the people will respond to this change in behaviour of mine.
Similarly in business sense, if a company plans to implement a strategy then it should first consider that how its competitors and other stakeholders will respond to their action. For example if a company is planning to compete in the market by reducing the prices of its products/services then it should consider the fact that this action might lead to a price war in the market as other competitors might also engage in similar actions in order to be competitive. Hence this could negatively affect the profitability of the whole industry and could cause some serious damages to the company which initiated such practice. Also if a company is too tough on its employees in terms of its policies or work culture then the employees also respond in a negative way like working half heartedly or creating an unfriendly atmosphere in their work place. So this will also severely impact the profitability of an organisation. On the other hand if a company shows a lot of concern for their welfare of their employees and always works for their betterment and prosperity then employees of such organisations shows a high degree of commitment and loyalty towards the organisation. Hence one should keep in mind that whatever actions one take, one will always face the equal and opposite reactions for it in return. Hence while formulating the strategies one should give a lot of importance to this aspect.
Before early 1990’s Dell focused on differentiating itself from the other players in terms of speed of delivery, low cost and customer service. With the advent of internet, Dell began to formally integrate operational components (e.g., logistics, manufacturing, distribution, inventory management) and develop a supply chain strategy. The supply chain strategy focused at driving costs out of the supply chain – being the low cost provider – while at the same time supporting a business strategy emphasizing customer service.
“Internally, Business Performance Contracts (BPCs) were crafted that defined formal, but flexible operational agreements between each operational process area. Execution concentrated on four areas: collaboration, value engineering, outsourcing, and the Out-of-Box Experience (OBE). As part of the process, the BPCs were also shared with the extended supply chain and similar operating agreements were arranged. These processes effectively kept the organization’s focus on strategy through performance management. Externally, Dell worked with suppliers to help control costs and improve customer service. Dell’s retail direct strategy requires processing orders direct from customers, building the computers to a customer specification, and delivery within a matter of days. To support this model, Dell asked suppliers to keep inventories within 15 minutes of the manufacturing locations. Virtually all products are made to order. Besides excellent working capital advantages, Dell also sells computers that are about two months newer than the competition! In an industry where component prices fall about 20% per year, this means significant cost-of-goods-sold advantages for Dell.”– UPS Supply Chain Solutions White Paper
The direct sales model, used by Dell isn’t an entirely new concept. Montgomery Ward began selling items directly to customers in 1872 from a mail-order catalog. But the efficacy with which Dell implemented the model was remarkable. A lot of this credit should go to Michael Dell, CEO of Dell. The step of simply integrating the various operational components turned out to be a significant turnaround for Dell. The success of Dell is majorly attributed to the fact that they had a clear business strategy and they focussed all their efforts into the proper execution of that. Also the timely execution of their strategy gave them the upper hand over the other players. The supply chain strategy that they aimed at was achieved in a short span of time due to the effective execution of that. Hence it is very important to make sure that the proper execution of the strategy takes place at the organisation level. Sometimes a strategy is pretty nominal but the best and timely execution of that can lead to significant results. The other big PC makers have since followed, but none has been as effective as Dell.
It is important for an organisation to have a well filled pipeline of people at all levels i.e. from fresh trainees to CEO. As time passes people move ahead in the pipeline and attains new responsibilities and positions. It is very disastrous for a company if a vacuum is created in the pipeline i.e. any post remains vacant or does not have the right successor. Hence effectively filling the pipeline is very crucial for any organisation. It basically involves 6 stages:
- From Self-management to Managing Others: It involves a transition from managing own activities to managing the activities of others. Good Managers don’t solve their people’s problems; they support their people to solve their own problems.
- From Managing Others to Managing other Managers: People at this level are promoted based on their leadership qualities rather than technical expertise. People at this level are looked as the people who can give right directions to managers.
- From Managing other Managers to Managing Functions or Departments: Many a times being a functional manager involves tasks that they haven’t done before. Functional Managers need to become skilled at recognizing functional needs and concerns, often teaming with other functional managers to achieve objectives.
- From Managing Functions or Departments to Business Managers: Being a Business Manager or a multi-functional manager is one of the hardest jobs in an organisation. They have to integrate functions including many which they do not fully understand. Their major role is not the functional thinking but establishing a strategic fit between various functions.
- From Business Managers to Group Managers: Managing various business units is a serious and high level consolidation task. These people are directly answerable to variety of stakeholders, including the government, communities and the financial markets. They must adopt a corporate view.
- From Group Managers to Enterprise Managers: Being a CEO is a task full of responsibilities. CEO is the face of a company in the public. Hence he has to be very careful about his actions not just in the corporate life but also in his/her private life. Majority of their time is spent on external relationships. The organization and its people look to Enterprise Managers for long-term visionary thinking.
Here I have discussed few of the strategies that work well in some of the business scenarios:
* Synergy. It’s tempting to think that one plus one equals three, but sometimes one plus one equals one. Sears got tripped up in the 1980s when it bought the Coldwell Banker real-estate services business and the Dean Witter stock brokerage. The theory was that customers who came to Sears for power tools would also buy financial tools. Some called the strategy “socks and stocks.” But customers select realtors and stock brokers using criteria other than whether they’re sitting in the middle of a department store. Sears sold both businesses after frittering away the management attention that should have been focused on the looming onslaught named Wal-Mart.
* Financial engineering. Sometimes, companies get too clever and come up with a strategy that works in the short term but can’t be sustained. Green Tree Financial led a surge in lending for mobile homes in the 1990s by offering 30-year mortgages versus the standard 15-year loan. But mobile homes can have a useful life of just 10 to 15 years. After three years, a $50,000 home could be worth $25,000 yet have $49,000 still owed on it. A wave of defaults not only took down Green Tree but also bankrupted Conseco, which bought it for $7.6 billion in 1998.
* Moving into an adjacent market. While companies can benefit greatly from stretching themselves, as GE did under Jack Welch, they sometimes overestimate the value of what they bring to the new market and underestimate its complexity. Laidlaw thought its expertise in operating school buses would transfer to a different form of transportation: ambulances. What Laidlaw found was that ambulances were actually a medical services business, subject to regulation and contractual issues that Laidlaw hadn’t faced. Laidlaw took a $1.8 billion write-off in 1998.
* Using technology. Although information technology can lead to highly profitable strategies, executives often fumble the technology, perhaps by underestimating how much competing technologies will improve. Federal Express made this mistake when it introduced Zapmail in 1984. Zapmail picked up documents at a customer’s office, faxed them to a FedEx office near the delivery point, then had a courier drop them off–less than two hours after being picked up. FedEx forecast that Zapmail would generate $1.3 billion in annual revenue, or a third of its total, in 1988. Instead, fax machines improved in quality and dropped in price so fast that customers didn’t need FedEx. Zapmail lost almost $700 million in its two years of operation and was shut down in 1986.
* Consolidation. It’s an axiom that as industries mature, they consolidate. But executives sometimes focus on the assets they will get by purchasing big competitors and underestimate the problems they’re buying. Ames Department Stores actually went into bankruptcy proceedings twice because of problems with acquisitions. Its founders had the idea for discount department stores four years before Sam Walton, and Ames became one of the four biggest chains in the country before liquidating in 2002.
A common problem with implementing a strategy from its point of inception to completion is the disconnect that occurs between senior management and employees. Senior management always does a great job with creating the vision while the employees must figure out what it means, how to do it and how much it will cost. When there is no alliance between senior management and employees, strategy suffers.
In their book One Strategy, Steven Sinofsky and Marco Iansiti suggest aligning strategy and execution should be aligned at all levels of an organization, thus creating strategic integrity. In order to achieve strategic integrity, the organization must match top-down directed perspectives with bottom-up tasks. The authors discuss three drivers to achieve strategic integrity: planning, organization and decision making
One key point made in One Strategy is that planning is essential to the success of the project. If there are gaps and inconsistencies in the plan, it will be mirrored in the output of work. It is difficult for an organization to hide a lack of capabilities.
Corporate Governance issues are quiet different in these 2 countries. Board is considered as a bridge between the Management and the owners. In US, majority of the Corporate Governance issues revolve around the effective implementation of this functionality board of directors. Their focus is to maintain a healthy and profitable relationship between the shareholders and the management of a company. Hence in recent years many actions have been taken in this direction. A lot of emphasis is there in US so as to have a majority of directors in the board as the independent directors so that the board’s decisions are free from any kind of biases and prejudices. Concept of Nomination committee has been formed in order to realize this objective. Also the idea of having a Compensation committee is also implemented in this direction so as to make sure that the benefits of management are at par with the shareholders.
In India, corporate governance picture is slightly different. Here most of the issues related with it revolve around the resolution of conflict between majority shareholders and minority shareholders. Majority shareholders often influence the business related major decision making process and can adversely affect the minority shareholders of a company. If we look this in terms of PSUs in India, then government here is the majority shareholder. In PSUs board plays a very insignificant role as most of the decisions of the PSUs are controlled by some or the other ministry. As far as audit is concerned, again the dominant role is that of the Comptroller and Auditor General (CAG). There was a well-known case a few years ago where a dispute of several billion rupees arose between two PSUs. One of these was wholly owned by the government while in the other there was a minuscule public shareholding. The government sided with the wholly owned forced PSU and forced the other PSU to pay up the disputed amount, and the impact on the earnings of the concerned PSU was quite substantial. Similarly in MNCs, often the conflict between majority and minority shareholders takes place. If the MNC has two subsidiaries in India in one of which it holds a higher stake (say 100%) while in the other it holds a smaller stake (say 51%). The manner in which the MNC structures its business in India between these two subsidiaries is riddled with problems as far as the minority shareholder is concerned. There have been allegations in some cases that the most profitable brands and businesses have been transferred from the long established 51% subsidiary to the newly formed 100% subsidiary at artificially low prices. This implies a large loss to the minority shareholders of the 51% subsidiary who have after all contributed to in equal measure to the investments that were made in the past to build up these businesses to their current dominant position.
The governance issue in the US is essentially that of disciplining the management who have ceased to be effectively accountable to the owners. The solution has been to improve the functioning of vital organs of the company like the board of directors. The problem in the Indian corporate sector (be it the public sector, the multinationals or the Indian private sector) is that of disciplining the dominant shareholder and protecting the minority shareholders. A board which is accountable to the owners would only be one which is accountable to the dominant shareholder; it would not make the governance problem any easier to solve. Clearly, the problem of corporate governance abuses by the dominant shareholder can be solved only by forces outside the company itself like the regulator (the company law administration as well as the securities regulator) and the capital market.
Jack Welsh, former Chairman & CEO of GE, once remarked:
“If you don’t have competitive advantage, don’t compete!”
Jay B. Barney in the book “Gaining And Sustaining Competitive Advantage” wrote:
“A firm is said to have a sustained competitive advantage when it is implementing a value-creating strategy not simultaneously being implemented by any current or potential competitors and when these firms are unable to duplicate the benefits of this strategy.”
When there are only a finite number of unique products and services, how do different companies sell basically the same things at different prices and with different degrees of success? Competitive advantage is simply the reason customers choose to buy from you instead of someone else.
While many business strategists emphasize the tremendous value of cultivating a competitive advantage – some even go so far to claim that a sustained competitive advantage is one of the greatest predictors of success – few business leaders have a firm grasp of the concept. A recent survey of over 1000 CEOs found only two who could clearly articulate their company’s competitive advantage – the other 99.8% were only able to offer vague and imprecise generalities.
The best way to learn a concept is to understand the key critical attributes of that concept. After studying hundreds of examples of competitive advantage, one can assert that the key critical attributes of competitive advantage are:
Not Claimed By The Competition
Difficult To Duplicate
Sustainable
Indian Banking sector is in a need of consolidation at the present stage. Despite the recent hike in number of branches and amount of advances and deposits, the total account holding still stands at one fourth of total population indicative of the long service gap the banking industry still has to plug. The situation becomes even graver if one were to exclude multiple accounts held by single person as is often the case in urban areas. However some optimism may be derived from the fact that the growth rate of domestic banking industry is 10 to 15 times that of European counterparts, now withstanding the preferred investment by commercial banks in zero risk government securities.
Moreover expansion of banks is necessary to meet the expected rise in account demands as the working force rises with the booming economy. Globalization entails increase in size of Indian banks to enable their foray into international markets while maintaining a strong foothold in domestic market.
In spite of having one of the highest average returns on capital, Indian banks lag far behind the other Asian banks when it comes to asset size. The small number of Indian banks in the top 1000 or top 500 banks in the world by asset size throws light upon the need for an increased focus on scale.
Optimists pointing to substantial fall in net NPA for banks over past few years turn a blind eye to its driving factor of excess provisioning which may land the banks in trouble in the event of rising interest rates. The ensuing plunging bottom lines will constrain them from further provisioning to bring down the net NPAs and expose their vulnerability to the rising interest rate situation. This justifies the need for merger of some weaker banks with more competitive ones so as to avoid the situation where the hard earned taxpayer’s money is not used to prop up the banks in crisis.
In a Microfinance PPP (MF-PPP) Model, the government, through agencies like NABARD and other interest subsidies apart from commercial banks, would be funding MFIs which will then disburse the same to the borrowers through SHGs (Self Help Groups). SHGs would be formed under NABARD’S SHG-BLP (Bank Linking Programme) and would be linked to MFIs instead of banks. NGOs would be attached to SHGs, though their association won’t be a necessary criterion for formation of SHGs. NGOs, with the help of their continuity, commitment, local knowledge and training inputs can guide SHG members efficiently.
PPP model would ensure easy accessibility to funds for the borrowers, which all the SHGs are not availing right now because banks usually prefer to fund MFIs. At the same time, this model will ensure that the sector is not commercialized and MFIs are sufficiently funded so that they need not approach private investors for funds.
In such a PPP model, the role of the regulator would be of utmost importance. Regulator would ensure that there is transparency in interest rates as well as the internal operations of MFIs. Regulator would also ensure that MFIs’ objective should not be exorbitant profit-making but making loans available at cheap cost while making profits that are enough for expansion and for being commercially viable. Regulator’s job would also involve setting benchmark interest rates for the loans. Regional Loan Guarantee agency under such a regulator would ensure that MFIs receive funds from government agencies and that these are disbursed among SHGs.
Entrepreneurship promoting agency would also form a part of the model whose prime objective would be to promote formation of micro enterprises by SHG members. NGOs linked to SHGs would also help in achieving this objective of capacity building.
The following ‘3 Cs’ are required for this Public Private Partnership to be successful:
1. Clarity: The microfinance sector needs to clearly articulate its objectives.
2. Commitment: The willingness and desire of every stakeholder to pursue efforts in delivering the agreed purpose.
3. Capability: Educate and improve the skills of all the stakeholders, most importantly of the borrowers so that they understand what they are doing and what they are being offered.
The following are a few risks which might emerge as a result of a merger:
1. Too big to handle and too big to Fail: A behemoth could be too difficult and unwieldy to handle, an extraordinarily large company might become the titanic. The term “too big to fail’ was often seen used in newspaper reports, during the financial crisis of 2007, in the event of its failure, the government, as recently witnessed in the US, would be left with a devil’s alternative of not allowing it to fail and using the tax payers money to protect what is a private venture.
2. Coordination: A merger is in essence a marriage, there could be compatibility issues, which are not visible on the surface, and this is true of any merger. Issues like employee dissatisfaction could occur in cases of organisations with diverse cultures.
3. Merging of structures and procedures: This can be an issue, especially in case of an alliance between a private sector and a public sector company.
4. Operational Difficulties: Lack of efficient coordination may result in operational difficulties.
5. The valuation question: The right price might be elusive and companies could end up paying more or less than the correct amount which might lead to loss in investor wealth and confidence.
6. Emergence of a Monopoly: A merger might give birth to a monopoly which is a nightmare to the general public.
7. Marginalisation of small customers: A large organisation may, though justified by operating expediencies, might not service very small accounts as it might entail, cost much higher than the revenue potential.
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