UNIVERSITY QUESTIONS AND ANSWERS

Q. 1. Distinguish between the following concepts with suitable illustrations:-

(a) Core Competence v/s Distinctive Competence

Core Competence Distinctive Competence

1.They are activities that a corporation can do exceedingly well or better than others in its area of competition.It is an advantage which it enjoys over its competitors.

2. A core competence may or may not provide competitive advantage.

3.Example: superior quality in a particular attribute like fuel efficiency

1.When a core competency provides the organization with a competitive advantage over its rivals it is termed as distinctive competence.

2.A distinctive competence always provides competitive advantage to the firm.

3.Example: superior engine technology of Honda giving it a competitive advantage of its rival.

(b) Offensive v/s Defensive Strategies in Mergers & Acquisitions (2003) What are mergers?

A merger is a combination of two or more organizations in which one acquires the assets and liabilities of the other in exchange for shares or

cash, or both the organizations are dissolved, and the assets and liabilities are combined and new stock is issued.

For the organization which acquires another, it is an ACQUISITION.

For the organization which is acquired, it is MERGER. The types of mergers:-

Horizontal merger Vertical merger Concentric merger Conglomerate merger

Types of acquisitions:-

Hostile takeovers Offensive strategy Defensive strategy

Offensive Strategies Defensive Strategies1. They are basically employed to achieve competitive advantage that cannot be easily broken by rivals in areas of cost advantage, differentiation advantage and resource advantage.

1.The purpose of defensive strategy is to lower the risk of being attacked weakening the impact of any attack that may occur. However the foremost purpose of defensive strategy is to protect competitive advantage and fortify firm’s competitive position.

2.They are used to CREATE AN ADVANTAGE & SUSTAINABLE EDGE.

2.The basic approaches are:-

Block challengers option for initiating an attack by may be introducing new features and broaden product lines to close of gaps and niches.

Signaling that retaliation is imminent by may be cutting price, increasing capacities and generally announce management commitment to defend its present share.

(c) Primary v/s Secondary Value Chain Activities (2003)

Primary Value Chain Activities

Secondary Value Chain Activities

(d) Vertical integration v/s Horizontal Diversification (2003)

Vertical Integration Horizontal Diversification

1.When an organization starts making new products that’s serve its own need.

(e) Vision v/s Mission

(2003), (2004)

Vision Mission

1.Vision has been defined in several different ways.

A vision statement describes what the organization would like to become.

A vision therefore articulates the position that a firm would like to attain in the distinct future. Seen from this perspective the vision encapsulates the basic strategic intent.

Understanding Vision:-

A vision is more --- than it is articulated. By its nature, it could be as hazy and vague as a dream. One would experience the previous night and is not able to recall perfectly in broad day light.Yet it is a powerful motivator to action and it is from the action that vision could be often derived.

Definition of vision:– Kotler (1990)Description of something (an organization, corporate culture, a business, a technology, an activity) in the future.

Miller and Den (1996)Category ------ that are broad, all inclusive and forward thinking.

1.A mission statement describes what the organization is now.

A mission statement often answers basic questions like:

– What business are we in?

– Who are we?– What are we about?

Understanding Mission:-

Organizations relate their existence to satisfy a particular need of the society. They do this in term of their mission. Mission is a statement which defines the role that an organization plays in a society.

Definition of mission:-Thompson (1997)Defines mission as the essential purpose of an organization concerning particular --- why it is in existence, the nature of business, it is ---- and the customers it seek to serve and ----

Hunger and --- (1999)Purpose or reason for an organization’s existence.

A vision expresses an organization’s fundamental aspiration and purpose, usually appealing to its members’ hearts and minds.

2.Vision is generally broad and general.

3.Benefits of a vision:

Good vision are inspiring and ---

Good vision foster long term thinking

Good vision foster risk taking and experimentation

Good vision help in creation of common identity and --- ----- of purpose.

2.Mission is more targeted.

3.In order to be effective, a mission statement should possess the following characteristics:-

a) It should be feasibleb) It should be precisec) It should be cleard) It should be motivatinge) It should be distinctivef) It should indicate major

components of the strategyg) It should indicate how

objectives are to be accomplished

(f) Divestment v/s Demerger (2002)

Divestment Demerger

1.De-merger is a major restructuring activity for delivering value to share holder. It involves spinning of part of the diversified co. into a new co. an undertaking free distribution of the shares of the spun off co. to the original shareholders of the original co.

Eg. Sandoz demerged its industrial chemical business into a new co. Clariant India Ltd.

Unlike divesting, the parent co. does not receive any proceeds of the de-merger since the de-merged co. shares are directly distributed to co. shareholders.

Hence, the major motives of de-merger are to close the value gap, improve mgmt. Focus and avoid cross subsidisation between business portfolio.

(g) Entry Barrier v/s Exit Barrier

Entry Barrier Exit Barrier

1.New entrants to the market bring with them a new production capacity, a desire to establish a secure place in the market and some time substantial resources to compete.

A barrier to entry exists whenever it is hard for a new comer to break into the market or the economic factors that need to be surmounted which poses a disadvantage to the new entrant relative to the competition.

Entry barriers may be classified as:-

1) Economies of scale deter enter because they force new players to enter

1.Restrict the firm in an industry and prevents from leaving even though the returns might be low or might even be sometimes negative.The exist barriers are the economic ---- or emotional factors which prevent companies from moving out after the disinvestment of business.

Effects of Entry Barriers and Exit Barriers on Industry Profits

Effects of Entry Barriers and Exit Barriers on Industry Profits

High, Risky Returns

Entry Barriers

Exit Barriers

High

Low

HighLow

Low, Stable Returns

High, Stable Returns

Low, Risky Returns

(h) Joint Venture v/s Strategic Alliance

Joint Venture Strategic Alliance1. A joint venture (often abbreviated JV) is a strategic alliance between two or more parties to undertake economic activity together. The parties agree to create a new entity together by both contributing equity, and they then share in the profits, losses, and control of the enterprise. The venture can be for one specific project only, or a continuing business relationship such as the Sony Ericsson joint venture.

1.Lando Zeppei, defines strategic alliance as a co-operative arrangement between two or more companies where:-

a) A common strategy is developed in unison and a win – win attitude is adopted by all the parties.

b) The relationship is reciprocal, which each partner prepared to share specific strengths with each other, thus lending power to the enterprise.

c) A pooling of resources, investments, and risks occurs for mutual (rather than individual) gain.

2. 2.Types of strategic alliances

Procompetitive alliances (low interaction / Low conflict)These are generally inter industry.

http://en.wikipedia.org/wiki/Joint_venture

Reasons for forming a joint venture

Internal reasons

1. Spreading costs and risks 2. Improving access to financial resources 3. Economies of scale and advantages of size 4. Access to new technologies and customers 5. Access to innovative managerial practices

Competitive goals

1. Influencing structural evolution of the industry 2. Pre-empting competition 3. Defensive response to blurring industry boundaries 4. Creation of stronger competitive units 5. Speed to market 6. Improved agility

Strategic goals

1. Synergies 2. Transfer of technology/skills 3. Diversification

Examples

AutoAlliance International between Ford Motor Company and Mazda Cingular between SBC and BellSouth Equilon between Texaco and Royal Dutch Shell LG.Philips Components between LG Group and Royal Philips Electronics NUMMI between General Motors and Toyota Penske Truck Leasing between GE and the Penske Corporation Sony Ericsson between Sony and Ericsson Verizon Wireless between Verizon Communications and Vodafone CW Television Network between CBS Corporation and Time Warner The Baseball Network between ABC, NBC, and Major League Baseball The Prime Time Entertainment Network from the Prime Time Consortium, a joint

venture between Warner Bros. Domestic Television and the Chris-Craft group of independent stations.

http://www.tata.com/tata_international/releases/20000926.htm

SITEL and Tata International to form joint venture

http://news.moneycontrol.com/india/newsarticle/stocksnews.php?autono=205271

Bharti to start life insurance joint venture

Q. 2. As a corporate planner of an Indian Co. create a document for formalizing “the strategic management process in your company”. Please explain the framework and key elements of this process. (2003)

Answer 2.

Definition of strategy

Kenneth Andrews: Strategy is the pattern of objectives, purposes or goals and the major policies and plans for achieving these goals, stated in such a way as to define what business the company is in or is to be in and the kind of company it is or is to be.

What is Strategy?

1. A company’s strategy consists of the set of competitive moves and business approaches that management is employing to run the company

2. Strategy is management’s game plan to Attract and please customers Stake out a market position Conduct operations Compete successfully Achieve organizational objectives

The three big strategic questions1) Where are we now?2) Where do we want to go?

Businesses to be in and market positions to stake out/ Buyer needs and groups to serve? Outcomes to achieve?

3) How do we get there?

Or****• Strategic management consists of four basic elements. These are :

– Environmental scanning : monitoring, evaluating and disseminating information from the external and internal environment to key people in the organization in order to identify factors that will determine the future of the organization. This is done through a SWOT analysis.

– Strategy formulation : development of long range plans for the effective management of environmental opportunities and threats, in the light of corporate strengths and weaknesses. It includes defining the corporate mission, specifying achievable

objectives developing strategies (courses of action) and setting policy guidelines.

– Strategy implementation : the process by which strategies and policies are put into action through the development of programs, budgets and procedures.

– (a) Programs: statement of activities needed to accomplish a plan. This makes strategy action oriented. It may also involve restructuring, changing the company’s internal culture or new research efforts.

– (b) Budgets: a statement of a company’s program in terms of money that lists the detailed costs of each program.. It serves as a detailed plan of the new strategy and specifies its expected impact on the firm’s financial future.

– (c) Procedures: a system of sequential steps or activities that describe in detail how a particular task or job is to be done.

– Evaluation and control : the process in which corporate activities and performance results are monitored so that actual performance can be compared with desired performance in order to take corrective action and improve performance.

****Or

The term “STRATEGIC MANAGEMENT” refers to the managerial process of forming

a) strategic visionb) setting objectivesc) crafting a strategyd) enabling it to implement and execute the set strategye) evaluating performance

As on ongoing process overtime one has to initiate whatever corrective adjustments that may be deemed necessary in the above parameters may be carried out.

Five components in the strategic process are typically called as the 5 task framework

a) develop strategic vision

what is the long term direction where are we headed to as a company what type of future should we embrace in terms of

technology / product / customer focus what is the industry standing we wish to achieve in the

next five years

Managers need to take look at the company’s internal and external environment in order to arrive at views and conclusions on the future scope and focus that it intends to pursue.

This pursuit constitutes the strategic vision for a company and reflects on the management’s aspiration for the organization and its business. The strategic vision generally helps direction setting and strategy making value enabling organization leader to make clear business courses in terms of resource allocation and strategy to reach the company to its logical goal of being an industry leader.

b) setting objectives

The purpose of setting objectives is to convert statements of strategic vision and business mission into specific result oriented targets which has to be achieved.

Objective setting is required by all managers.

Every functional unit in a company needs concrete and measurable performance target that contribute meaningfully towards achieving company objectives.

All managers of each unit are held accountable for achieving them.

Develop Mission and Vision

Set Objective

Crafting strategy to achieve the objectives

Implement and execute strategy

Evaluating performance continuous improvementMonitoring new developments and initiating corrective measurements

Thus building a result oriented climate towards the enterprise.

c) crafting a strategy

d) enabling it to implement and execute the set strategy

e) evaluating performance

Q. 3. What are the key elements of change process? How will you handle the change process in the following situations: - (2003)

a) Your Company wants to go ahead with the implementation of ERP Package for better inventory management and JIT.

b) Your Company wants to change incentive systems for sales which are focused more towards new products.

Ans.

Change is a process that can be schematically represented as

Pain Remedy

For eg Liberalization, downsizing with VRS, merger & acquisition (change culture)

The pre-requisites of change are

1. Pain – critical mass of information breaks the current status quo.2. Remedy – certain desirable & accessible action solve the problem or take

advantage of the current status of the situation.

The key issues are

Will the people choose to accept change If not should you force change If you do force change will people value the benefit

The major requirements to effect change are

Continuous commitment & involvement of top management High degree of trust at all levels of organization facilitates change Patience in terms of time frame to allow benefits of change Change is always expensive but has to be done if maintaining current status

is even more prohibitive. Change will result in significant disruptions of peoples expectations,

resulting in loss of control over some important aspects of their lives & environment.

Change consistent with current organization cultures are usually successful

Change Process

Present State

Transition state

Desired state

Stage 1- Choosing the target actions

Identify possibilities/opportunity Select the best one Gain sufficient commitment to initiate the process Set a target & general direction for efforts by clearly describing future

situation

Stage 2- Setting Goals

Test feasibility of making change Develop specific goals & action plans to achieve targets Develop clear understanding of future requirements in terms of resources,

skills, tools & timing. Gain substantial commitment to time & resources required

Stage 3- Implementing action

Initiate the plan Involve all those who must change. tell them how & why Shift the working pattern Demonstrate effectiveness of plan & progress towards goals & tangible

proof of benefits of change.

Stage 4 – Review

Complete the implementation process Encourage & support people who are making efforts to change Improve upon the approach based on feedback

Stage 5 – Re balancing & accommodating change

Identify ripple effects of change on department , systems, organization structure

Integrate changes with existing attitudes & systems

Stage 6- Consolidation

Audit accomplishments against original goals Identify what worked & what didn’t & analyze why Share the learning process

Leadership in the change process

An effective leader will be a visionary & a catalyst with creativity & intuition who will be the key driver in the change process. He will effectively target change by planning an effective path with a conducive climate to initiate the process. He will involve all concerned to realize the benefits of change & with continuous communication & commitment with adequate flexibility, he would lead the organization on the path way of change.

****

Or

****

Change takes place as a process through certain channels and involves social roles of members

The change decision process involves: A decision maker Obtaining information about the need for change Promoting a positive attitude toward the change Making a decision to adopt or reject Implementing the idea Confirming the decision

Change is an integral part of any business or process. Without change there is no growth.

Forces ForForces ForChangeChange

WorkforceWorkforce

CompetitioCompetitionn

WorldWorldPoliticsPolitics

TechnologTechnologyy

SocialSocialTrendsTrends

EconomicEconomicShocksShocks

My business is about distribution of Traveler’s cheque (TC) and travel plastic card to various banks and non banking institutions, who in turn sell them to the end customer.

Our business has it’s headquarter in UK with a total base of $ 400 million. We have offices all over the world. From India we manage the business of South East Asia, Bangladesh and Pakistan.

In India we have our offices in all the four metros.

Our products i.e. Traveler’s cheque (TC) and travel plastic card are printed and designed in U.K. Hence

Q. 4. Mergers & Acquisitions have now become a major corporate restructuring tool in the Indian Corporate Scene. Discuss this statement in relation to current scenario. What are the objectives based on which company can initiate Mergers & Acquisition process. Illustrate your answer with examples. (2003)

Acquisition stands for taking over the management of the firm.

Merger stands for amalgamation of the firm with the existing parent firm or joining hands between friendly companies.

Since the motives of merger and acquisition are the same and both involve the transfer of ownership and control of assets and the right to manage corporate cash flows and the difference between them is only a matter of technical detail, the term mergers and acquisitions are often used interchangeably.

Merger

In business or economics a merger is a combination of two companies into one larger company. Such actions are commonly voluntary and involve stock swap or cash payment to the target. Stock swap is often used as it allows the shareholders of the two companies to share the risk involved in the deal. A merger can resemble a takeover but result in a new company name (often combining the names of the original companies) and in new branding; in some cases, terming the combination a "merger" rather than an acquisition is done purely for political or marketing reasons.

Classifications of mergers

Horizontal mergers take place where the two merging companies produce similar product in the same industry.

Vertical mergers occur when two firms, each working at different stages in the production of the same good, combine.

Conglomerate mergers take place when the two firms operate in different industries.

A unique type of merger called a reverse merger is used as a way of going public without the expense and time required by an IPO.

Motives behind M&A

These motives are considered to add shareholder value:

Economies of scale: This refers to the fact that the combined company can often reduce duplicate departments or operations, lowering the costs of the company relative to theoretically the same revenue stream, thus increasing profit.

Increased revenue/Increased Market Share: This motive assumes that the company will be absorbing a major competitor and increasing its power (by capturing increased market share) to set prices.

Cross Selling: For example, a bank buying a stock broker could then sell its banking products to the stock broker's customers, while the broker can sign up the bank's customers for brokerage accounts. Or, a manufacturer can acquire and sell complementary products.

Synergy: Better use of complementary resources. Taxes: A profitable company can buy a loss maker to use the target's tax

write-offs. Geographical or other diversification: This is designed to smooth the

earnings results of a company, which over the long term smoothes the stock price of a company, giving conservative investors more confidence in investing in the company. However, this does not always deliver value to shareholders (see below).

These motives are considered to not add shareholder value:

Diversification: While this may hedge a company against a downturn in an individual industry it fails to deliver value, since it is possible for individual shareholders to achieve the same hedge by diversifying their portfolios at a much lower cost than those associated with a merger.

Overextension: Tend to make the organization fuzzy and unmanageable. Manager's hubris: Oftentimes the executives of a company will just buy

others because doing so is newsworthy and increases the profile of the company.

Empire Building: Managers have larger companies to manage and hence more power

Manager's Compensation: In the past, certain executive management teams had their payout based on the total amount of profit of the

company, instead of the profit per share, which would give the team a perverse incentive to buy companies to increase the total profit while decreasing the profit per share (which hurts the owners of the company, the shareholders); although some empirical studies show that compensation is rather linked to profitability and not mere profits of the company.

Bootstrapping: Example: how ITT executed its merger.

Examples for Major Mergers and Acquisitions

DaimlerChrysler; Daimler Benz and Chrysler (Announced May 1998 - Final 1998) ($35 billion)

Procter & Gamble buy Gillette (2005, $54 billion)

Walt Disney Company and Pixar, announced January 2006, $7 billion

Q. 5. Global players are entering the Indian consumer durable market in a big way with heavy investment. How they can achieve sustainable competitive advantage given the fact that they have different levels of experience and different entry modes. Can they apply Porter’s Model of generic strategies? (2003)

Answer 5.

Porter’s Generic Strategies

Strategy 1

CostLeadership

Strategy 2

Differentiation

Strategy 2

Differentiation

Strategy 3A

Cost Focus

Strategy 3A

Cost Focus

Strategy 3B

DifferentiationFocus

Strategy 3B

DifferentiationFocus

Competitive Advantage Lower Cost Differentiation

CompetitiveScope

BroadTarget

NarrowTarget

Differentiation strategy – involves competing with all other firms in the industry by offering products that customers perceive to be unique

Cost leadership strategy means competing in the industry by providing a product at a price as low as or lower than competitors’ prices

– This strategy requires a constant concern for efficiency, and – High volume and / or rapid growth are needed

Focus strategy involves competing in a specific industry niche by serving the unique needs of certain customers or a specific geographic market

Porter’s Five Forces Model

Threat of new entrants Rivalry among existing firms Threat of substitute products / services. Bargaining power of buyers and suppliers. Relative power of other stakeholders

Generic Strategies

OVERALLCOST LEADERSHIPDIFFERENTIATION

Low Cost PositionUniqueness Perceived

by the Customer

Industry wide

ParticularSegment only

STRATEGIC ADVANTAGE

ST

RA

TE

GIC

TA

RG

ET

Source: Michael Porter, Competitive Strategy, 1980

FOCUS

3

Q. 6. Deregulation of insurance sector is a key change in the business environment of insurance in the country today? You are retained as a consultant to conduct environmental scanning for a new entrant for the insurance sector. What are the different aspects of analysis that you will carry out for your Client? (2003)

Answer 6.

INSURANCE SECTOR IN INDIA

The insurance sector in India has come a full circle from being an open competitive market to nationalisation and back to a liberalised market again. Tracing the developments in the Indian insurance sector reveals the 360-degree turn witnessed over a period of almost two centuries.

http://www.mindbranch.com/products/R459-85.html

EXECUTIVE SUMMARY:

With an annual growth rate of 15-20% and the largest number of life insurance policies in force, the potential of the Indian insurance industry is huge.

Total value of the Indian insurance market (2004 - 05) is estimated at Rs. 450 billion (US$10 billion).

According to government sources, the insurance and banking services’ contribution to the country's gross domestic product (GDP) is 7% out of which the gross premium collection forms a significant part.

The funds available with the state-owned Life Insurance Corporation (LIC) for investments are 8% of GDP.

Till date, only 20% of the total insurable population of India is covered under various life insurance schemes, the penetration rates of health and other non-life insurances in India is also well below the international level. These facts indicate the of immense growth potential of the insurance sector.

The year 1999 saw a revolution in the Indian insurance sector, as major structural changes took place with the ending of government monopoly and the passage of the Insurance Regulatory and Development Authority (IRDA) Bill, lifting all entry restrictions for private players and allowing foreign players to enter the market with some limits on direct foreign ownership.

Though, the existing rule says that a foreign partner can hold 26% equity in an insurance company, a proposal to increase this limit to 49% is pending with the government. Since opening up of the insurance sector in 1999, foreign investments of Rs. 8.7 billion have poured into the Indian market and 21 private companies have been granted licenses.

Innovative products, smart marketing, and aggressive distribution have enabled fledgling private insurance companies to sign up Indian customers faster than anyone expected. Indians, who had always seen life insurance as a tax saving device, are now suddenly turning to the private sector and snapping up the new innovative products on offer.

The life insurance industry in India grew by an impressive 36%, with premium income from new business at Rs. 253.43 billion during the fiscal year 2004-2005, braving stiff competition from private insurers. RNCOS’s report, “Indian Insurance Industry: New Avenues for Growth 2012”, finds that the market share of the state behemoth, LIC, has clocked 21.87% growth in business at Rs.197.86 billion by selling 2.4 billion new policies in 2004-05. But this was still not enough to arrest the fall in its market share, as private players grew by 129% to mop up Rs. 55.57 billion in 2004-05 from Rs. 24.29 billion in 2003-04.

Though the total volume of LIC's business increased in the last fiscal year (2004-2005) compared to the previous one, its market share came down from 87.04 to 78.07%. The 14 private insurers increased their market share from about 13% to about 22% in a year's time. The figures for the first two months of the fiscal year 2005-06 also speak of the growing share of the private insurers. The share of LIC for this period has further come down to 75 percent, while the private players have grabbed over 24 percent.

There are presently 12 general insurance companies with four public sector companies and eight private insurers. According to estimates, private insurance companies collectively have a 10% share of the non-life insurance market.

Though the focus of this market research report is on the potential growth on the Indian Insurance Sector, it also talks about the market size, market segmentation, and key developments in the market after 1999. The report gives an instant overview of the Indian non-life insurance market, and covers fire, marine, and other non-life insurance. The data is supplied in both graphical and tabular format for ease of interpretation and analysis. This report also provides company profiles of the major private insurance companies.

REPORT HIGHLIGHTS: Gains of Liberalization in Indian Insurance Sector Indian Insurance Market Segmentation By Products Size of the Market and Market Share Of Life Insurers, In INR (crore) Market Share Of Non-Life Insurers Forecast of Life Insurance Growth Up to 2012 Forecast of Non-Life Insurance Growth Up to 2012 Market Revenue of Both Public and Private Insurers Policies and Measures Taken By IRDA To Develop The Insurance

Market Research and Development Activities Regulation of insurance and reinsurance companies Major Challenges That Indian Insurance Sector is Facing Profiles of the Major Players

REPORT FEATURES:

In the globalize market scenario, companies need to understand and challenge the competitive markets they operate in. RNCOS’s “Indian Insurance Industry: New Avenues for Growth 2012” is a complete analysis of the market that will help you in decision making. Chapter 2, 3, and 4 of this report discussed the impact of liberalization of the market, market shares of public and private sector companies and polices implemented by IRDA to develop the insurance market in India. Chapter 5, 6, and 7 deals with market revenue of private and public players, opportunities and forecasts and Government policies. Regulation of insurance and reinsurance companies, international cooperation and major challenges of Indian insurance sector along with profiles of major players are discussed in Chapter 8 and 9. Similarly, the level of competition among the existing players and their strategies are also discussed.

Q. 7. Liberalisation & Globalisation has virtually changed the scenario for the

Financial sector. Perform an external analysis for SBI covering the environmental scanning and five forces model. (2002)

Answer 7.

The financial sector in India has been changing rapidly over the years with liberalization and globalization, playing a very important part in the development of the country.

The public sector banks which primarily enjoyed a very important role in the banking sector in India have now taken a back stage wherein private players like HDFC Bank, Kotak Mahindra Bank and ICICI Bank who have emerged since the last decade with latest Technology, improvised customer focused skills and timely services has started enjoying an important share in the banking sector. Recently with Foreign Direct Investment in banking to -- % foreign banks who are looking for an Indian partner such as HSBC who holds more than 49% in UTI bank, Goldman Sachs who holds nearly 25 % in Kotak Mahindra Bank Ltd having changed the banking face in India. Hence if SBI, which in itself is a giant in banking and financial sector in India want to maintain the said position it would then have to revamp itself in totality.

Environment Scanning

One would have to understand the information from external and internal environment which can bridge the gap between profitability and long term benefits.

External Environment:

Environment would play a very important role in understanding why such a giant like SBI has taken a back stage and what it would require to do to come to the front stage.

Economic forces:-

GDP trends Interest Rates Money supply and Monetary Policy of RBI Inflation Unemployment

These indicators would throw light on how banks ------ how they survive and achieve level of trust and satisfaction.

Technology:-

Intra city banking Clearing house setup Specialized cell for investment High technology and --- technology

These would be the parameters on which SBI would have to look on before -----

Political and Legal:-

Lack or no influence of politics or minister Favourable environment for new players to enter the market with increase

in FDI limit

This would help bank to learn new technology which are followed by the foreign players----

Social Environment:-

Changing life style --- expectation Consumer ---

Changing in the demand and need of the customer in terms of quickness, efficiency, prompt customer service -------

Porter’s model is based on the following:-

1) Threat of new entrants2) Rivalry among existing firms3) Threat of substitute product / services4) Bargaining power of buyers5) Bargaining power of suppliers6) Relative power of the stakeholders

OrPorter’s Five Forces Model

Threat of new entrants Rivalry among existing firms Threat of substitute products / services. Bargaining power of buyers and suppliers. Relative power of other stakeholders

Threat of new entrants

SBI would be seriously faced with this factor because of liberalization and globalization the world is known as a Global Village and with the level of foreign direct investment --- the foreign players would like to --- emerging market ---- economies of scale.

SBI could look at opening more branches abroad or go on acquisition mode where SBI could acquire some foreign banks and start business ---

Rivalry among existing firms

Competition which is healthy is always important for any business as this helps business to grow and keep it self --- and changes in the environment

Threat of substitute product / services

SBI would have to --- approach towards it on business partners internally and externally. They would have to get in ---- latest technology and also have their staff to handle customer ----

Bargaining power of buyers

Since the banking industry is now more opened where in private players are into pampering their client by offering them under one roof entire banking and financial --- these clients are more aware of their rights and then they would demand similar from others banks where they have their accounts.

Thus SBI should be more prompt to adapt to these changes in the industry.

Bargaining power of suppliers

Here SBI should be more focused in the --- and subsidiary banks by flowing down the information of banking by teaching new banking procedures and guidelines.

Relative power of the stakeholders

The stakeholder and promoter of the co. are very important for any company without which any company is not ----. In fact sometimes due to stakeholders influence, company changes their decision and practice. It would be high time that SBI would want to consider its stakeholder and undergo a revamp in the structure.

***

Environmental scanning - screening large amounts of information to detect emerging trends and create a set of scenarios – it often scans and throws light on:

– Events – Trends

– Issues – Expectations

Porter’s (1980) Five Forces Model of Competition

Threat of Substitute Products

Threat of New

Entrants

Threat of New Entrants

Rivalry Among Competing Firms in

Industry

Bargaining Power of Buyers

Bargaining Power of Suppliers

Porter’s 5 Forces Model

PotentialEntrants

Industry Competition

Rivalry AmongExisting Firms

Suppliers Buyers

Substitutes

Threat of new entrants

Threat of substitute goods and services

Bargaining power of buyers

Bargaining power of suppliers

Banking: The GOI increased the FDI limit for private banks to 74 percent in March 2004, but the Reserve Bank of India has not yet issued implementing guidelines. For state-owned banks the FDI limit remains at 20 percent. The 74 percent cap includes all foreign portfolio investments. At all times, at least 26 percent of the paid up capital must be held by residents. Wholly-owned subsidiaries of foreign banks are exempt from this requirement. The Foreign Institutional Investment (FII) limit remains at 49 percent. Foreign banks in India have the option to operate as branches of their parent banks or assubsidiaries. Shareholders of banking companies may exercise their voting rights to a maximum of 10 percent. 

http://www.hinduonnet.com/thehindu/biz/2002/03/28/stories/2002032800140100.htmThursday, Mar 28, 2002

FDI in the banking sector

With FDI investments of up to 49 per cent of equity and supported by substantial FII investments, foreign banks can control nearly the entire equity of taken over private sector banks, says Abhijit Roy

THE LAST few weeks have seen substantial activity in the banking sector. The position is not entirely clear yet, but it is obvious that the Government has decided to encourage foreign banks wishing to enter India in order to strengthen the banking sector.

The Reserve Bank of India announced on February 16 a major policy change with regard to foreign direct investment (FDI) in the Banking Sector. The guidelines are:

Limit for FDI under automatic route in private sector banks:

FDI up to 49 per cent from all sources will be permitted in private sector banks on the automatic route.

(b) For the purpose of determining the ceiling of 49 per cent FDI under the "automatic route'' in respect of private sector banks, the following category of shares will be included IPOs; private placements; ADRs/GDRs; and acquisition of shares from existing shareholders {zcaron}subject to (d) below.

(c) However, as per government guidelines, issue of fresh shares under the automatic route is not available to those foreign investors who have a financial or technical collaboration in the same or allied field. This category of investors requires the Foreign Investment Promotion Board approval.

(d) Further, the automatic route is not applicable to transfer of existing shares in a banking company from residents to non-residents. This category of investors require approval of FIPB, followed by "in principle'' approval by the Exchange Control Department (ECD) of the RBI. The "fair price'' for transfer of existing shares is determined by the RBI, broadly on the basis of SEBI guidelines for listed shares and erstwhile CCI guidelines for unlisted shares.

(e) Under the Insurance Act, the maximum foreign investment in an insurance company has been fixed at 26 per cent. Application for foreign investment in banks which have joint venture/subsidiary in insurance sector should be made to the RBI. Such applications will be considered by the RBI in consultation with the Insurance Regulatory and Development Authority (IRDA).

(f) Foreign banks having branch in India, are eligible for FDI in the private sector banks subject to the overall cap of 49 per cent mentioned above, with the approval of the RBI.

Limit for FDI in public sector banks In the case of nationalised banks as well as SBI and its associate banks, the overall statutory limit of 20 per cent as FDI and portfolio investment will continue.

Voting rights of foreign investors

In the case of private sector banks, no person holding shares, in respect of any share held by him, shall exercise voting rights in excess of 10 per cent of the total voting rights of all shareholders.

Budget announcements

Further, the Finance Minister has made the following announcements in the budget 2002.

* It has been decided to give an option to foreign banks to either operate as branches of their parent banks or to set up subsidiaries. A foreign bank will have to choose one of the two options. It has also been decided to relax the maximum ceiling of voting rights of 10 per cent for such subsidiaries.

* New FII portfolio investments will not be subject to the sectoral limits of FDI except in specific sectors. Guidelines in this regard will be issued separately.

Earlier, it had been interpreted that FII investments in private sector banks could be made up to 49 per cent of equity, at the same level as FDI limit. However, after the Finance Minister's announcement one has to wait and see as to the level that FII investment will be allowed in this sector.

Interesting possibilities

With FDI investments of up to 49 per cent of equity and supported by substantial FII investments, foreign banks can control nearly the entire equity of taken over private sector banks. If this is the intention of the Government/RBI, then what happens to branch restrictions applicable to foreign banks? We may then witness a dual policy of foreign banks with branches not being allowed to open new branches, while foreign banks controlling private sector banks being allowed to operate all over the country.

In case foreign banks convert their branch operations in India into a subsidiary, then in the normal course the new legal entity should be treated as a domestic company and not a foreign company. In addition to the issue of differential taxation, would such a conversion enable more freedom in geographical expansion?

Trends in banking

The scheduled commercial banks operating in India are classified into public sector banks, old private sector banks, new private sector banks and foreign banks. In the last few years, the new private sector banks have outperformed the other three groups. Between 1995-96 and 1999-2000, the share in assets of public sector banks fell from 84.5 to 80.2 per cent, while the share of foreign banks during the same period fell from 7.9 to 7.5 per cent. The share of the old private sector banks rose modestly from 6.2 to 7 per cent during the same period, while the new private sector banks increased their share from 1.4 to 5.3 per cent. The main disadvantage that the foreign banks face is the restriction on branch expansion imposed by the RBI.

Vulnerability of old private banks

The 23 old private sector banks represent a vulnerable section of the commercial banking sector. They have a comparatively high level of non-performing assets. They also have a low capital base, inadequate technology infrastructure and limited branch network. Over a period, they need to be merged with stronger players. Till now the new private sector banks were in the best position to take them over. However, with the new guidelines, the Government/RBI has introduced a new set of players, namely, foreign banks, in this consolidation game. The capital market has already realised this; witness the recent rise in shares of listed private sector banks.

Public sector banks

In the case of public sector banks, the Government had earlier announced that it is planning to reduce its stake in such banks to 33 per cent in a phased manner. This is mainly because the Government does not have enough money to contribute the additional capital that would be required over a period. Private domestic capital may not be enough to fill the gap in capital requirements, which means that foreign capital would have to be accessed. Such foreign capital can be either FII or FDI investments. The moot point is whether sufficient capital from overseas investors would be forthcoming if there were no change in management in the public sector banks. Induction of FDI in public sector banks would probably have to be accompanied by change in management style in public sector banks. Politically such decisions are not easy to take. Therefore, lack of capital in addition to other well known impediments may constrain the growth of public sector banking segment as a whole.

Consolidation

Consolidation of the banking industry is expected to proceed apace. The banking industry in India has witnessed many changes since the early 1990s. Initially the Government contributed substantially to the equity of a large number of public sector banks in order to improve their capital adequacy levels. Then the Government sought to change the structure of the Indian banking industry by granting licences to a new generation of private sector banks. This step has been quite successful, as these banks have introduced the latest technology to differentiate themselves, opened ATMs and branches at a rapid pace and successfully weaned away customers from other banks.

The Government has now taken the next step by allowing foreign banks to take over private sector banks. The next few years will show whether foreign banks are really interested in doing business in India. We have seen that some of them have been quite unpredictable in their business decisions. Foreign banks must have the tenacity to overcome the rigidities of the banking system in India. The road ahead is not clear, but one can be sure that commercial banking in India will continue to witness changes.

Q. 8. Your company is a number of large business group with a AAA + rating from CRISIL. Your company is considering three options:- a) Enter into insurance sector with an alliance from foreign partner b) Joint venture with global telecom giant c) Takeover a major sick competitor What are the parameters of diversification will you apply to arrive at best Strategic option for your company. (2002)

Answer 8.

Q. 9. India will usher in a free economy with the provisions of WTO agreement coming into force Your MD wants the strategic planning group of your company to perform environmental scanning (industry and competitive environment) of the emerging scenario. What analytical tools you can use as a part of the strategic planning committee to carry out this study. Illustrate your answer by taking any industry or sector of your choice (2004)

Answer 9.

The factors of environment to be covered under environment survey:-

1) Macro Environmental Factors Demographic environment Socio – cultural environment Economic environment Political environment Natural environment Technology environment Legal environment

Government policies

2) Environmental factors related to business The market / demand The consumer The industry The competition Government policies The supplier related factors

***Environmental scanning - screening large amounts of information to detect emerging trends and create a set of scenarios – it often scans and throws light on:

– Events – Trends – Issues – Expectations

Q.10. Fiat India Ltd. despite launching 3 models – UNO, Sienna and Palio within the last seven years is facing a crisis in the Indian automobile industry. As a CEO of Fiat India Ltd. conduct strategic audit for the company. As a management consultant what are the critical questions that you would like to cover in the audit process and how will you get answers to make recommendations. (2004)

Answer 10.

Fiat India is wholly managed by Fiat Auto Spa of Italy, to give India truly world class cars.

Fiat has achieved a high level of localization for all its cars, and is making world-class cars available in India at even more competitive and affordable prices.

Market Share (2004-05)

Passenger Vehicles 13.44

Commercial Vehicles 4.03

Three Wheelers 3.90

Two Wheelers 78.63

Strategic Audit

1. Current Situation

A) Current performance B) Strategic Posture

2. Strategic managers

A) Board of Directors B) Top Management

3. External Environment

A) Societal EnvironmentB) Task Environment

4. Internal Environment

A) Corporate StructureB) Corporate CultureC) Corporate Resources

5. Analysis of Strategic Factors

A) Situational Analysis (SWOT) (SFAS)B) Review of current Mission and Objectives

6. Strategic alternatives and recommended strategy

A) Strategic Alternatives B) Recommended Strategy

7. Implementation

8. Evaluation and Control

Additional questions

Distinguish between

1. Concentration and integration Strategy2. Concentration and diversification Strategy3. turnaround and divestment strategy4. divestment and liquidation strategy5. cost and focused cost strategy6. cost leadership and differentiation strategy7. horizontal and vertical mergers8. concentric and conglomerate mergers9. CSFs and distinctive competencies10. functional and divisional structure11. SBU and functional structure12. divisional and matrix structure13. divisional and network structure14. customer based and product based structure15. traditional and emerging organizational design

Strategic Management - Distinguish between

Topic Year

competence and core competence2001, 2002, 2003, 2005

vertical integration and horizontal integration 2001, 2004strategic alliances and joint ventures 2001, 2002suppliers value chain and forward value chain 2001, 2005stars and cash cows in BCG matrix 2001entry barriers and exit barriers 2001, 2002, 2005offensive and defensive strategies 2001, 2003strategies of market leaders and market challenger 2001divestment and demerger 2002portfolio management and restructuring in diversification 2002global and multi country operations 2002, 2003, 2005declining markets and fragmented markets 2002primary and secondary value chain activities 2003vertical integration and horizontal diversification 2003vision and mission statements 2003, 2004high velocity markets and fragmented markets 2003mergers and amalgamations 2004financial objectives and strategic objectives 2004competence and distinctive competence 2004embryonic industries and fragmented industries 2004divestment and spin off 2005growth markets and high velocity markets 2005

Stars and cash cows in BCG matrix – 2001

Companies that are large enough to be organized into strategic business units face the challenge of allocating resources among those units. In the early 1970's the Boston Consulting Group developed a model for managing a portfolio of different business units (or major product lines). The BCG growth-share matrix displays the various business units on a graph of the market growth rate vs. market share relative to competitors:

Resources are allocated to business units according to where they are situated on the grid as follows:

Cash Cow - a business unit that has a large market share in a mature, slow growing industry. Cash cows require little investment and generate cash that can be used to invest in other business units.

Star - a business unit that has a large market share in a fast growing industry. Stars may generate cash, but because the market is growing rapidly they require investment to maintain their lead. If successful, a star will become a cash cow when its industry matures.

Question Mark (or Problem Child) - a business unit that has a small market share in a high growth market. These business units require resources to grow market share, but whether they will succeed and become stars is unknown.

Dog - a business unit that has a small market share in a mature industry. A dog may not require substantial cash, but it ties up capital that could better be deployed elsewhere. Unless a dog has some other strategic purpose, it should be liquidated if there is little prospect for it to gain market share.

The BCG matrix provides a framework for allocating resources among different business units and allows one to compare many business units at a glance.

However, the approach has received some negative criticism for the following reasons:

The link between market share and profitability is questionable since increasing market share can be very expensive.

The approach may overemphasize high growth, since it ignores the potential of declining markets. The model considers market growth rate to be a given. In practice the firm may be able to grow the market.

These issues are addressed by the GE / McKinsey Matrix, which considers market growth rate to be only one of many factors that make an industry attractive, and which considers relative market share to be only one of many factors describing the competitive strength of the business unit.

Short Notes

1. Vision, mission and objectives.

2. Environmental scanning

Involves studying & interpreting the sweep of social, political, economic, ecological & technological events in an effort to spot emerging trends & conditions that could become key driving forces.

It involves time frames in excess of three to five years for e g Forecasting demand for electric power 10 years hence or how will people communicate in the future or how will income levels & consumer habits change .

Environment scanning thus attempts to spot futuristic possibilities & their implications.

The purpose of environment scanning is to raise consciousness of managers about potential developments that could have an important impact on industry & pose new opportunity or threats.

Environment Scanning can be accomplished by systematically monitoring & studying current events & constructing future scenarios.

These methods are highly qualitative & subjective & despite its speculative nature it helps managers lengthen the planning horizon, translate vague issues for future opportunities or threats into clearer strategic issues.

3. strategic audit4. SWOT analysis5. Organizational appraisal6. strategic alliances7. Hostile takeovers8. GE corporate portfolio matrix9. regulatory framework of Indian industry

10.leadership and strategy11.strategy and culture12.strategic control

Strategic Management - Short notes

Topic Year

scenario analysis 1998value chain analysis 1998, 1999, 2000, 2001, 2005generic strategies for growth 1998product differentiation 1999strategic business unit 2000competitive advantage strategies 2000strategic audit 2000, 2005corporate objectives 2000, 2001global strategies 2001benchmarking 2001diversification strategic options 2001, 2005strategies for fragmented industries 2001vision and mission statements 2005balanced score cards 2005competitive capability analysis 2005

Global strategies (2001)

Companies expand into foreign markets for the following reasons:

To gain access to the new customers To achieve lower cost and enhance firm’s competitiveness To capitalize a core competencies To spread business risk across the wider mkt. base

A Company is considered as a global competitor when it is pursuing or has mkt. presence in most continence and virtually in all major countries.

The main concerns faced by companies competing in foreign mkt. are cross country variation in culture, demographic and mkt. conditions besides having into customized their offerings in each country differently in order to match local preferences. Global companies however offer standardized product worldwide which leads to scale economies and experience curve effects contributing to low cost advantage.

Global competition exists when competitor conditions across national mkt. are linked together strongly enough to form a truly international mkt. In global competition a firm’s competitive advantage grows out of its worldwide operations, a competitive advantage created at home is supplemented by advantages growing out of its operations in other countries. E.g. of global competitions are, automobiles, t.v. tyres, watches and aircraft.

The key strategic options for competing globally are,

Export from single country production base or license to foreign firms or employ franchising. These are generic strategies wherein country to country variation is minimum.

Employ a global low cost strategy to gain cost leadership over global and local rivals.

Opt for global differentiation strategy, thus endeavoring to set itself apart from rivals and create an image and mkt. position on this basis.

Follow a global best cost strategy and strive to provide bias the best value.

Adopt a global focused strategy serving certain select niches in each strategically important mkt.

Hence key aspects of global strategy are aimed at,

Same strategy and product standards worldwide Plans located on the basis of maximum competitive advantage i.e. low cost

countries, close to major mkt. and dispersed in order to minimize transport cost.

Additional questions

Q1. “To anticipate and manage change, you need a visionary leader”, Comment with examples. (1998)

Q2. Describe how corporate objectives are influenced by vision and mission of an organization. (1999)

Q3. “Managing change is the most challenging area of Strategic management

and has proved to be a benchmark for judging the performance of a company in implementing strategic plans”. Discuss the statement in the light of factors affecting change management. How can we manage change effectively in an organization?