Strategising against corruption

Corruption is not the problem – but rather, Corruption, Nepotism and Special interests are the symptoms of a deep-rooted malaise in India’s government system that is threatening to dismantle and derail the concept of public life and democratic government that our founding fathers envisioned.

          The need to usher in better Governance is not an academic issue nor is it only about morality and probity in public life as discussions on corruption invariably boil down to. Good governance has very tangible benefits in terms of money! It improves fiscal position of and allows Governments to more directly impact the lives of more people in our country that need government support AND also creates a more sustainable and prolonged growth cycle by making more and more investments for the future. A good example of benefits of governance - is the impact this year of the decision to auction 3G/BWA spectrum despite pressure and lobbying from many quarters, including the leaders of business – which garnered the Government approx. Rs.1,40,000 crores – representing about 14% of the total Budget outlay, which has helped in the faster fiscal consolidation despite increased spending.
         
          For India to develop faster and do better as an economy, it is, therefore, important to foster the culture of honesty and trustworthiness. Hence, to cut down on corruption and pilferage, we have to design policies in such a way that there is no incentive for ordinary citizens and the enforcers of the law to cheat.

          The problems of Governance arise from the issue of “unfettered discretion” - Unfettered Administrative discretion in dealing with Public assets and unfettered administrative discretion in doling out Government contracts and spending with very little oversight and failure/compromise of institutions like Independent Regulators – leading to repeated instances of public policy and regulatory capture by vested interests. The current telecom scam is such an example of compromised regulators, public policy capture by vested interests and administrative discretion being used to the fullest to benefit some private interests.

          The solutions for this are obvious – a value for money culture – a culture that reinforces the truth that Government is only a trustee of public money and assets. The spending of this money and the handling of public assets must always pass the test of national good, and not in the misused public interest argument that’s often used to give scarce national assets to private interests.

Four Point Strategy to address Corruption

A four point strategy for this can be outlined as follows:

            Firstly, Statutory disclosures by all Government departments on commercial decisions. Disclosures are the best way to keep Government departments honest. Knowing that their financial decisions are available for media and people to scrutinize without relying on RTI - is a great way to encourage honesty.

            Secondly, More effective ministry oversight on all decisions relating to Spending, contracts and public assets.

            Thirdly, increased use of technology for ensuring better disclosure and expenditure management.
            Fourthly, A relook at the Independent Regulatory institutions.

These four, if pursued, will be catalysts for introducing a culture of fiscal responsibility and value for public money within the Government.

          There will be the usual arguments made that these would slow down administrative decision making – But those should be brushed aside. To quote John F. Kennedy – “The problems of this world cannot possibly be solved by skeptics or cynics whose horizons are limited by the obvious realities. We need men who can dream of things that never were.”

          Elaborating on the last issue of the Regulators in recent years, it pains to see independent regulators become parking spots for bureaucrats. They cannot and should not become another layer of bureaucracy. We must create motivated, public service oriented and specialist people who want to serve as Independent Regulators.

          Telecom is a classic case where very poorly equipped or people with questionable motivation were put as regulators and they have presided over the public policy capture by vested interests. The Supreme Court also has said recently that the CVC need not be chosen from retired bureaucrats. Creating a set of credible regulatory institutions is one of the most important requirements of delivering governance and improving the state of Governance.

          We all know that India has both the resource base and the human capital that is necessary to transform itself into an economic superpower. However, corruption is proving to be the biggest hurdle on that journey. It is time that the govt. formulates an effective strategy to uproot it, once and for all.

          Until next time.

Cheers!!!
Signing off
Shauvik.

Innovate - Within the Rules

Innovation ahs become the most hyped word in the dictionary of business models in the 21st century. New ideas, concepts and products have provided firms with tools to counter the dynamic forces of change. Innovation has helped firms improve on their longevity and also aided with them forces with which they can transform the industry structure rather than waiting for the change to hit them and be causght unawares.
         Organizations face challenges with a view to create innovation that lasts and to initiate an architectural change in the industry structure. The industry, next faces the task of implementing these innovations and introducing them to the markets. For eg. the battle between the LCD and LED in the TV market has been shaped by the market forces and the consumer acceptance rather than the features and superiority of the format. The context and time of the innovation is also important as innovations may fail with changing needs and demands have a scope of resurrection. Innovation can be seen by firms as providing an opportunity to foster growth eternally for them but they need to be aware of the potential for the next big change.
         The present age of revolution is marked by the dazzling and the unknown. However, the path to innovation follows these simple rules as have been elaborated below:

1. Expect the unbelievable: No person has desired for the next door shop and reached the moon. We aspire and achieve as much as we are capable of but our aspiration forms the upper limit of our achievement. No company or individual can outperform what they aspire to achieve as our efforts are in the same proportion as our aspirations. Therefore, our aspiration becomes the determing factor. We set ourselves towards unthinkable goals and work towards achieving them.

2. Removal of restrictions and constraints: Flexibility in the business model allows organizations to innovate and accept change more rapidly. In the modern business world, it is difficult and not advisable for companies to restrict themselves to few product lines with distinct markets and specific competitors. PepsiCo has diversified from colas to juices as well as snacks and drinking water. Companies believe in using their brand to capture a wider market share and tap consumers in various nations. An elastic business permits managers to diversify without any fear of cannibalization.

3. Vision: The vision of the firm gives it an identity that people can associate with and feel passionate about. It gives employees a sense of purpose in their work. Revolutionary innovations cannot take place without a sense of purpose in the beginning and achievement in the end. The skills and relationships of all its employees are valuable to the firm, and hence, the purpose of the firm guides the organization like a beacon of light. The vision, feeds life into the most inanimate of products and this is what motivates the people to innovate and bring about positive change in the lives of the consumers they serve.

4. Hear the revolution before feeling it: There are voices around who can make the next path-breaking change. Vandana Luthra began VLCC as a recation to the constant cribbing of people about the lack of right knowledge and tools to achieveing weight loss. People in companies can have innovative solutions to their problems but the top-down approach can inhibit them from expressing themselves. Hence, companies need to instate a mechanism for revolutionary ideas to reach the right ear and make a difference to the organization.

5. Have an open mind for ideas: This rule is applicable not for the company, but for the marketplace. The internal market for ideas exists and allows the formation and perpetuation of ideas for the organization to benefit as a whole. The reason behind the success of Bangalore as an IT hub is the breakdown of hierarchies that created an atmosphere for innovative ideas to germinate and a platform where they could be shared with the management. The organization has no prejudices about the capability of individuals or the stereotyped portfolios of innovators. Everyone who has ideas is accepted and allowed to present their thoughts to the organization. The most regular chores can lead to the most brilliant of ideas and they form the innovation wave for the next big thing.

6. Open market for capital: VC's and Angel investors are people who recognize the worth and potential for innovation and invest in the creation of the next big wave for change. While traditional financial firms have set notions of effectiveness and productivity of ideas, these people are eager to dirty their hands with the unknown and the unexplored. Also, capital is an essential requirement for innovations to take flight and see the light of the day that they have helped to create. 

7. Open market for talent: People need to keep an open mind for creative potential. Efficiency and qualifications are mere signals as companies endeavour to segregate open minded, fresh ideas from mere academic excellence. Talent that adds value to the organization comes at a premium and it is the prerogative of organizations and investors to recognize the potential of talent and give it a fillip. Organizations can challenge people and truly talented people find innovative solutions to the company's challenge. However, talent is not mere restricted to academic qualifications and the market for talent is not essentially a market for employment.

8. Low Risk Experimentation: The answer to innovation lies between risk averseness that compels people to take the safe, well-trodden path and heady, dangerous ventures characterized by high risk and high returns. Portfolios help spread risks over multiple projects with relatively low probabilities of success but a high chance of atleast one succeeding. Even individually, they can generate dramatic returns.

9. Cellular division: Cellular division allows different business models to develop within the same organization and frees the human and capital resource to adopt it. It helps nurture thought and innovation as the companies then run as separate entities and the managers run almost independent businesses in the same organization. Innovation and flexibility grow in such an environment.

10. Personal wealth accumulation: The returns that a company gets out of successful innovations need to be shared with entrepreneurs and investors whose efforts have helped in materializing those gains. Wealth incentives are a way of keeping the innovator from switching companies and build a sustainable innovative base for growth and development in the long run.

          These rules, if properly implemented, can pave the way for successful innovations.

Cheers!!!
Signing Off
Shauvik.

Servant leadership

Leadership, as a parameter for evaluation of the success of organizations has long attracted the attention of theorists. The latest buzz in the domain of leadership is that of servant leadership.


       Lets take a tour of history. On 1–3 July 1863, more than 158,000 soldiers fought near the market town of Gettysburg, Pennsylvania in what proved to be a turning point of the American Civil War (1861–1865). On 19 November 1863, President Abraham Lincoln dedicated the battlefield as a national cemetery. He gave the Gettysburg Address, one of the most quoted speeches in the history of the United States, in 10 sentences and about 2 minutes. Its last words - government of the people, by the people, for the people - have come to define democracy. Lincoln's address can be thought of as one of the oldest references to servant leadership.
      

The philosophy and practice of servant leadership was coined and defined by Robert Greenleaf in the 1970s. The general concept is ancient, with roots in China (Lao Tzu) and India (Chanakya). Jesus of Nazareth urged his followers to be servants first, and became a messenger of a great religion. It begins with the natural feeling that one wants to serve, to serve first. Then, conscious choice brings one to aspire to lead. Servant leadership seems to touch an innate need in many and probably harks back to the beginning of time

• Definition and Best Test. Servant leadership is about moving people to a higher level of individual and communal self-awareness by leading people at a higher level. Its principal tenet is that it is the duty of a leader to serve followers, his or her key role being to develop, enable, and support team members, helping them fully develop their potential and deliver their best. From this perspective, in a world of organizations, servant-leaders are considered humble stewards of their organization’s resources and capabilities. In a 1970 essay, The Servant as Leader, Greenleaf explained:

          The servant-leader is servant first … It begins with the natural feeling that one wants to serve, to serve first. Then conscious choice brings one to aspire to lead. That person is sharply different from one who is leader first, perhaps because of the need to assuage an unusual power drive or to acquire material possessions … The leader-first and the servant-first are two extreme types. Between them there are shadings and blends that are part of the infinite variety of human nature.

    This is no pie in the sky: the proof of the pudding is in the eating and the test of a servant-leader is one of pragmatism based on visible outcomes. Greenleaf continued:

          The best test, and difficult to administer, is: do those served grow as persons; do they, while being served, become healthier, wiser, freer, more autonomous, more likely themselves to become servants? And, what is the effect on the least privileged in society; will he benefit, or, at least, will he not be further deprived?

     Indeed, servant-leaders turn leadership into a territory, a field of endeavour in which people can operate—each leveraging individual abilities and capacities—to serve the mission of the organization and the people who make the organization happen. The objective, to repeat, is to enhance the growth of individuals in organizations and promote teamwork and personal involvement.

     Servant Leadership is not a concept or a principle. It is an inner standard of living requires a spiritual understanding of identity, mission, vision and environment.

     In the context of leadership styles, the most common division of leadership styles is the distinction between autocratic, participative and laissez-faire leadership style. The authoritarian style of management requires clearly defined tasks and monitoring their execution and results. The decision-making responsibility rests with the executive. In contrast to the autocratic, the practice of a participative leadership style involves employees in decision-making. More extensive tasks are delegated. The employees influence but also their responsibility increases. The laissez-faire style of leadership is negligible in practice.

            Servant Leadership can be most likely associated with the participative management style. The authoritarian leadership style does not correspond to the guiding principle. The highest priority of a servant leader is to encourage, support and enable subordinates to unfold their full potential and abilities. This leads to an obligation to delegate responsibility and participative decision-making. The servant leadership approach goes beyond employee-related behavior and calls for a rethinking of the hierarchical characterized relationship between leaders and subordinates. This does not mean that the ideal of a participative style in any situation is to be enforced, but that a focus of management responsibilities to the promotion of performance and satisfaction of employees is set.

            Let us now look at some characteristics of servant leadership.

• Listening: Traditionally, and also in servant leadership, managers are required to have communication skills as well as the competence to make decisions. A servant leader has the motivation to listen actively to his fellow men and supports them in decision identification. This applies particularly to pay attention to unspoken. This means relying on his inner voice and find out what the body, mind and spirit are communicating.

• Empathy: A servant leader attempts to understand and empathize with others. Workers may be considered not only as employees, but also as people who need respect and appreciation for their personal development. As a result, leadership is seen as a special type of human work, which ultimately generates a competitive advantage.

• Healing: A great strength of a Servant Leader is the ability for healing one’s self and others. A servant leader tries to help people solving their problems and conflicts in relationships, because he wants to develop the skills of each individual. This leads to the formation of a business culture, in which the working environment is characterized by dynamic, fun and no fear from failure.

• Awareness: A servant leader needs to gain general awareness and especially self-awareness. He has the ability to view situations from a more integrated, holistic position. As a result, he gets a better understanding about ethics and values.

• Persuasion: A Servant Leader does not take advantage of his power and his status by coercing compliance; he rather tries to convince them. This element distinguishes servant leadership most clearly from traditional, authoritarian models and can be traced back to the religious views of the inventor Robert Greenleaf.

• Conceptualization: A servant leader thinks beyond day-to-day realities. That means he has the ability to see beyond the limits of the operating business and also focuses on long term operating goals. A Leader constructs a personal vision that only he can develop by reflecting on the meaning of life. As a result, he derives specific goals and implementation strategies.

• Foresight: Foresight is the ability to foresee the likely outcome of a situation. It enables the servant leader to learn about the past and to achieve a better understanding about the current reality. It also enables to identify consequences about the future. This characteristic is closely related to conceptualization. In contrast to the other characteristics, which can be consciously developed, foresight is a characteristic which one may be born.

• Stewardship: CEOs, staffs and trustees have the task to hold their institution in trust for the greater good of society. In conclusion, servant leadership is seen as an obligation to help and serve others. Openness and persuasion are more important than control.

• Commitment to the growth of people: A servant leader is convinced that people have an intrinsic value beyond their contributions as workers. Therefore, he should nurture the personal, professional and spiritual growth of employees. For example he spends money for the personal and professional development of the people as well as having a personal interest in the ideas form everyone and involving workers in decisions making.

• Building community: A servant leader identifies means to build a strong community within his organization and wants to develop a true community among businesses and institutions.

As a result it has to be emphasized that these 10 characteristics are by no mean exhaustive. They should not be interpreted as a certain manner to behave and they do not represent the best method to gain aims. Rather every person shall reflect, if these characteristics can be useful for his personal development.

What are the advantages of servant leadership?

• This concept is seen as a long-term concept to live and work and therefore has the potential to influence the society in a positive way.
• The exemplary treatment of employees leads to an excellent treatment of customers by employees of the company and a high loyalty of the customers.
• There is a high employee identification with the enterprise.
• An excellent corporate culture is developed.
• Leaders of a company define themselves by their significance to the people.

However, servant leadership does also have some downsides in the sense that its applicability for all industries and markets is questionable, and that it might have to be tweaked in good measure to make sure it still remains potent for other cultures. Also, it is a long term proposition and hence might not be applicable if one is looking for instant gratification.

That's all for now. Until next time.

Cheers!!!

Signing Off

Shauvik.

       

Corporate Governance

What Enron did for the world, Satyam did for India. And what was that? Bring corporate governance to the forefront of business operations. The importance of governance has gained prime importance in the strategic management of firms. Now, companies emphasize on honesty, accountability and transparency in their operations. Stakeholders, investors and people in general demand a clean record of companies. They want the companies to abide by the laws and rules and adhere to the norms laid out for business.
        Corporate governance is a relationship between the stakeholders that gives a sense of purpose and direction to the firm. It controls the strategic direction and performance of the firm and allows for effective implementation of the strategy in the firm. In simple terms, corporate governance establishes an order between the top management of the firm and its stake and shareholders. However, scams and treasury are rampant in any firm as the interests of the top management may come into conflict with the values of the organization. The principal-agent conflict captures the essence of the companies that flout the norms of the corporate governance.
        Most big corporations have a clear demarcation between ownership and management control. Company ownership is divided between among its many shareholders while the operations of the firm are carried out by a different set of people who comprise the top management. The shareholders, who hold the stock of the company become residual claimants and reduce their risks with diversified portfolios. The professional management carries out the decision making roles in the organization. Although, this division leads to an efficient specialization of tasks, it leaves the risk of entrepreneurship to the owner for profits, while the strategic development and decision making choice is with managers for a salary sans the risk. This segmentation of tasks and benefits leads to conflict of interest between the two.
       The OECD defines corporate governance as "involving a set of relationships between a company's management, its board, its shareholders and stakeholders". Corporate governance also provides the structure through which the companies are set, the means for gaining these objectives and monitoring performance. Good corporate governance should provide proper incentives for the board and the management to pursue objectives that are in the interest of the company and its shareholders and should facilitate effective monitoring.
        Below is what is stated in OECD's Principle of Corporate Governance. Corporate governance is only a part of the larger economic context in which firms operate, that includes, for eg. the macroeconomic policies and the degree of competition in product and factor markets. The corporate governance framework also depends on the legal, regulatory and institutional environment. In addition, factors such as business ethics and corporate social interests of the communities in which a company operates, can also have a long term impact on the reputation and success of an organization.
        What are the mechanisms for corporate governance? Lets take a look.

--- Ownership Concentration: Large stockholders take interest in the operations of the firm and hence, closely supervise the working of the management.

--- Board of Directors: The board of directors includes the insiders (CEO and other top level managers), related outsiders (individuals not involved in the daily running of the business but related to the firm) and outsiders (individuals related to the firm but not involved in its daily operations). The diversified backgrounds, interests and involvement in the company allow for better supervision of the company.

--- Executive Compensation: The focus is to make an incentive scheme that would eliminate conflict of interest between the owner and the managers giving them a reward scheme proportionate to their effort to maximize returns from the firm.

--- Multi-divisional organizational structure: The hierarchical structure controls managerial opportunism by creating a board and a corporate office to monitor strategic decisions and create a vested interest in wealth maximization for the managers. However, a diversified company with wider levels of management with various laterally spread managerial controls would lead to problems in supervision.

--- Market for corporate control: An incompetent firm, due to ineffieient managers. creates chances of a takeover, acting as a cure for managerial incompetence.

        Ultimately, better governed organizations lead to better products and services for the public.

Cheers!!!
Signing Off
Shauvik.

The World of Regulation

Liberalization and privatization have been the buzzwords of all developed and developing economies of late. It was regulation that was blamed for economic stagnation and social backwardness and the all pervading diktat for success was to de-regulate. However, developing economies in particular which followed this dictum blindly did not get the expected resulst. The recent financial crisis is another example of why a laissez faire economy cannot function properly.
          What is Regulation? It is a set of rules, decrees, laws and other practices and govt. formalities that govern the political, economic and social domain. Economic or market regulation is a subset which governs economic transactions between the various stakeholders in a market place. These focus on setting prices, entry into the market place and other financial and business license regulations.
          What regulation impacts is on the various forces that shape industrial dynamics. Taking a cue from the Porter's five forces model, we can say that licensing can impose entry barriers, while labour laws and other similar regulations can impose barriers on the exit of firms. The rivalry among competitors is determined to a large extent by the ease of entry. Another form of regulation is environmental laws that are meant to create conditions for sustainable development. Take for example the case of Lavasa Hill town near Mumbai or Vedanta's mining fiasco in Chhattisgarh. In both cases, the companies had to comply with mining laws and environmental impact assessment study findings' to continue their operations. Land regulations and zoning laws are another constraint that define the threat of new entrants in the industry. Real estate industry is the one impacted as we recently saw in Greater Noida.
          The debate raging is between regulation and competitiveness. Good regulations ensure that the rules laid down are welfare-oriented and at the same time do not harm the competitive nature of the market place. However, companies can argue that they need to operate in a dynamic environment and need to cope with changes on a regular basis. The regulatory authorities must also be prepared to keep up with the technologies and innovations in the market to better understand the competitive forces prevalent in the market. The purpose of regulations is to ensure that businesses are run efficiently and effectively and their progress must not be hindered by mindless rules. Therefore, the need of the hour is creation of responsive regulations.
          To ensure compliance, regulatory authorities need to have a range of escalating penalties that are high enough to play deterrent to any intention of the companies not to play ball. Punishment for non-compliance needs to be swift and harsh otherwise companies would never comply. To guarantee the efficiency of the laws, the regulatory authority must be in close contact with the dynamics of the particular industry. Simulatneously, it is also important for the authorities to evaluate and forecast the effect of the mechanisms implemented and base their decision on the feasibility so adjudged.
          When forming regulations, it is important to keep the welfare of the society and the people in mind. The rules laid down must be judged not only on the effect it could have on the market, companies and principles of the regulatory authority but also on the people at the ground level. The regulatory authorities need to understand that they have the dual expectation to make industry attractive as well as ensure the welfare of the people and the environment.
          The efficiency of the regulations is a function of the goals and the cost. They are directly proportionate to the achievement of social goals and indirectly proportional to the economic cost of achieving them. The economic costs of regulation can emerge from 2 sources:
1. Administration cost of implementing the regulatory system.
2. Costs external to the regulatory mechanism that emanate from its implementation and befall on consumers and producers as they conform or evade the regulations.
          There are three criteria to judge the efficacy of a particular regulation.
--- Accountability: Puts regulatory bodies within the bounds of law and compels them to take responsibility for their actions.
--- Transparency: Ensures that the protocol followed is in clear view of the policy-makers as well as the affected group. There are no hidden agendas or processes for decision making.
--- Consistency: Helps to build public confidence.
          Finally lets take the contrasting examples of TRAI and FCI. While TRAI has managed the telecom industry to ensure competitiveness and welfare through private and public players engaging in healthy competition while offereing low prices, FCI, on the other hand, through its skewed regulations, has resulted in unnecessary stockpiling of goods and shortage of foodgrains coupled with wastage of the same due to lack of proper storage facilities.
         In conclusion, we can say that, Regulation can make or mar any industry. Regulations cannot be dispensed with as they form an important part of the market system today. They ensure that the forces of demand and supply work without any constraints. Efficiency and effectiveness can be insured even during a market failure by healthy regulations. Regulation coupled with competitiveness leads to an optimal balance between the firm and the environment.

Cheers!!!
Signing off
Shauvik.

Mergers and Acquisitions

Enhanced strategic competitiveness and augmented competitive advantage has resulted in more firms opting for mergers and joint ventures. In recent times we have seen industries move towards consolidation as witnessed in acquisitions like Tata-Corus and Pfizer-Wyeth.
         Mergers occur when two firms agree to integrate their operations on a stipulated basis to create a competitive advantage from their combined resources and capabilities. Acquisitions hold one firm in dominance as it merges the other firm's competencies more effectively as a part of its original portfolio.
         Let us now look at what might be the chief motives behind acquisition. The motives differ significantly for the buyer and the seller.
        One of the primary reasons for acquisition is to enhance market power. This motive was at play when Coca-Cola acquired Thumbs Up in India. Thumbs Up was (and still is) the largest selling carbonated soft drink in the country and the acquisition helped Coke to boost sales as well as diversify its product line while gaining bargaining power over suppliers and consumers. Noteworthy in this case is that, Thumbs Up continues to sell as a different brand from Coca-Cola, the acquirer brand.
       Another motive behind such strategic alliances is to reach new markets. Wal-Mart, the world's largest retailer entered the indian market through a JV with Bharti for wholesale cash and carry format as India at that time did not allow 100% FDI in retail. Now, that the rules are set to be relaxed, it can use its experience of the Indian market to its advantage.
       Enjoying the benefits of cost optimisation over economies of scale and scope is another reason companies like to go for mergers and acquisitions as it spreads their fixed costs of promotion and other overheads.
       Pepsi acquired brand like Tropicana, Lay's etc. to extend its product portfolio to snacks and other beverages and thus in this case the motive was diversification.
       Other advantages accruing to the acquirer could be of fiscal advantages, financial gains and top managerial characteristics or impulses.
       Why do the seller's sell?Primarily because of the following reasons:
1. To increase the value of the owner's stcok
2. To increase growth rate
3. To acquire resources to stabilize operations
4. To benefit from tax legislation
5. To deal with top management succession problems
       Acquisitions can be Horizontal (in the same industry eg. Arcelor-Mittal), Vertical (same industry but different stages of the value chain) or Related acquisitions (Merck-Medco).
       The approach, which a company should take towards integration, should be understood by considering two (additional) criteria:
1. The need for strategic interdependence.
2. The need for organizational autonomy.
FOUR TYPES OF VALUE CREATION IN MERGERS AND ACQUISITIONS
        Obviously, the goal and central task in any acquisition is to create the value that is enabled when the two organizations are combined.
There are four types of value creation:
1. Resource sharing. Value is created by combining the companies at the operating level.
2. Functional skills transfer. Value is created by moving certain people or sharing information, knowledge and know-how.
3. Transfer of general management skills. Value is created through improved insight, coordination or control.
4. Combination benefits. Value is created by leveraging cash resources, by borrowing capacity, by increased purchasing power or by greater market power.
ORGANIZATIONAL AUTONOMY
         Managers must not lose sight of the fact that the strategic task of an acquisition is to create value. Furthermore they must not grant autonomy too quickly, although obviously people are important and should be treated fairly and with dignity.
THE PREFERRED MERGERS AND ACQUISITIONS MODEL
        Depending on the score on the above two factors, the preferred Acquisition Integration Approaches are:
§ Absorption: Management should be courageous to ensure that this vision for the acquisition is carried out.
§ Preservation: Management focus is: to keep the source of the acquired benefits intact, “nurturing”.
§ Symbiosis: Management must ensure simultaneous boundary preservation and boundary permeability, gradual process.
§ Holding: No intention of integrating and value is created only by financial transfers, risk-sharing or general management capability.

         Now let us look at the pros and cons of mergers:
PROS:

•To ensure management responsibility

•They create easy & quick growth opportunity

•They create mobility of resources

•Offer a chance to a rick unit to survive

•Avoid gestation period & hurdles in setting up new projects

CONS:

•Professionalism gets replaces by money powers

•No new assets are created

•The interests of minority shareholders are not protected

•They create avoidable stress & strains to workers & managers

         Culture has emerged as one of the dominant barriers to effective integrations. In one study, culture was found to be the cause of 30 percent of failed integrations. Companies with different cultures find it difficult, if not often impossible, to make decisions quickly and correctly or to
operate effectively. The following are few of the steps which can be taken to ensure that cultural issues do not become a roadblock to integration in acquisitions:
1. Make culture a major component of change component work stream
2. Identify who owns the corporate culture and have them report to the senior management
3. Ensure that the cultural work focuses on the measurable business results
4. Consider the strengths and weaknesses of both cultures
5. The decision-making process should be independent of cultural differences
6. People with culture change knowledge should be put on teams that define the organizational interfaces in the new model.
       Its imperative to understand that efforts to address culture should be based on the recognition that culture is both powerful and implicit, that employees are unlikely to change their
cultural beliefs in response to exhortations to adopt new cultural values, and that culture can be rigorously linked to behaviors that affect business value.

       Well, that's all for the day. Until next time.

Cheers!!!

Signing off

Shauvik.

The lure of the Blue Ocean Strategy

We talk about strategies to enable and maintain sustainable competitive advantage - be it through low cost, differentiation or through focus. But what is the way ahead for organizations stuck in an industry with fierce competition, where companies try to outperform each other to grab market share with each of them working on the same strategy to create competitive advantage. The result is that, with a seemingly "perfectly competitive" setup, its very difficult for organizations to differentiate their offerings and hence growth and profit prospects reduce as the marketplace gets crowded. 
     The way out for organizations mired in such a competitive landscape is what is known as the Blue Ocean Strategy. The strategy, propounded as recently as 2005, in a book of the same name, proclaims the view that organizations can generate high growth and profits by creating new demand in an uncontested market place or "Blue Ocean" as compared to competing head-to-head with other suppliers for known customers in an existing industry.
      Let's look at the basic premise of the Blue Ocean strategy. Its something called Value Innovation - wherein the actions of a company affect favorably both its cost structure and its value proposition to customers. Cost savings are made by eliminating and reducing the factors an industry competes on.  Buyer value is lifted by raising and creating elements the industry has never offered.  Over time, costs are reduced further as scale economies kick in due to the high sales volumes that superior value generates. 
      A blue ocean is created when a company achieves value innovation that creates value simultaneously for both the buyer and the company. The innovation (in product, service, or delivery) must raise and create value for the market, while simultaneously reducing or eliminating features or services that are less valued by the current or future market. 

      The metaphor of red and blue oceans describes the market universe.

                     Red Oceans are all the industries in existence today—the known market space. In the red oceans, industry boundaries are defined and accepted, and the competitive rules of the game are known. Here companies try to outperform their rivals to grab a greater share of product or service demand. As the market space gets crowded, prospects for profits and growth are reduced. Products become commodities or niche, and cutthroat competition turns the ocean bloody. Hence, the term red oceans.
                          Blue oceans, in contrast, denote all the industries not in existence today—the unknown market space, untainted by competition. In blue oceans, demand is created rather than fought over. There is ample opportunity for growth that is both profitable and rapid. In blue oceans, competition is irrelevant because the rules of the game are waiting to be set. Blue ocean is an analogy to describe the wider, deeper potential of market space that is not yet explored.

         Now let us look at the principles of the Blue Ocean strategy.

Before we adopt the Blue Ocean strategy, it is pertinent to understand the current condition of the marketplace to find out the areas the competitors are investing. This is done by the Strategy Canvas. It captures the current state of play in the known market space, allowing organizations to understand where the competition is currently investing, the factors the industry currently competes on in products, service, and delivery, and what customers receive from the existing competitive offerings on the market. Now, to break the the trade-off between differentiation and low cost and create a new curve, we have a Four Actions Framework (Eliminate, Raise, Reduce, Create). It answers the four key questions of:
What industry takes for granted and needs to be eliminated; 
What factors need to be reduced below industry standards; 
What factors need to be raised above industry standards; and 

What should be created that the industry has never offered.

              The eliminate-reduce-raise-create grid pushes companies not only to ask all four questions in the four actions framework but also to act on all four to create a new value curve.  By driving companies to fill in the grid with the actions of eliminating, reducing, raising, and creating, the grid provides four immediate benefits: it pushes them to simultaneously pursue differentiation and low costs; identifies companies who are only raising and creating thereby raising costs; makes it easier for managers to understand and comply; and it drives companies to scrutinize every factor the industry competes on.

               This is followed by the 4 steps to visualize strategy through unlocking the creativity of the people. The four steps include visual awakening, visual exploration, visual strategy fair, and visual communication.

 Additionally, for a sustainable blue ocean strategy, we need to create new demand by unlocking the three tiers of non-customers and launch a commercially-viable blue ocean idea by aligning unprecedented utility of an offering with strategic pricing and target costing and by overcoming adoption hurdles. 

          An important part of blue ocean strategy is to “get the strategic sequence right.”  This sequence fleshes out and validates blue ocean ideas to ensure their commercial viability.  This can then reduce business model risk.  In this model, potential blue ocean ideas must pass through a sequence of buyer utility, price, cost, and adoption.  At each step there are only two options: a “yes” answer, in which case the idea may pass to the next step, or “no”.  If an idea receives a no at any point, the company can either park the idea or rethink it until you get a yes. 

          The buyer utility map helps managers look at this issue from the right perspective.  It outlines all the levers companies can pull to deliver exceptional utility to buyers as well as the various experiences buyers can have with a product or service utilizing the 6 stage buyer experience cycle - Purchase/Delivery/Use/Supplement/Maintain/Dispose. Uncovering the blocks to buyer utility at each stage of this cycle can help the organization get a clear idea of how and whether the new idea not only creates a different utility proposition from existing offerings but also removes the biggest blocks to utility that stand in the way of converting non-customers into customers.

        Next, the Price Corridor Tool helps managers find the right price for an irresistible offer, which, by the way, isn’t necessarily the lower price.  The tool involves two distinct buy interrelated steps.  The first step involves identifying the price corridor of the mass which deals with customer price sensitivity and pricing strategies of products offered outside the group of traditional competitors.  The second step deals with specifying a level within the price corridor which factors in legal protection and exclusive assets. 

        Finally,the profit model of blue ocean strategy shows how value innovation typically maximizes profit by using the three levers of strategic price, target cost, and pricing innovation.

Let us look at some successful examples of companies using Blue Ocean strategy to zoom ahead of their competitors. In the auto industry, we can think of Chrysler that created the blue ocean of minivans in the 80's. In 1984, for example, Chrysler unveiled the minivan, creating a blue ocean in the auto industry in which the company has been an established existing player. The minivan broke the boundary between car and van, creating an entirely new type of vehicle. Smaller than the traditional van and yet more spacious than the station wagon, the minivan was exactly what the nuclear family needed to hold the entire family plus its bikes, groceries, and other necessities. And the minivan was easier to drive than a truck or van. Built on the Chrysler K car chassis, the minivan drove like a car but provided more interior room and could still fit in the family garage.

thereby breaking the market boundary between car and van.
          Another example - NTT DoCoMo is the first company to make money out of the mobile internet. In a very competitive industry engaged in a technology race and strong price erosion, NTT DoCoMo was able to achieve superior performance when it launched its novel i-mode services in February 1999. It was an immediate and explosive success in Japan.   

                 The first example in "Blue Ocean Strategy" is Cirque de Soleil. The criteria/boundaries/rules for the circus industry that were "taken for granted" for decades included: animal shows, star/famous performers, multiple shows at the same time (i.e. 3 rings), and pushing concession sales. Rather than keeping a high emphasis on all the existing rules and then creating new ones, they either eliminated or reduced many of those rules and created a bunch of new ones. In the process, they increased value for their target market while lowering their own costs. A key thing they did at Cirque de Soleil was that they looked across market boundaries to alternatives to the circus. It ended up being part circus and part theatre. Rather than focus on the market boundaries, they focused on the job the customer was hiring for -- in this case, it was adults looking for sophisticated entertainment. Another key thing they did was not targeting the existing market (i.e. children), rather they targeted non-consuming adults.


            Thus as these examples suggest, companies have understood the need to seek out new target groups of customers and to expand their existing market domains in order to seek continued growth. It all depends on how well they are able to internalize the concept of value innovation so that the value proposition of their offerings continues to be sustainable.

Until Next time.


Cheers!!!
Signing off
Shauvik.