Corporate Strategy-

Resources ,Capabilities
CRRajan
 RESOURCES AS THE BASIS OF PROFITABILITY

Barriers to entry Patents

Brands
Retaliation
Industry
attractiveness
Monopoly Market share

Rate of profit Vertical Firm size

in excess of bargaining power Financial resources
competitive level
Process technology
Cost advantage Size of plants
Access to low–cost inputs
Competitive
advantage
Brands
Differentiation Product technology
advantage Marketing, distribution
(Grant, 1991) and service
Strategy (from Greek στρατηγία stratēgia,
"art of troop leader; office of general,
command, generalship"[1]) is a high
level plan to achieve
one or more goals under conditions of
uncertainty.
In the sense of the "art of the general", which
included several subsets of skills
including "tactics", siegecraft, logistics etc
 A REALISTIC MODEL OF STRATEGY PROCESS

Environmental Resources and

analysis strategic capability
Strategic
Identifying
analysis Planning and
options
allocating
resources
Evaluating
options Strategic Strategy
choice implementation
Stakeholder
expectations Organisation
structure
Selecting a
strategy Managing strategic
change and culture
 Key Elements of Business Strategies:
Understanding Resources, Capabilities, and Competencies is
the key
• Selecting a business strategy that exploits valuable resources and
distinctive competencies (ie. competitive advantages)
• Ensuring that all resources and capabilities are fully employed and
exploited
• Building and regenerating valuable resources and distinctive
competencies -- competitive advantages
 Rationale for the Resource-based
Approach to Strategy

• When the external environment is subject to rapid change,

internal resources and capabilities offer a more secure basis for
strategy than market focus
• Resources and capabilities are the primary source of
profitability. Firm-specific strategic differences account for 50-
70 percent of observed differences in firms’ profits
Resources, Capabilities, and Competitive Advantage:
The Basic Relationships

INDUSTRY
KEY
COMPETITIVE SUCCESS
ADVANTAGE STRATEGY FACTORS

ORGANIZATIONAL
CAPABILITIES

RESOURCES

Tangible Intangible Human

Categories of Firm Resources

• Financial $ ¥ £

• Physical

• Human

• Technological

• Reputational
 Identifying a Company’s Capabilities
Identifying a Company's Capabilities
and
Value Chain

Functional Area Capability Example

• Corporate head office

• Capability in basic e.g., IBM, AT&T,
• Management information
research Sony
• Research and development
• Ability to produce • 3M
• Manufacturing innovative products
• Canon
• Product design • Speed of new
product development
• Marketing

• Sales and distribution

Source: Robert M. Grant, Contemporary Strategy Analysis , Basil Blackwell, 1991.

Sustaining Competitive Advantage

• Is a competitive advantage necessary to sustain

superior performance?
• Not necessarily so just look at the proverbial
mousetrap
• 692 business units top ROI 39% bottom 3%
• ROI difference shrank by 90%over the 10 year
period

13
Threats to Sustainability
• Sustained superior performance is likely if two conditions are satisfied:
1. Scarcity
2. Appropriability
• Diamond Vs Air
• Part of the difference is transforming the products
• But the big part is scarcity
• How do you test whether a strategic position offers scarcity value?
1. Imitation
2. Substitution
3. Appropriability can owners pocket the value
4. Holdup and Slack

14
Imitation
• Most direct and obvious threat-China: toys, clothing etc.
• Attempts at product differentiation based on R&D as opposed to Marketing are vulnerable on
several counts
• Competitors secure detailed information on the bulk of new products within a year of their
development
• Patenting usually fails to deter imitation and imitation tends to cost a 1/3 less than innovation
and 1/3 quicker
• Process innovations do not seem to be significantly less imitable than product innovations
Summary
• Imitation is a serious threat to sustainability
• Impediment to imitation can be early mover advantage
• First mover advantage may be beneficial but also risky

15
Five Principals of Early mover Advantage
1. Private information
• Better information kept private good example is food processing processes Instant Coffee.
2. Size Economies
• Scale –being large. Shipbuilding Hyundai
• Learning-being large at a particular time
• Scope-interrelated businesses Canon Optics
3. Enforceable Contracts/Relationships-Better terms or contracts lock up the supply
of a critical input ie
4. Threats of Retaliation
• US Cigarette industry-filtered brands supported by advertising
5. Response Lags-sum or observation and implementation
▪ US Cigarette Industry-Filter brands 80% of market within two decades
▪ 1951 there were 18 varieties by 1967, 80 varieties
▪ Advertising to sales ratio up from 3.8% to 8.7%
▪ Prisoners’ dilemma

16
Substitution
1. Less likely to be confined to direct competitors
2. Successful substitution finds away around scarcity, it is an indirect attack
• Substitution is a bigger threat then scarcity since it is often overlooked by companies
• Substitution depends on the mismatch between established positions and market
opportunities to override early mover advantage
• Mainframe computer need 10* performance improvement
• Some companies control substitution some get displaced
• PBX Switches :
1 Electromechanical AT&T→ 2 Electronic (Voice only) 125 conversations Rolm→3 Voice & Data
InteCom →Voice, Data, Video …..Voice over IP

17
Holdup
• Consequence of gap between owners and managers
• NFL
• Survived substitutes like WFL USFL
• Recognizing the threat of holdup the NFL evolved practices to thwart holdup
by the players
• Players were signed to enforceable multiyear contracts
• Rights to draft rookies
• Restrictions on free agency
• Revenue sharing among owners prevented bidding wars
• Players formed the NFL players’ association
• Owners could not thwart holdup and player salaries climbed 170% 1970-1984
• Players share of revenue jumped from 35% to 55%
• Same thing is playing out today in the NHL

18
Slack
Slack measures the extent to which the scarcity value realized by the organization
falls short of its potential
• Holdup concerns portion of pie to owners and non-owners
• Slack affects the total size of pie available to owners and non-owners
• Slacks stems from organizational problems
• Xerox- slack represented 20% of the companies sales revenues
• The ratio of shareholder enrichment R/E over the 70’s and early 80’s was -220%
Reasons slack build:
• High innovation intensity hard to monitor
• Incomplete information to monitor
• Growth of employees
• How to manage
• Information, aligning goals of employees with companies

19
Building Sustainable Competitive Advantage
Multiple potent threats to sustainability implies that manager cannot take the sustainability of a
competitive advantage for granted
• Is sustainability rooted in resources or activities
• Resource base view- intrinsically inimitable-infinitely costly
• IE Location, patents, causal ambiguity-sum of parts or social complexity corporate culture –
Southwest Culture of service, 3M culture of innovation. Not a 9-5 environment
• Activity based focuses on activities rather than resources
• Basic idea is takes more time and costs more to imitate along many dimensions than along one
or two. The probability decreases as the number of activities increases .9*.9*.9*.9=66%
• Both views afford limited insight into building sustainable advantage

20
 What Makes a Resource Valuable?

Appropriability
Scarcity

Demand

Value creation zone

The dynamic interplay of three fundamental market forces

determines the value of a resource.

Source: Collis and Montgomery, Corporate Strategy (1996)

 Resource Imitability
Cannot be imitated:
Patents
Unique location
Unique assets
(e.g. Mineral rights)

Difficult to Imitate:
Brand Loyalty
Favorable cost position
Employee Satisfaction
Reputation for Fairness

Can be Imitated (but may not be):

Capacity Pre-emption
Economies of Scale
Easy to Imitate:
Cash
Commodities

Source: Collis and Montgomery, Corporate Strategy: Resources and the Scope of the Firm (1996).
 Valuable Resources and Competencies: The
“key” to Competitive Advantages
• Resources can be:
• Physical ie the wiring into your home (ramp for the info highway)
• Human ie. skilled and creative employees (Wal*Marts’ dedicated
employees)
• Intangible ie. brand names and technological know-how (Coca-Cola,
Disney, Sharp LCDs)
• Organizational Capabilities embedded in the business’ routines,
processes, culture (Japanese auto makers)
 Defining Organizational Capabilities

Organizational Capabilities = firm’s capacity for

undertaking a particular activity. (Grant)

Distinctive Competence = things that an organization

does particularly well relative to competitors. (Selznick)

Core Competence = capabilities that are fundamental to a

firm’s strategy and performance. (Hamel and Prahalad)
 CORE COMPETENCIES

⚫ Provide access to a wide variety of markets

⚫ Make a significant contribution to the perceived customer benefits of

end products

⚫ Are difficult for competitors to imitate

“Core competence does not diminish with use. Unlike physical assets,
which do deteriorate over time, competencies are enhanced as they are
applied and shared.”

(Prahalad and Hamel, 1990)

First-Mover Advantages in Resource Acquisition

• Patents
• Brand Recognition
• Reputation
• Accumulated Learning
• Attractive Locations
• Installed Base
 Summary: Key Elements of
Resource-Based Strategy
• Select a strategy that exploits principal resources and
competencies.
• Ensure that resources are fully employed and exploited.
• Build a resource base.

Source : Hamel and Prahalad

 Strategic Implications of Competing on
Resources
• Investing in resources, continually
• Upgrading resources, creating or acquiring new resources,
finding alternatives resources
• Leveraging resources
• Rapid redeployment of resources
 Internal dimension
• We know that :
– Investors are interested in revenue streams
• We recognize that:
– Earnings come from Physical and financial assets
• That’s why we measure ROCE, RONW, EPS etc.
• Do we realize that earnings also (and increasingly) come from :
– The unique intangible assets we have?
• The quality of our relationships with vendors, dealers, customers?
• The competence of our employees?
• The composition of our customers?
• The reputation our company/group has in the market?
• The value of our brands?
• The patents we have?
• The respect we earn from research institutions, academic bodies, consultants
, social organizations etc. ?
• Etc………..

5 September 2018 34
 Assets – 5 categories, 25 types
• Physical: ➔ Financial : ➔ Organization:
– Land Cash  Leadership
– Building Receivables  Strategy
– Equipment
– Inventory
Investments  Structure
Equity  Culture
Debt  Brand
➔ Employee and supplier  Innovation
 Employee  Knowledge
 Supplier  Systems
 Partner  Processes
➔ Customer  IP
 Customer
 Channels
 Affiliates
5 September 2018 35
 Creating value by leveraging assets
➔ We need to view our businesses as a portfolio of assets

Employee
Physical Financial Customer Organizational
/supplier

Williams Industries Charles Schwab

(optical fiber) (distribution)
Southwest Airlines Unilever Johnson & Johnson
(culture)
GE Starbucks Proctor & Gamble
Amazon (people) (systems
GOOG:LE Tata’s
List assets of the company in each of the 5 areas
Are we realizing value in area?
5 September 2018 36
 Fundamental business processes
•Understand assets and markets
Strategy •Develop vision & strategy
•Allocate investments
Evaluate & Manage Restructure
Financial Dispose
structure offers finances financial ops
Assess needs &
Physical Manage Enhance Dispose
acquire
Develop
Understand Develop new Conclude
products
Customer needs & make products & Customer
& provide
offers services relationships
services
Develop & Support &
Employee Assess needs , Redefine
manage reward
& supplier recruit/hire relationships
relationships performance
Develop &
Assess needs
maintain Codify & share Redirect
Organization & design
systems knowledge assets
structure
& processes

Measure & •Identify and source information needs

report •Measure value creation & risk
•Ensure continuous improvements

5 September 2018 37
Walmart Stores
CRRajan
Case issues
• Walmart

• a) What are the sources of Walmart's competitive advantages in discount

selling

• b) How sustainable is their position in discount retailing in the future?

• c) How effective will their diversification into the food industry be?
Extraordinary performance
• Industry Structure ?
Shareholder Value
• $ 1000 invested at IPO grew to $ 2 mn !!
• This is a CAGR of 39%

• Sam Walton’s heirs were worth $ 22.5 bn in 1993

• Is this owing to the nature of industry?
Compare with others
• How is the industry returns so high?
• @ 13 % how can such a broad industry be so attractive?
What are the sources of Competitive
advantage
• Low cost and high efficiency operations?

• Market position?

• Culture and people

Low cost efficient operations
• Hub and spoke model for distribution
• Huge scale of operations
• Automation and technology enablement
• Trucks are > 60% full on return vs Industry average of 20%
• Picking up supplies
• POS scanning to devote floor to sales
Configuration
• Remote locations , few customer alternatives,low rental,
• Low ad expense
• Inexpensive employees (?)
• Regional saturation, In-house distribution
• Early mover advantage reinforces advantage
Coordination
• Bulk buying ( huge scale)
• Hard bargainers
• Store managers generate orders
• Automation
• Less licencing
• Product mix biased towards high volume hard goods
• No central pricing: Store managers have autonomy vis
a vis merchandising
Coordination
• Relatively low everyday prices
• Few promotions
• Good IR
• Administrative frugality
• Decentralization
• Closely held
• Limited diversification
Quants -
• Walmart’s low op expense ->rural, uncontested, ( hence low payroll,
ads and rentals, lean management)
• COGS (as % of net sales) is higher !.
• Sale prices are low
• Lax pricing
• Local monopolies ( 32 % stores)
• 2-3 % lower op margin
Sustainability
• Local scale economies:
• Volume threshold
• Local price war can reduce price 6-9%
• This is a huge fall
• Urban is different: Can locate miles apart
• Experience: distinctive competence-around small
town ops
• Dominant locations difficult to dispalce
Regional Economies
• Low radius of distribution in domiinated locales
• Transport economy
• Distribution costs matter a lot (pg 4-5)
• Economies of scope for customer: seeking alternatives mean longer
travel !
Lack of early challenge
• Inconspicuous – Rural , did not arouse national interest
• Uncertainty: concept was adventurous
• Other investment opportunities
• Investment asymmetry: tacit knowledge of Walton
• Reaction time lag
Threats
• As they grow they will have to grow into “higher
competition zones". Diseconomies will appear
• Diversification : Cannibalization instaed of
complimenting?
• Succession of leader
• Competitor intrusion: may affect non dominant areas
more
• Regional depression can change things: Local
employment, sources of livelihood
Diversification
• Warehouse clubs :
• Saturation: Growth is slowing. Newer additions are large format and
may not “fit”
• Cash availability : dividend vs reinvestment
• Growth : warehousing growth is breathtaking
• Competitive advantage:
• Warehouse stores have several advantages
• Large pool of potential members
Diversification
• Exit options: Company has diverssified and is unlikely to be trapped in
“space”
Downside
• Excessive entry: everyone is getting onboard the warehouse club
businesss
• Urban orientation”: Location in larger areas where competition is
better known?
• Irreversibles : over $ 100mn already invested by ‘85.This
“commitment “ is probably sunk
• Other growth areas
Potential gains from diversification
• Visibility : Warehouse formats are “ visible” and
attract competition
• Limited efficiency differentials : wholesale clubs are
bounded by urban locations and “follower” status
• Unsustainability : Switching costs ( membership) .
• Other advantages can be imitated.
• Regional economies may no longer matter
Background Strategies Sources of Advantage

Summary
67bn ( now $ 500bn) Cost Focus
‘000s of stores ( now 11500) Huge Scale
Scale/ Size
Local Monopolies
Semi Urban –Cost Adv.
IPO in 1969 Hub and Spoke/Cross Dock- Tacit Knowledge
Huge savings in logistics
Sam Walton Satellites Business Model- logistics,
local pricing,Globalization
POS

Low Advertising Technology

Incentives for Workers Experience Curve

Information arbitrage

Significant local monopolies

Bias to fast moving goods

Food and WH stores

Future?
• Well –what about Amazon?
• What will change ?
• Warehousing and transport common as also billing, packaging etc.
• Store cost vs, delivery cost
• Will they step into each other’s space?
PGPM-Session-5
GE –Jack Welch

CR Rajan
Perspectives
• Be#1 or #2 –fix it, sell it, or close it?

• Standard of performance ?

• Common Cause?—can a diversified group have one strategy?

• What is strategy in such a diverse group?

Priorities ?

Services
Invest in people& Technology
acquisitions Invest in R &D

Core
Reinvest in
productivity
&
Quality
Chop and slash phase
• Costs saved between 4 bn $ to $ 6 b !! –in that year profit was $3 bn

• Neutron Jack !

• What was being tried?

• Market cap from 13bn to 330 bn !

Video -1
• Was slow and timid?!!!

• 370 acquisitions
• 200++ divestitures

• 125000 head count reduction

• Incremental vs step or exponential change

• What does change imply- embedded norms,values and practices

• Move to softer issues?

• Globalisation theme
• Work outs

• Challenge, coach –move away from safe zone

• Management as scarce resource

• How is Welch adding value

• 4% increase in productivity
Video-2
• 90’s –work environment that unleashes people
• Not objectives but values
• Most conglomerates broke up in 90s how did GE escape eg itt,
textron hanson trust
• Westinghouse was offloading!
• Is GE corporate centre superior? How?
• Boundaryless –cross pollination of best practices
• Cross company collaboration
Crotonville

• Growing leadership within

• “A players” mentality
• Ability to develop internal leadership to deploy
• Crotonville as epicenter
• Stretch targets

• Service businesses
Video-3
• 6 sigma

• A players

• E-business
• Lead than follow
• Strong core

• Workouts and globalisation—software and hardware

• Key initiatives
• Speed, simplicity and self confidence
• Champions for initiatives
• Bonus for sharing ideas
• Reward stretch targets

• Welch as champion communicator

• What is his leadership style?

Video-4
• Is the business model sustainable?

• Is Welch and future tied up too much?

GE way
• Face reality as it is ,not as it was or as you wish it were
• Be candid with everyone
• Don’t manage: lead
• Change before you have to
• If you don’t have a competitive advantage, don’t compete
• Control your own destiny, or someone else will
Performance and Values
• Those who deliver results and share company values
• Those who have not delivered results and don’t share company
values
• Those who miss short term commitments but share all values
• Those who deliver but d not share values
Crotonville
• Became the centre of change
• GE’s cases rather than general ones
• Personal commitment of Welch to L & D
• Used to identify “highpot”, glean insights and spread message

• Trained facilitators
Workouts People/Leadership Value added

Developing New •Leveraging Productivity

processes Changing Mindsets
Roles and and style
relationships •Crotonville
•Leverage productivity
•Model new roles •Co-opt HR Process
•Frontline •Pushing growth
•Coaching •Jack’s Personal •Globalization
Role
•50% on people
•Operationalise culture
•Speed •Building LT Capability
•Simplicity, •Weed out E type
•Self confidence
Social software system at GE.
• GE ’ s highly developed social operating system is central to the
company’s success.
• The social operating mechanism includes:
• Corporate Executive Council (CEC) quarterly meet.
• 2 ½ day meeting with top leaders reviews all aspects of their
business and the external environment to identify the
company’s greatest opportunities and problems and share best
practices.
• Annual leadership and organizational review.
• 8 to 10 hrs – CEO and Head of HR meet with business leaders
and HR executives of each business units to review the units
prospective talent pool and organizational priority.
• S-1 and S-2 the strategy and operational review.
• S1 meeting towards the end of 2nd quarter with CEO, CFO and
unit head with his team to review / discuss for the strategy for
the next 3 years including the initiatives agreed upon by the
CEC.
• S2 – held in November is the operating plan meeting that
focuses more on the coming 12 to 15 months, linking strategy
to operating priorities and resource allocation.
Social software system at GE (Contd.)
• In between other social operating mechanisms are at work:
• In April surveys some 11,000 employees online for feedback on
how well the initiatives are taking hold throughout the organization.
• In October the 150 top corporate officers meet at learning center to
review the progress of the initiatives, get operating plans rolling for
the coming year, and participate in executive development courses.
• In December CEC meeting, among other things, executives set the
agenda of January’s Boca meeting.

• This system of linked social operating mechanisms is how GE’s

Leaders unite a company of businesses so diverse.
• The dialogue, a norm of behavior created by former CEO Jack
Welch, is a honest and reality based. Feedback is candid.
The importance of robust dialogue
• Robust dialogue is the pre Requisite for execution
culture.
• It brings out reality to the surface through openness,
candor and informality.
• Indeed, harmony-sought by many leaders who wish
to offend no one – can be the enemy of truth. A
good motto to observe is “Truth over Harmony”
• Informality is critical to candor. Formality suppresses
dialogue ;and informality encourages it. Candor helps
wipe out the silent lies and pocket vetoes, and it
prevents the stalled initiatives.
• Meetings with robust dialogue ends up with people
agreeing what each person has to do and when.
They have committed to it in an open forum and they
are accountable for the outcomes.
Succession Planning
• Jones’ succession plan process was rancorous and made things
difficult
Welch method

• Specs.
• Integrity and Values
• Experience
• Vision
• Leadership
• Edge
• Stature
• Fairness
• Energy, balance and courage
• Added on
• “ insatiable appetite for knowledge”
• Demonstrate courageous advocacy
• Ability to work under a microscope
• Play for high stakes
• Three finalists with characteristics like
• Youth ( enough span for at least 10 years)
• Homegrown
• GE Heritage
• Strong track record
• Ability to integrate acquisitions and grow
GE -9 box

16 – Jan 2010
87
BCG model

Question Marks
STARS
High Business
Growth
Rate

DOG Cash Cow

Low

Low High
Relative Mkt Share
 BOSTON CONSULTING GROWTH-SHARE
MATRIX

Earnings: growing Earnings: low, unstable,

Cash flow: neutral growing

Annual real rate of market growth

Strategy: invest for growth Cash flow: negative
Strategy: invest or divest

High STAR QUESTION MARK

Earnings: high stable Earnings: low, unstable

Cash flow: positive Cash flow: neutral or negative
Strategy: milk Strategy: divest

CASH COW DOG

High Low

Relative market share

GE
high winners winners Q Marks

Industry Winners Av losers

Attractiveness Business
Med

Profit losers losers

producers
Low

Strong Average Weak

Business Competency
 MCKINSEY-GENERAL ELECTRIC
PORTFOLIO ANALYSIS

BUSINESS-UNIT POSITION
LOW MEDIUM HIGH
INDUSTRY ATTRACTIVENESS

LOW
MEDIUM
HIGH
Intl. Portfolio

High
invest./gr Dominate
ow /JV
Country selective
Attractive-
ness

harvest
Low

High Low

Competitive Strength
 BENEFITS OF CORPORATE COMBINATIONS

COMPLEMENTARY BENEFITS

⚫ Combining physical assets

⚫ Capacity utilisation, risk reduction, economies of scale and scope

SYNERGY BENEFITS

⚫ Combining or leveraging invisible assets

⚫ Culture, technical expertise, reputation, image, expert knowledge,
information
⚫ Capable of simultaneous use; do not wear out; use can create new
invisible assets
 TWO CONCEPTS OF THE CORPORATION

SBU Core Competence

Basis for competition Current products Building future competencies

Portfolio of product / Portfolio of competencies, core

Corporate structure
market units products and businesses

Status SBU autonomy and Businesses are reservoirs of

ownership of resources core competencies

Resource allocation Capital allocated by business Capital and talent allocated to

competencies and businesses

Capital allocation trade-offs Strategic architectureand

Top management value
between businesses building future
competencies

(Prahalad & Hamel, 1990)

Jack Welch
• https://www.youtube.com/watch?v=7j5MUPk12Zw&index=4&list=PL
P7dwhWWMse33p8sNw1-Q6BiRDOpsZVdZ
• https://www.youtube.com/watch?v=_-a2Di5u2GE
 Conclusions
Context Strategies Initiatives
Recession #1 or 2 : fix, sell or close 6 Sigma
High Interest Rates. Core, Services and Hi-Tech
Strong $ GE Values Workouts
Weak Europe/yen Leadership development Bell Curve
Delayer
Multiple SBUs Boundaryless A -players
Huge manpower Stretch and Incentivize Speed, simplicity, self-
Succession in GE Newer ways-Better ways- confidence
Productivity 4 E’s
Quality Cut out bureaucracy
Crotonville
Playbook
Differences in Culture

Dr CR Rajan
 Differences in Culture
➢Societies’ differ along cultural dimensions
➢What is culture?
➢How/why do social structure, religion, language
influence cultural differences?
➢What are differences between culture and values in
the workplace (corporate culture)?
➢Culture changes over time. What are some reasons
behind this?
➢Implications for business managers
Cultural Appreciation
Values

Customs
Aspects of
culture

Symbols

Language
 What is Culture?
➢Culture: a society’s (group’s) system of shared,
learned values and norms; these are the society’s
(group’s) design for living
• Values: abstract ideas about the good, the right, the
desirable
• Norms: social rules and guidelines; guide appropriate
behavior for specific situations
▪ Folkways: norms of little moral significance
dress code; table manners; timeliness
▪ Mores: norms central to functioning of social life
• bring serious retribution: thievery, adultery, alcohol
Cultural Diversity
➢Values represent personal or socially
preferable modes of conduct or states of
existence that are enduring.

Why doesn’t McDonald’s sell their

regular hamburgers in India?
Cultural Diversity
➢Customs are norms and expectations
about the way people do things in a
specific country.

Why were 3M executives perplexed

concerning lukewarm sales of Scotch-
Brite floor cleaner in the Philippines?
 What is Culture?

“the collective programming of the mind which

distinguishes the members of one human group over
another…

Culture, in this sense, includes systems of values;

and values are among the building blocks of culture”

Geert Hofstede
 National Culture
“Nation” is a useful:
• Definition of society
• similarity among people a cause -- and effect -- of national
boundaries
• Way to bound and measure culture for conduct of
business
• culture is a key characteristic of societ
• can differ significantly across national borders
• also within national borders
• laws are established along national lines
➢Culture is both a cause and an effect of economic
and political factors that vary across national
borders
 Social Structure and Culture
Unit of social organization: individual or group?
Society may be stratified into classes or castes
High-low stratification
High-low mobility between strata
The individual: building block of many Western societies
Entrepreneurship
Social, geographical and inter-organizational mobility
The group:
Two or more associated individuals with a shared identity
Interact with each-other in specific ways on the basis of a
common set of expectations.
 Individual vs Group
Societal Characteristics
➢Individual ➢Group
• Managerial mobility • Loyalty and commitment to
between companies company
• Economic dynamism, • In-depth knowledge of company
innovation • Specialist skills
• Good general skills • Easy to build teams,
• Team work difficult, collaboration
non-collaborative • Emotional identification with
➢Exposure to different ways group or company
of doing business • e.g., Japanese companies
• e.g., U.S. companies
 Language: Culture Bound
➢Language, spoken
• “private” does not exist as a word in many languages
• Eskimos: 24 words for snow
• Words which describe moral concepts can be unique to
countries or areas
• Spoken language precision important in low-context
cultures
➢Language, unspoken
• Context... more important than spoken word in high
context cultures
➢ Clairol introduced the “Mist Stick”,
a curling iron into Germany

➢ Only to find out that “mist” is

German slang for manure.
Cultural Diversity
Chevy Nova Award
When Gerber started selling baby food in
Africa, they used US packaging with the
smiling baby on the label.

In Africa, companies routinely put pictures

on labels of what’s inside, since many
people can’t read.
Cultural Diversity
Chevy Nova Award
Pepsi’s “Come Alive With the Pepsi
Generation” in Chinese translated into
“Pepsi Brings Your Ancestors Back
From the Grave”
Cultural Diversity
Chevy Nova Award
Coca-Cola’s name in China was first read as
“Kekoukela”, meaning “Bite the wax tadpole” or
“female horse stuffed with wax”, depending on the
dialect.

Coke then researched 40,000 characters to find a

phonetic equivalent “kokou kole”, translating into
“happiness in the mouth.”
Cultural Stereotypes

➢ Cultural stereotypes: values and behaviors

considered typical of a culture

➢ Are they valuable?

Yes, if they reduce uncertainty about what
expatriate can expect.

No, if used to label an individual unlike the

stereotype
High/Low Context Cultures
 Education and Culture

➢Education
• Medium through which people are acculturated
• Language, “myths,” values, norms taught
• Teaches personal achievement and competition
• Critical to national competitive advantage
➢Education system may be a cultural outcome
Culture and the workplace (Hofstede)
➢Finds national culture dimensions meaningful to
business
➢Basis:
• Work related values not universal
• National values may persist over MNC efforts to create
corporate culture
• Home country values often used to determine HQ policies
• MNC may create morale problems with uniform moral
norms
➢Purpose: understanding of business situations across-
cultures
➢MUST understand own culture AND other culture(s)
Culture and the workplace
➢ Geert Hofstede – sampled 100,000 IBM
employees 1963-1973
➢ Compared employee attitudes and values across
40 countries
➢ Isolated 4 dimensions summarizing culture:
1. Power distance
2. Individualism vs. collectivism
3. Uncertainty avoidance
4. Masculinity vs. feminity
Power Distance -- (Hofstede)

➢Degree of social inequality considered

normal by people
➢Distance between individuals at
different levels of a hierarchy
➢Scale: from equal (small power
distance) to extremely unequal (large
power distance)
Individualism Vs. Collectivism (Hofstede)

➢Degree to which people in a

country prefer to act as
individuals rather than in groups
➢Describes the relations between
the individual and his/her fellows
Uncertainty Avoidance (Hofstede)

➢Degree of need to avoid uncertainty about the

future
➢Degree of preference for structured versus
unstructured situations
• Structured situations: have tight rules may or may not
be written down
➢High uncertainty avoidance: people with more
nervous energy (vs easy-going), rigid society,
"what is different is dangerous."
Masculinity Vs. Femininity (Hofstede)

➢Division of roles and values in a

society
➢Masculine values prevail:
–assertiveness, success, competition
➢Feminine values prevail:
–quality of life, maintenance of warm
personal relationships, service, care for
the weak, solidarity
Confucian Dynamism (Hofstede)

➢Attitudes towards
• Time
• Persistence
• Status in society
• “Face”
• Respect for tradition
• Gifts and favors
 Cultural Change Over Time

➢Change is slow and often painful

➢Shifts away from “traditional values”
towards “secular values”
➢Changes with shift from “survival
values” to “self-expression values”
 Cultural Distance

➢Geographic and cultural (or

pshychic) distance among countries
may not be the same
➢Key concept which can affect IB
strategy and conduct
Organizational Culture
• “A pattern of basic assumptions that the group learned as it
solved its problems of external adaptation and internal
integration, that has worked well enough to be considered valid
and, therefore, to be taught to new members as the correct way
to perceive, think and feel in relation to those problems.”
Edgar Schein, 1992
 Artifacts – symbols of
culture in the physical
and social work environment

Values
Espoused: what members of Levels of
an organization say they value Organizational
Enacted: reflected in the way Culture
individuals actually behave

Assumptions – deeply held

beliefs that guide behavior and tell
members of an organization how
to perceive and think about things
 Artifacts – symbols of Organizational Culture
culture in the physical Visible, often not
and social work environment decipherable

Values
Espoused: what members of Greater level
an organization say they value of awareness
Enacted: reflected in the way
individuals actually behave

Assumptions – deeply held Taken for granted,

beliefs that guide behavior and tell Invisible, Preconscious
members of an organization how
to perceive and think about things
Types of Artifacts
• Personal Enactment
• Ceremonies and Rites
• Stories
• About the boss
• About getting fired
• About relocating
• About promotions
• About crisis situations
• About status considerations
• Rituals
• Symbols
Functions of Organizational Culture

• Culture provides a sense of identity to members

and increases their commitment to the
organization
• Culture is a sense-making device
for organization members
• Culture reinforces the values
of the organization
• Culture serves as a control
mechanism for shaping
behavior
Understanding
Organizational Culture
Antecedents Organizational Organizational Group & Social
Culture Structure & Processes
• Founder’s values Practices • Socialization
• Observable artifacts
• Industry & business • Reward systems • Mentoring
environment
• National culture • Organizational • Decision
• Espoused values making
• Senior leaders’ design
vision and behavior • Group
• Basic assumptions dynamics
• Communication
Collective • Influence &
Attitudes & empowerment
Organizational • Leadership
Behavior
Outcomes
• Work attitudes
• Effectiveness
• Job satisfaction
• Innovation &
stress • Motivation
Types of Cultures
• Constructive
• Valuing members, self-actualizing, affiliative, and humanistic/encouraging normative
beliefs (expected behavior or conduct)
• Passive-defensive
• Approval-oriented, traditional and bureaucratic, dependent and nonparticipative,
punish mistakes but ignore success
• Aggressive-defensive
• Confrontation and negativism are rewarded, nonparticipative, positional power,
winning valued, competitiveness rewarded, perfectionistic
 Managerial Implications
➢Ethnocentrism vs Polycentrism
,Geocentrism
➢Must a company adapt to local
cultures or can corporate -- often
home-country dominated -- culture
prevail?
➢Cross-cultural literacy essential
➢Do some cultures offer a national
competitive advantage over others?
Sylvio Napoli at Schindler
Dr CR Rajan
Was Silvio the right choice as GM of Schindler
(India)?

As Luc Bonnard how would you evaluate Silvio’s first

seven months ? What would be your advice to him?

What is your advice to Silvio on non standard glass

wall ?

How would you face the challenge of transfer prices

and limited technical co-operation from Europe?
Schindler
• Established in 1874 in Switzerland by Robert Schindler.
• The company began manufacturing elevators in 1889.
• By 1998, Schindler had worldwide revenues of 6.6 billion.
• It was also the number one producer of escalators in the
world.
• Don’t have a local market base in India until 1950s.
• Alfred N Schindler took over the company in 1987, becoming
the 4th generation in line.
• Company has over 38,000 employees in 97 subsidiaries.
• First Schindler elevator in India installed in 1925.
• In 1985, Schindler enter into technical collaboration with
Mumbai based Bharat Bijlee ltd.
• In late 1996, collaboration with BBL ended and Schindler began
considering options to establish its own operation in India.
The Indian Entry Project
• Boston Consulting Group was engaged by Schindler to
look for alternative local partners as negotiations with BBL
broke down in India.
• A business plan for Schindler Market entry was approved
by the corporate Executive Committee (VRA) in Oct’95.
• The plan called for $ 10 million investment.
• To keep costs down and avoid India’s high import tariffs.
• The plan also proposed that all manufacturing and local
activities be outsourced to local suppliers.
Mr. Napoli was offered the job of creating the Indian
subsidiary.
Characters in the Case Study
• Schindler Top Management Staff.
Alfred N Schindler (Chairman & CEO)
Luc Bonnard ( Vice Chairman of the board )
Alfred Spoerri ( Member of the Board of Directors)

• Schindler India Key Manager profile

Silvio Napoli (VP, Schindler South Asia)
Meher Karan Singh (MD)
T.A.K Mathews (VP field Operation)
Ronnie Dante (GM engineering)
Jujudhan Jena( CFO)
Silvio Napoli
Name : Silvio Napoli, 46 yr
Position : VP , Schindler South Asia
D.O.B : August 23, 1965

Education : 1992-1994 MBA Harvard University Graduate school

of Business
1984-1989 Graduate degree in Materials
Science
engineering, Swiss Federal Institute of
Technology (EPFL) Lausanne University
Switzerland
1983- 1984 Ranked among top 20% foreign student
admitted to EPFL
 ENVIRIONMENT
Environment

Liberalization post 1991

Growing Middle Class

Urbanization– Pressure on Land

Growth in vertical buildings

Ban on Collapsible doors

Ban on manual ( safety concerns)

Opportunity starting with Low/Medium rise

Is market changing rapidly ? But predictably ?or is it “ too settled “

Buying logic and factors on which buyers discriminate?

Pluses of Sylvio Minuses of Sylvio

Highly qualified- HBS MBA, Engineer No experience in operations

Enjoys confidence of top management May not fit Indian culture

Has worked on SCM project Support of top need not translate to

support across company
Prepared India business plan
No demonstrated business level
Cultural fit with Schindler organization experience

Young and driven Task oriented

Highly competitive –has played serious Staff role → line job

Rugby ( an aggressive team sport )

Knows the Elevator/Escalator business Competence may be corporate , deep

think type and not hands on?
Thorough understanding of elevator
industry , appreciation of company
strategy
 Strategic Choices

Someone who fits Indian Culture vs someone who fits the Schindler culture

Some one who knows Elevators vs Someone who knows the Market

Possibly hire an Indian ?

Indian who also knows elevators ? And Indian market? Pluses and Minuses

National Culture and Organizational Culture

Replacement vs New construction s

Standard vs Customize
What are the stages of revenue?—Service?
What kind of individual is he?-his style?

Do analytical skills translate into action frames?

• Claim of recruiting on basis of “ attitude and energy”. Is not

knowledge critical?
• Does he have the right attitude –Impulsive, hard working, single
minded
• Do these attributes fit Indian culture?
Strategy
• Offer small range of standardized elevator and

• Source components locally ( tariff etc)

• Problems
• European plants are reluctant to transfer specifications and expertise
• Local management has different ideas on strategy for India
Strategy
• Mid range concept addresses 50% of market opportunity ( exhibit 5)
• By ignoring low end and high end idea is to build a range of
standardized lifts with outsourced components
• Differentiate via KAM ( service etc) –build an advantage ( This is the
Indian Manager’s perspective)
Outsourcing Strategy
• Silvio Napoli’s business plan was to outsource the production of 90%
of the components of S001 from local suppliers.
• The safety equipment would be imported from Schindler plant in
South- Asia.
• The basic on site assembly work would also be outsourced
• Eventually they would install their own dedicated plant be
manufactured the parts.
Standardize Customize

Production Costs can be lowered with scale Flexible for replacement of obsolete types

Highly skilled Crew maintenance crew Will need more skills/crew for maintenance
Possible
Outsourcing component volumes may be
More focused on new buildings /installation lower

Can plan out what to outsource and what to Could need higher scale of operations to
hold break even

Vendors more likely to come on board only if

volume is committed
 Choice of Sylvio
What would a top man look for?

Organization and competitive capability?

Key Men– MK Singh?, Mathew? , Dante?

Structute and conduct ?

Or
Sales on month on month ?

What would reassure that things are “on hand”?

Challenge to India Strategy

Changes in transfer pricing

Impediments to sourcing components in India

Linkage
• Link between corporate strategy and frontline implementation

• Challenges in developing capabilities and achieving outcomes

• Cross cultural issues
Bonnard - Schindler
• Bonnard has an interest in the standard low cost strategy

• Formula 1 test concept

• Or defer to signals from frontline who know the market better?

• Should Bonnard persist?
Challenges- Bonnard’s Review?

European partners/arm not sharing Designs /Technology?

Tariff hike on components?

Transfer Price?

Team Morale?

Why is the team so anxious to book sales that they go “out of script”?-Glass door

What was predictable? What was Controllable? And what was controllable and
predictable?
What could have been done better by Sylvio?

Decision Rights?

Communications?

Negotiating Timeliness with bosses ? What about with subordinates?

How could he have got his team on board so everyone is aligned on strategy and
deliverables?

What about his hires?

Negotiations with European associates on transfer of technology and designs?-how?

Who?

Transfer price –what could he have done?-Deferred payment, One time concession?
Softer terms?
 Silvio Napoli’s Role
• Recruiting the team Agent in Pakistan
Silvio Napoli
VPS Asia Agent in Srilanka
Operation
Agent in
M.K Singh Bangladesh
M.D

T.A.K Mathew Ronnie Dante J. Jena Pankaj Sinha

Field Operation Engineering Finance HR

Head of Technical Head of

Development Executive
Existing New logistics
Installation Installation
Vendor
Development
Account Executive
Existing Administrative
Management Commissioning
Installations Executives Support
Team Leader/ Support
Team Support
Member
Trainees
 EXECUTION CHALLENGES
What to outsource?

Key safety critical equipment – Europe

Embedded software and instrumentation ?

Rails , doors, carriage –outsource?

Drive and Motors?

Installation has to be local any which way

Sylvio Napoli- Video
• https://www.youtube.com/watch?v=oFbKgm2hTVQ
Indian Elevator Market

Schindler
Segment Stops Speeds Products

Manual 2-8 0.5-0.7 NIL

Low Rise 2-15 0.6-1.5 S001

Mid Rise 16-25 1.5 S300P

High Rise >25 >1.5 S300P

New Culture, New Challenges
• Family problems

• Hunting for office space, filling

government registrations and completing legal paper
work. Developing the relationships

• Napoli began working to develop them into an effective

team.
Attitude
• Sylvio’s “bullheadedness” in fitting a predetermined solution? –Not
accepting customization etc

• Does this fit India??- is he too much “soldier”?

• Does this show he has a closed mind?

Culture
• Indian business culture ( Sylvio’s view)
• Hierarchical
• Bureaucratic

• Slow
• Corrupt
• “Cant say no “
Culture
• Should you try fitting an European concept into India or change your
strategy

• Should Schindler India have a different culture

• Standardized product + Local sourcing approach

Org Capabilities – How good
• Loss of strategic control?

• Team of competent professionals ( from Otis)

• Hence pressure to customize?

• Schindler India is building a service based company

Customization
• Glass door?

• Otis is a customizer !

• Results are needed

• Options
• Stay with corporate logic
• Build in local customization
• One time exception
Value Chain
• R&D-------→ Global centralized
Europe
• Hi Tech e.g drive and control-→Global Europe
• Low cost less sophisticated -→Local outsource
• Engineering and installation->Schindler India
• Sales and Marketing---------→Schindler India

• Parts & Service---------------→>Schindler India

Alternatives
• Global Europe → Build Relationships

• Local Outsource-→Access and manage vendors

• Schindler India→ Build differentiated account management capability

Motives
• Europeans manufacture may see the beginning of exit fro Europe
• Face to face or mail/ phone?
• Indian team’s role in negotiations
Epilogue
• Stuck to limited standard range – felt customization required too
much resource
• Invited top team ( controller ) to India to expose local context
• Local sourcing efforts continued but slowly

• Deputed Dante to Europe for technology transfer

• Schindler installed 500 by 2000 and in 2001 started customization
• Introduced Escalators
 CONCLUSIONS

Strategy Execution vs Strategy Formulation

Expectations, Time& Resource,Structure & Conduct

Predictability and controllability issues

People as key- Alignment , Communication,Trust

Culture– National and Organizational

Adaptation
Tesla
Dr CR Rajan
Entry
• Tesla Motors attempts to become the first US firm (since WWII) to
successfully enter the car industry with a mass-produced car. We will
explore its strategy.
• Should BMW expect Tesla to grow into a strong direct competitor like
Audi, versus Tesla being limited to a niche or being just a flash in the
pan? Is Tesla at a competitive advantage or disadvantage? How will
that evolve? 

• What do you think of Tesla’s entry strategy? What barriers did it have
to overcome? Should Nissan learn something from Tesla’s approach?
Will other firms follow in Tesla’s footsteps? 

• How do you expect the industry to evolve? 

Elon Musk discussing first Tesla Model S
• https://www.youtube.com/watch?v=9E3Si8FWb18
• The problem led to a Model S software change that
keeps the car higher off the ground at highway
speeds. 

• http://www.youtube.com/watch?v=dGoobeIU4bQ
Tesla Videos
• https://www.tesla.com/models

• https://www.youtube.com/watch?v=5XdiGMIUxeY
Tesla’s position
Should BMW be nervous that Tesla will become a strong competitor,
like Audi? Or is Tesla more a flash in the pan or a niche player?


• Quantitative analysis of competitive advantage. Does Tesla have

competitive advantage right now??
• How will their position evolve?
• Economies of scale and learning will give strong improvements by the end of
2014, but they may have to lower price and start advertising. 

• Audi or flash/niche? 

Tesla’s Entry puzzle
• But Tesla shouldn’t even be here! This industry has huge barriers to

entry.
• There has indeed been no entry in the US since WWII.
• What are the barriers to entry?
• How did they overcome these barriers?
• Brand: high-end entry gives a halo effect. Other advantages of high-end entry?
• Build own sales network: Did dealers not want to distribute Tesla? 

How did Tesla even manage to enter this industry?

• But Tesla shouldn’t even be here! If you had told

someone 5 years ago that a VC backed firm in Silicon
Valley would launch a volume-produced car, trying to
challenge BMW, Audi, and Mercedes, they would just
have laughed. If we had done an industry analysis
back then, we would have concluded “massive
barriers to entry.” So how did they do it?
Barriers
The most important barriers are
Brand: GM and Ford both Spend about $4bln per year; BMW’s brand
value was estimated at about $30bln.
Distribution network: Toyota has 1600 dealers. 

Service network 

Production plants and production know-how: one plant costs about $1-
2bln. 

Supplier network: about 1000 suppliers for a car. 

Barriers
• Design cost and know-how: $1bln to up to $6bln for design.
• there are also some barriers specific to entering with an electric car
• lack of acceptance and issues with range anxiety, lack of charging
infrastructure, and uncertainty about technological future.
• As a point of reference for these barriers to entry, Tesla had about
$1bln in funding by the time of the Model S launch (some $300
million in start-up funding, $250 million in equity funding since its
IPO, and a $450 million government loan).
• Entry barriers are systemic sources of sustainable competitive
advantage for incumbents
• When you look at the nature of these entry barriers, does that
remind you of something?
• All these barriers to entry are indeed stocks of resources and
capabilities, with some multiplier effect from scale and from the fact
that they need to do many of these things at the same time (pattern).
How did Tesla overcome barriers
• Disruptor at high end - It gives them a halo effect, so they get their
marketing for free.
• How important is this? Even with their massive scale, Ford and GM
spend about 3% of revenue on marketing, so this benefit is huge.
• This approach of entering on the high end is a considerable
departure from the approach of other manufacturers, such as Toyota
and Nissan. These firms entered in the mid-market with their hybrid
and electric vehicles.
• Apart from this halo effect, is entering on the high end a good or a
bad idea? High end entry has some important advantages for Tesla.
First, sales at the high end are smaller, so Tesla is at less of a scale
disadvantage (and market demand better matches its capacity).
• Second, margins are (likely) higher, giving Tesla more room to
breathe with a cost disadvantage. High end customers are less price
sensitive, so competing on price has limited benefits
Tesla entry strategy
• Dealership

• Infrastructure –charging etc

• Customer connect

• Pedigree ?
Partners -Ecosystem
Partner with Lotus for car body and assembly while developing drivetrain, then go into
assembly:
How would the other way (first assembly then 
powertrain) have worked out? 


 Know-how:
1) hire mixture of employees, some with long experience in the car industry,
2) unconventional (design, distribution) makes knowledge obsolete
3) smart tech choices such as use commodity batteries to overcome battery know-how and
scale 
4) opportunistic purchases of plant and equipment 

 Design: Simplicity
• There’s something puzzling: Tesla designed the Model S
for half the money than a regular design, even though this
was Tesla’s very first car. And the car wins about every
award and top safety rating on the planet!
• How can they do this design magic? (Silicon Valley) But Nissan
also developed the Leaf in less time than a run-of-the-mill CV?
Simplicity.

• What are other implications of simplicity? (Cheaper design, less
suppliers, simpler logistics; simpler and faster assembly so less
labor and smaller plant; less quality problems; less service
problems: cheaper and better car). How does that affect
Economies of Scale (and Minimum Efficient Scale)? 

• Less service: how do dealers like that?
Imitation and Industry Evolution
• Does this give a sustainable competitive advantage to
Tesla?
• Which other things can others imitate? Can Tesla
prevent others from following its high-end entry
path? Should it do so? 

• How will the industry evolve? 

• Effect of smaller Economies of Scale: easier entry,
more competition.
Simplicity
• Other effects of simplicity? (Modularization; potentially Tesla Inside)
• Should Tesla try to push their battery on others? (Slow Nissan by
limiting scale and learning. Increase entry and competition at car level
to capture
• Should Nissan have copied their approach?
• Should Nissan have used the same battery? 

• Should Nissan have entered from the high end? 

• A second dimension is dynamic fit: how choices of today fit
with the expected path of the 
firm and with the
expected choices of tomorrow. The optimal battery choices
of Tesla vs 
Nissan are a nice example.
• An explicitly dynamic strategy can be very powerful. Such
strategy guides how to enter 
and sequence and where to
invest in learning. It also makes the path clear so that
employees choose today what they will need tomorrow. 

• A final important dynamic dimension is how industry may
evolve. 

An Explicit strategy can be a powerful guide for decision-
making.
Having the strategy developed or announced by the CEO
makes it more credible, increasing the likelihood of
execution. Musk’s statement illustrates all characteristics of
a strategic decision. 

• Even high entry barriers can be overcome with a smart
path, with an unconventional approach, and by leveraging
change. A firm needs to think carefully about how to
prevent others from imitating (close door to high-end
entry) or from gaining an advantage (sell batteries to slow
Nissan). 

• A factor such as complexity can have dramatic impact,
both on the firm itself and on industry structure. High-end
entry can be effective. 

Innovation ecosystem ?
• First, while Silicon Valley has always been a hotbed of
innovation, most of that innovation is targeted to IT. Tesla is
one of the few Valley firms to target a more traditional
industry and definitely the one targeting the largest
traditional industry.
• That leads to the second unusual feature: Tesla is a VC-funded
company making a frontal attack on an industry with some of
the world’s largest companies.
• Two of the 10 largest US companies are car companies: GM
and Ford. This is like trying to go head-to-head with Boeing as a
VC funded firm.
• Third, there is obviously the person of Elon Musk. With Tesla,
SpaceX, and SolarCity, he’s a central player in three of the most
significant technological revolutions of the moment, and he’s
doing it simultaneously. (With SpaceX, he is going, in some
ways, head to head with Boeing!) If he pulls this off, he will be
– with some hyperbole – a business legend. But will he?
Competitor’s perspective
• Should BMW anticipate that Tesla will become another Audi?
• The Tesla Model S and Model X seem to compete directly with BMW.
In fact, when describing the future Generation 3 (now referred to as
Model E), Elon Musk explicitly referred to the BMW
• BMW thus seems to be an important reference point for Tesla’s
positioning: sporty high-end luxury cars. “The Ultimate Driving
Machine.”
• How worried should BMW be? Will Tesla survive and thrive and
become a strong direct competitor, like Audi? Or is it doomed to be a
niche player or just a flash in the pan?.
Strong Competitor/Audi
• Tesla is already profitable 
 • Tesla is not profitable
• Their cost will go • · Once the newness is off,
down, especially battery 
 their cost will go up
• Incredible product; (advertising, no cheap
even more attractive once machinery) and their price
newness is off (and fear of has to come down (no
new is down) 
 exclusivity, most interested
buyers have one).
• Resale value • · Niche product; less
guarantee; start on high end attractive once newness and
where people don’t see a exclusivity is off. BMW has a
Tesla as such a big much more trusted brand.
investment. 

• · People don’t trust electric
cars. Big investment in
something uncertain. Any
fire makes people anxious.
+ and -
• Most people don’t need
range. Battery will improve
and battery can get
swapped. 

• Ultimately, CV will be
replaced anyways. Tesla
will then have a huge
competitive advantage.
Very hard for traditional
mfg to make electric cars


• Tesla is building a
competitive advantage
with its proprietary
charging stations. 

• Range anxiety will remain
a key hurdle.
• Once this market takes
off, BMW can just jump in.
They let Tesla test the
waters and beat a path.
They will follow and
overtake Tesla.
• There will be many other
alternative energy sources.
Range etc
• Some people see range anxiety as an important issue, others
don’t. How should Tesla think about that? It is useful to make
this more concrete.
• Suppose that for a third of people range anxiety is a deal
breaker, a third doesn’t care, and a third values an electric car
$10,000 less. Is this good or bad for Tesla? This is good: a third
of the market is huge~ 2 mn
• This raises two interesting points: First, for a challenger or
start-up, variance in preferences often matters more than
average preferences.
• Second, since it is variance that matters, it is important to go
beyond your own personal preferences to see the range.
• Does the case have any information that can help us think
about the range anxiety issue? Less than 1% of trips exceed
100 miles. 20% of households owned 3 or more cars. High-
income families are more likely to have more cars and less
likely to do long trips by car and thus less sensitive to range
anxiety issues.
Quantitative Analysis
What do the numbers say?
Is Tesla profitable?
Does it have a competitive advantage?
The best starting point for this discussion are the
income statements in Exhibits 12 and 14 of the case.
Tesla’s situation doesn’t look great but also not
disastrous: Tesla seems to have a considerable
competitive disadvantage ($13 disadvantage per $100
spent on a BMW) but its total operating income is only
slightly negative.
 Tesla vs BMW
Tesla 2013 ( $ BMW 2013( Tesla ( indexed
Th) Euro Mn) 100) BMW (100)
Revenues 847531 57293 88 100
ZEV credits 119400 12

Costb of Rev 770128 40377 80 70

Gross Profit 196803 16916 20 30

R&D 107171 3993 11 7
SG&A 107008 6369 11 11
Total Expense 214179 10362 22 18
Loss -17376 6554 -2 11
 Tesla vs BMW ( Excl ZEV credits)
Tesla 2012 ( $ BMW 2012( Tesla ( indexed
Th) Euro Mn) 100) BMW (100)
Revenues 847531 57293 100 100
ZEV credits 119400 12

Costb of Rev 770128 40377 91 70

Gross Profit 196803 16916 9 30

R&D 107171 3993 13 7
SG&A 107008 6369 13 11
Total Expense 214179 10362 25 18
Loss -136776 6554 -16 11
Quants
• Before we proceed with these numbers, let’s make
sure that these are the right numbers to look at, if we
want to understand Tesla’s competitive position?
• These are definitely not the right numbers to look at:
Tesla’s revenue includes income from ZEV certificates
• Both the quantity and the price of these certificates
are expected to drop quickly as other manufacturers
ramp up their production of electric cars.
• So this is a temporary source of income that should
be excluded to get to strategic performance
• BMW competes with the Tesla Model S in the
(representative) customer’s mind
• how much revenue – including subsidies – Tesla
would get (if the customer bought a Tesla instead).
• There are no precise data about that in the case, but
the case mentions that the total cost of ownership of
a BMW and a Tesla are similar.
Exhibit 9
• One possible approach is to take the data of in the case and
assume that these are comparable cars in the customer’s mind.
Note that for $48725 that the customer spends on the BMW, he
would spend $61070 on the Tesla (which is not unreasonable
given the $1500 per year savings in fuel costs alone and given the
different ratings), but Tesla receives $71070 thanks to subsidies.
So for every $100 spent on the BMW, if that is the choice, Tesla
would receives $146, if it were chosen. The adjusted numbers
(for both this adjustment and the ‘direct sales adjustment’) are
then in TN Exhibit 3b.
• Tesla’s cars compete with the regular BMWs (which they clearly
do) and these regular BMWs are a stronger competitor, then that
is the right comparison. You want to compare with your real and
toughest competitor product.
• What matters are which products the customer considers as
being competitors, not how these products compare physically.
Adjustments
• Let us take both indexed to 100
• Then BMW price ~$48725
• Tesla price ~61070
• Add ZEV then TESLA gets $71070
Like to like ( two ways- Price-value)
Tesla BMW Tesla ( value BMW
adjusted)
LT Rev 100 100 146 100

Cost of Rev 96 70 140 70

Gr Profit 4 30 4 30

R&D 13 7 13 7

SG&A 7 18 7 11

Tot Exp 20 18 20 18

Profit/loss -16 11 -23 11

Economies of Scale:
• Tesla expects to ramp up production to 40,000 units by the
end of 2014 and probably more beyond, economies of scale
will drive the average fixed costs down.
• annual production is currently only 20,000, this would cut the
average fixed cost in half.
• To estimate effect, we need to determine the fixed costs in the
income statement.
• For the cost of revenue, we can get some : in production and
production overhead (excluding R&D), partially fixed cost items
are about 1/3 of the cost of revenue.
• About half of this is probably really fixed. However, this
estimate is for a car ‘on scale’ – so that its average fixed cost
will underestimate the average fixed cost of a sub-scale
producer like Tesla – so we need to compensate for that.
• Overall about 25% of this ‘cost of revenue’ maybe really fixed
• Estimate that 80% of R&D and 80% of SG&A are
fixed. (Any reasonable number will do here.
• For these estimates, TN Exhibit 5a (resp. TN-4a)
shows the updated income comparison. It is clear that
the effect of scale is massive.
• First, with another doubling of scale, the plant will be
getting close to full scale and so the economies of
scale on that level will soon be exhausted.
• Second, the share to which scale applies has become
smaller: while doubling scale a first time cuts the fixed
cost in half, doubling it the second time then cuts half
of half, i.e., one quarter. 

Price-value- Scale improvement
Tesla BMW Tesla ( value BMW
adjusted)
LT Rev 100 100 146 100

Cost of Rev 96 70 140( -17) 70

Gr Profit 4 30 6 30

R&D 13 7 19 (-8) 7

SG&A 7 18 10 (-4) 11

Tot Exp 20 18 29 18

Profit/loss -16 11 -23 11

 Learning or Experience Curve:
▪ Costs will also decrease through learning.
▪ The case mentions a 90% learning curve on defects and assembly time.
▪ The effect of this particular learning – defects and assembly time – is
mainly to lower average fixed costs: with a higher rate of (defect-less)
production, the fixed costs of plant and labor get spread over more units.
▪ But there will be learning in the whole system, from SG&A to better and
cheaper parts and inputs.
▪ Assume for this analysis that the average learning curve for all costs is 95%.
The purpose of this analysis is to get a feel whether learning may
meaningfully change the picture.
▪ To calculate the effect of learning, -the cumulative production at the end of
H1 was about 10,000 cars. By the end of 2013 that would have doubled and
by the end of 2014, that would have quadrupled. With a learning curve of
95%, that means a reduction of each cost item to about 90% (= .95^2) of
before, or a 10% reduction of the cost
Price-value-Learning Curve effects
Tesla BMW Tesla ( value BMW
adjusted)
LT Rev 100 100 146 100

Cost of Rev 96 70 140( -14) 70

Gr Profit 4 30 6 30

R&D 13 7 19 7

SG&A 7 18 10 11

Tot Exp 20 18 29 (-3) 18

Profit/loss -16 11 -23 11

Price •effects
A first question is whether current prices will be sustainable,
especially if Tesla wants to double production. Cumulative
production by itself, even without doubling scale has a double
negative effect on demand (or on customer value).
• First, it reduces the exclusivity of the brand and thus the value
to buyers
• Second, as Tesla fills more of the existing demand, it needs to
start selling to people down on the demand curve, who may be
less enthusiastic about Tesla or more worried about range
anxiety. Customer value will thus go down and the price may
have to come down too. 

• Tesla bought its plant and its machinery on the cheap, thanks to
the crisis (and potentially thanks to the fact that they were not
yet seen as a threat).
• In the future, such bargains may be harder to come by. And to
start really competing with BMW, they will need to expand
capacity. 

Outlook
• Third, government support for EVs may run out in a few
years: according to the current law, Tesla cars will start
losing their subsidy once Tesla reaches 200K cumulative
cars (at which time Tesla’s will, after a short transition, be
at a $7,500 price disadvantage versus other electric cars!).
• If so, the price either goes up by $7,500-$10,000 or
Tesla’s revenue will go down. This is equivalent to a 10-
15% price cut, wiping out all Tesla’s estimated profits at
the end of 2014.
• However, by the time that these benefits expire, both
Tesla’s scale and its learning should also have grown
further.
• Moreover these programs may be (partially) extended, as
they have been in California (???) 

Advantages
• Currently, Tesla does not need to spend on advertising but
that may change when it needs to reach new customers, when
its halo effect decreases (because of going more down-
market), and when competition in its segment increases. 

• These negative effects will not kick in as quickly as the scale
and learning effects. But by the time that they kick in, the scale
and learning effects will likely have leveled off a lot. This
suggests that Tesla will see an inverted U-shape in its margins
(especially if the subsidies do indeed stop). 

1) the massive effects of scale and learning and how this may
really distort the profitability picture of an early venture
2) details of these cost structures – for example, at what level
the plant will be at scale – is key to be able to get a full picture
3) a careful analysis of dynamics may turn up many interesting
insights. 

Distribution Network
• To distribute its cars, Tesla creates its own sales
network. It is useful to follow up here as this point
comes back later: Did Tesla create its own sales
network because dealers didn’t want to distribute
Tesla?
• No: dealers would in fact love to sell Tesla and are
trying to pass laws (in Texas and North Carolina) to
stop Tesla from selling directly to customers.
• dealers may have a conflict of interest in selling both
CVs and EVs
Service Network
• Given the small scale on which Tesla starts, this is not
such an issue. It suffices to have some service points
in high-density high-demand areas. Tesla also uses
valet service and the high-end segment, such services
were probably appreciated.) By relying heavily on
software, Tesla can also solve problems from a
distance via software updates.
• Acceptance of Electric Cars: Tesla builds a car with a
much larger range than other electric cars and with
very high safety ratings, which reduces some common
worries. Tesla complements this with free
Supercharger stations and with battery swaps.
• Tesla also gave a resale value guarantee
• Plants and Equipment: Tesla gets bargains on its plant and part of its
equipment(fortuitous timing also partially due to not being
considered a threat at the time.)
• Overall, Tesla is estimated to have spent less than 1/3 of what it
would usually cost: US $300 mln instead of $1bln. (How much does
this matter in the bigger picture? Not so much on an average cost
basis, but a huge deal from the perspective of reducing its initial
capital needs.)
• Know-how: Tesla partnered with Lotus for the Roadster and hired
experienced people from the car industry in both management and
plant positions.
• It chose standard batteries and motors, but improved on their usage.
(There is a lot of know-how in how the batteries are put together, i.e.,
safety features, charging and de-charging, temperature management,
etc. Tesla has patents on these technologies. Tesla has about 200
patent applications with 90% of these battery and powertrain relate
• Tesla’s sequencing of capabilities: they first developed know how on
powertrains while partnering with Lotus for the assembly and only
later started developing their own assembly know how.
Simplicity
• Design: A simpler product is faster and cheaper to design.
• Production: Fewer parts make it easier to find suppliers
and to manage logistics and 
inventory. Faster and easier
assembly saves on labor cost and on plant (as you can
produce more cars in the same plant, driving down
average fixed cost) and other fixed costs. Less errors (in
assembly) reduce labor and material cost (for rework) and
reduce the space needed for rework, saving on plant. It
also leads to less quality problems and higher ratings
Vs Nissan
• First, they keeps many of the traditional design features of
CVs, so they probably don’t leverage simplicity as much.
Second, they build the Leaf on a line shared with
traditional cars, which will also limit the benefits they can
get.
Simplicity
• Service: Fewer errors in assembly reduces warranty costs and quality
problems, as does the much simpler powertrain by itself. Nine out of
10 repairs are on drivetrains. The most frequent service task (oil
change) is eliminated. This results in higher quality and lower service
needs.
• How do dealers feel about that? They don’t like this at all: most of
their profits come from service and repairs and from selling service
plans up front. So how will dealers think about a conventional car
versus an electric car? Clearly, they prefer to sell conventional cars.
This throws a very different light on why Tesla prefers not to work
with dealers: dealers have all the wrong incentives.
Conclusion
How will the industry evolve?
-Dynamics are an essential part of good strategy
A first important dimension of dynamics is the evolution of competitive
advantage:
• This is driven mainly by the learning curve and economies of scale. 

-Managing start ups and innovation in a fast changing industry
These dynamics are especially important for understanding and
managing start-ups and innovation, and will likely increase in
importance as faster change means more time spent on the steep part
of the curves. 

Macro Industry Strategy Disruptive Financials
Innovation
Oil Price politics No New Entrant Silicon Valley Economy of
Huge Barriers Spirit High Scope
Alternatives ~2bn Factory End/Premium -FC
~1 To 6bn Demonstrator of -Halo effect -VC?
Solar PV Design speed -Word of Mouth Economy of
-Inelastic price Scope
Battery- Li Ion ~90 mn. Market High price car
Own Experience
US, German, Knock Down Distribution Curve advantage
Exponential Japanese factory
Improvement &Chinese Battery Pack Move Down to
Lotus design outsourced mass Market
Legal Hassles Distribution
IPO+ Govt Loan Chassis – Ecosystem Cost
After-Sales Battery-Stability advantage ?
Elon Musk ?
Fuel Ecosystem Silicon Valley
Ex- Ante +Auto
Strategy Organisation
How will the future evolve?
• The way environment concerns tradeoff with use of fossil fuel
• Emission reduction technology
• Battery technologies- charging speed /density
• Economics of alternative charging methods
• Recyclability of batteries
• Auto majors may choose to be “followers”
• http://thefutureishere.economist.com/infographic-lifetrends-
transportation.html

• http://www.visualcapitalist.com/electric-vehicles-poised-model-t/

• http://www.visualcapitalist.com/future-automobile-innovation/
Battery
• http://ritholtz.com/2017/03/future-battery-technology/
Da Vinci robot

• https://www.youtube.com/watch?v=0XdC1HUp-rU
Multi business Corporations
& Conglomerates
Dr CR Rajan
Multi-business formations
• Set of SBUs

• Set of companies

• Set of SBUs+ Companies

• What could be sources of authority?

What is managed
• Operations ?

• People Processes?

• Funding?

• Shareholder relations etc?

Managing the Multibusiness
Corporation
OUTLINE

• Structure of the Multidivisional Company

o Theory of the M-form
o The divisionalized firm in practice
• The Role of Corporate Management
• Managing the Corporate Portfolio
o Portfolio planning techniques
o Value-creation through corporate restructuring
• Managing Individual Businesses
• Managing Internal Linkages
• Recent Trends
The Multidivisional Structure: Theory of the M-Form

Efficiency advantages of the multidivisional firm:

• Recognizes bounded rationality—top management has limited
decision-making capacity
• Divides decision-making according to frequency:
—high-frequency operating decisions at divisional level
—low-frequency strategic decisions at corporate level
• Reduces costs of communication and coordination: business level
decisions confined to divisional level (reduces decision making at
the top)
• Global, rather than local optimization:- functional organizations
encourage functional goals. M-form structure encourages focus on
profitability.
• Efficient allocation of resources through internal capital and labor
markets
• Resolves agency problem-- corporate management an interface
between shareholders and business-level managers.
 The Divisionalized Firm in Practice

• Constraints upon decentralization.

• Difficult to achieve clear division of decision making between
corporate and divisional levels.
• On-going dialogue and conflict between corporate and divisional
managers over both strategic and operational issues.
• Standardization of divisional management
• Despite potential for divisions to develop distinctive strategies and
structures—corporate systems may impose uniformity.
• Managing divisional inter-relationships
• Requires more complex structures, e.g. matrix structures where
functional and/or geographical structure is imposed on top of a
product/market structure.
• Added complexity undermines the efficiency advantages of the M-
form
 The Functions of Corporate Management

Managing the —Decisions over diversification, acquisition,

Corporate divestment
Portfolio —Resource allocation between businesses.

Managing the — Business strategy formulation

individual —Monitoring and controlling business
businesses performance

Managing
linkages —Sharing and transferring resources and
between capabilities
businesses
The Development of Strategic Planning Techniques:
General Electric in the 1970’s

Late 1960’s: GE encounters problems of direction,

coordination, control, and profitability

Corporate planning responses:

▪ Portfolio Planning Models —matrix-based frameworks
for evaluating business unit performance, formulating
business strategies, and allocating resources
▪ Strategic Business Units —GE reorganized around
SBUs (business comprising a strategically-distinct
group of closely-related products
▪ PIMS —a database which quantifies the impact of
strategy on performance. Used to appraise SBU
performance and guide business strategy formulation
 Portfolio Planning Models: Their
Uses in Strategy Formulation

• Allocating resources-- the analysis indicates both the

investment requirements of different businesses and their
likely returns
• Formulating business-unit strategy-- the analysis yields
simple strategy recommendations (e.g..: “build”, “hold”, or
“harvest”)
• Setting performance targets-- the analysis indicates likely
performance outcomes in terms of cash flow and ROI
• Portfolios balance-- the analysis can assist in corporate
goals such as a balanced cash flow and balance of growing
and declining businesses.
Portfolio Planning Models:
The GE/ McKinsey Matrix

Industry Attractiveness
High

Medium

Low

Low Medium High

Business Unit Position

Industry Attractiveness Criteria Business Unit Position

- Market size - Market share (domestic,
- Market growth global, and relative)
- Industry profitability - Competitive position
- Inflation recovery - Relative profitability
- Overseas sales ratio
 Portfolio Planning Models: The BCG
Growth-Share Matrix

Earnings: low, unstable, growing

Cash flow: negative Earnings: high stable,
Annual real rate of market growth (%)

growing
HIGH

Strategy: analyze to determine

business can
grown into a
star, or
will degenerate
whether
be
? Cash flow: neutral
Strategy:
growth
invest for

Earnings:
into a dog low, unstable Earnings: high
stable
Cash flow: neutral or
negative Cash flow: high stable

Strategy: divest Strategy: milk

LOW HIGH
Relative market share
 Applying the BCG Matrix to Time Warner Inc.

Annual real rate of market growth

12
Cable TV
Networks
8

Cable Film
(%)

Magazine
4

production
Publishing
0

Bakery division
-4

Music
-8

AOL

Relative market share

Position in 2003 Position in 2000. (Area of circle proportional to $ sales)

 Do Portfolio Planning Models Help or Hinder
Corporate Strategy Formulation?
ADVANTAGES
• Simplicity: Can be quickly
prepaired
• Big picture: Permits one page
representation of the corporate
portfolio & the strategic
positioning of each business
• Analytically versatile:
Applicable to businesses,
products, countries,
distribution channels.
• Can be augmented: A useful
point of departure for more
sophisticated analysis
DISADVANTAGES
• Simplicity: Oversimplifies the
factors determining industry
attractiveness and competitive
advantage
• Ambiguous:The positioning
of a business depends
critically upon how a market is
defined
• Ignores synergy: the analysis
takes no account of any
interdependencies between
businesses
Corporate Restructuring to Create
Value: The McKinsey Pentagon

Current
market
value
1
Current perceptions Maximum raider
gap opportunity

Company Optimal
value as is 2 RESTRUCTURING 5 restructured
value
FRAMEWORK
Strategic and Total company
operating opportunities
opportunities
Potential value 3 Disposal/acquisition 4 Potential value
with internal opportunities with external
improvements improvements
Corporate Control over the Businesses

2 basic approaches

Input Output (or performance)

control control

Monitoring & approving Setting & monitoring

business level decisions the achievement of
performance targets

Primarily through strategic Primarily through performance

planning system & capital management system,
expenditure approval including operating budgets
system and HR appraisals
Goold & Campbell’s Corporate Management
Styles: Financial and Strategic Control

High
Centralized

Strategic
planning

Strategic
control

Holding Financial
company control
Low

Flexible strategic Tight strategic Tight financial

CONTROL INFLUENCE
 Managing Linkages between Businesses

KEY ISSUE—How does the corporate center add value to the business?

BASIS OF BUSINESS LINKAGES—Sharing of resources and capabilities.

SHARING OCCURS AT TWO LEVELS:
• Corporate level—common corporate services
• Business level—sharing resources, transferring capabilities

PORTER’S ANALYSIS OF BUSINESS LINKAGES AND CORPORATE

STRATEGY TYPES
• Portfolio management— Parent creates value by operating an internal
capital market
• Restructuring—Parent create value by acquiring and restructuring
Inefficiently-managed businesses
• Transferring skills—Parent creates value by transferring capabilities
between businesses
• Sharing activities—Parent creates value by sharing resources between
businesses

ROLE OF DOMINANT LOGIC—importance of corporate managers’ perception of

linkages
 What Corporate Management Activities are Implied by
Porter’s “Concepts of Corporate Strategy”

(1) Portfolio Management

• Using superior information and analysis to acquire attractive companies at
favorable prices (e.g. Berkshire Hathaway).
• Minimizing cost of capital (e.g. GE)
• Create efficientt internal system for capital allocation (e.g. Exxon-Mobil)
• Efficient monitoring of business unit performance (e.g BP-Amoco).
(2) Restructuring: Intervening to cut costs and divest under performing assets (e.g.
Hanson during 1980s & early 1990s)
(3) Transferring skills:
—Transferring best practices (e.g. Hewlett-Packard)
—Transferring innovations (e.g. Sharp)
—Transferring key personnel between businesses (e.g. Sony)
(4) Sharing activities:
—Common corporate services (e.g. 3M)
—Sharing operational resources and functions (e.g. sales and distribution,
manufacturing facilities).
 Rethinking the Management of Multibusiness
Corporations: Lessons from General Electric

Jack Welch’s transformation of GE’s structure and management systems:

•Delayering --- from 9 or 10 layers of hierarchy to 4 or 5

•Decentralizing decisions.
•Reformulating strategic planning—from formal, document-intensive analysis to direct
face-to-face discussion of key issues.
•Redefining the role of HQ—from checker, inquisitor, and authority to facilitator,
helper, and supporter.
•Coordinating role of HQ— corporate HQ to lead in creating the “boundaryless
corporation” where innovations and ideas flow and where horizontal coordination
occurs to respond to new opportunities.
•HQ as change agent— corporate HQ driving force for continual organizational change
(e.g. “workout”, “six-sigma”).
Rethinking the Management of Multibusiness
Corporations: Bartlett & Ghoshal’s Analysis
of Key Management Processes

Managing the tension RENEWAL PROCESS

between short-term
ambition Creating and maintaining Shaping and embedding
organizational trust corporate purpose

Managing operational
interdependencies and
personal networks Developing and nurturing
Linking skills, knowledge, and
resources organizational values
Creating and pursuing Establishing
opportunities strategic mission &
Reviewing, developing, and
supporting initiatives performance standards

Front-line Management Middle Management Top Management

Group Concept
• Very popular in India , Korea ,Japan , China

• More a “ federation of companies”

• Each a legal entity and independent sets of shareholders

• Core owners –own equity AND actively supervise. Oversight on major
decisions

How can some one spending 10 % time do better

than others spending 100% time and effort
Forces
• Forces that pull outwards to “ focus “ and sovereign entities-legal
independance

• Forces that keep them together- Participation of corporate centre

• Tatas e.g 100 entities and adding

Group Centre concepts
Strategy
Sensing weak signals ( Vantage Point)
Spotting distant opportunities

Different “combos’ beyond- product /market

boundaries
Incubation
• Mahindra’s related and unrelated diiversifications
Group Centre concepts
• Strategic capabilities on M &A –synthesised from group-affiliate
interactions
• Aditya Birla acquisition of Novelis, Atlanta ($6 bn) –a 4 X size
• Tata’s center –Business Review process—stretches boundaries
• Cross Business Opportunity –Tata in beverages etc
Group Centre concepts
Identity
• Group “ Over –Identity”-shapes beliefs, perceptions in markets and
employees-Coherent thinking
• Choate branding
• Value nurturing
• Multipier on CSR
• Goodwill
TATA SONS – GLOBAL
FOOTPRINTS
Dr CR Rajan
Indian Brand

• Perception gaps
• Fakirs
• Elephants
• Like all Ems the only undisputed logic is cost
• Moving up the value curve ? (apple type)
TATAs
• Placing Shared Values in the middle of the model emphasizes that
these values are central to the development of all the other critical
elements. The company's structure, strategy, systems, style, staff and
skills all stem from why the organization was originally created, and
what it stands for. The original vision of the company was formed
from the values of the creators. As the values change, so do all the
other elements.
Old view vs New
• Comparative cost advantage
• Wine and butter approach
• Rooted in “natural endowment”
• Agrarian view point –either as output or input to industry
• Old world –spice trade , silk road ,
• Does not explain successes like Japan ?
Competitive advantage of nations
• Porter tried to answer the following questions:

• Why does a nation become the home base for successful international competitors in an
industry ? Germany is renowned for car manufacture;
• Why are firms based in a particular nation able to create and sustain competitive
advantage against the world's best competition in a particular field ?
• Why is one country often the home of so many of an industry's world leader ?
• Porter called the answers to these questions the determinants of national competitive
advantage. He suggested that there are four main factors which determine national
competitive advantage and expressed in the form of diamond.
Diamond
Factor Conditions: Include availability of raw materials
and suitable infrastructure.
Demand Conditions: The goods or services have to be
demanded at home: this starts international success.
Related and supporting industries: These allow easy
access to components and knowledge sharing.
Firm strategy, structure and rivalry: If the home market
is very competitive, a company is more likely to become
world class.
Diamond
Context
5-Forces domain

Factor Condition
Demand
-Natural resources
Local context that encourages -Demanding
-HR
investments customers
-Infrastructure
Vigorous competition among Unusual Local
-Scientific and
local rivals Demand in segments
Tech Infrastrure
that can be met
globally
Related and Support
Industry
-local suppliers
-Presence of clusters
Clusters
• Auto in germany
• Semiconductors of Japan
• Hosiery in Tirupur
• Films in Hollywood
• Stone cutting in Italy
• Detroit
Global Competitiveness Index
BASIC REQUIREMENTS
1. Institutions
Key for
2. Infrastructure
factor-driven
3. Macroeconomic environment
economies
4. Health and Primary Education

EFFICIENCY ENHANCERS
5. Higher Education and Training
Key for
6. Goods Market Efficiency ,
7. Labour Market Efficiency, efficiency-driven
economies
8. Financial market Efficiency
9. Technological Readiness
10. Market Size & SOPHISTICATIONS FACTORS
INNOVATION
Key for
11.Business Sophistication
innovation-driven
12Innovation
economies
Progression
• Factor Driven Economies

• Efficiency Driven

• Innovation driven
Examples
Porter found that countries with factor disadvantages were
forced to innovate to overcome problems e.g. Japanese
companies experienced high energy costs and were forced to
develop energy efficient products and processes that were
subsequently demanded everywhere in the world.
Sweden's global superiority in its pulp and paper industries is
supported by a network of related industries including packaging,
chemicals, wood-processing, conveyor systems and truck
manufacture. Many of these supporting industries have also
achieved leading global positions. ( Indian IT companies and
Automotive - Tata Motors are in process of doing so.)
 Tata Group –
Global Footprints
Dr. CR Rajan
Key questions
• Should Tata bid for Jaguar and Land Rover
• How else can Tata compete with Ford ,Toyota Honda
and other rivals to globalize ? .Can they think of being
a global Parts supplier
• How are the Tata group companies using M &A
• Tata Steel
• Indian Hotels
• Tata Tea
• TCS
• How does Tata as conglomerate manage globalization
and M & A
Keepers of the flame
• https://www.youtube.com/watch?v=tKb-
voAUww0&feature=youtu.be
Jaguar and Land Rover-1st
Yes
• Stretch Capabilities
• Acquire Distbn Channels
• Keep up with other low cost
players
• Add low cost manufacturing and
design to Land Rover
Pasture
No
• Tata motors already stretched ( $3
bn Capexes)
• High debt/equity, -ve FCF
• Low cost resources can be
contracted in India
• Premium car inconsistent with Tata
image
• Tata Beuracracy?
• How about China as a emerging
mkt. instead?
Tata Motors competencies
• Deep insights of Indian market
• Ace –an innovation
• Lower end car
• Leveraging existing channels of distribution
• Understanding of social issues
• Political management –very mixed e.g Bengal
• Is there any arena they are not in?!!
Routes to globalise

• Emerging market first like LG ?

• China as an exploding opportunity
• Focus on Heavy vehicles

• How does an Ansoff look?

Tata JLR acquisition – Bumpy Road?
• https://www.youtube.com/watch?v=H8kSF_pv9uE
Wharton
https://www.youtube.com/watch?v=LYQ9OCItyyk
Other Tata Companies-2nd pasture
• Tata tea
• Prototyped global M &A
• Limits to Synergy
• Use platform for growth
• Indian Hotels
• Acquiring a chain?
• Can an Indian company own a premium chain? Brands?
• Hostile take overs?
Other Tata Companies
• TCS
• Born global?
• Capitalized on labor market asymmetry and created an Indian MNC
• Tata Steel
• Lower costs
• Paternalism
• Are these transferable ? Especially cost advantage?
• Why did they buy Corus?
• Can we compare with Haier? Others?
Third Pasture
• Group assets
• Brand name ,quality, ethics and transparency
• Tapping into Indian assets?
• Are there commonalities across global strategy
• Not really –varying industries, structure and conduct
• What is unique about group structure?
Third Pasture
• What is unique about group structure?
• Equity ties cement group
• Tata Industries as holding company to launch new initiatives
• Not conglomerate but a large clutch of companies all independent –what do
they share?
• Take a long term view
Harbir Singh – Indian way
• https://www.youtube.com/watch?v=LYQ9OCItyyk
Tata Sons Experience Rationale for Gains Challenges
Acquisition
Taj Hotel’s Books are stressed
understanding of Access to Developed Jaguar Brand, Land
Luxury customers Markets –US, Rover Brand Internal Capex ~ $3
Europe bn
Tata Tea acquisition Aspirational product
of Tetley Access to high class in Emerging High leverage impact
Technology Markets on stock price
Tata Steel
Acquisition of Corus Leapfrog into high Potential high Shareholders may
end segment growth in China not support
House of Tata ,India wholeheartedly
credibility National Pride?
Price may be far less Corus deal “ iffy “
Titan Global Relevance than what it would
Corporate Center cost to build Perception of India
Competencies Ford selling in something like JLR
distress
Strategic Management -
Closing
Dr CR Rajan
 Basic Concepts of Strategic Management

Where do we start?

Environmental
Variables

1-294
 A REALISTIC MODEL OF STRATEGY PROCESS

Environmental
Analysis-PESTEL, 5
Forces,
Resources,Capabilities Resources and
Competence strategic capability
Strategic
Identifying
analysis Planning and
Options-Generic Strategies,
BOS allocating
Resources-
Evaluating Opportunity ,
Options- Strategic Strategy Budgets,
Stock price, choice implementation
PBT, MKT
Share Organisation
Structure-C-P
Stakeholder
Selecting a
expectations Managing strategic
Strategy—what best fit
change and culture
Environmental Analysis
• PESTEL
• Factors that have profound effect on consumption, aspirations, income
structures , Demography—
Aging societies- productivity and consumption
AI, Robotics
Industry 4.0
Industry Structure
• Five forces
• Rivalry
• Buyer’s power
• Supplier’s power
• Threat Of New Entrants
• Substitutes
• Competitive Strategy can work even in unattractive industries-Crown
Cork and Seal
Generic Strategies
• Cost Leadership

• Differentiation

• Focus
• Market Scope-Broad –Narrow
• Cray and Ivory
Strategic Process Management
Group Exercise – The Strategy Map and
Differentiated Strategies
Southwest Airlines SINGAPORE AIRLINES
The value chain...

Rs.

The processes which lead to delivery

of value to the customer
 A RESOURCE BASED APPROACH TO STRATEGY
ANALYSIS

4 Select a strategy that best exploits the

firm’s resources and capabilities relative to Strategy
external opportunities.

3 Appraise the rent-generating potential

of resources and capabilities for sustainable Competitive
competitive advantage, and appropriability. advantage 5 Identify resource
gaps which need
to be filled. Invest
2 Identify firm’s capabilities. What can the in replenishing and
firm do more effectively than its rivals ? augmenting the
Capabilities firm’s resources
Identify the resources inputs and
complexity of each capability.

1 Identify firm’s resources. Appraise

strengths and weaknesses relative to
Resources
competitors. Identify opportunities for
better utilisation of resources.
Resources and capabilities
• Resources- Scarcity, Imitability, substitutes

• Demand,Scarcity , Appropriability

• Capabilities

• Core competence
• Walmart
Blue Ocean Strategy
• Blue ocean vs Red ocean

• Making the competition irrelevant

• Strategy Canvas
• Value Innovation
• American Wine Industry
Diversification
• Diversification

• Synergy

• Inimitable Resources- How sustainable is competitive advantage/

• Entertainment
• Walt Disney Case
 Rethinking the Management of Multibusiness
Corporations: Lessons from General Electric

Jack Welch’s transformation of GE’s structure and management systems:

•Delayering --- from 9 or 10 layers of hierarchy to 4 or 5

•Decentralizing decisions.
•Reformulating strategic planning—from formal, document-intensive analysis to direct
face-to-face discussion of key issues.
•Redefining the role of HQ—from checker, inquisitor, and authority to facilitator,
helper, and supporter.
•Coordinating role of HQ— corporate HQ to lead in creating the “boundaryless
corporation” where innovations and ideas flow and where horizontal coordination
occurs to respond to new opportunities.
•HQ as change agent— corporate HQ driving force for continual organizational change
(e.g. “workout”, “six-sigma”).
Execution
• SCP

• Culture

• Transformation

• Performance
 Goals, values and performance

Definition Box
Value (for customers and profit)
Value-added

Profit
Accounting profit
Economic profit (economic rent)
EVA

Free Cash Flow

Discounted Cash Flow DCF

Real options

ROCE
 Goals, values and performance

To avoid ethical and societal issues, simplifying assumption:

Goal = interest of owners through long term profit maximization
Reasons: competition; market for corporate control; convergence of STOs’ interests and simplicity

Accounting profit: Normal return to capital

PROFIT
Nature? Economic profit: surplus available after all inputs have
Questions been paid for

Stock market value DCF

SMV = net value of firm
Emphasis on Max [Firm value] rather than Max [STo
value] because convenience and strategic view
In practice, they mean the same for strategy
Max [Profit] = Max [NPV of profits over life-time of firm]
Therefore, use of DCF method where NPV of CF
Max [Profit} translates to Max [Firm value]
Difference DCF and Discounting profits is treatment of K
consumed
Multi Business Enterprise
• Jack Welch
• #1,2 ,fix, close or sell
• 6 sigma
• Performance-Potential
• GE-Mckinsey
• Work Outs
• BCG
• GE- two decades of transformation
Execution
• MNC
• How is a country head of an MNC selected?
• Factors to look for
• Culture fit
• Business fit
• National Cultures
• Hofstede’s dimensions
• Organizational Culture
Sylvio Napoli
• Schindler’s India strategy
• Culture match and mismatch
• How good must a leader be?
• What is a must have
• What can be learnt?
• How do we execute a strategy?
• Alignment
• Consistent Goals
Tesla
• Disruptive Innovation- how does this work?
• Why is Tesla a valuable company?
• How do scale and scope play out?
• Financial impact of scale
• Financial impact of learning curve .
• Resources, Capabilities .
• How important is it to enter at premium end or low cost end
• Who will dictate the terms in future in auto business- Auto makers,
Battery makers, Google?
Globalization
• Challenges in globalization
• India’s special challenges

• Tata Sons – JLR case

• Group strategy- JLR as “Indian Pride”
• How was the future seen?
Global
• Theories of comparative cost advantage

• Porter’s Diamond

• GCI

• Challenges of MNC and Emerging Markets

THANK YOU