Strategic marketing

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Strategic Marketing

Faculty : Prof .Ashok Kumar Reference : Subhash Jain, Marketing Planning & Strategy, 6th Ed.)Strategic Marketing Management, Aakers)

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What should corporations do to survive in the fast changing environment.

What policies & business practices should be followed to support changing business environment ? .“SURVIVAL OF THE FITTEST”.

What should be the responsibilities of marketing managers to achieve the goals ?

Which is the best alternative among the options available? ( Evaluation and choice of strategy )

What is the system to monitor & control the operational issues ?

Benchmark Corporate excellence periodically to evaluate the position.

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First one touched the elephant’s side and expressed it as a big wall.

Second one felt the tusk and expressed it as a spear.

Third one felt its squirming trunk and said it is like a snake.

Fourth one felt around its knee and said it is like a tree.

Fifth one touched the ear and said it is like a fan.

The sixth one caught the swinging tail and said it is like a rope.

Story of blind men and elephant : Six blind men went to see an elephant .Each

satisfied himself by feel and observation

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All these men disputed loud and long , each was right in his view , but they all were wrong .

What is the morale of the story

Managers often act like blind people, they loose sight of big picture of the business and focus on short term goal . Strategy formation is our elephant. Since none of them had the vision of the entire beast (elephant) , each caught hold of some part or other and relied on the utter ignorance about the rest. While you can not get an elephant by just adding all parts, to comprehend the whole , we need to understand each part.

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Strategic management is a process through which organizations analyze and learn their internal and external environments , establish strategic direction, create plans that are intended to help and achieve the established vision & goals by executing the plans with an effort to satisfy the stakeholders & shareholders.

Strategic Management Process.

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Sun Tze on Strategy

• “Know your enemy ( Competition ) , know yourself,( Corporation ) and your victory will not be threatened.

Know the terrain,( market ) know the weather ( market forces ) , and your victory will be complete.”

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Strategic Planning

…is the managerial process of developing and maintaining a strategic fit between the organization's objectives and resources and its changing market opportunities.

Org Objectives Resources

Changing Environment

Strategic Fit

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Strategic planning in an organization aims to achieve a fit between the internal resources and capabilities of an organization and external opportunities and threat in the industry environment.

According to C.K Prahalad and Gary Hamel, such approach leads to a mind set in which management focuses too much on achieving the best fit between internal resources and external environment and do not focus enough in building new resources and capabilities to exploit future opportunities in the business. Therefore the organization which rely on the fit model to strategy formulation are unlikely to build competitive advantage. This is more apt in dynamic competitive environment.

Eg Xerox ignored the rise of cannon, Ricoh, etc in photocopier market. GM overlooked Toyota , Caterpillar ignored komatso.

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Hence strategic approach by the companies to think beyond their existing resources and capabilities create an obsession and quest for global leadership within the top management of the company . This is described as Strategic intent. It is more internally focused and concerned with building new resources and capabilities .

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Strategic InnovationInnovation helps to address the demand of new market and or existing market. This can be explained with Ansoff’s model.

Existing Market

New Market

Exiting Product

New product

Evolution

Disruptive innovation

Revolution

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SustainingRevolutionary or discontinuousAn innovation that creates a new market by allowing customers to solve a problem in a radically new way.

EvolutionaryAn innovation that improves a product in an existing market in ways that customers are expecting.

DisruptiveAn innovation that creates a new (and unexpected) market by applying a different set of values.

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Strategic Innovation

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Innovation versus sustainability: An age old questionIs which is more important Strategy or execution ?

You stick to your knitting You think out side the box.

You exploit what you know You explore what you don’t know.

You meet current customer needs. You anticipate future needs.

You Plan You let things emerge.

You demand accountability You allow freedom and flexibility

You impose process and You avoid process and encourage Structure . Unstructured interaction.

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The Role of Marketing Strategy

in business

CorporateVision Strategy:

•Corporate•Business•Functional

Operating Plans

Execution & control

Market feedback

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According to Hofer and Schendel, organizations develop strategies at three structural levels:

• Corporate level—(corporate marketing)

• SBU level — (Strategic Marketing)

• Product/Market level—(Functional Marketing)

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Strategic Marketing (Marketing at the SBU Level)

• Strategic Marketing requires–Detailed understanding of market needs,

–Proactive use of competitive intelligence at the corporate as well as SBU’s levels

• Strategic Marketing –Focuses on what the firm do best at the SBU level

–To secure and maintain a sustainable competitive advantage

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Strategic Marketing Process.

Define Vision, Mission Goal , Objective

Environment Analysis

Identify core competency

Generate strategic Alternatives

Implement , feedback and Control

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SINGAPORE AIRLINES is engaged in air transportation and related businesses. It operates world-wide as the flag carrier of the Republic of Singapore, aiming to provide services of the highest quality at competitive prices for customers to earn the mind share of its customers and profit for the company

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Examples of Corporate Mission

MARRIOTT’S Mission Statement:

We are committed to being the best lodging and food service company in the world, by treating employees in ways that create extraordinary customer service and shareholder value

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Strategic marketing begins starts with defining the vision for the company. Vision is some thing a company wishes to become or aspire to be. It defines the frame work for the organization taking in to account the core ideology and envisioned future.

•Core ideology is the unchanging part of the organization, it is like a character . •Envisioned future is the goal to be reached .

VISION

CORE IDEOLOGY

ENVISIONED FUTURE

CORE VALUES

CORE PURPOSE

AUDACIOUS GOALS

VIVID DESCRIPTION

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Core values are deeply held thought which an organization would not change irrespective of change in industry environment or management fads. Social responsibility, Integrity, Innovation, Customer excellence etc.

Core purpose : It is the idealistic reason for being. The purpose sets the direction in which organization proceeds.

Audacious goal : what an organization would like to achieve , a tough and an extra ordinary commitment and effort of the management .

Vivid description is putting the goal in to words that invoke an action . ( Putting a measurable system )

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“ Corporate Culture" is people's ability to collaborate with humour and energy to to align themselves with the vision of the firm & create smart strategy on-the-hoof. Margaret Wheatley said that strategy concept has to move from strategic planning to strategic thinking. A better strategic thinking comes when people are adept at thinking collaboratively. They think better when not being constantly whipped into line by a hefty strategy document produced by a clever elite.They think better when each member of the organization feels the Sense of Ownership Responsibility Accountability towards the assigned task in line with the goal. ( SHARED VISION )

Corporate Culture

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McKinsey 7-S Framework for building corporate level Strategy .

STRUCTURE

STRATEGY SYSTEMS

STYLESKILLS

STAFF

SHARED VALUES

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Commit

Resources Build responsibility

Define measurement criteria

Strategic control

Measure Performance

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Frame Work of Marketing Strategy

A successful marketing strategy requires customer orientation and competitor focus called market orientation

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Strategy Formulation

Mission Goal Objective

External Analysis

Internal Analysis

BPESTanalysis

Corporate level strategy

Business Unit level

Functional Level

Evaluate business performance ,Governance & ethics

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Key Elements of Marketing Strategy Formulation

• The strategic 3 Cs –Customers, Competitors & the Corporation

• Environment analysis -- PEST• Strategic Marketing Decisions

–Where to compete

–How to compete

–When to compete

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• Must have a clearly defined market • Must have a good match between

corporate strengths and market needs• Must have significant positive

differentiation in the key success factors of the business

A Viable Marketing Strategy

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Fast GrowthFast growth is the result of strategies designed to expand the market size and earnings quickly, in terms of monetary value rather than quantity.

Fast InnovationFast innovation involves setting extremely high innovation goals and securing a competitive edge, over what our competitors can do.

Marketing strategy of a firm is for :

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GROWTH STRATEGY OF AN ORGANIZATION CAN BE :

ORGANIC GROWTH OR INORGANIC GROWTH

Organic growth strategies are business development techniques that grow a company via increased output and larger sales volume. Organic growth is growth that comes from a company's existing businesses. Organic growth strategies are built on four main pillars: revenue, headcount, PR, and quality.

Inorganic growth strategy : As part of business strategy , management decide whether the firm should grow naturally (commonly called organic growth) or in the form of going outwards to acquire or merge with other businesses .. This is called inorganic growth which normally takes the form of Mergers and Acquisitions (M&A) exercise.

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While M&A is the easiest way to grow, it is a risky proposition as it could either be a success or disaster. While the market values growth, there is a hierarchy in quality of growth drivers.Organic growth is preferred over inorganic growth as the latter comes at a higher cost and is more risky.

Companies go in for M&A activity to boost sagging growth in top line. Typically, growth is slow in maturing markets with intense competition. In such a scenario, companies can either boost growth through product innovation or differentiation.

Alternatively, they can acquire a high growth company with good fundamentals in a fast growing market.

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In the early 21st century, the beer industry experienced aggressive consolidation due to a series of mergers and acquisitions between the big breweries. To strengthen its position in the fast consolidating industry, South African Breweries (SAB) acquired Miller brewing company, thereby forming the world's second largest beer company- SABMiller. Instead of establishing its own brands, SAB had a history of acquiring companies and transforming them according to its own model. With the formation of SABMiller, the competition in the US heated up between itself and Anheuser-Busch, which controlled more than half of the US beer market. The battle intensified when Anheuser-Busch entered the Chinese market, where SABMiller already had a presence.

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Cisco systems, which is a well know brand in the networking and communications space, is on a major expansion spree with its recent acquisition of Starent Networks. The $2.9 billion deal aims to leverage Starent’s mobile infrastructure capability by enabling Cisco to provide a strong architecture for rich, quality multimedia experiences to mobile subscribers.Starent has an extended expertise in delivering high quality content such as video, mobile TV and gaming to mobile subscribers. With the rapid explosion of content downloads from mobile phones, especially video transfer, mobile data traffic has seen an exponential growth in recent times.

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Accelerating organic growth – The first step to accelerate organic growth is securing the customer relationships for effective retention strategies. Understanding the factors most important to your customers, what drives their loyalty, and what areas deserve the most focus.

Develop account managers and sales departments to develop a coordinated strategy to build and grow your company the most intelligent way – through the eyes of your customers.

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GE 9 cell matrix or business screen matrix. Market

Attractiveness

L

M

H

Organization’s business strength

H M L

Go

stra

tegy

Selecti

ve / h

old s

trateg

y

No Go s

trateg

y

Market Attractiveness : Size, growth, Margin , Regulation Fewer competition etc

Business strength : Skill, financial soundness, technology edge , Distribution , Brand , large customer base , R&D, prod Qlty etc.

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Michael Porter’s 5 force model to study the barriers to entry In a market .

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Entry mode strategies in new Market .

Entry Mode Choice Advantage

Exporting Ability to realize on economy of scale

Licensing Low development costs & risk

Franchising Low development cost & brand visibility

JV Access to local partner & leverage on their Competitive advantage

Wholly owned Subsidiaries. Protection of technology , global strategic

coordination , leverage on location & experience curve.

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•For Outsourcing to be an effective strategy :

•Evaluate organizational Cultural compatibility between the partners.

•Technological and managerial skills which complement the principle partner’s line of business

•Principle’s control over quality

•An agreement to ensure that there will be no infringement of copyright , IPR etc.

•Evaluate if the local partner has potential to turn out to be principle’s competitor in near future .

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Reason for New Product Failures Overestimating market size Poor marketing research Design problems Excessive development costs Incorrectly positioned, priced, or advertised Competitive reaction

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New Product Development Strategy Original products Acquisition Product improvements Product modifications New brands through the firm’s own R&D efforts.

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NPD Strategy

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Strategic role of Product Management

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Buying motives.

Benefits desired

Consumer Perception

Product attributes

Product choices

Brands preference

Buy

Consumer decision making process.

= ∑ P.A + CP

Gives meaningTo the product

Purpose In consumer To associate

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• We need to set price when we have a new product, or when we enter a new market with an existing product.

• How? – Need to decide what position you want your

product to be in.

Pricing strategy

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Pricing Strategies

A Sound Strategy Pays for Itself . Sound pricing strategy creates a more competitive position within your industry and has the potential to increase profitability across product lines. While it may be tempting to implement tactics that yield short-term gains, a well-crafted pricing strategy will help to deliver sustainable profitability over the long haul.

Pricing strategy addresses 4 key drivers of pricing strategy excellence:

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4 key drivers of pricing strategy .

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Transaction management : Manages immediate pricing issues for all products and services that impact list prices, discount grids, allowances, rebates, and resulting net prices.

Value Perception: Perceived value metric and competitive environment analysis determine how your products and service measure up with customers in order to determine base prices.

Organization: Work in partnership with clients to transfer pricing management knowledge, establish best pricing practices and processes, instill a pricing culture focused on driving profits, and install tools to control and manage price .

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Pricing Grid

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Price-Quality Strategies

• Philip Kotler’s 9 price-quality strategies

Premium HighValue

SuperValue

OverCharging

MidValue

GoodValue

Rip-offFalse

EconomyEconomy

High QualityHigh Quality

Low QualityLow Quality

High medium High medium Low Low

Medium

Price

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New-Product Pricing Strategies

1. Skimming pricing– Charging a high price initially and reducing the

price over time– Commonly used when introducing new &

innovative products .

2. Penetration pricing– Charging a low price when entering the market

to capture market share– Used when competitors are closing in with

similar or better products

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3. Intermediate pricing– Pricing somewhere in between the skimming

strategy and the penetration strategy

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Pricing Strategies

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Pricing Process

1. Set Pricing Objectives (see next slide)2. Analyze demand3. Draw conclusions from competitive

intelligence4. Select pricing strategy appropriate to

the political, social, legal and economical environment

5. Determine specific prices

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Possible Pricing Objectives

• Profit objectives e.g.– Targeted profit return

• Volume objectives e.g.– Dollar or unit sales growth– Market share growth

• Other objectives e.g.– Match competitors’ price– Non-price competition

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Demand Analysis

• Measure the impact of price change on total revenue

• Predicts unit sales volume and total revenue for various price levels

• Different customers have different price sensitivities and needs

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Impact of Cost on Pricing Strategy

• Fixed and variable costs – Full-Cost Pricing

• Markup pricing, break-even pricing and rate-of-return pricing

– Variable-cost pricing

• 3 types of relationships– Ratio of fixed costs to variable costs– Economies of scales– Cost structure

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Impact of Ethics on Pricing

• How should you price if your product is a life-saving drug?

• What are the ethical considerations?– Customers have no choice– Need to pay for the research– When cheaper options doesn’t work– Competition decides

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Information Needed for Price Change

• Customers’ ability & willingness to buy; customer lifestyle; benefits sought; characteristics of the product e.g.– When the kopi tiams, local coffee shops in

Singapore tried to raise the price of a cup of coffee by 10 cents in March 1994, the grass-root reaction was stormy

– When Starbucks Coffee and Spinelli’s raised their prices in the beginning of 1998 by a hefty 20%, nobody raised an eyelit

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• Need to know everything about the competitors – How would competitors react to our price

change? (see following slide)– In obtaining competitors’ information,

remember the value of the information

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Pricing Strategies for Established Products

Three strategic alternatives:• Maintain the price if you are the leader e.g.

– In 1999, Shell in Singapore maintained its price when other petrol companies engaged in a price war until towards the end of the engagement

• Reduce the price e.g.– SIA regularly reduce its airfare in anticipation of the

developing market situations

• Increase the price – during inflation, or if demand is expected to increase or if

you wish to harvest e.g. in Indonesia

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Price-Flexibility Strategy

• One-price policy—setting one fixed price for all markets

• Flexible-price policy—setting different prices in different markets based on:– Geographic Location,– Time of delivery, or – The complexity of the product

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How much flexibility in price?

• Depends on the Demand-Cost gap and the influence of competition, social, legal and ethical considerations

• Example: Life-saving drugs

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Product-Line Pricing

• When pricing products in different lines, must take cross-elasticities of demand across the set of products into consideration

• The idea is to maximize the profits of the entire organization rather than that of a single product or a single line

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Leasing Strategy

• Leasing is more common for industrial goods e.g.– Singapore Airlines sold many of their

aircraft and lease them back for their operations

• There is a growing trend toward leasing consumer goods as well– e.g. Leasing of office equipment

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Reactions to Price Change

• Customers are more sensitive to price changes if the products cost a lot and/or are bought frequently

• Competitors may see each of your price change as a fresh challenge and react according to its self-interest at the time. Need to estimate each close competitor’s likely reaction

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Responding to Competitors’ Price Change

• If competitors lower price for homogenous products– Try augmenting the product– If it doesn’t work or if it is not likely to work,

then meet the price cut head-on

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Responding to Competitors’ Price Change (cont’d)

• If competitors raise price– In a homogeneous market, follow if you think the

whole market is likely to follow– In a non-homogeneous market, evaluate

• The reason for the competitor price change• If the price increase is temporary• The effect on your market share & profit• The likely response(s) from the other competitors

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When a Market Leader is Being Attacked on Price

Options available:• Maintain price

• Raise perceived quality

• Match competitors’ price

• Increase price and improve quality

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Impact of Discounting on Brand Equity

• Why discount?

• Problems emerging with discounts

• The value equation (V=Q/P)

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Price War

Price wars are frequent in industries where• Cost differentiation opportunities exists• Capital is intensive and products are

homogeneousExamples: Airfares, ISP, Petrol, & Loans e.g.

– The Home Loan price war in Singapore in Sept 2000 involving OUB, UOB, DBS among others

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Yield Management

• What is it?

• Yield management goals

• Industries that benefited from yield management

• Common variables

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Core Capabilities

Product LeadershipRefers to the ability to develop creative, premium products through specialized new technologies.

Market LeadershipRefers to the ability to achieve the "LG brand is No. 1" goal backed by its formidable market presence worldwide.

People LeadershipRefers to talented people who perform excellently by internalizing and practicing innovations.

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LG strives to enhance the customer’s life (and lifestyle) with our intelligent features, intuitive functionality, and exceptional performance. (Positioning Statement)

Choosing LG is a form of self-expression and self-satisfaction. Our customer will take pride in owning and take comfort in knowing he/she made a smart, more informed decision.

Brand Platform The LG brand is composed of four basic elements:

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Management Level responsible for strategic management in an Organization

LEVEL-I Corporate Management Chmn, B.o.Dir

LEVEL-2 S BU Management CEO, COO, CFO, CMO

LEVEL -3Operating Management . Line & Functional managers

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Level Responsibilities

Corporate Management Set Vision, Goal & Direction for the organization .

Chart long range plans . Review the strategies w.r.t Goal & suggest

course of correction if any.

Strategic Business Unit Make strategies for SBU in line with Management the corporate goal . Drive strategies to

achieve the desired performance at business unit level.

Operating Management Execute the plans at all functional level to achieve the target set by the SBU .

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Summary : Objective of Strategic ManagementProcess in an Organization.

Achieve Goal Congruence . Harmonize corporate goals , Vision across the diversifies corporation of business enterprise.

Ensure Smooth communication & coordination between all business function of the corporation for successful implementation of business strategy

Evaluate business strategy , take corrective action plan, formulate contingency plan in tune with the market condition.

Influence change management in the organization .

Enhance profit consciousness among the employees.

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Generic issues in BPEST analysis in external environment.

Business Political Economic Social Technological

Life Cycle of Legislation Inflation skill DevelopmentIndustry Labor Law Interest rate consumer in IT

Company law Currency confidence IndustrialCompetition Taxation fluctuation Consumerism application type Government’s GDP

priority Terms of trade Income levels

employment levels

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McKinsey 7-S Framework to create organizational Structure conducive for growth .

STRUCTURE

STRATEGY SYSTEMS

STYLESKILLS

STAFF

SHARED VALUES

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Inboundlogistics

operation

Out boundlogistics

Mktg & Sales

Service &support

Organizational infrastructure

HRM

Technology initiative

Procurement

Internal analysis for building Competitive advantage : Michael Porter’s value chain model

Primary

Support

Activities

value

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Generic building blocks of competitive advantage

CA through LOW COST &Differentiation

Innovation

Superior efficiency

Quality Process

Customer Responsiveness

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Long range corporate planning strategy

Growth & expansion strategy

Expansion Diversification Divestment Strategy Strategy Strategy

1.New market/Existing Related Un Related Product 2.New Product/Existing Forward, Backward, Concentric Conglomeratemarket M&A3.Existing market /Existing J.Vproduct

1.Hive off2.Out source3.ContractManufac-turing4 Liquidation

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Entry mode strategies in new Market .

Entry Mode Choice Advantage

Exporting Ability to realize on economy of scale

Licensing Low development costs & risk

Franchising Low development cost & brand visibility

JV Access to local partner & leverage on their Competitive advantage

Wholly owned Subsidiaries. Protection of technology , global strategic

coordination , leverage on location & experience curve.

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•For Outsourcing to be an effective strategy :

•Evaluate organizational Cultural compatibility between the partners.

•Technological and managerial skills which complement the principle partner’s line of business

•Principle’s control over quality

•An agreement to ensure that there will be no infringement of copyright , IPR etc.

•Evaluate if the local partner has potential to turn out to be principle’s competitor in near future .

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The corporate level strategy identifies the business in which an organization should participate , create value , expand or contract by mergers, acquisition & spin-off to maximize the long term profitability & growth.

Corporate Level Growth Strategies.

Three corporate level growth strategies are :

•Horizontal growth strategy : •Vertical Growth Strategy •Out source strategy

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Corporate level growth strategies :

1.Horizontal integration. The process of acquiring or merging with industry competitors in an effort to achieve competitive advantage which come with large scale & scope. Eg World COM acquired 60 companies between 1983 to 2001 Chrysler merged with Diamler Benz Pfizer acquired Warner lambert

2 .Vertical integration is a process of expanding the operation backward into an industry which produces inputs for the company or forward into an industry to market its products. IBM , Reliance Raymond etc.

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Strategic out-sourcing :: : This involves separating some of the value creating activities within the business & allowing them performed by independent entity or spinning off the part of that function of the organization as an independent entity.

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Strategic Management process at SBU level in an organization.

Business vision& goal

Strategic plan

Budget &Resources.

ResponsibilityCenters

Evaluationof

performance

Reward & recognize ( Satisfied)

Corrective Action( Unsatisfied)

(Feedback)

Budget revision

Alternativeplan/ Contingencyplan

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STRATEGIC MOVES TO FACE

COMPETITION IN MARKET

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The objective of defense position or fortress strategy is to strengthen the strongly held position to build an impregnable fortress capable of repelling attacks by current or future competitors. The marketing actions used are :

Retain customer & build CLV by improving customer satisfaction & loyalty.

Actions are: Increase quality control process at all level. TPM , Six sigma Lean manufacturing process , etc.

Continue product innovation & modification to increase customer benefit.

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Focus on market communication to simulate selective demand , stress product superiority & build TCO.

Build key accounts , customer referrals.

Train internal employees , partners, channel members , build learning & sharing culture ( knowledge management initiative)

Build/expand distribution channel , subcontract , outsource the activities which are not of competitive strength of the organization

Leverage on technologies for building strength.

Reduce attractiveness of switching : create /build brands, brand extensions at every price point . Fill the product gaps.

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Flanker strategy: Protect against loss of specific segment of customers by developing a second line of products /Brand which takes care of the weakness of the original product offering in terms of price point, compact features. etc. More often used in the mass segment for price conscious customer to deliver the similar benefit of owning a reputed brand with more critical features. A strategy for creating a second line of customers who are different from the early adopters & wanting to associate /experiment the brand .

The underlining purpose of the strategy is to close the product gaps through which the competitors can enter in the market. ( unorganized sector , regional player etc)

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Confrontation strategy Protect against he loss of share in the current market or customer base by meeting or beating a head to head competitive offering . Improve ability to win new customers who will other wise attract to competition offing .

Develop or modify the product to match superior competitor’s offering. Lower prices & or heavy promotional efforts . Create a price war & force the competition to to follow it.

Market expansion strategy: Increase ability to attract new customers by developing new product offering . Build product line extension, for variety of new applications.

Contract or strategic withdrawal . Increase ability to attract new customers in select high growth segment & with draw from smaller non strategic ( markets , profit ) . Build segment focus.

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Follower’s growth strategy.Frontal attack strategy : Leapfrog strategy , Flank strategy , Encirclement strategy , Guerrilla attack strategy.

Frontal attack strategy : The challenger builds cost advantage through internal efficiency & creates a differentiation good enough to attract the leaders,s existing & potential customer base. The strategy works well only when the consumer do not have strong brand preference for the leader’s product.

Leapfrog strategy: Challenger differentiates its position, on distribution, price, low cost product etc leveraging on technology, tie ups. More often technology is used as a driver to differentiate itself. Vistacon’s strategy on “Acuve” contact lens, to displace Bausch & Lomb.

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Flank attack strategy: When the leaders brand does not satisfy the full need of the segment , which is more fragmented . The strategy is all about re-defining the market. Small car , bike market etc.

Encirclement strategy: Targeting several untapped/ underdeveloped market segment simultaneously , The strategy is to surround the leader’s brand with variety of offering aimed at several peripheral segments.The strategy works well when the market is fragmented on the basis of multiple applications, & different geographic locations.

Guerilla Attack strategy: A challenger makes sporadic un predictable moves in the market to upset the going strategy of the leader. These strategies can be either a artificial price drop. Short term sales promotion campaign, offensive strategies leading to lawsuits. Etc. The aim of the strategy is to slow down the leader’s expansion strategies by diverting its resources & attention.

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Investment center Decisions

ROI = PBIT Invested Capital

ROCE = PAT + Post tax interest on Loan term Loan

Capital Employed

CE=(Shareholder’s capital+ Reserves+ Long term Liabilities)

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ROI Problems

• Feed the Dogs ( Over Investment )

• Starve the Stars ( Under Investment )

Relative Market Growth

Market Share Low

High

High Low

DOG

PROBLEMCHILD

STAR

CASH COW

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EVA Basic PremiseManagers are obliged to create value for their investors Investors invest money in a company because they expect returns There is a minimum level of profitability expected from investors, called capital charge Capital charge is the average equity return on equity markets; investors can achieve this return easily with diversified, long-term equity market investment Thus creating less return (in the long run) than the capital charge is economically not acceptable (especially from shareholders perspective) Investors can also take their money away from the firm since they have other investment alternatives

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EVA is the gain or loss that remains after assessing a charge for the cost of all types of capital employed. What an accountant calls profits in an income statement , it includes a charge for the debt capital employed which is commonly referred to as interest expense. However, an income statement does not include a charge for the equity capital that was employed during the accounting period.

Therefore, EVA goes beyond conventional accounting standards by including a provision for the cost of equity capital. The cost of equity needs to be factored into business investment decisions in order to enhance shareholder value.

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•Although EVA is couched in financial analysis, its primary purpose is to shape management behavior.

•EVA can be used as a performance measure to evaluate an overall company, a division within a company, a location within a division, or an individual manager.

•By setting goals, EVA can become a motivational tool at various levels of management.

•EVA can also be used in downsizing decisions.

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EVA and Corporate CulturePaying managers for performance is a backward-looking practice, but the capital markets assign value on a forward-looking basis. Therefore, companies that pay for past performance may be unwittingly paying their managers to undermine value creation.

When EVA-related performance measurement process is implemented throughout your company, all affected employees need to understand the goal, as well as how their actions contribute to meeting it. In this respect, the EVA’s popularity parallels the 1980s “total quality management” trend. Like quality, value is every employee’s responsibility. To this end, management and employee training programs are a crucial component of any EVA plan.

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What is Needed to Calculate Company’s Economic Value Added (EVA)?Only following the information is needed for a calculation of a company’s EVA:

•Company’s Income Statement •Company’s Balance Sheet

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Illustration: Income Statement ( P/L statement )Net Sales 2,600.00

Cost of Goods Sold 1,400.00SG&A Expenses 400.00Depreciation 150.00Other Operating Expenses - 100.00

Operating income 550.00Interest : 200.00Income Before Tax 350.00Income Tax (40%) 140.00

Net Profit After Taxes 210.00

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Illustration: Balance Sheet

Current Assets Current Liabilities

Cash 50.00 Accounts Payable 100.00Receivable 370.00 Accrued Expenses 250.00Inventory 235.00 Short-Term Debt 300.00Other Current Assets 145.00 Total current Assets 800.00 Total Current Liabilities 650.00Fixed Assets Long-Term Liabilities Long-Term Debt 760.00 Land 650.00 Total Long-Term Liabilities 760.00Equipment 410.00 Capital (Common Equity)Other LongTerm Assets 490.00 Capital Stock 300.00Total Fixed Assets 1,550.00 Retained Earnings 430.00

YTD Profit/Loss 210.00 Total Equity Capital 940.00

TOTAL ASSETS 2,350.00 TOTAL LIABILITIES 2,350.00

NonInterest Bearing Liabilities

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CCRDebt = [Debt/(Debt+Equity)](1-t) Where t represents the company’s tax rate.

+ CCREquity = Equity/(Debt+Equity)

Capital Cost Rate (CCR) will be : Assume owners expect 13 % return* for using their money because less are not attractive to them, therefore, company has 940/2350 =40% (or 0.4) of equity with a cost of 13%.

Company has also 60% debt and assume that it has to pay 8% interest for it. So the average capital costs would be: CCR ** = Average Equity proportion * Equity cost + Average Debt proportion * Debt cost = 40% * 13% + 60% * 8% = 0.4 * 13% + 0.6 * 8% = 10%

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** Note: if tax savings from interests are included (as they should if), then CCR would be: CCR = 40% * 13% + 60% * 8% *(1- tax rate) = 0.4 * 13% + 0.6 * 8% * (1 - 0.4) = 8.08 % (Using 40 % tax

rate)

Companies paying high taxes and having high debts may have to consider tax savings effects, by adding the tax savings component later in the capital cost rate (CCR)

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Identify Company’s Capital (C)Company’s Capital (C) are

Total Liabilities less Non-Interest Bearing Liabilities:

Total Liabilities 2,350.00lessAccounts Payable 100.00Accrued Expenses 250.00----------------------------------Capital : 2,000.00

[ No interest cost incurred on these Liabilities. ]

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EVA = NOPAT - C * CCR = 210.00 - 2,000.00 * 0.10 = 10.00

Note: this is the EVA calculation for one year.

If a company calculates & reports EVA in its quarterly report ,then it’s capital costs will be : Q1 Capital costs for 3 months: 3/12 * 10% * 2,000 = 50 Capital costs for 4 months: 4/12 * 10% * 2,000 = 67 Q2 Capital costs for 6 months: 6/12 * 10% * 2,000 = 100 Q3 Capital costs for 9 months: 9/12 * 10% * 2,000 = 150

EVA for Q1, Q2 , Q3, Q4

160 143 110 60

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Growth market strategies for Market leaders.

It is a strategic objective a market leader to maintain its leading relative market share in the face of increasing competition. The marketing strategies followed to maintain leading share position are : 1Fortress or defense position strategy. 2Flanker strategy 3Confrontation strategy 4Market expansion or Mobile strategy 5 Contraction or strategic withdrawal strategy.

An organization will deploy these strategies singly or in combination to maintain it s leading position.

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. Mission statement of Boeing : “People working together as a global enterprise for aerospace leadership by 2016.”

GE : Be No.1 or No2 in all the businesses it venture into.

Microsoft: Empower people through great software any time , any place & in any device.

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Secrets of success of business corporation. Dell computer is one of the most extraordinary success story in business . Michael Dell started in 1984 , became the highest performer & largest producer of computer’s system .The company is quoted as the best example for logistic & supply chain system. How did Dell register persistently high profitability?

South West Airlines has long been a high performer in U.S airline industry , known for low fares ( 30% below its rivals) low cost structures & superior profitability.

Cisco Systems started in 1984 as a networking product company ,went public in 1990 with annual sales of $ 70 Mn, & evolved as $19 bn organization having no debt & ROI of 22 % by 1999.

The success of these organization lies in strategically planned, executed & monitored business with strong leadership quality which exhibited willingness to change with environment.

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Strategic Planing & Control in an organization.

Operational level

planing &Control

Corporate level planing Control Strategic

Business Unit level planing Control

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Measure financial & non financial performance of activities . Identify the functions deviating from the organizational goal & objective.Take corrective action .

( Financial : Top line revenue , Bottom line profit , ROI , EVA , PAT ROCE Working capital, Budget , Debt control , NPA etc)

Non Financial : Customer satisfaction , Employee satisfaction & retention, Productivity & efficiency of the employee , Technology & processes . Market share maximization. Business integrity & commitment . ( Corporate Governance ) Supplier integration

Conducting Management Audit : Employee (People) audit , process audit , Financial audit, Infrastructure audit , Supplier audit

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Competitive strategy in a declining industry .

Leadership through Process, quality etc.

Niche strategy through differentiated level of product & service

Harvest strategy by optimizing the cash flow

Divest strategy by selling off the business

The choice of the strategy depends upon intensity of the competition & the firm’s ability to address it.

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Corporate performance :Why divide business in to responsibility centers.

Is performance affected by governance & business ethics. What made the collapse of Enron ,a principal player in the natural gas pipe line operator in 90’s

The causes of poor performance.

Lack of ownership & responsibility at various management levels .High cost structure lack of integrity & Business ethics. Improper mechanism for measuring the business performance. Poor organizational culture

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Economic Value Added.

Why EVA ?

Performance measures like ROI, ROCE , ROE ,EPS Net profit , operating profit evaluate the performance of the business .

They lack proper bench mark for comparison . Shareholders require minimum rate of return on their investment depending on the risk in the investment. Their wealth is measured in terms of capital appreciation reflected in the market value of shares & dividends . Management’s ability to meet the expectation of the share holders are reflected in terms of the share value.

EVA helps to focus the share holder’s return & mould the managers of the organization to work like a owners of their business.

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Concept of EVA : Started by US financial advisory ; Stern Stewart & Co.Called Economic Income. Subsequently called EVA. An organization creates hare holder’s value only if it generates return in excess of the cost of capital.

Net profit > the cost of capital

Hence EVA = NOPAT -( Total Capital Employed X average cost of Capital) = Excess of return over CoC

If the EVA is negative , it implies that the organization is destroying the shareholder’s wealth , even though organization reports positive & growing EPS, or ROCE. .

ROI verses EVA : 1. EVA measures the real profitability . It indicates the shareholder’s wealth for the risk they take in investing the capital in the organization.

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2.EVA encourages growth in new products, new equipment , market, quality measures etc 3.Builds sensitivity towards the resource mobilization , allocation & investment decision. 4.It measures the effective productivity of all factors of production.

Increasing EVA :

1. Increase NOPAT with the same amount of capital 2. Reduce the capital employed without affecting the earning.( Discard the unproductive assets) 3. Investing in the projects , products etc where the earning is more than the CoC . EVA & Managerial performance 1.Builds the competitive spirit among the managers to create value for the share holders , by focusing how capital is being used to create higher cash in flow.

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2. Develops the overall competency of the organization to earn higher return operating in a similar risk seeking business environment.

3. Makes the mangers to care about the assets & income & helps them to assess properly the trade off between the two.

4. It helps the managers to focus on the value creating activities rather than wasting time & energy with accounting principles.

5 EVA linked Incentive : There is no upper limit of incentive for performing managers who helps to increase the EVA . It creates tremendous peer pressure.

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Who is using EVA in Indian corporate sector

TCSTATA MotorsTISCOICICI bank Eureka ForbesGodrej group( GCPL, Godrej Properties , Godgej Sara Lee , Godrej Agrovet Godrej Food )NIIT

Insights : Godrej recorded an EVA improvement of 35 Cr (FY01-02) Sales grew 24%, Profit grew 71%

The EVA target set by the organization was not only met but exceeded . ED & President EVA has no only helped the Godrej Group reward richly outstanding performance but also build entrepreneurial spirit.

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Implementing EVA in an organization

4 Step process :Known as 4 M approach

1 Measurement

2 Management system

3. Motivation

4. Mindset

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Management audit Process.

People audit

Process audit

Financialaudit

Infrastructure audit

Strategic plan audit

Evaluation & Management Control

Compensationcompetencyperformance productivityB/MLTQ

PolicyQuality processIT process (ERP)CSISupplier rating

Work environment BSC

Operation audit versus & management audit

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Performance measures are split in four categories

I Financial Factors Soundness of the organization to share holders

II Customer Factors Quality , Speed effectiveness, efficiency with which the organization

deliver the customer satisfaction

III Internal Business Internal business process support the organization or Process not ?

IV learning & Growth Continuos improvement & building capability to sustain change & achieve competitive dominance

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Strategic goals & objectives

Customer perspective

Learning & growth

Financial perspective

Internal business & process perspective

BSC Frame work

Strategic marketing

Education

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