Nissan, Renault and GM Alliance

Factfile

• Carl Goshn is the CEO of both Renault and Nissan
• Renault owns a controlling stake in Nissan. It own 44% of Nissan’s shares and Nissan inturn owns 15% in Renault.
• Nissan & Renault would buy 10 percent stakes in GM
• Some analysts believe that Toyota may overtake GM
• Earlier Renault’s past efforts to invade the American market, have ended in costly fiascos
• The combined total production of 15 million vehicles a year would account for one quarter of the global market
• Toyota has 14% market share
• Investors value GM at $17 billion, Renault at $ 31billion and Nissan at $49 billion
  
  Questions worth pondering
• What would be the alterations in the competitive landscape of the auto industry
• How will it specifically affect the other 2 (ford, Chrysler) of the big 3 in Detroit
• Challenges in this Euro- American alliance
• Financial improvement of GM which currently is planning to cut 30,000 jobs by 2008
• Operational Impact on linkages in the engineering, design and manufacturing of GM
• Implications of product and marketing strategies of many vehicle brands involved in such an alliance.
  
  Please provide your comments on the FUTURE outcome of this alliance while considering the aforesaid points

Chess Teaches Strategy

Chess, according to me teaches the nuances of strategy. Most of today's books generally talk about what KIND of strategies rather than HOW TO FORM strategies.

According to me, the game of chess has different facets which explains the term "Strategy" beautifully. For starters, how do we define strategy in simple terms..." A means to an end"...

Taking this definition forward, the end objective in chess is the declaration of "checkmate"and the sequence of moves to achieve that becomes "the strategy". So based on the previous sentence, we also have another definition - strategy as a pattern of moves/actions over a period of time to achieve a particular objective.

Well, lets explore that in a bit detail and let me bring in the works of various thought leaders while I draw an analogy between chess and strategy.

Objective - Termination of the opponent is when "checkmate" is declared. Else, at a levelled situation, "stalemate" is declared.

Means- A sequence of moves (ployed) using the available pieces (resources) within the specified time (the time is all important in business context as well)

For those who dont know chess- this game is fundamentally divided into 3 parts.
1. The Opening Game
2. The Middle Game and
3. The End Game

THE OPENING GAME AND THE PRESCRIPTIVE STRATEGIES

The Opening game has certain predefined moves or "openings" (as we call it in the chess lingo). Depending on the assessment of the opponent and the hunch factor ( as in business), the opening for a game is always chosen by the player who initiates the game ( the white player). It may be anything " prescriptive" from Guico Piano to Ruy Lopez to Queens' Gambit, etc. The other player (black) responds to this with a suitable defence such as sicilian, kings indian, etc. These type of prescriptive strategies is what Porter suggested in his groundbreaking "Competitive Strategy". According to him, the kind of strategies an organisation can follow, can be either differntiated, low-cost or focus. However, in todays' world even if you are a differentiated player, the concept of low-cost need to co-exist so as to battle the cut throat competition.

Different openings have different ways of attack and the game in chess proceeds forward only w.r.t the counter moves of the competition. This is the criticism against Porter's strategy - the market tends to be dynamic and the prescriptive mode only goes thus far. Post which, the further ploy is based on the competitive interaction between the players.

Another interesting opening to look at is the "Gambit" variations. This is a mode where a resource is sacrificed in short term to gain a long term advantage. Again, in strategic relevance, this may be called good competitors. Whenever, a new concept or market is developed, good competition is welcomed to develop the market along with the leader. This fosters market growth which otherwise is a herculean task, if it needs to be done alone by the leader It is also during this phase, that the minor pieces get developed, castling is done, so on and so forth. In other words, you may call this as the resource allocation phase. You tend to concentrate your resources occupying the the middle 4 squares and the surrounding 8 squares in the board to get maximum advantage of their movements. Resource allocation in business is thus an important and integral part of strategy.

Southwest Airlines (or Deccan in India) entering as a low cost player is an opening move. The further alterations in the structure of the industry would then be interesting to watch. In southwest's case, it safely avoided the most celebrated hub and spoke model while developing their own set of competitive advantages. Now this helped them sustain the price war in the US aviation industry post the deregulation in 1978. The big carriers embraced the hub and spoke model and became vulnerable to new entrants in that route which eventually ended up in Bertrand Equilibrium ( price competition severtiy which reduces price to cost).

MIDDLE GAME AND DESCRIPTIVE STRATEGIES

The past has helped you get where you are. The "present stage" of the game helps in proceeding forward. This is the pivotal stage of the game, where the allocated resouces are utilized based on the ploy. Mintzberg popularly calls this as a descriptive strategy or emergent strategy. This is emergent in nature as it is developed as a consequence of competitive interaction. This part of the game is where the "Gambit" part materializes against the opponent. For instance, the reward for the sacrifice made in the opening game shall be reaped in this game, taking the opponent by surprise. In business terms, a new entrant or substitute which suddenly emerges to disrupt the equilibrium.

This part of the game also marks "the strategic inflection point" as popularly defined by Andy Grove, by making a focussed move to disrupt the equilibrium at the opponent's end. Although, you wouldnt find a 10X force ( or a mega force) as defined in "Only the paranoid survive", but more often than not the tipping point in the game is established at this time. Also, as the end becomes more clearer, different schools of strategy defined by different gurus comes into use here.

For instance, Scenario Planning is one, which needs to be perpetually employed in chess to gauge how and where the game will proceed based on a particular move. The concept of "strategic intent" and stretch discussed by Prahalad also gets defined here. Also, as we understand the entire game involves a lot of cognition as explained in the "fifth discipline" by Peter Senge.

Time and again, in history, we have come across companies, who have reinvented their business models in the middle game to become successful. One such case in point is Nokia, which transitioned from a Boots company into the Telecom space. AT&T in US, which is again merging itself to transform itself (what is going to transpire needs to be wait and watched).

THE END GAME

The end game is the culmination phase of the efforts of the entire game. Dealing with the scarce resources while proceeding towards the objective of mating the king, enhances the challenge of the game. At this point, (of course, assuming that the game is still more or less equally poised instead of being tilted towards one player) one needs strong execution coupled with mental acumen, and a will to outperform the opponent. The dexterity is tested because in such a situation, even the slightest of mishandling might lead to stalemate or losing the game. Hence, while the past has got you here, and the future needs to be attained, the present moves need to pave a way for achieving the same.

CHECK MATE

Finally, when the checkmate position is attained, the entire steps in the game, right from the first to the very final move denote the "strategy" of the game. Unlike most of the strategy texts which illustrates the discipline of strategy as fixed and pre-meditated, it is PROGRESSIVELY built OVER A PERIOD OF TIME towards A FINAL OBJECTIVE using PLOYS (the fixed opening variations in chess and the industry analysis/ other useful models in business- which denotes the science of strategy), MANAGING the crisis or threats ( (unexpected) good threats raised by opponent – which is an ART) while having an EYE for the future (both impending and distant) and thus CRAFTING a solution for the same.

CONCLUSION

Humph…so much for a definition. But this is the beauty of strategy. People who do not envision it completely can't appreciate its beauty and they tend to defile this subject restricting it to just a science (as most of the planning departments in an organization) or just as an incomprehensible art . Great turnaround examples such as IBM and Nissan are classic illustrations for the same. While IBM took 9 years to turn around, the entire strategy could be realized only at the end as a sequence of ploy, over a period time, deftly managing the crisis and thus crafting a solution to turn IBM from hardware to a software company.

Book Reviews

BOOK REVIEWS

Who Says Elephants Cant Dance?
If anyone ever wanted to read a work of one of the great strategists of our times, then this is the book. While being modest, Lou elucidates how he turned around the mother of all companies in the IT industry. Packed with immense PRAGMATIC strategy lessons, this book is a feast for anyone who loves strategy

Competition Demystified
After a long time, a jargonless strategy book has finally arrived. Although, Greenwald et Kahn focus on the prescriptive strategy focused on competition, the detailed analysis packed with powerful insights of exemplary companies, sets this book apart. The book deals with the five forces of Porter, while prioritizing them based on their contribution while formulating an organizations’ strategy. Together, a perspective of game theory has been neatly blended providing an altogether enriching experience on the business competition. Any executive/student who wants to decipher competition for his own purpose MUST read this book

Economics of Business Policy
An Indian counterpart of Competition Demystified, by Anindya Sen et al. Despite the content and range of topics covered being good, a lay man may not make much sense out of it. The mathematical derivations supplementing the theory makes this book a heavy read. Yet, a good strategy book quoting Indian examples is worth a buy.

Strategy Bites Back
A disappointment from Mintzberg and co. For people who have read strategy safari, this is a mere re-read and waste of time. Although, an effort has been made to present strategy in the lightest of its forms, the book doesn’t live upto an interest of a habitual strategy reader. Strategy bites back is a fallacy.


Strategy Safari
Mintzberg et al at their best. For the first time ever, a book on strategy deals with the fact as to HOW STRATEGY IS TO BE FORMULATED rather than WHAT STRATEGY TO BE FORMULATED. Hats off, to the great thinkers who progressively and gradually define the beast called “Strategy”. But then the book becomes slightly dragging when the cognitive part of strategy is detailed. For all those people, who are tempted to know the beast called strategy in the wild jungle of business, this book would guarantee a ride


Only the Paranoid Survive
The book is only based on 3 words – “Strategic Inflection Point”. Different chapters beat about the bush on this one single concept. Also, the examples are not many apart from that of Intel. Unless you have don’t have choice with other strategy books, you may pick this one.



STILL TO COME
BLUE OCEAN STRATEGY, THE NEXT GLOBAL STAGE, INNOVATORS’ DILEMMA, GAMES OF STRATEGY, FUTURE OF COMPETITION

A PERSPECTIVE ON THE COMPETITION OF INDIAN IT INDUSTRY

A Brief Introduction Of Indian IT Industry

The article brings insight into competitive scenario of Indian IT industry. A quick review of the essential figures reveal that with the year ending 2004-05, the Indian IT industry had recorded a growth of 33% reaching an annual turnover of Rs 124,039 Crores. Although the top 5 Indian players, on an average, have been growing at a healthy 42% their combined contribution is lesser than 25% of the entire industry.

Introduction Of Various Theories And Their Linkages To Our Industry

As per the strategic literature, the Indian IT industry could be trapped in what is known as “the red queen effect”. The red queen effect refers to the red queens’ advice in Lewis Carroll’s Through the Looking Glass in which she says, in order to stay in a (competitive) place you have to run harder whereas to get anywhere you have to run even harder. Such an effect can prove detrimental with the conditions such as: new players entering the market, limitations in improvement and intense head to head competition (as rivals in the industry have adapted and become stronger competitors).

First Symptom – New Players Entering The Market

The condition of many players entering the market, a prominent characteristic of red queen effect, can be explained through conventional economics. When players with homogeneous offering and similar prices inundate the market, the competition is said to be perfect. Being able to do something, which the rivals cannot is the definition of competitive advantage. Thus, the entries of many such players occur due to the lack of substantial competitive advantages by the incumbents so as to deter entry of new comers. With lack of barriers to entry, the newcomers would pour in until the extra-ordinary profits (which are profits over the sum of opportunity cost and normal profits) are reduced to normal profits. A similar scenario could be associated with the Indian IT industry albeit with certain exceptions.

The Indian IT industry could be better defined by the term “polyopoly” coined by Dr.Taikobo Onoda in the 1960’s. The basis of the classification is that the market leader has less than 26.1% of the market and each company is within the 1.7 times the market share of its nearest rival. In such a case, the market is unstable with a strong possibility of abrupt shifts in the company ranking. The numbers associated with the market share arise from Onoda’s investigation on 3:1 law and reliance on Lanchester equation.

In 1914, F.W. Lanchester developed his famous equations, which have been made relevant to business by Nobuo Taoka. The basic approach is to mathematically equate the loss rate of market share taking into consideration the market share of the competitor(s) and the ability with which the competitor(s) can either sustain or increase its share.

Another useful law, that’s worth mentioning, is 3:1 law. The latter with reference to a battle in the military context states that in order to vanquish a competitor, who has established a defensive position; there must be 3 times as many troops needed as that of the incumbent. However, for the business context, the troops can be surrogated by market share. Thus, the figure of merit 1.7 times the market share is achieved by applying Lanchester equation on 3:1 law.

With reference to the market share of the top Indian IT players- TCS leads the industry with a market share of 7.8%. Infosys and Wipro closely follow with market shares of 5.5% and 5.4% respectively. From the above data, its evident that the market share of TCS is 1.4 times that of Infosys and Wipro.

Although the figure of 1.7 times the market share is obtained from the application of Lanchester equation, its significance is revealed by another theory named range distance theory. The latter indicates that if the gap of 2 companies in a market is less than 1.732, then the leading company will not be in a safety status and hence there will be a threat from the following company. The competition, in such a case, becomes intense and rivalry increases.

Although the Indian IT market is swarmed with many players, the top 5 players on an average enjoy an operating margin of 22.8%. Such a paradoxical situation, at least theoretically, begs the question regarding the sustenance of their profitability. Essentially these profits under question will be an outcome of the competitive scenario that would unfold with maturing markets and declining growth of industry.

Second And Third Symptoms: Limitations In Improvement And Adaptation Of Rivals

With lack of substantial entry barriers or forces that would deter entry in the Indian IT market, it will be useful to analyze the competitive advantages of the incumbents. As per the strategic literature, the 3 most potent competitive advantages are advantages from supply (ability to produce and deliver goods at a cost advantage), economies of scale and customer captivity. In their book, competition demystified, Bruce Greenwald and Judd Kahn, suggest that a combination of any two of the above mentioned advantages might help an organization to a great extent against competition.

A company can realize the cost advantage when the company has an exclusive access to raw materials or through the know-how or with the use of proprietary technology. The above advantage, in the context of Indian IT industry, seems to be weak. This may be attributed to the lack of technological superiority, with almost all the offerings of one company being easily replicated by others in the industry. Thus with a limited scope for improvement, rivals tend to adapt easily to the competition.

The Indian IT industry, unlike that of China or Brazil is predominantly service oriented, with less contribution from the product space. Hence, majority of the revenues come through repeat business with the existing customers. Customer captivity, for the top guns, is then a major advantage.

Together, the economies of scale (EOS) are enjoyed in a limited and relative context by the frontrunners of Indian IT industry. The EOS, depend not on the absolute size of the dominant firm but on the difference between it and its rivals, that is on market share. In context to the Indian IT industry, there are 2 limitations in realizing the EOS. First, a growing market does not help realize EOS to a great extent. Second, the industry is fragmented and the players are handicapped without a substantial difference in market share. Thus even the major players have comparable average as they operate on comparable scale (adaptation of rivals)

Future Outlook Of The Indian IT Industry

Hence, with a moderate degree of competitive advantage working to their favor, the top Indian IT companies can make inroads against the weaker competition. Put differently, though there may be new entrants it is certainly impossible for them to create another TCS, Infosys or Wipro. However, the competition from global players such as IBM and Accenture is accelerating at a great pace. The comparative advantage of low cost (highly skilled) labor that the Indian IT industry had been enjoying over other countries is now getting eroded with global MNCs setting up their shops in India. The rule of thumb in such a scenario would be to remain competitive and become operationally efficient.

With greater efficiency there will be some respite from the aforesaid conditions of red queen effect. The combination of EOS and customer captivity can help tier the competition and help the rivals of one tier fight effectively the rivals from another tier. The tier-1 companies, for example, can collectively deter the entry of another player from tier-2 into their group. Michael Porter defined the formation of groups or tiers within industry, in his breakthrough book competitive strategy, as strategic groups and the mobility barriers as the forces that deter entry of players from one group to another.

Apart from organic growth, Indian IT companies may also pursue the mode of inorganic growth. The trend has already started with few acquisitions been made by the biggies in the recent past. With industry maturing, there would be more consolidation activities to be witnessed. In such a case, only few players will concentrate the market.