What is Strategy?

What is Strategy?

Strategy is a long term plan formulated and executed over a period of time by firms such that their resources are best utilized and output of the firm is optimized. What is usually expected out of such optimal performance is profitability and competitiveness. Usually firms in the present day choose a five year time period for formulating and executing strategy. That is to say, firms see five years ahead of time and plan for what needs to be done during these five years. Then, they execute the plan withing the time frame of five years.

Firms answer three important questions when formulating their strategy. They are:

(a) Where are we right now?

(b) Where do we want to go?

(c) How do we get there?

The first two questions usually are answered in terms of specific measurable terms such as Market Share, Profitability, Return on Investment, Sales Revenues, Margins, Share of retail space, etc., The second question requires the ability to forecast by estimating the environmental conditions five years from the present period. The third question requires the ability to think what needs to be done such that our goals are met inspite of the challenges that the environment might throw at us during the execution. In other words, we would be thinking how can the resources of the firm be adjusted in such a way that all the external environmental challenges that might come up during the execution are adequately met with while still being able to reach to where we want to go!

For example lets say a firm, say, Hindustan Unilever Limited, wants to formulate its strategy for the next five years for its cosmetics product line. So here's how they would try and answer these three questions. Note that all data is fictional.

(a) Where are we right now?

We have 62.3% of the share of the market. Our margins stand at 5% of the revenues. We have about 80% of shelf space dedicated to our product lines in 90% of retail outlets in North India and 70% of shelf space dedicated to our product line in 75% of retail outlets in South India.

(b) Where do we want to go?

We want to achieve 80% of the market share. Margins should stand at 8% of revenues. We must have about 85% of shelf space dedicated to our product lines in 85% of retail outlets across India.

(c) How do we get there?

Decrease the prices of our products by atleast 5%, which might attract 10% of additional users in the market for our product line. Various sales promotions in various regions of the country depending upon the value perceptions of the customers in those regions to target 10% of additional sales across the country. These two steps would impact our margins and pull them down. Marketing expenses need to be controlled and

budgeted. Heavy advertising will take a back seat and social network marketing on the internet will be a priority. Trade promotions such as contests across distributors and awards for best shelf display, best shelf space allocation can be given. Training for distributors, fun events and holiday travel organization will continue as they were earlier.

So, having said that, it is now relevant to take this concept a bit further and introduce a simple variation. If the firm is a lone player in the market, then the situation is the simplest. However, the market is a large and complex entity and hence cannot be served by an individual business firm for long. Thus, we can expect several others joining the competition. We can expect that there will be several firms that will be operating in the market, each with its own strategy.

Let us switch over to the consumer's point of view. If the consumer had only one choice, the situation is the simplest. However, we have seen that the market comes up with a number of players which have a similar offering, each trying to get the attention of the consumer in its own way. Thus, the consumer has a variety of offerings to evaluate and choose from. Thus the market gets divided amongst the players. The one which has the most consumers buying its offering is said to be the best and is said to have an advantage, over competing offerings. This is also termed formally as the “Competitive Advantage” of the firm.

The question that we now have to address is how can firms gain competitive advantage. More specifically we will have to address how IT helps firms in gaining competitive advantage over others. There are eight different ways of gaining strategic advantage. Lets list them down and explain one by one.

Eight ways to gain strategic advantage

1. Reduce Costs: If a firm can operate at a reduced cost the impact will be there on the Margins. It is a well known fact that if we take away / substract costs from the revenues made by the firm, then we are left with surplus of money which is the margin of the firm. Reduced costs will result in increased margins. If the margins are higher they can be used for two purposes. First, they can act as savings for “future investment”. Second, the reduced cost can result in lower prices. As the law of demand states at lower prices more units of the product/service can be sold and hence more revenues result.

IT, through extensive automation can help reduce the labor costs where labor intensive technology is used for producing goods. For example, the Japanese car makers made use of extensive robotics technology to carry out manufacturing of automobiles. This usage resulted in a two fold cost reduction process. First, precision in fixing the parts led to reduced to lesser mistakes. There was no need now for doing extensive quality checks and hence there was reduced cost of quality. There was also no need for reworking on the same car and hence lowering the labor cost and improving the time to market. Second, less and less of labor was needed and hence the overall cost of labor came down. With this, Japanese auto companies could claim higher quality cars, shorter delivery schedules and both of these at lower prices. The result was that during the 1980s the Japanese car makers flooded the US Market with new models of cars and gave a stiff competition to established car makers such as Ford and General Motors.

2. Raise barriers to new entrants: The easier it is to enter into a business venture, the more will be the number of people who would try various things. That gives a lot of variety for the consumer to choose from and hence becomes difficult to differentiate one offering from the other. Raising barriers to new entrants, keeps the pie of the market open only to lesser number of players. This makes competition manageable and gaining competitive advantage becomes easier. By gaining protection on Intellectual Property and by increasing cost of entry, one can gain competitive advantage in this situation.

Amzon.com, in its early days developed a process whereby a visitor to their site can accumulate all the items he/she wanted to purchase in one place and then make the payment at one shot, instead of making separate payments for each item. This was called the “One Click Purchase” method. Amazon applied for a patent on this method thereby forcing competitiors who wished to use their technology to pay royalties or not to use their technology at all. Those who didnt have this, had their customers go through a miserable time and thos who had had to have their offerings at a higher price than Amazon's and hence Amazon had a clear competitive advantage for a few years.

Banks by establishing ATM networks make the cost of entering into business higher. If anyone wants to open a banking service today, they have to have a network of ATMs. The cost of acquiring space for it, the cost of setting up and managing ATM networks is prohibitively high. Hence there are openings for low scale players or niche players, which doesnt disturb the main banking competitive scenario. Thus, banks in the existing network have a competitive advantage over all others.

3. Establish High Switching Costs: Switching costs are costs incurred when a customer wants to switch over to a competitors products/service. For example, a non-refundable initial deposit asked by cable TV operator is a switching cost, as customers would not want to lose this money, in case they are planning to switch over to another cable operator. Similarly fixed monthly rentals on telephone services are also an example of switching costs.

IT and IT Enabled Services can be used to deliver some of the services at cheap, flexible and convenient ways to the customer, thereby increasing the reluctance to switch, even though there are many other options available. These “costs” are not directly related to money, but are more psychological. For instance, take the case where you are finding your mobile phone service operator to be more and more expensive.

4. Create New Products/Services: This gives companies an advantage called the “First Mover Advantage”. Anyone creating a new product/service would go through a phase of checking and rechecking in the market if it works on a commercial basis. The amount of time spent in understanding the market is large and hence there is a learning curve prior to establishing the new product. This, is an advantage as other competitors do not have this knowledge. They may re-engineer the product technically, but may not have the capability to steer their ship to the port when the storm hits.

The rate at which new products are created and delivered to the market is greatly enhanced by IT frameworks. With the existing telecom infrastructure, the World Wide Web, converging hardware and software standards, one can collaborate and share information and knowledge making distance, time and form irrelevant totally. Thus, teams across the globe can come together and create products and services at an astonishing rate. Nokia used to produce one new model with distinctive features every three months. Television makers make one new model every six months available in the market place. The knowledge and wisdom of people (including customers) across the company the reach of which might span several continents can now be collectively utilized to do this impossible feat using IT frameworks.

From a competitive advantage point of view, the time taken for an idea to get to the market as a new product is drastically reduced, making new product creation a continuous process rather than a specilaized effort. The constant ability to innovate makes the company a wanted one, since

consumers are sure that the organization is going to keep them aloft with latest offerings which are well researched and are accepted by consumers easily. The participation of the consumers right from the stage of ideation to completion of the manufacturing of the product, makes the adoption and diffusion of the innovation much easier to manage.

5. Differentiate Products/Services: In a world that is full of competition, there is no end to product variety. Thus, after a while it would be difficult to say which product is better than the other and in which way. Many products/services are rather undifferentiated in their corest form. For example, any bank that you might name does the same core services as any other. In this no bank differs from the other. But, what differs is what the banks do to customers other than doing the core services. For example, ICICI Bank might extend its banking hours till eight pm in the evening, while others might not. Since this bank does this differently, its services stand differentiated in the market. An interesting example of how differentiation is more psychological than not is demonstrated by researchers several times across the globe. These are called “Blind Taste Tests”. People were given a “Cola” Drink in a glass without any labels and were asked to say if the drink was “Pepsi” or “Coke”. To everyones surprise consumers got thoroughly confused about which drink it was. Researchers then went on to say how much of differentiation is in the consumers mind rather than in the core offering. At the heart of it, any Cola drink is the same. The difference lies in the minds of people drinking the beverage.

IT helps in making the products different. Advertising on the Internet was a challenge. Majorly because people didnt find the right Ad at the right time. The advantage of Advertising on Internet is that people come to the Internet seeking for information and when information is provided to a seeker, it actually gets processed and helps him/her make a choice. Simple as the logic seems, the challenge was to get that information that is being sought after by a visitor on line. Google developed a new technology to deliver “context sensitive” advertising. Delivering advertisiements that were relevant to what consumers were searching at a given instance of time proved to be a more fetching strategy for advertisers, becuase the seeker of information is more likely to click on an ad that gives him more information on what he/she is seeking than not. And google really was able to differentiate its advertising model from others and hence got a huge competitive advantage. This combined with protection of Intellectual Property can help a firm be very hugely competitive. No doubt that coke holds a patent on its recipe and Google has IPR on AdSense and AdWords.

6. Enhance Products/Services: Enhancing product experience is another strategy to gain competitive advantage. Adding new features to the product/service, making the customer interface with the organization better, increased convinience of two way interactions between consumers, and the like are many tactics that firms use to enhance products/services.

Lets look at Printo. Printo is a go-between business model that places itself from the bulk printing traditional but inexpensive printing services and the light weight but expensive DTP works run by individuals. By combining email, document management systems and electronic billing, it completely enhances the customer experience. Today a customer can create his/her own calendar or dairy by logging into their website, downloading a template from a catalog, personalizing it, uploading it for printing, paying for it online and getting it delivered to where it all began. Thus, many small and medium scale enterprises find this an interesting proposition. Thus, a whole new business model has come out in the name of enhanced customer experience using IT as a basic way of working.

7. Establish Alliances: Allinaces with suppliers, vendors and customers are critical to the success of any businesses. Strategic Alliances, in fact, are the order of the day. Alliances

allow the firm to gain cost advantages, without taking on backward integration through captive units. A vendor or a supplier of specific components of a manufactured product is not your supplier alone. He/she is a supplier to other competing firms as well. For example, Intel sells its processors to IBM as well as HCL and DELL. But, lets say, if IBM has a strategic alliance in which, using its own supply chain, IBM can deliver back reusable components of microchips to Intel and help it to reduce its cost, then Intel would be willing to supply microprocessers to IBM at a cheap cost. If HCL and DELL cannot follow suit, then IBM will have an advantage over them.

Using IT, it is a lot more easier to collaborate with the suppliers and vendors. Usually, suppliers and vendors are smaller business entities which, sometimes, might be wholly dependent on one firm's orders for their business. Helping them to scale up their business model and helping them to have efficiencies of scale and specialization always brings about a kind of loyalty that is difficult to break. IT helps do this. For example, helping a vendor to be integrated into a firm's own ERP solution seamlessly, helps reduce information lags and leads to implementing of JIT systems that not only result in profits for the business but also for the supplier.

A striking example of this if how Travel Websites collaborate with Hotels, Tour Operators, Transportation Services to deliver “Vacation Packages” to its customers. Whether its GoIbibo.com or TravelYaari.com, the site will help its customers to pan and execute a neat vacation at cheaper prices through their collaborations. Right from booking flight tickets to planning site visits and entertainment during the vacation, every single aspect is managed, at a cost that is a fraction when compared to what the customer has to go through if that has to be done individually.

8. Lock in suppliers and buyers: Suppliers and buyers can be locked in by asking them to collaborate only and only with the business entity and not with any competitors. For example, if Toyota puts in a condition that a person who owns Toyota Showroom cannot own any other car showroom in the city, then Toyota has attempted to lock in a retailer into its network. Gillette uses extensive trade promotions to lock in small retailers. Offers such as free merchandize and higher slotting fees often represent a huge opportunity for the retailer to make more margins and hence are a good way to lock in the retailer. Similarly training of vendors and other terms and conditions which can be legally enforced on the supplier, makes the lock in stronger.

Getting to leverage on the IT expertise of the manufacturer is a huge lock in factor for many suppliers. Suppliers and vendors, being small and medium business maynot have the resource base required to deploy and work on high end software architectures such as ERP Systems, which bring in cost savings. Thus, when a company offers such a platform, the vendor gets locked in into the system. Dependence on the manufacturer in any form, is therefore, a candidate for locking in.

CRM software that enables a company to know the customers better are really a great help to lock in buyers. Getit Yellow Pages has a telephone service through which we can know the locations of shops and small and medium retail outlets such as medical stores, plumbing joints etc. However, they have a system through which they can systematically track and identify patterns of searching for information based on customers queiries over a period of time. This gives them the ability to interact with customers on an intimate basis, irrespective of the human being handling the call at the given instance of time. That experience of dealing with Getit leaves the customer sometimes delighted and hence the lock in.

Components of telecommunications system Telecommunication systems

Telecommunications refer to the communication of information by electronic means, usually over some distance. Telecommunications system is a collection of compatible hardware and software arranged to communicate information from one location to other. Having said that its a system, we can now go on to examine the components and functions of a telecommunication system. The simple sentences are self explanatory and hence I will not go into a detailed discussion of each item. Where relevant I have provided additional material for understanding. However, our interest lies in looking at what the telecom systme can do to us, rather than on the technical details of how it functions through its components.

Components of telecommunications system

A. Computers to process information.

A. Terminals or any input/output devices that send or receive data.

A. Communication channels, the links by which data or voice are transmitted between sending and receiving devices in a network.

A. Communication processors, such as modems which provide communications support for

data transmission and reception.

A. Communication software to manage network

Functions of a telecommunications system

A. Transmits information

A. Establishes the interface between sender and receiver

A. Routes the messages along the most efficient paths.

Since computers and terminals in a network can be connected in multiple ways, there are different paths from a sender to a receiver, the telecom system figures out a path in such a way that transmission and reception is done in an uniterrupted manner and at the same time through the shortest path consuming the shortest time.

A. Ensures that the right message reaches the right user.

A. Performs editorial tasks such as checking for transmission errors.

A. Converts the messages from one speed to another.

Networks use communication channels and other hardware and software that vary in their transmission and reception speeds. The telecom system is responsible for managing the speed of transmission and reception irrespective of what type of channel and which type of other hardware and software is used.

A. Converts the messages from one format to another.

Networks often have information processing hardware and software which require information to be presented for processing in a given format, when information is not in that format, its not processed and furthered on the network. Thus, converting information from one format to another is a very important function of the telecommunication system.

A. Controls the flow of information.

Having known the above, let us now review what value does telecom networks carry when being used in business organizations. In other words, we will be seeing what business organizations can expect out of using telecom networks.

Business Value of Telecommunication Networks

A. Reduced Transaction Costs

A transaction is an exchange of goods/services by the producer for money from the customer. Each transaction, if it has to take place, is associated with a cost. For example, if you go to a bank to with draw money, you may have to fill in a form, give it to a cashier, who records the transaction in a ledger and passes it on along a chain of decision makers, removes the cash from the vault and gives it to you. The form, the cashier, the ledger, the vault arent free. Right from the cost of real estate to the cost of labor, this exchange involves a series of costs called Transaction costs.

Telecom systems by handling the flow of information and by allowing people to collaborate with each other help reduce the transaction costs. For example, an online store, selling books, can completely avoid having a physical book store. So the cost of real estate, sales assistance, inventory costs can all be avoided getting the price of the book down to a great extent. Similarly, a bank, using an ATM, drastically cuts on the labor cost as well as administrative costs of managing information. Thus, at a lower cost, higher amounts of transactions can be managed. This brings the average cost of transaction to a fraction of the cost of setting up a full fledged branch.

A. Reduced Agency Costs

Agency costs are the costs that are incurred by a firm in order to setup and execute a

managerial process that enables the exchange of products/services in the market place. For instance, if you have a grievance about your banks services, you approach executives who can address the issue and resolve it such that you continue to use the banks services. These are managerial professionals who can figure out what went wrong with the system and make changes such that such mistakes are not repeated. They have nothing to do with the transactions until the process of making the transaction happens goes kaput.

For an executive to figure out what went wrong with the system and how the system can be improved, information from various sources would be required. To collate this information is the first step. Second, to assess this information in the light of the task to be performed, in the light of the policy to be implemented, in the light of the steps to be taken to reconcile from the deviation is another task. Thus, we can see managerial delays in making decisions are a function of (a) avaialability of information and (b) the skill of the decision maker to see this information from various perspectives and make a choice. Using Telecom services it would be easy to collate information and to process it in multiple ways in a very very short period of time. This results in

Higher span of control of each managerial professional. Meaning the ability to handle more number of people on a timely and effective basis. Further meaning less number of managers are required to manage more number of people.

Lower information overheads. Meaning lower cost of processing and using

▪information that is already present with the organization.

A. Increased Agility

By transmitting and processing information faster, the response times across organizations reduces drastically. The response time for customer demands, for supplier's requests and employee requests come down as the speed with which information travels across the organization improves.

If demand information can be transmitted across production units, decisions on how the demand can be made use of to result in more sales can be made faster. Thus, when an opportunity for serving a market is spotted, the time which the organization takes to respond to that active demand is reduced. This time is called “Time to Market”.

The time to market can be furhter reduced, if employees can easily collaborate to create the framework needed to fulfil an active demand. Using telecom systems, the best talent across the company, irrespective of its location, can be brought together to collaborate and find a solution to exploit an active opportunity.

Suppliers are a key for increased agility of the firm. By talking to suppliers and making sure the information is available to them as fast as allowed by a telecom system, they can be kept informed and collaborative plans for exploiting market demand can be made.

A.Higher Quality Management Decisions

Managerial professionals now dont have to run an arsenal of information processing executives to arrange, sequence, sort and find pieces of information that is valuable to decsion making. All that can be done by connecting computers using a telecom network. Thus information is made available on demand, wherever you are and whenever you need. This ability leads to management professionals focusing their time and effort on the issue at hand rather than on verifying and re-seeking information from their organizations databases. Further, this leads to higher quality managerial decisions.

The ability of the organization to present information in wholistic, rather than compartmentalized, form leads to the formation of the complete context rather than looking at the problem/deviation from a single context. Hence professionals make better choices than when such information is not presented.

A. Declining geographical Barriers

The World Wide Web or the Internet's presence is a huge barrier breaker. The entire outsourcing industry which is thriving in our country is based on telecom infrastructure. What is a non-core business operation for a firm is now a core business operation for another. For example, tax calcualtion and auditing is a non-core busines operation for an automobile maker. His main focus shall be on designing and selling effective automobiles based on customer demand. However, taxes and audits are an essential formality to be legally complied with. So, what many firms do today is that they hire a firm which does the auditing and taxation for them by examining their documents, while the firm focuses on design and sales of automobiles. These documetns can be electronically made available and the resulting reports can also be electronically made available. So, a finance executive can transmit the documentation at 6pm (when he leaves home) to an Indian BPO for processing and by the time he returns back to office the next day at say, 9am, there is a report waiting for him to see and say okay for the audition. The Indian morning and the US evening are at the same time and hence this magic can happen.

Having discussed about the above, we need to now look at the capabilities that the system must possess to deliver such business value. The following are the capabilities of the system. These have been sufficiently elucidated in the above discussion and hence are being touched in brief here.

Capabilities of a Telecom System

A. Ability to manage communications with

Employees, Customers and Suppliers

A. Provided connectivity on demand Whenever, Wherever

A. Manage communication channels for

Text, Voice, Data, Images, Videos: Suffice it to say here that, all data can be transmitted through a single channel, but depending on the complexity of the data to be transferred the speed limits will vary. Hence managing communication channels for handling a variety of data is an essential capability.

Types of Networks

A. Small Networks – These networks have a very limited range ranging a few kilometers at their best. Thus, they dont extend beyong a city limit. If they do, they become very expensive. All these networks are connected by physical cables. The following are the examples

LAN – Local Area Network. Range is within a few hundred meters. Maybe a whole building can be connected using a Lan. Very limited serving capability and data transmission rate is low. Very fast communication when the number of devices is small. As devices get added the speed goes down and the errors in transmission increase.

WAN – Wide Area Network. Connects maybe a couple of buildings next to each other. Uses physical cables for connecting. Except for a wider range, other features are similar to LANMAN – Metropolitan Area Network. Connects different locations across a city. Uses telephone lines for communcations. Also private communication channels can be established but are usually expensive. We can think of a MAN as a network of several LANs. Features similar to that of LANs. More complicated to manage as several networks have to come together.

A. Large Networks – These networks can extend beyond city limits and usually use telephone infrastructure or a fibre optic cable infrastructure to connect beyond city limits. These systems are more complicated to manage and often involves dealing with a third party service provider.Intranet – A term used to refer to the network that is accessible from anywhere within the company premises only to the authorised users of the organization. Requires to ride on either a government telecom network or a private one on a leased basis. If the requirements are limited and/or huge privacy is required, organization usually set up their own teams.

Extranet – A term used to refer to the network between different organizations that need to collaborate to fulfil a market need. For example a supplier or a customer such as a retail outlet can be connected to a company using an Extranet. Again a government

telecom infrastructure or a third party service provide would be involved.

Internet – A network of all networks, publicly accessible to everyone across the world. Usually also know as the World Wide Web, its the most dynamic of all networks and also the most complex.

A. Wireless Networks – Do not require any wired connections and hence are more convenient

to use. Usually used to increase mobility and as a complimenting force for Large Networks.

Bluetooth – Has a range of upto 10 meters. Data transmissions effective upto a few MB of data. Usually effective for text and voice data. Vidoe, Images and other types of data would be painfully slow for exchange.

Wi-Fi – Wireless Fidelity networks. Have a range of about 100 feet from access points. Has low security and Interference from other devices is not handled appropriately.

Wi-Max – Wireless Interoperability for Microwave Access. Uses Microwave transmission technology. Access range is around 31 miles. Uses antennae to beam signals at high speed.