BLOCK 3

FORMULATION OF STRATEGY
BLOCK 3 FORMULATION OF STRATEGY
This block discusses these three strategies in brief. These are:
Unit 7: Business Level Strategy: Business level strategies are popularly known
as generic or competitive strategies. Michael E. Porter classified these strategies
into overall cost leadership, differentiation and focus. The first two strategies are
broader in concept as their competitive scope is wide enough and the third
strategy i.e., the focus strategy has a narrower competitive scope.
Unit 8: Competitive Strategy: In this unit the formulation of competitive
strategies is discussed in different situations. This unit will help you to understand
different competitive moves taken by the organizations to make its strategy
effective and the different dimensions of competitive strategy.
Unit 9: Corporate Level Strategy: deals with the concept of strategy at corporate
level and also explains different types of growth strategies. The major stress in
this unit is on different types of expansion strategies and the rationale for
implementing these strategies.
Formulation of Strategy

116
 Business Level Strategies
UNIT 7 BUSINESS LEVEL STRATEGIES
Objectives

After reading this unit, you should be able to:

 Acquaint yourself with the concept of cost and its role in business growth.

 Understand the cost leadership strategy;

 Understand the concept of differentiation;

 Understand the concept of focus.

Structure

7.1 Introduction
7.2 Role of Cost in Business Growth
7.3 Overall Cost Leadership
7.4 Differentiation
7.5 Types of Differentiation
7.6 Cost of Differentiation
7.7 Advantages and Disadvantages of Differentiation
7.8 Focus
7.9 Summary
7.10 Keywords
7.11 Self-Assessment Questions
7.12 References and Further Readings

7.1 INTRODUCTION
Business level strategies are a set of certain moves and action which are taken
with aim to provide value to the customers thereby developing a competitive
advantage. The organization gets this competitive advantage by using the core
competencies of an organization. Such strategies usually occur in the organizations
having multiple businesses where each business is considered to be a Strategic
Business Unit (SBU). Therefore, these strategies are the actions specifically
selected for each SBU. The business level strategies try to address the following
issues:
 Satisfying the customer needs;
 Achieving an edge over its competitors;
 Avoidance of competitive disadvantage.
Michael Porter in his book Competitive Advantage (1998) suggested three generic
competitive strategies aiming to develop a dependable position in the long-run
117
Formulation of Strategy and out-perform the competitors. These three strategies are: Cost Leadership;
Differentiation; and Focus. All the three strategies can either be used individually
or in combination to each other.
Cost analysis occupies an important place in business strategy. In order to gain
and sustain competitive advantage, an organization should not only monitor
its cost performance but also should endeavor to control it. Several strategic
decisions like fixation of competitive prices, provision of after-sale services,
quality of the products etc. depend upon relative cost level of the business
organization.
Cost leadership stresses on producing quality products at low cost for the
consumers who are price sensitive. Differentiation is a strategy, which is directed
at producing goods and services considered unique in its industry and directed at
consumers who are relatively price-insensitive. Focus strategy concentrates on
producing products and services that fulfill the needs of small groups of consumers
and is based on segmentation. To gain competitive advantage, it is essential for
the organizations to transfer skills and expertise among autonomous business
units effectively. The competitive advantages in cost leadership, differentiation
and focus can be achieved depending on factors like; type of industry, size of
organization, and nature of competition.
Differentiation strategy is more of a positioning strategy whereby the organization
tries to be unique in its industry by positioning itself along certain dimensions.
The degree of differentiation varies with different strategies. Differentiation is
industry-wide whereas focus strategy is based on a segment or group of segments
in the industry. There are two variants of focus strategy, which are cost focus and
differentiation focus. This unit discusses all these aspects.

7.2 ROLE OF COST IN BUSINESS GROWTH

You have noted that costs play an important role in the survival and growth of a
business organization. For survival, a business organization must make some
profit so that it can sustain its operations on a long-term basis and fulfillll its
other obligations. Before a business starts operating, it has to incur certain
initial costs for acquiring assets, such as land, building, plant and equipment.
These assets have to be installed and commissioned. Then the raw materials
are paid for and fed into the machines so that the finished goods can be
produced. These are then sold in the market to generate revenue. A part of this
revenue is used for repaying installments towards loans and other borrowings.
The shareholders also expect certain returns in the form of dividends on the
equity held by them.
It is presumed that, after meeting such expenses, the organization is left with
some revenue to buy the raw materials and other needed utilities so that it can
run the next operating cycle of the business process. The survival and growth of
the business organization, to a large extent, depends on what the organization
pays for its fixed costs and what contribution it generates after meeting all the
expenses.
Apportioning of the fixed costs incurred by the organization in starting a business
depends on the volume of its operations. A lower volume of products puts a
heavy burden on each unit produced. A larger volume of operations reduces the
cost per unit. The total variable cost, which varies with the volume produced,
may also reduce, as a consequence of the Experience Curve Effect.
118
Relative Cost Advantage and Competitive Strategy Business Level Strategies

Let us understand this concept through some examples:

 A large manufacturing organization initially entered only into the largest
product segment, i.e. truck tyres and aimed at dominant market share.
Their latest technology helped them. They initially priced their products
lower than industry leaders, and offered “good value for money” to truck
operators. Subsequently they matched the market leaders’ price and
displaced by capturing higher market share.
 A FMCG organization has used relative cost advantages in three areas:
production, distribution and promotion. By adopting semi-manual
production process and concentrating in the North and West Zone urban
markets, and by cost effective distributor incentive schemes and
advertising spots on national radio (initially), they kept their costs low
in three areas and offered a highly price competitive product.
 A cycle manufacturing organization dropped the irrelevant product
attributes and by sub-contracting the production of parts to small units,
achieved cost advantages which helped the company in processing their
products very competitively.
Activity 1
Think of more such success stories and comment on their competitive strategy.
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7.3 OVERALL COST LEADERSHIP

The organizations operating in this highly competitive environment are always
on the move to become successful. To strive in this competitive environment the
organizations should have an edge over the competitors. To develop competitive
advantage, the organizations should produce good quality products at minimum
costs etc. This means that the organizations should provide high quality at low
cost so that the customer gets the best value for the product s/he is buying.
Therefore, it becomes necessary for the organizations to have a strategic edge
towards its competitors. One such generic strategy is overall cost leadership,
which aims at producing and delivering the product or service at a low cost
relative to its competitors at the same time maintain the quality. According to
Porter, following are the prerequisites of cost leadership:
1) Aggressive construction of efficient scale facilities;
2) Vigorous pursuit of cost reduction from experience;
3) Tight cost and overhead control;
4) Avoidance of marginal customer accounts;
5) Cost minimization. 119
Formulation of Strategy According to Porter cost leadership is perhaps the clearest of the three generic or
business level. To sustain the cost leadership throughout, the organization must
be clear about its accomplishment through different elements of the value chain.
Figure 7.3 shows a matrix of the three generic strategies and their interrelationship
as given by Porter.

Figure 7.1: Three Generic Strategies

Source: Adapted from Porter (2008)

The low-cost leadership strategy at times enables the organization to defend
itself against each of the five competitive forces. If we see the concept of cost-
leadership in the Indian context, we find that it had worked wonders with textile
industries, pharmaceuticals and telecomm. This shows that a cost leader, however,
cannot ignore the bases of differentiation.
Activity 2
Scan the business dailies or any of the business magazines available and prepare
a case study of any of the business organization, which has become successful in
the recent past by adopting cost leadership strategy.
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Though, low cost can be one of the most important competitive advantages
enjoyed by organizations all over the globe but it does have its drawbacks. Some
of the drawbacks can be listed as follows:
 Initiation by the competitive organizations;
 Threat of competitive organizations from other nations;
 Organization losing cost leadership due to fast technological changes,
which require high capital investment;
 Threat by competitors to capture still lower cost segments; competition
based on other than cost.
Looking at these drawbacks, one can say that cost leadership strategy has to be
adopted keeping in mind, the risks involved and develop an overall effective
cost-strategy.
120
 Business Level Strategies
7.4 DIFFERENTIATION
Every individual customer is unique in itself so is his/her preferences regarding
tastes, preferences, attitudes, etc. These needs of the customers are fulfilled by
the organizations by producing differentiated products. In our day-to-day life we
see many such examples of differentiated products. Most of the fast moving
consumer goods like biscuits, soaps, toothpastes, oils, etc. come under the category
of differentiated products. To satisfy the diverse needs of the customers, it becomes
essential for the organizations to adopt a differentiation strategy. To make this
strategy successful, it is necessary for the organizations to do extensive research
to study the different needs of the customers. An organization is able to differentiate
from its competitors if it is able to position itself uniquely at something that is
valuable to buyers. Differentiation can lead to differential advantage in which
the organization gets the premium in the market, which is more than the cost of
providing differentiation. The extent to which the differentiation occurs depends
on the overall strategy of the organization. Previously differentiation was viewed
narrowly by the organizations, but in the present scenario it has become one of
the essential components of the organization’s strategy.
When we talk of differentiation, it can be said that virtually any product can be
differentiated. The greatest potential of differentiation lies in products, which
are of complex nature but do not have to adhere to strict regulatory standards,
but the success of a differentiation strategy depends on the organization’s
commitment towards customers and the understanding of customer needs as
differentiation is all about perceiving on the part of the customer of something
unique. Differentiation can be said to have more competitive advantage than the
cost advantage as it is quite difficult to imitate the differentiated products. Even
if the initiation is done in terms of concept, then also a particular product remains
unique regarding its value, style, packaging, etc. Therefore, when we talk about
differentiation, it is important to understand the demand of the customers and
fulfilling this demand keeping in mind the differentiation advantage. In this case,
one thing the organizations should concentrate on is creativity and innovativeness
than on market research. We have discussed about the concept of differentiation
as a whole but we need to know the why aspect of differentiation, i.e., why do
the organizations need differentiation?
Need
There are a number of reasons depending on the nature of organization to adopt
a differentiation strategy. It is not necessary that the organization should and
must go for differentiation strategy if it does not require one. The requirement is
need based and depends on the organization’s position in the market. There are a
number of factors which result in differentiation. Some of them are as follows:
 To compete against the rivals;
 To create entry barriers for newcomers by building a unique product;
 To reduce the threats arising from the substitutes;
 To develop a differentiation advantage.
Looking at these reasons, one can say that differentiation indeed helps the
organizations to get a competitive advantage over its rival organizations.
121
Formulation of Strategy Activity 3
Give the examples of any three major organizations, which have achieved
differentiation advantage by adopting differentiation strategy. Do name the
differentiated products they are offering.
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7.5 TYPES OF DIFFERENTIATION

Differentiation can be classified into two basic types vis a vis.
 Tangible differentiation
 Intangible differentiation
As the name suggests, tangible means, something which is real and can be seen,
touched, etc. whereas intangible means, something which is abstract in nature
and cannot be touched, it can just be felt. We have already discussed the tangible
aspect. In fact most of the time while discussing differentiation, we actually discuss
the tangible differentiation. Table 7.1 shows some of the opportunities available
for creating uniqueness within the organization. These opportunities in one way
or the other measure the performance of the organization, but when these
opportunities are related to the customer’s psychology, the intangible aspect to
differentiation comes into the picture.
Table 7.1: Opportunities for Creating Uniqueness within the Organization
Activity Differentiation opportunity
Purchasing Quality of components and material acquired
Design Aesthetic appeal
Robustness of performance
Ease of maintenance
Manufacturing Minimization of defects
Delivery Speed in fulfilling customer orders
Reliability in meeting promised delivery items
Human Resource Improved training and motivation increases
Management customer service capability
Technology Permits responsiveness to the needs of specific
Management customers
Financial Management Improves stability of the organization
Marketing Building of product and company reputation
through advertising
Customer Service Providing pre-sales information to customers

122 Source: Adapted from Sadler (2004)

Projecting an image about a particular product is one form of intangible Business Level Strategies
differentiation. This can be done with the help of packaging, style, etc. This
shows that tangible as well as intangible differentiation goes hand in hand and
either of them cannot exist independently. Exhibit 1 show some tangible and
intangible components, which result in differentiation of a particular product.
Exhibit 1: Tangible and Intangible Components of Differentiation
Tangible Intangible
Design Image
Packaging Brand
Style Company reputation
Quality Customer preferences

Intangible differentiation is more effective in those cases where the customer

has once experienced the product, for example, chocolates. Every brand has a
unique taste, different packaging style, etc. This is the case where quality can be
judged only after using the product once but in case where the quality cannot be
judged by experience, e.g., medical services, the intangible differentiation is not
that effective. In short, it can be said that intangible differentiation is accompanied
by tangible differentiation.

7.6 COST OF DIFFERENTIATION

Differentiation is usually costly. The differentiation adds costs as it involves
added features to cater to the needs of the customers. Usually the cost is incurred
in the following cases:
 Increased expenditure on training;
 Increased advertising spend to promote the product;
 Cost of hiring highly skilled sales force;
 Use of more expensive material to improve the quality of the product,
etc.
There can be many more cost drivers depending on the nature of the organization’s
activity. It is not necessary that differentiation is always costly. Some
differentiation is surely costly but if the value activities are coordinated properly,
the costs can be minimized. The cost of maximizing profits by minimizing costs
can surely be achieved. It is believed that differentiation in having more product
features can be more costly than having different but more desired features.
Similarly, for bigger products, differentiation is likely to be less costly than for
the small products like soaps. The cost of differentiation more or less depends on
the cost drivers. The cost drivers determine the uniqueness of the differentiation
activity for a particular organization. The different forms of differentiation have
different effect of cost drivers. But the crux of the whole concept is that the cost
be minimized to achieve an appropriate differentiation strategy, which gives a
premium price for the product. Though it is very difficult to develop a trade-off
123
Formulation of Strategy between differentiation and cost efficiency but not impossible. This practice is
very popular in case of automobile industry where different organizations have
many variants but the difference is basically related to the features of the product.
With the world becoming smaller due to high technological innovations,
differentiation strategies adopted by many organizations is accompanied by
computer aided work culture. Though application of modern technology increases
the cost but on the other hand, the labour cost is reduced to a large extent and
technical efficiency achieved is very high. The economies of scale can be exploited
to a large extent with the help of a trade-off between cost and differentiation.

7.7 ADVANTAGES AND DISADVANTAGES OF

DIFFERENTIATION
Everything is accompanied by advantages and disadvantages and so is
differentiation.
Let us first discuss the advantages of differentiation followed by its disadvantages.
Advantages
 Premium price for the organization;
 Increase in number of units sold;
 Increase in brand loyalty by the customers;
 Sustaining competitive advantage.
Premium price for the organization: When the organization is able to exploit
all sources of differentiation that are less costly or are not costly, then the
organization can differentiate from its rival organizations. There can be many
examples like changing the mix of product features than adding more features,
which are less costly but differentiate the product giving a competitive advantage,
i.e., the price premium to the organization.
Increase in number of units sold: If the product is unique then the demand for
it increases, henceforth increasing the number of units sold. A very good example
is of a Noodle Company, which has competition from the big companies, but
is still considered to be different from its rivals. Here, the number of
customers is won by smart differentiating strategy, thereby increasing the
number of units sold.
Increase in brand loyalty by the customers: A well-positioned and differentiated
product gains the brand loyalty of the customers. For example, a large coffee
brand has developed a brand loyalty amongst coffee lovers. First, it came in
powdered form, but it differentiated itself by coming in granular form then it
moved to decaf version and the pre-mix in different flavours, maintaining the
quality. Once experienced, the brand loyalty or customer loyalty for a particular
brand is developed.
Sustaining competitive advantage: Last, but not the least, this is the crux of the
differentiation. This can be achieved by optimizing cost and increasing profits.
It is more often known as low-cost differentiation strategy. It is the combination
of all three advantages discussed above.
124
Looking at these advantages, one can say that capitalizing the buyer/customer Business Level Strategies
value is the most important. The organizations must concentrate on those activities
which affect the customer value than the ones which do not.
Disadvantages
It is not necessary that every time the organization goes for differentiation strategy,
it is successful. At times there are disadvantages associated with it. Some of the
most common disadvantages are:
 Uniqueness of the product not valued by buyers;
 Excess amount of differentiation;
 Loss due to differentiation.
Uniqueness of the product not valued by buyers: There are a number of cases
where the differentiated product has not gained importance by the customers,
hence failed to position itself in the market. Uniqueness necessarily does not
lead to differentiation. More important is the perception of buyers regarding a
particular product.
Excess amount of differentiation: Too much of anything is bad. Same is the
case with differentiation. If the organization is unable to understand the customer
needs and preferences but goes on differentiating the product, then the
organization loses its market value. Unnecessary differentiation results in failure.
Loss due to differentiation: In certain cases the organization while differentiating
does not realize the importance of coordinated activities in the value chain, which
results in high costs. Considering the fact that differentiation always leads to
profitability is absolute nonsense. This results in loss to the organizations.
The disadvantages associated with differentiation should be looked upon with
utmost care by the organizations going in for differentiation.

7.8 FOCUS
The third business level strategy is focus. Focus is different from other business
strategies as it is segment based and has narrow competitive scope. This strategy
involves the selection of a market segment, or group of segments, in the industry
and meeting the needs of that preferred segment (or niche) better than the other
market competitors. This is also known as a niche strategy. In focus strategy, the
competitive advantage can be achieved by optimizing strategy for the target
segments.
Focus strategy has two variants. They are:
 Cost Focus; and
 Differentiation Focus
Cost focus is where an organization seeks a cost advantage in the target
segment; and
Differentiation focus is where an organization seeks differentiation in the
target segment. 125
Formulation of Strategy When we talk about focus strategy as a niche strategy, it means that a market
niche is chosen where customers have distinct preferences or requirements.
According to Thompson and Strickland the term ‘niche’ is defined as “geographic
uniqueness, by specialized requirements in using the product or by special product
attributes that appeal only to niche members”.
The success of the focus strategy depends on the difference of the target segment
from other segments. To explain this concept, let us take example of soft drink
market. Two major players in the Indian market are rivals but each has
developed a competitive advantage by serving different segments offering
flavoured drinks as well. The focuser can also have an above average level of
performance by having an appropriate cost-focus and differentiation focus
strategies.
Focus strategy can be effective in certain situations only they are:
 Market segment large enough to be profitable;
 Market segment has good growth potential;
 Market segment is not significant to the success of major competitors;
 Focuser has efficient resources;
 Focuser is able to defend against challenges;
 High costs are difficult to the competitors to meet the specialized needs
of the niche;
 Focuser is able to choose from different segments.
There can be more situations depending on the need of the focuser. Focus/niche
strategy has certain advantages as well as disadvantages or risks associated with
it.
Advantages
Focus strategy, if implemented properly, has following advantages:
 Focuser can defend against Porters competitive forces;
 Focuser can reduce competition from new organizations by creating a
niche of its own;
 Threat from producers producing substitute products is reduced;
 The bargaining power of the powerful customers is reduced;
 Focus strategy, if combined with low-cost and differentiation strategy,
would increase market share and profitability.
Disadvantages
The disadvantages associated with focus strategy can be:
 Market segment may not be large enough to generate profits;
 Segment’s need may become less distinct from the main market;
 Competition may take over the target-segment.
126
  We can very well say that the main objective of the focus/niche strategy Business Level Strategies
is to perform a better job of serving buyers in the target market niche
than rivals.
Activity 4
List one example each of automobile sector, technology sector, and airlines where
the companies of respective sectors have adopted focus strategy.
1. Automobile
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2. Technology
........................................................................................................................
3. Airlines
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Let us now discuss the two variants of focus.
Cost Focus
This is basically a niche-low cost strategy whereby a cost advantage is achieved
in focusers’ target segment. According to Porter, cost focus exploits differences
in cost behaviour in some segments. In this the focuser concentrates on a narrow
buyer segment and out-competes rivals on the basis of lower cost.
Differentiation Focus
In this, the organization offers niche buyers something different from rivals.
Here, the organization seeks differentiation in its target segment. Differentiation
focus exploits the special needs of buyers in specified segments. A very good
example of differentiation focus is the luxury car segment. After understanding
all these business/generic strategies, we can say that if all the three are combined
and the cost is optimized, then the market share and profitability can be increased.
Focus strategy can be a tool to help the management team define and rebuild
their business strategy, in turn helping them gain an edge over their competitors.

7.9 SUMMARY
The cost levels in Indian industry in general are high and this has an adverse
effect on the demand of the products, both in the domestic and the international
markets. A number of factors such as high government levies (excise, custom,
and sales tax), uneconomic production levels and high manufacturing costs are
responsible for this.
The role of cost depends upon the nature of the market, i.e., whether it is buyers’
market or sellers’ market. While cost is of critical importance to a producer
operating in a buyers’ market, it is relatively of little significance where s/he is
operating in a sellers’ market. The reason is that in the latter case s/he can pass
on increase in cost to the buyers. As such s/he has no motivation to control or cut
down costs.
127
Formulation of Strategy This unit also discusses the concept of low cost competitive strategy known as
cost leadership and how it helps the organizations to defend themselves against
the five competitive forces.The three business/generic strategies, viz. overall
cost leadership, differentiation and focus, play an important role in the success
of a business. All the three strategies can be used individually or in combination
to create a sustainable competitive advantage. Porter has specifically suggested
that these strategies can be used to defend against the competitive forces.
An effort has been made to develop an understanding of differentiation and focus
and how the two can be brought into practice. In differentiation, the organization
tries to be unique in the industry whereas in focus, the organization tries to
concentrate on a specific segment or a niche market. Overall, the unit tries to
develop a practical approach towards understanding the business strategies.

7.10 KEYWORDS
Cost-leadership : is a low-cost competitive strategy.
Competitive advantage : It is about how an organization puts the business
strategies into practice.
Differentiation : A strategy where an organization seeks to be unique
in its industry along some dimensions that are
widely valued by buyers.
Focus : A strategy which involves the selection of a market
segment, or group of segments, in the industry and
meeting the needs of that preferred segment (or
niche) better than the other rivals.

7.11 SELF-ASSESSMENT QUESTIONS

1) Discuss the concept of cost leadership in the present context.
2) Explain the concept of differentiation strategy. Illustrate your answer with
suitable examples.
3) Suppose you are the business strategist of your company, which is into
manufacturing FMCGs. What would be your differentiation strategy looking
at the present trends? Discuss.
4) Is focus strategy relevant in the present context? Discuss.

7.12 REFERENCES AND FURTHER READINGS

Bhattacharyya S.K. & N. Venkataraman (1983). Managing Business Enterprises—
Strategies, Structures and Systems. New Delhi: Vikas Publishing.
Bolten, Neil & McManus, John. (1999). Competitive Strategies for Service
Organizations. MacMillan Press Ltd.
Cherunilam, F. (2017). Business Policy and Strategic Management—Text and
128 Cases.India: Himalaya Publishing House.
David, F. R. (2008). Strategic Management: Concepts And Cases(12 th Business Level Strategies
Ed.). India: Prentice-Hall Of India Pvt. Limited.
Kourdi, J. &Economist, T. (2015). Business Strategy: A Guide to Effective
Decision-Making. United Kingdom: PublicAffairs.
Kozami, A. (2002). Business Policy and Strategic Management
(2nded.). India: McGraw-Hill Education (India) Pvt Limited.
Porter, M. E. (2008). Competitive Advantage: Creating and Sustaining Superior
Performance. United Kingdom: Free Press.
Porter, M. E. (2008). Competitive Strategy: Techniques for Analyzing Industries
and Competitors. United Kingdom: Free Press.
Rao, Subba P. (2004). Business Policy and Strategic Management. New Delhi:
Himalaya Publishing House.
Sadler, P. (2004). Strategic Management. India: Kogan Page India Pvt. Ltd.

129
Formulation of Strategy
UNIT 8 COMPETITIVE STRATEGY
Objectives

After reading this unit you should be able to understand the:

 Process of formulating a competitive strategy;
 Concept of competitor analysis;
 Competitive moves made by the organization;
 Various dimensions of competitive strategy:
 Competitive strategies in different types of industries.

Structure

8.1 Introduction
8.2 Formulation of Competitive Strategy
8.3 Framework for Competitor Analysis
8.4 Competitive Moves
8.5 Dimensions of Competitive Strategy
8.6 Fragmented industries and Competitive Strategy
8.7 Emerging industries and Competitive Strategy
8.8 Declining industries and Competitive Strategy
8.9 Summary
8.10 Keywords
8.11 Self-Assessment Questions
8.12 References and Further Readings

8.1 INTRODUCTION
In unit 7 of block 2, we discussed business level strategy which consists of generic
strategies. These three generic strategies viz Differentiation, Overall cost leadership
and Focus form the basis of this unit. This unit is an extension of unit 7. In this
unit we will learn different aspects of competitive strategy. After knowing all
about generic competitive strategies, it is very important to understand how these
strategies can be formulated. The organization need to understand how to tackle
with the competitors and what specific decision to be taken while formulating a
competitive strategy. There are various types of industries be it declining, fragmented
or emerging. Each industry has to plan its own competitive strategy either to
come out of a bad situation or to grow or expand. Michael E. Porter has described
generic competitive strategies to cope with five competitive forces (unit 5). These
strategies usually are consistent in nature that is why they are termed as generic
strategies. These strategies help the organization in different situation to develop
130 appropriate competitive strategy which can be implemented effectively.
 Competitive Strategy
8.2 FORMULATION OF COMPETITIVE
STRATEGY
Any organization in any type of industry has a competitive strategy. This may be
explicit or implicit in nature. If it is explicit then it is developed through a planning
process taking into account the external environment and if it is implicit then it
is developed through the activities of different functional units. In the present
context the combination of the explicit and implicit strategies can be the best
option as it gives the direction to the organization to achieve its set objectives.
Developing a competitive strategy is technically developing a formula for success.
It should answer the following questions?
 What are the goals (ends) of the organization?
 What are the policies (means) to achieve these goals?
This is a classical approach to formulate a strategy but is still relevant in
formulating any kind of strategy. Figure 8.1 depicts the “Wheel of Competitive
Strategy” (Porter, 2008) which gives a broad view of an organization competitive
strategy.

Figure 8.1: The Wheel of Competitive Strategy

Source: Adapted from Porter (2008)

The centre point depicts the goals of the organization which defines the way the
business is going to compete including the economic and noneconomic objectives.
The spokes of the wheel depict the functional areas through which the goals of 131
Formulation of Strategy the organization can be achieved. Each spoke defines the key operating policies
for a specific functional area. This wheel can be modified as per the needs of the
organization. Therefore, the hub represents the goals and the spokes represent
the policies.
Level of formulating competitive strategy
There are four key factors which determine the capability of the organization to
successfully achieve these goals. Figure 8.2 depicts these factors.

Figure 8.2: Factors determining the formulation of competitive strategy

An organization must take into consideration these four factors to develop realistic
competitive strategy.
Consistency testing
It is necessary for an organization to test for consistency of the competitive strategy
taking into consideration four important variables. These are
 Internal Consistency
 Environmental Fit
 Resource Fit
 Implementation
There are certain parameters which need to be checked for all the variables.
These are as follows:
Internal Consistency
 Realistic goals;
 Key operating policies in sync/alignment with the goals;
 Key operating policies in sync with each other.
Environmental fit
132  Capitalization of industry opportunities as per the goals and the policies;
 Goals and policies deal with the industry threats; Competitive Strategy

 Timing of the goals and policies with respect to the environmental

changes;
 Goals and policies respond to societal expectation.
Resource fit
 Goals and policies match the available resources;
 Goals and policies adaptable to change.
Implementation
 Well designed goals which can be implemented;
 Alignment of goals and policies with that of the core values;
 Sufficient managerial capability for effective implementation.
The above considerations help in formulating an effective competitive strategy.
The organization need to then follow the process of formulating a strategy.
Activity 1
Formulate a competitive strategy of a hypothetical organization using the four
factors discussed in section 8.2.

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8.3 FRAMEWORK FOR COMPETITOR ANALYSIS

We have learnt how a competitive strategy is formulated. After the formulation
of the strategy the organization needs to position its business in such a manner
that it maximizes its value proposition. Competitor analysis is one of the major
components of strategy formulation. Therefore, it is important for organization
to perform a competitor analysis.
There are four components which need to be covered in a competitor analysis.
These are:
1. Future Goals
2. Current Strategy
3. Assumptions
4. Capabilities
An organization should analyze both the existing as well as the potential
competitors. Figure 8.3 describes the components of a competitor analysis.
133
Formulation of Strategy

Figure 8.3: Components of a competitor Analysis

1. Future goals: It is very important to diagnose the goals of the competitors

as it helps in:
 Predicting the current financial position of the organization;
 Predicting the strategic moves of the competitors if they are not satisfied
with their present position;
 Predicting the reaction of the competitor to the external environment;
 Predicting reactions to strategic changes.
This can be understood with the help of an example. Suppose there are
two organizations A and B. A is interested in maintaining stable sales
growth being conservative in nature whereas B is interested in
maintaining its rate of return on investment. Both the organizations will
react differently to the situations like downturn in the business or increase
in the market share.
In diagnosing the future goals of the competitors apart from the financial
position, qualitative factors like targets with respect to market leadership,
technological status, social status etc. is also important.
2. Assumptions: This is the second component in the competitor analysis and
is quite critical in nature. There are two categories when the competitor’s
assumptions are identified.
(a) Self-Assumption of the competitor;
(b) Competitors’ assumption about the industry and other organizations
which are a part of the industry.
When we talk about self-assumptions then it means the set of assumptions
in which an organization is operating. For e.g. the competitor may have
an assumption that it is a market leader or an assumption that it is a
134 socially conscious organization etc. These assumptions act as the
 directing force for the organizations behaviour. It is not necessary that Competitive Strategy

the assumptions made by the organization are accurate. This is where it

loses the market share before it recognizes that there was flaw in its
assumptions.
Similarly, the competitor’s assumption about the industry also may not
be accurate. Therefore, it is important to identify the biases, popularly
known as blind spots so that the errors are minimized.

3. Current Strategy: The third component is assessing the current strategy of

the competitors. This includes the policies in the functional areas. In
competitor analysis it is necessary to assess both the internal and external
strategies of the competitor.
4. Capabilities: This is the last component in the competitor analysis. This
includes assessing the competitors’ strengths and weaknesses which is done
by using Porters five forces. The capabilities include the core competencies
of the organization. The capabilities can be core or quick response capabilities,
adaptability and sustainability.

Combining the four components, the competitors’ position, as defensive

or offensive, can be judged. This helps the organization to predict the
moves to be made by the competitors.

Activity 2
Select an organization of your choice and perform a competitor analysis using
the four components.
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8.4 COMPETITIVE MOVES

As we have learnt that in competitor’s analysis, the organization can predict
whether the competitor is going to make offensive or defensive move. This is
basically due to the instability in the industry. When we discuss competitive
moves, this means that there are situations where the organizations compete
against or with each other. Competitive moves can be classified as follows:
a) Cooperative or non-threatening moves
b) Threatening moves
Now let us discuss these in details
a) Cooperative or non-threatening moves: As the name suggest, these are
the moves which do not threaten the competitors. The categories of such
type of moves are:
 Improving the position of the organization along with the position of the
competitors even if they are not at par; 135
Formulation of Strategy  Improving the position of the organization along with the position of the
competitors only if a significant number match;
 Improving the position of the organization as the competitors are not
able to match with them.
Moves are said to be nonthreatening when:
 Competitors are not aware of the adjustments made by the organization;
 Competitors are not at all concerned due to their own assumptions;
 Performance of the competitors is impaired due to their own assumptions.
b) Threatening moves: There are certain moves which may threaten the
competitors. The key to such type of move is predicting and influencing
retaliation. Retaliation can be fast, or slow, effective or ineffective; tough or
soft. Based on the kind of retaliation the move can be adjudged as highly
threatening or it may be mild.
Non-Threatening moves can be termed as defensive competitor moves
whereas threatening moves can be termed as offensive competitive moves.
Activity 3
Select an organization and study its strategy. Analyze whether the organization
is going for offensive move or defensive move. Justify.
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8.5 DIMENSIONS OF COMPETITIVE STRATEGY

Let us now discuss different dimensions of competitive strategy. Each organization
has its own competitive strategy. However, the main dimensions are discussed
below which demarcate an organizations competitive strategy from that of others.
The various dimensions of competitive strategy are as follows:
 Specialization: As the name suggests, this focuses on the efforts of the
organization in specializing in teams of product line, market segments
and the niche markets.
 Branding: This dimension focuses on the brand identification of the
products than on the competition. This can be done through promotional
techniques adopted by the organization.
 Push vs Pull: This dimension focuses on the degree to which brand
identification can be done. It may be selling directly to the customer or
through other distribution channels e.g. online platforms. Push strategy
involves pushing the product or brand to the target consumers whereas
pull strategy is about attracting the interest of the consumers towards
136 the product or brand.
  Distribution channel: Selecting an appropriate distribution channel is Competitive Strategy

important. The organization needs to decide which channel it has to use.

It can be company owned, retail outlets, online platforms, specialty outlets
etc.
 Quality of product: It is very important for organization to focus on
this aspect. Quality of product matters a lot and it depends on the type of
raw material, specifications, features etc. for making a finished product.
 Technological leadership: It focuses on the degree to which an
organization seeks leadership in the technology. These are organizations
which tend to imitate the product and this is where they lack the
competitive advantage.

 Vertical integration: This explains the degree to which the organization

follows forward and backward integration.
 Cost-position: Optimum utilization of cost is very important for
competitive advantage.
 Service: This gives the degree to which the organization provides
ancillary services. This may be in the form of in-house service network,
credit, after sales service etc.
 Pricing policy: This is one of the important dimensions as it describes
the price position of the organization in the market. This is a distinct
strategic variable and should be considered separately.

 Leverage: This is the financial as well as operating leverage of the

organization.

 Relationship of Strategic Business Unit (SBU) with the parent

organization: This is important as a SBU can be a part of a major
conglomerate and its relationship with the parent organization will have
an impact on the objectives, resources available etc. of the SBU.

The scope of strategic differences with respect to these dimensions depends on

the nature of the industry. All the strategic dimensions are related. For e.g. an
organization with a relatively low price has a low-cost position and may not
have a superior product quality. The organization can become low-cost only if it
has a high degree of vertical integration. This example shows that strategic
dimensions for a specific organization form a consistent set internally.

8.6 FRAGMENTED INDUSTRIES AND

COMPETITIVE STRATEGY
Fragmented industries comprises of organizations which do not have a significant
market share but can influence the industry strongly. Fragmented industries consist
of a large number of small and medium sized organizations. The industries make
the environment unique in the sense that they do not have market leaders. These
industries can range from services, retail, and agriculture to creative businesses.
Some fragmented industries are characterized by differentiated products like
137
Formulation of Strategy software, TV etc. and some undifferentiated products like fabricated aluminum.
Designing a specific competitive strategy for a fragmented industry is a
combination of the generic strategic management process along with the specific
dimensions discussed here.

Probable strategic hindrances

There are many strategic traps which hinder the competitive position of the
fragmented industry. Some of the common hindrances which need to be taken
care of while formulating the competitive strategy are:

 Aiming for dominance: Aiming for dominance by a fragmented industry

can be detrimental. If the organization tries to gain dominant share it
leads to the failure of the organization.

 Dearth of strategic discipline: A high level of strategic discipline is a

must for competing in fragmented industries. An opportunistic strategy
may work in the short-run but a disciplined approach is a must to sustain
and be successful in the long run.

 Over centralization: In many fragmented industries it is seen that they

are controlled centrally. This can be counterproductive as the essence of
competition in such industry is personalized service, local contact,
controlled operations and the ability and adaptability to change to the
environmental fluctuations.
 False assumptions: It has been seen that the organizations have false
or inaccurate assumptions about the other organizations. Most of the
organization has owners for the non-economic reasons like person from
the family, so there are chances of errors in assessing the assumptions of
other organizations. The faultiest assumption is that the competitors have
same overheads and objectives.

 Reaction to new products: Usually the organizations in fragmented

industry tend to overreact to new products. This results in the increase
in costs and overheads leading to competitive disadvantage. This occurs
because of large number of competitors insures that buyer is able to pay
for a new product. Therefore coping with the new product becomes all
the more difficult in fragmented industry.

These were the generic strategic traps. There can be more such traps depending
on the type of industry. These traps need to be considered to formulate the strategy.

Formulating Competitive Strategy in Fragmented Industry

Collating the concept of fragmented industry and the strategic hindrances we
can outline a broad framework to formulate a competitive strategy in fragmented
industry. This is a broad framework which can be tweaked as per the requirement
of the organization. There are five steps involved. These are:

Step 1: Conducting industry and competitor analysis

Step 2: Identifying the causes of fragmentation in industry

138
Step 3: Examining the causes of fragmentation Competitive Strategy

Step 4: Predicting the new structural equilibrium in the industry

Step 5: Coping with fragmentation
All the four steps are interrelated. Step 1 focuses on conducting industry analysis
on the whole industry and also to perform the competitor analysis. This will help
the organization to identify the sources of the competitive forces in the industry
and the standing of the competitors in the industry.
Step 2 focuses on identifying the reasons which made the industry fragmented.
It is important to have a list of all the reasons and assess their relationship with
the economies of the industry.
Step 3 focuses on investigating the causes of industry fragmentation with respect
to industry and competitor analysis. This will help the organization to assess
whether these causes can be overcome say by innovation or strategic change.
Step 4 depends on the previous three steps. The organization needs to assess
whether the fragmentation can be overcome or not and if it can be then whether
the industry is able to give attractive returns or not. The organization needs to
predict a new structural equilibrium.
Step 5 deals with coping the fragmentation in case the fragmentation is inevitable.
In this step the organization needs to select the best alternative which can be
used to cope with the fragmented structure.
Though this can be an ideal competitive strategy for fragmented industry but it
can be applicable to overcome the fragmentation and develop competitive
advantage.

8.7 EMERGING INDUSTRIES AND COMPETITIVE

STRATEGY
As the name suggests, emerging industries are the industries which are new or
are re-formed due to emergence of socio-economic developments. The best
example can be from the present pandemic situation which has given rise to new
organizations which are catering to the specific customer needs. This situation
has also given rise to the existing organizations modifying themselves and
emerging in new avatars to cater to the end users. Industries like Solar power,
wind power, online gaming, OTT platforms, social media platforms etc. are a
result of potentially viable opportunities for businesses. The main feature of such
industry is that there are no specific rules of the game. The absence of rules can
be both risky as well as opportunistic. However in both the cases they need to be
managed. The major competitive problems in the industry are establishing a set
of rules so that the organization can cope with it and be successful.
Features of Structural Environment
Each industry may have its own structure but here are some common factors
which indentify the industry in their emerging stage of development. There are
certain features of the structural environment in the emerging industry. Figure
8.4 depicts these: 139
Formulation of Strategy

Figure 8.4: Elements of Structural Environment in Emerging Industries

Uncertain technological environment: In an emerging industry there is lot of
technological uncertainty. Uncertainty can be in terms of the configuration of
the product, production technology etc. For e.g. in manufacturing optical fibers,
there are number of different processes available and are being used by different
organization in the industry. Which one will be or is the best cannot be predicted
unless the product is accepted in the market.
Uncertain strategy: There are number of strategic approaches tried by the
participants in the industry. There is no ‘right’ strategy creating level of uncertainty.
Every organization tries different approaches of strategy. For e.g. organization
manufacturing solar heating panels use different approaches with respect to supply
chain, market segmentation etc. as the organizations are not much aware of the
competitors, customer perception and industry conditions in the emerging phase.
High Volatility: It is a known fact that small volumes of production result in
high costs especially in the emerging industries. In this case the learning curve is
very steep especially with new technology. Initially the steep learning curve
results in high costs but as the productivity increases these costs decline at a very
high proportional rate. The decline in cost is even more if the learning is combined
with increasing opportunities. This situation results in an unbalanced situation.
Nascent Organizations and Spin-offs: As discussed earlier, the emerging phase
has more proportion of newly formed organizations. The Nascent organization
is in a position to enter the emerging industry as neither there is set rules nor
economies of scale acting as a deterrent. Usually this happens with the
organization into digital equipments.
Apart from the nascent organization these are spin-off organizations as well.
Majority of these are the organizations created by employees by leaving their
parent organization. Spin-offs occur due to perceived opportunity, rewards of
140 equity participation, fluid technology and strategy and creativity.
First time buyers: Usually in the emerging industry, the buyers of the product Competitive Strategy
are first-time buyers. The organizations try to use specific marketing tactics to
influence the buyers to buy new products. For e.g. the organizations manufacturing
solar heating panels try to convince the homeowners and homebuyers convincing
about the sustainability of the product.
Shorter Time Period: The time period to take the end product to reach to the
customers to meet the demand is very short. This makes the organization to act
fast using conventional wisdom.
Subsidy: There may be subsidies in many emerging industries especially those
are coming up with new technology or addressing the societal concerns. Solar
heating panels are a very good example where the subsidy is being provided by
government and also the start-ups with innovative and indigenous ideas are being
given subsidy. From the strategic point of view subsidies may cause instability
to the industries.
Formulating competitive strategy
Now we know the structural environment of emerging industries. It is important
for organizations to cope with the uncertainty and risk associated with the
environment. This can be done by making certain strategic choices. The positive
aspect of uncertainty is that there is more freedom to make good strategic choices.
The following strategic choices can be made to formulate the competitive strategy.
 Shaping Industry Structure: The organization can give a shape to the
industry structure by setting the rules of the game. This can be done by
making appropriate strategic choices. It can be done in the areas of
pricing, marketing etc.
 Externalities: A major strategic issue in the industry is the dependence
on the external environment. The organization needs to strike a balance
between the industry advocacies at the same time pursuing its own
interests. Therefore, the organization should promote standardization,
police substandard quality and attract first time buyers.
 Changing role of supply Chain: The organizations should be ready
for a probable shift in the orientation of its suppliers and distribution
channels. Since the supply chain is dependent on the industry conditions,
the organization should adapt to the changing conditions. For e.g.
distribution channels may become more proactive to invest in advertising
etc. If the organization is ready to change then it can exploit such
opportunities to give itself a strategic leverage.
 Shift of Mobility Barriers: The common barriers in emerging
technology can be
1. Proprietary technology
2. Access to raw materials and distribution channel
3. Cost advantage due to experience curve
4. Risk
141
Formulation of Strategy The organization should be prepared to defend itself and try to avoid these barriers.
This will involve high level of commitment of capital. The organization should
be prepared against integration and secure supplies and markets.
 Entry Timing: The timing to enter the emerging industry should be
appropriate. Early entry involves risk but can have low entry barriers
and can give higher returns.
 Tactical Moves: The organization planning to enter the emerging industry
should make some tactical moves. These can be committing the suppliers
of raw material and early financing can help lower the cost of capital.
In the merging industry the organizations tend to grow rapidly and gain profits
but the decision for the organization to enter the industry should be based on
proper structural analysis.
Activity 4
Select a start-up in the emerging industry of your choice and try to formulate a
competitive strategy for the same.
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8.8 DECLINING INDUSTRIES AND COMPETITIVE

STRATEGY
Declining industries are those which have experienced complete decline in unit
sales for a considerable period of time. Declining situation is a real time situation
for which an end game strategy needs to be developed. Decline may be due to
many reasons. Some of them are listed below:
 Low economic growth
 Rapid cost inflation
 Rapid technological advancements
Declining industry is characterized by low or declining markets, trimming product
line, lack of R&D and no promotional policy leading to reducing competitors.
The accepted role for formulating a strategy, for declining industry is the harvest
strategy which focuses on putting an end to the investment, trying to generate
maximum cash flow from the business and then going for divestment; figure 8.5
depicts a model for harvest strategy.

Abolish Generate Divest Harvest

investment Cash Flow Strategy

Figure 8.5: Model for Harvest Strategy

However, when the nature of competition is studied in declining industry, it is

142 quite complex as the industries differ in which they respond. Some industries
exit gracefully and some enter into complexities. It is therefore, important to Competitive Strategy

understand the structured environment of declining industry. This can be done

by understanding the determinants of competition in decline phase.
Determinants of competition in decline phase:
The determinants which have a major impact on the declining industry can be
generalized as follows:
 Uncertainty
 Declining pattern
 Pockets of demand
 Reasons for decline
 Exit barriers
 Rivals/ volatility
 Uncertainty: This is one of the major factors which affect the end game
competition. It determines the degree of uncertainty which is perceived
by the competitors about the demand that whether demand will continue
to decline or not. Organizations may differ in their perceptions regarding
future demand. Some may visualize that the demand will increase and
such organizations tend to continue. Some organization may not think
so and may take the decision to exit. The stronger is the organization’s
position and higher the exit barriers, the future positioning of the
organization seems to be quite optimistic.
 Declining pattern: The pattern of decline whether it is steady, slow or
high depicts the volatility of this phase. The rate of decline determines
the withdrawal capacity of the organization.
 Demand pockets: The demand pockets are the areas where the demand
still exists in declining industry. The demand pockets play an important
role in determining the profitability of the competitors who are left in
the business.
 Reasons for decline: There can be many reasons for decline and they
have an impact on competition during the decline phase. These factors
can be substituting technology, demographics, shifts in customer
perception etc. The reasons for decline provide a clue for the probable
degree of uncertainty organizations perceive about the future demand.
 Exit barriers: The capacity in which the organization leaves is quite
crucial to competition in declining industries. The exit barriers force the
organizations to keep competing in the declining industry. The higher
the exit barrier, higher is the inhospitability in the industry.
 Rivals’ volatility: As the sales decline, there can be a situation of price
warfare among the competitors. This price war arises because the product
is perceived as commodity, fixed costs tend to rise, and organizations
get stuck due to exit barriers and uncertainty. 143
Formulation of Strategy The determinants discussed above give an idea regarding the position of the
competitors in the decline phase. Keeping these determinants into consideration,
strategic alternatives in decline phase are discussed below:
Usually strategy during decline revolves around harvest strategy but there can
be other probable alternatives though it are not necessary that all the alternatives
are viable. There can be four basic approaches to develop a competitive strategy
in decline. These are:
 Leadership strategy
 Niche strategy
 Harvest strategy
 Quick divestment strategy
Table 8.1 gives the description of these strategies.

Table 8.1 Alternative Strategies in Decline

S. Basis of Leadership Niche Harvest Quick

No. Comparison Divestment

1. Nature Leader in terms Defend or create Taking advantage Liquidate

of market share strong position in of strengths, investment
specific segment manage controlled
disinvestment

2. Investment Aggressive Moderate Abolish Liquidate

quickly

3. Market Strong Strong Weak Weak

position

4. Demand High Stable Past strengths Buyer in

position cashed bargaining
position

5. Impact of Low Low High High

exit barriers

Strategic choice in decline

Choosing a right strategy in declining industry depends on the requirement of
the organization with the relative position of the organization. Organizations
situated differently will have different optimal strategies in decline phase. Figure
8.6 shows the matrix of the strategic alternatives available to the organization.
Leadership or Niche: This alternative is available when the industry structure
is favourable to hospitable decline phase. This is the result of low uncertainty,
less exit barriers etc.
Niche or Harvest: This strategic alternative is available when the industry is
not favourable to decline. This may be due to high exit barriers for competitors
leading to volatile end-game rivalry.
144
Harvest or Quick Divestment: This strategic position arises due to organizations Competitive Strategy
need to remain in the business. In this case the organization should assess its
strategic needs and match with the industry structure to determine appropriate
strategy.
To conclude we can say that it is important for organization to performs a thorough
internal analysis and then match it with external analysis and try to improve its
position in the decline phase.
INTERNAL CAPABILITIES
&
MARKET POSITION
Strong Weak
Hospitable Leadership Harvest
ENVIRONMENT
INDUSTRY

decline or or
phase Niche Quick
Divestment
Inhospitable Niche Quick
decline or Divestment
phase Harvest

Figure 8.6: Strategic Alternatives in Decline

8.9 SUMMARY
Competition has always been the focal point of every organization. Each
organization whether it is an old organization or a new one or a start-up has a one
point agenda and that is how to be successful. In unit 5 of block 2 we have
discussed the three generic competitive strategies viz-a-viz overall cost leadership,
differentiation and focus. These three strategies build a background for framing
the competitive strategy for an organization. In this unit we discuss the formulation
part of competitive strategy and how to perform a competitor analysis. The wheel
of competitive strategy gives an idea to the classical approach to strategy. It is
important to note here is that competitive strategy is different for different
organizations. This is the reason we have discussed the competitive strategy in
different types of industries. Although the basic strategy formulation remains
the same but keeping in view certain dimensions of competitive strategy in
different industries, specific competitive strategy can be formulated. The unit as
a whole discusses various aspects of the formulation of competitive strategy.

8.10 KEYWORDS
Competitive strategy : It is the long term plan of action of the organization
to gain competitive advantage.
Competitor analysis : It is the process of assessing the strengths and the
weaknesses of competitors. 145
Formulation of Strategy Fragmented Industry : It is an industry in which the organizations do not have
a significant market share to become market leaders.
Emerging Industry : This is a newly formed or re-formed industry created
as a result of social or economic changes.
Declining Industry : This is the industry which has declined in terms of
sales for a long period.

8.11 SELF-ASSESSMENT QUESTIONS

1) What is competitive strategy? Discuss with illustrations.
2) How is a competitive strategy formulated?
3) Explain the concept of competitor analysis.
4) What are the different dimensions which need to be considered while
formulating a competitive strategy?
5) How can you formulate a competitive strategy for;
a) Fragmented Industry
b) Emerging Industry
c) Declining Industry

8.12 REFERENCES AND FURTHER READINGS

Bensoussan, B. E. & Fleisher, C. S. (2015). Business and Competitive Analysis:
Effective Application of New and Classic Methods. United States: Pearson
Education.
Charan, R. (2021). Rethinking Competitive Advantage: New Rules for the Digital
Age. United Kingdom: Random House.
Daidj, N. (2014). Developing Strategic Business Models and Competitive
Advantage in the Digital Sector. United States: IGI Global.
Flanagan, W. G. &Smith, J. L. (2006). Creating Competitive Advantage: Give
Customers a Reason to Choose You Over Your Competitors. United
Kingdom: Currency/Doubleday.
Porter, M. E. (2008). Competitive Advantage: Creating and Sustaining Superior
Performance. United Kingdom: Free Press.
Porter, M. E. (2008). Competitive Strategy: Techniques for Analyzing Industries
and Competitors. United Kingdom: Free Press.
Wright, S. (2014). Competitive Intelligence, Analysis and Strategy: Creating
Organizational Agility. (n.p.): Taylor & Francis.

146
 Competitive Strategy
UNIT 9 CORPORATE LEVEL STRATEGY
Objectives

After reading this unit, you should be able to:

 Acquaint yourself with the concept of corporate strategy;
 Familiarize yourself with the various generic corporate strategies;
 Explain the nature, scope and approaches to implementation of stability and
growth strategies; and
 Understand different diversification strategies;
 Learn the concept of retrenchment strategy; and
 Understand the concept of turnaround strategy.

Structure

9.1 Introduction
9.2 Nature and Scope of Corporate Strategies
9.3 Types of Corporate Strategies
9.4 Stability Strategy
9.5 Expansion Strategies
9.6 Diversification
9.7 Alternative Routes to Diversification
9.8 Retrenchment Strategies
9.9 Summary
9.10 Key Words
9.11 Self-Assessment Questions
9.12 References and Further Readings

9.1 INTRODUCTION
Strategic management deals with the issues, concepts, theories approaches and
action choices related to an organization’s interaction with the external
environment. It in general, refers to how a given objective will be achieved.
Strategy, therefore, is mainly concerned with the relationships between ends and
means, that is, between the results we seek and the resources at our disposal.
Some organizations are groups of different business and functional units, each
of them must be having its own set of goals, which may not necessarily be same
as the goals of the corporate headquarters looking after the interests of the entire
organization.
Since the goals are different and the means to achieve them are different, strategies
are likely to be different. As per Porter this understanding has led to the hierarchical 147
Formulation of Strategy division of strategy at two levels: a business-level (competitive) strategy and
an organization-wide strategy (corporate strategy). In addition to these
strategies, many authors also mention functional strategies, practiced by the
functional units of a business unit, as another level of strategy.
Corporate Strategies are concerned with the broad, long-term questions of “what
businesses are we in, and what do we want to do with these businesses?” The
corporate strategy sets the overall direction the organization will follow.
Competitive Strategies involves the decisions that determine how the
organization will compete in a specific business or industry. This involves deciding
how the organization will compete within each line of business or strategic
business unit (SBU). Competitive strategies include being a low-cost leader,
differentiator, or focuser. Functional Strategies are also called operational
strategies, are the short-term (less than one year), goal-directed decisions and
actions of the organization’s various functional departments. Functional strategies
identify the basic course of action that each functional department in a strategic
business unit will pursue to contribute to the attainment of its goals.
In a nutshell, corporate-level strategy identifies the portfolio of businesses that
in total will comprise the corporation and the ways in which these businesses
will relate. The competitive strategy identifies how to build and strengthen the
business’s long-term competitive position in the marketplace while the functional
strategies identify the basic courses of action that each department will pursue to
contribute to the attainment of its goals.
Corporate Strategy
Corporate strategy is essentially a blueprint for the growth of the organization. It
sets the overall direction for the organization to follow. It also spells out the
extent, pace and timing of the organization’s growth. Corporate strategy is mainly
concerned with the choice of businesses, products and markets. Defined formally,
a corporate-level strategy is an action taken to gain a competitive advantage
through the selection and management of a mix of businesses competing in several
industries or product markets. Corporate strategies are normally expected to help
the organization earn above-average returns and create value for the shareholders
and addresse the issues of a multi-business organization as a whole. It deals
with the following questions:
 What should be the nature and values of the organization in the broadest
sense?
 What are the aims in terms of creating value for stakeholders?
 What kind of businesses should the organization be in?
 What should be the scope of activity?
 Whether divestment is required?
 Whether expansion is required?
 What structure, systems and processes will be necessary to link the
various businesses to each other and to the corporate centre?
 How can the corporate centre add value to make the whole worth more than
the sum of the parts?
148
Most corporate level strategies have three major components: Corporate Level Strategy

a) Growth or directional strategy which outlines the growth objectives ranging

from drastic retrenchment through stability to varying degrees of growth
and methods and approaches to accomplish these objectives.
b) Portfolio strategy helps corporations for creating value through their
businesses. Portfolio strategy plans the necessary moves to establish positions
in different businesses and achieve an appropriate amount and kind of
diversification. A portfolio strategy is concerned not only about choice of
business portfolio, but also about portfolio of geographical markets for
acquisition of inputs, locating various value chain activities and selling of
outputs. In short, a portfolio strategy facilitates efficient allocation of
corporate resources, links the businesses and geographically dispersed
activities and builds synergy leading to corporate or parenting advantage.
c) Corporate parenting strategy, which tries to capture valuable cross-business
strategic fits in a portfolio of business and turn them into competitive
advantages, especially transferring and sharing related technology,
procurement leverage, operating facilities, distribution channels, and/or
customers. In other words, it decides how organizations allocate
resources and manage the capabilities and activities across the portfolio.
Corporate parenting views the corporation in terms of resources and
capabilities that can be used to build business units value as well as generate
synergies across business units. Corporate parenting generates corporate
strategy by focusing on the core competencies of the parent corporation
and on the value create from the relationship between the parent and its
businesses.

9.2 NATURE AND SCOPE OF

CORPORATE STRATEGIES
Growth is essential for an organization. Organizations go through an inevitable
progression from growth through maturity, revival, and eventually decline. The
broad corporate strategy alternatives, sometimes referred to as grand strategies,
are: stability/consolidation, expansion/growth and divestment/retrenchment
and combination strategies. During the organizational life cycle, managements
choose between growth, stability, or retrenchment strategies to overcome
deteriorating trends in performance.
At the core of corporate strategy must be a clear logic of how the corporate
objectives, will be achieved. Most of the strategic choices of successful
corporations have a central economic logic that serves as the fulcrum for profit
creation. Some of the major economic reasons for choosing a particular type of
corporate strategy are:
 Exploiting operational economies and financial economies of scope;
 Avoiding uncertainty and increasing efficiency;
 Management skills creating corporate advantage;.
 Long term profit potential of a business.
149
Formulation of Strategy The non-economic reasons for the choice of corporate strategy elements include:
 Dominant view of the top management;
 Employee incentives to diversify (maximizing management compensation);
 Desire for more power and management control;
 Ethical considerations ;
 Corporate Social Responsibility.

9.3 TYPES OF CORPORATE STRATEGIES

Corporate level strategies are also termed as grand strategies. There are four
types of generic corporate strategies. They are:
 Stability strategies: make no change to the organization’s current activities
 Growth strategies: expand the organization’s activities
 Retrenchment strategies: reduce the organization’s level of activities
 Combination strategies: a combination of above strategies
Let us discuss each strategy on by one.

Stability Strategy
Stability strategy is a strategy in which the organization retains its present strategy
at the corporate level and continues focusing on its present products and markets.
The organization stays with its current business and product markets; maintains
the existing level of effort; and is satisfied with incremental growth. It does not
seek to invest in new factories and capital assets, gain market share, or invade
new geographical territories. Organizations choose this strategy when the industry
in which it operates or the state of the economy is in turmoil or when the industry
faces slow or no growth prospects. They also choose this strategy when they go
through a period of rapid expansion and need to consolidate their operations
before going for another phase of expansion.
Growth Strategy
Organizations choose expansion strategy when their perceptions of resource
availability and past financial performance are both high. The most common
growth strategies are diversification at the corporate level and concentration at
the business level. Diversification is defined as the entry of an organization
into new lines of activity, through internal or external modes. The primary
reason an organization pursues increased diversification are value creation
through economies of scale and scope, or market dominance. In some cases
organizations choose diversification because of government policy, performance
problems and uncertainty about future cash flow. In one sense,
diversification is a risk management tool. Risk plays a very vital role in
selecting a strategy and hence, continuous evaluation of risk is linked with an
organization’s ability to achieve strategic advantage. Internal development
can take the form of investments in new products, services, customer
150 segments, or geographic markets including
international expansion. Diversification is accomplished through external modes Corporate Level Strategy
through acquisitions and joint ventures. Concentration can be achieved through
vertical or horizontal growth. Vertical growth occurs when an organization takes
over a function previously provided by a supplier or a distributor. Horizontal
growth occurs when the organization expands products into new geographic areas
or increases the range of products and services in current markets.
Retrenchment Strategy
Many organizations experience deteriorating financial performance resulting from
market erosion and wrong decisions by management. Managers respond by
selecting corporate strategies that redirect their attempt to turnaround the
organization by improving their organization’s competitive position or divest or
wind up the business if a turnaround is not possible. Turnaround strategy is a
form of retrenchment strategy, which focuses on operational improvement when
the state of decline is not severe. Other possible corporate level strategic responses
to decline include growth and stability.
Combination Strategy
The three generic corporate strategies can be used in combination; they can be
sequenced, for instance growth followed by stability, or pursued simultaneously
in different parts of the business unit. Combination Strategy is designed to mix
growth, retrenchment, and stability strategies and apply them across a
corporation’s business units. An organization adopting the combination
strategy may apply the combination either simultaneously (across the different
businesses) or sequentially.
Activity 1
Search the internet for information on three different groups of
organizations. Compare the business models of each one of them and briefly
explain the type of corporate strategies that these follow.
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9.4 STABILITY STRATEGY

An organization following stability strategy maintains its current business and
product portfolios; maintains the existing level of effort; and is satisfied with
incremental growth. It focuses on fine-tuning its business operations and improves
functional efficiencies through better deployment of resources. In other words,
an organization is said to follow stability/ consolidation strategy if:
 It decides to serve the same markets with the same products;
 It continues to pursue the same objectives with a strategic thrust on
incremental improvement of functional performances; and 151
Formulation of Strategy  It concentrates its resources in a narrow product-market sphere for
developing a meaningful competitive advantage.
Adopting a stability strategy does not mean that an organization lacks concern
for business growth. It only means that their growth targets are modest and that
they wish to maintain a status quo. Stability strategy is basically a defensive
strategy as products, markets and functions remain unchanged. A stability strategy
is ideal in stable business environments where an organization can devote its
efforts to improving its efficiency while not being threatened with external change.
In some cases, organizations are constrained by regulations or the expectations
of key stakeholders and hence they have no option except to follow stability
strategy.
Generally large organizations with a sizeable portfolio of businesses do not usually
depend on the stability strategy as a main route, though they may use it under
certain special circumstances. They normally use it in combination with the other
generic strategies, adopting stability for some businesses while pursuing
expansion for the others.
However, small organizations find this a very useful approach since they can
reduce their risk and defend their positions by adopting this strategy. Niche players
also prefer this strategy for the same reasons.
Conditions Favouring Stability Strategy
Stability strategy does entail changing the way the business is run, however, the
range of products offered and the markets served remain unchanged or narrowly
focused.
An organization’s strategists might choose stability when:
 The industry or the economy is in turmoil or the environment is volatile.
 Uncertain conditions;
 Environmental turbulence is minimal and the organization does not
foresee any major threat to itself and the industry concerned as a whole;
 The organization just finished a period of rapid growth and needs to
consolidate its gains before pursuing more growth;
 The organization’s growth ambitions are very modest and it is content
with incremental growth;
 The industry is in a mature stage with few or no growth prospects and
the organization is currently in a comfortable position in the industry.
Managers pursue stability strategy when they feel that the organization has been
performing well and wish to maintain the same trend in subsequent years. They
would prefer to adopt the existing product-market posture and avoid departing
from it. Sometimes, the management is content with the status quo because the
organization enjoys a distinct competitive advantage and hence does not perceive
an immediate threat.
Stability strategy is also adopted in a number of organizations because the
management is not interested in taking risks by venturing into unknown terrain.
152
In fact they do not consider any other option as long as the pursuit of existing Corporate Level Strategy

business activity produces the desired results. Conservative managers believe

product development, market development or new ways of doing business entail
great risk and therefore, avoid taking decisions, which can endanger the
organization.

Approaches to Stability Strategy

There are various approaches to developing stability/consolidation strategy. The
Management has to select the one that best suits the corporate objective. Some
of these approaches are discussed below. In all these approaches, the fundamental
course of action remains the same, but the circumstances in which the
organizations choose various options differ.
Holding Strategy: This alternative may be appropriate in two situations: (a) the
need for an opportunity to rest, digest, and consolidate after growth or some
turbulent events - before continuing a growth strategy, or (b) an uncertain or
hostile environment in which it is prudent to stay in a “holding pattern” until
there is change in or more clarity about the future in the environment. With a
holding strategy the organization continues at its present rate of development. This
approach suits an organization, which does not have requisite resources to pursue
increased growth for a longer period of time. At times, environmental changes
prohibit a continuation in growth.

Stable Growth: This alternative essentially involves avoiding change,

representing indecision or timidity in making a choice for change. Alternatively,
it may be a comfortable, even long-term strategy in a mature, rather stable
environment, e.g., a small business in a small town with few competitors. It
grows slowly but surely, increasingly its market penetration by steadily adding
new products or services and carefully expanding its market.

Harvesting Strategy: In this approach, an organization has a dominant market

share and seeks to take advantage of this position thereby generating cash for
future business expansion. This approach is most suitable to an organization
whose main objective is to generate cash. Even market share may be
sacrificed to earn profits and generate funds. A number of ways can be used
to accomplish the objective of making profits and generating funds. Some of
these are selective price increases and reducing costs without reducing price.
Profit or Endgame Strategy: A profit strategy is one that capitalizes on a situation
in which old and obsolete product or technology is being replaced by a new one.
This type of strategy does not require new investment, so it is not a growth
strategy. Organizations adopting this strategy decide to follow the same
technology, at least partially, while transiting into new technological domains.
Strategists in these organizations reason that the huge number of product based
on older technologies on the market would create an aftermarket for spare parts
that would last for years.

Activity 2
Identify few Indian organizations following stability strategy. Also identify the
type of stability strategy followed by these organizations. 153
Formulation of Strategy ...............................................................................................................................
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9.5 EXPANSION STRATEGIES

Every organization seeks growth as its long-term goal to avoid annihilation in a
relentless and ruthless competitive environment. Growth offers ample
opportunities to everyone in the organization and is crucial for the survival of
the organization. However, this is possible only when fundamental conditions of
expansion have been met.
Expansion strategies are designed to allow organizations to maintain their
competitive position in rapidly growing national and international markets. Hence
to successfully compete, survive and flourish, an organization has to pursue an
expansion strategy. Expansion strategy provides a blueprint for
business organizations to achieve their long- term growth objectives. It
allows them to maintain their competitive advantage even in the advanced
stages of product and market evolution.
Conditions for Opting for Expansion Strategy
Organizations opt for expansion strategy under the following circumstances:
 Organization having high growth objectives;
 New opportunities in the environment;
 Market leader trying to continue being a market leader;
 Volatile situations;
 Surplus resources;
 Regulatory environment.
Growth of a business organization entails realignment of its strategies in product
– market environment. This is achieved through the basic growth approaches of
intensive expansion, integration (horizontal and vertical integration),
diversification and international operations.
Expansion through intensification
Intensification involves expansion within the existing line of business. Intensive
expansion strategy involves safeguarding the present position and expanding in
the current product-market space to achieve growth targets. Such an approach is
very useful for organizations that have not fully exploited the opportunities
existing in their current products-market domain. An organization selecting an
intensification strategy concentrates on its primary line of business and looks for
ways to meet its growth objectives by increasing its size of operations in its
primary business. Intensive expansion of an organization can be accomplished
in three ways, namely, market penetration, market development and product
154
development. Intensification strategy is followed when adequate growth Corporate Level Strategy

opportunities exist in the organization’s current products-market space. However,

while going in for internal expansion, the management should consider the
following factors.
 While there are a number of expansion options, the one with the highest net
present value should be the first choice.
 Competitive behaviour should be predicted in order to determine how and
when the competitors would respond to the organization’s actions. The
organization must also assess its strengths and weaknesses against its
competitors to ascertain its competitive advantages.

 The conditions prevailing in the environment should be carefully examined

to determine the demand for the product and the price customers are willing
to pay.

 The organization must have adequate financial, technological and managerial

capabilities to expand the way it chooses.
 Technological, social and demographic trends should be carefully monitored
before implementing product or market development strategies. This is very
crucial, especially, in a volatile business environment.

Ansoff’s Product-Market Expansion Grid

The product/market grid first presented by Igor Ansoff (1968), shown in exhibit
1, has proven to be very useful in discovering growth opportunities. This grid
best illustrates the various intensification options available to an organization.
The product/market grid has two dimensions, namely, products and markets.
Combinations of these two dimensions result in four growth strategies. According
to Ansoff’s Grid, three distinct strategies are possible for achieving growth through
the intensification route. These are:
 Market Penetration: The organization seeks to achieve growth with existing
products in their current market segments, aiming to increase its markets
share.

 Market Development: The organization seeks growth by targeting its

existing products to new market segments.
 Product Development: The organization develops new products targeted
to its existing market segments.

 Diversification: The organization grows by diversifying into new businesses

by developing new products for new markets.

Exhibit 1: Ansoff’s Grid

MARKETS/ Current Markets New Markets
PRODUCTS

Current Products Market Penetration Market Development

New Products Product Development Diversification

155
Formulation of Strategy Combination Strategy
Combination strategy combines the intensification strategy variants i.e. market
penetration, market development and product development to grow. In the market
development and market penetration strategy, the organization continues with
its current product portfolio, while the product development strategy involves
developing new or improved products, which will satisfy the current markets.
Activity 3
Search for information about an organization following intensification strategies.
Why is the organization following these strategies? Discuss.
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Expansion through integration
In contrast to the intensive growth, integration strategy involves expanding
externally by combining with other organizations. Combination involves
association and integration among different organizations and is essentially driven
by need for survival and also for growth by building synergies. Combination of
organizations may take the merger or consolidation route. Merger implies a
combination of two or more concerns into one final entity. The merged concerns
go out of existence and their assets and liabilities are taken over by the acquiring
organization. A consolidation is a combination of two or more business units to
form an entirely new organization. All the original business entities cease to
exist after the combination. Organizations use integration to:
 increase market share;
 avoid the costs of developing new products internally and bringing them
to the market;
 reduce the risk of entering new business;
 speed up the process of entering the market;
 become more diversified and
 reduce the intensity of competition by taking over the competitor’s
business.
The costs of integration include reduced flexibility as the organization is locked
into specific products and technology, financial costs of acquiring another
organization and difficulties in integrating various operations. There are many
forms of integration, but the two major ones are vertical and horizontal integration.
156
Vertical Integration: Vertical integration refers to the integration of organizations Corporate Level Strategy
involved in different stages of the supply chain. Thus, a vertically integrated
organization has units operating in different stages of supply chain starting from
raw material to delivery of final product to the end customer. An organization
tries to gain control of its inputs (called backwards integration) or its outputs
(called forward integration) or both. Vertical integration may take the form of
backward or forward integration or both. Some organizations expand vertically
backwards and forward. In essence, an organization seeks to grow through vertical
integration by taking control of the business operations at various stages of the
supply chain to gain advantage over its rivals.
Factors conducive for vertical integration include
 Taxes and regulations on market transactions;
 Obstacles to the formulation and monitoring of contracts;
 Similarity between the vertically-related activities;
 Sufficient large production quantities so that the organization can benefit
from economies of scale and
 Reluctance of other organizations to make investments specific to the
transaction.
There are alternatives to vertical integration that may provide some of the same
benefits with fewer drawbacks. The following are a few of these alternatives for
relationships between vertically related organizations.
 Long-term explicit contracts
 Franchise agreements
 Joint ventures
 Co-location of facilities
 Implicit contracts (relying on organization’s reputation)
Horizontal Combination / Integration: The acquisition of additional business
in the same line of business or at the same level of the value chain (combining
with competitors) is referred to as horizontal integration. Horizontal growth can
be achieved by internal expansion or by external expansion through mergers and
acquisitions of organizations offering similar products and services. An
organization may diversify by growing horizontally into unrelated business. This
sort of integration is sought to reduce intensity of competition and also to build
synergies.
Benefits of Horizontal Integration
The following are some benefits of horizontal integration:
 Economies of scale-achieved by selling more of the same product, for
example, by geographic expansion.
 Economies of scope – achieved by sharing resources common to different
products. Commonly referred to as ‘synergies’.
157
Formulation of Strategy  Increased bargaining power over suppliers and downstream channel
members.
 Reduction in the cost of global operations made possible by operating
plants in foreign markets.
 Synergy achieved by using the same brand name to promote multiple
products.
Disadvantages of Horizontal Integration
Horizontal integration by acquisition of a competitor will increase an
organization’s market share. However, if the industry concentration increases
significantly then anti-trust issues may arise. Aside from legal issues,
another concern is whether the anticipated economic gains will materialize.
Before expanding the scope of the organization through horizontal integration,
management should be sure that the imagined benefits are real. Many
blunders have been made by organizations that broadened their horizontal
scope to achieve synergies that did not exist, for example, computer
hardware manufacturers who entered the software business on the premise
that there were synergies between hardware and software. However, a
connection between two products does not necessarily imply realizable
economies of scope. Finally, even when the potential benefits of horizontal
integration exist, they do not materialize spontaneously. There must be an
explicit horizontal strategy in place. Such strategies generally do not arise from
the bottom –up, but rather, must be formulated by corporate management.

9.6 DIVERSIFICATION
Diversification involves moving into new lines of business. When an industry
consolidates and becomes mature, most of the organizations in that industry would
reach the limits of growth using vertical and horizontal growth strategies. If they
want to continue growing any further the only option available to them is
diversification by expanding their operations into a different industry.
Diversification strategies also apply to the more general case of spreading market
risks; adding products to the existing lines of business can be viewed as analogous
to an investor who invests in multiple stocks to “spread the risks”. Diversification
into other lines of business can especially make sense when the organization
faces uncertain conditions in its core product-market domain.
Diversification of an organization can take the form of concentric and
conglomerate diversification. Concentric (Related) diversification is appropriate
when an organization has a strong competitive position but industry attractiveness
is low. Conglomerate (unrelated) diversification is an appropriate strategy when
current industry is unattractive and that the organization lacks exceptional and
outstanding capabilities or skills in related products or services. Generally, related
diversification strategies have been demonstrated to achieve higher value creation
(profitability and stock value) than unrelated diversification strategies
(conglomerates). The interpretation of this finding is that there must be some
advantage achieved through shared resources, experience, competencies,
technologies, or other value-creating factors. This is the so called synergy effect
of diversification i.e., ‘the whole is greater than the sum of its parts’. There are
158 two types of diversification which are as follows:
  Related diversification (concentric diversification) Corporate Level Strategy

 Unrelated diversification (conglomerate diversification)

Related diversification (concentric diversification)
In this alternative, an organization expands into a related industry, one having
synergy with the organization’s existing lines of business, creating a situation in
which the existing and new lines of business share and gain special advantages
from commonalities such as technology, customers, distribution, location, product
or manufacturing similarities, and government access. In essence, in concentric
diversification, the new industry is related in some way to the current one. This
is often an appropriate corporate strategy when an organization has a strong
competitive position and distinctive competencies, but its existing industry is
not very attractive. Thus, an organization is said to have pursued concentric
diversification strategy when it enters into new product or service area belonging
to different industry category but the new product or service is similar to the
existing one with respect to technology or production or marketing channels or
customers.
Unrelated diversification (conglomerate diversification)
Conglomerate diversification is a growth strategy in which an organization seeks
to grow by adding entirely unrelated products and markets to its existing business.
An organization that consists of a grouping of businesses from unrelated streams
is called a conglomerate. In conglomerate diversification, an organization
generally introduces new products using different technologies in new markets.
A conglomerate consists of a number of product divisions, which sell different
products, principally to their own markets rather than to each other. Conglomerates
diversify their business risk through profit gained from profit centers in various
lines of business.
Rationale for diversification
Under strict assumptions of an efficient market theory, there is no convincing
rationale for one organization to acquire another, especially less efficient or
unrelated businesses. Since the markets are imperfect and do not follow the norms
of efficient market theory, organizations do diversify for several reasons given
below:
Economies of Scale and Scope (Synergy): The merger of two organizations
producing similar products should allow the combined organizations to pool
resources and attain lower operating costs. The saving may come from reduced
overheads or the ability to spread a larger amount of production over lower
(consolidated) fixed costs. There may also be differential management capabilities.
Efficiencies can also be gained through pooled financial resources or simply
through pooled risk.
Widen Market Base and Enhance Market Power: Large number of
collaborations and acquisitions are aimed at expanding the market for the
organization’s products. Mergers and acquisitions can increase an organization’s
market share when both organizations are in the same business. But, market
share does not necessarily translate to higher profits or greater value for owners
unless the merger substantially reduces the inter-organization rivalry in the
industry. 159
Formulation of Strategy Profit Stability: Acquisition of new business can reduce variations in corporate
profits by expanding the organization’s lines of business. This typically occurs
when the core business depends on sales that are seasonal or cyclical. A large
number of organizations pursue diversification strategy just to avoid instability
in sales and profits which can result from events such as cyclical and seasonal
shifts in demand, changes in the life cycles and other destabilizing forces in the
micro and macro environment.

Improve Financial Performance: Large organizations generate cash that can

be invested in other ventures. The organization acts as a banker of an internal
capital market. The core business sustains itself on its moneymaking ventures,
and uses this cash flow to create new ventures that generate additional profits.
An organization may also be tempted to exploit diversification opportunities
because it has liquid resources far in excess of the total expansion needs.

Growth: Diversification is basically a way to grow. Indeed, managers often cite

growth as the principle reason for diversification. The most important factor that
motivates management to diversify is to achieve higher growth rate than possible
with intensification strategy. If the management feels that the existing products
and markets do not have the potential to deliver expected growth, the only
alternative they have is to diversify into new territories. Unlike organic growth,
which is slow, an acquisition or merger (inorganic) can deliver the results rather
quickly since resources, skills, other factors essential for faster growth are
immediately available.

Counter Competitive Threats: Organizations are driven at times towards

external diversification through merger by competitive pressures. Such a strategic
move is expected to counter the competitive threats by reducing the intensity of
competition.

Access to Latest Technology: Many Indian organizations enter into strategic

alliances with foreign organizations to gain access to the latest technologies
without spending huge amount of money on R&D.

Regulatory Factors: A large number of organizations have diversified their

operations geographically to exploit opportunities in different regions and nations
and also to take advantage of the incentives being offered by the various
governments to attract investment. Many organizations enter other nations to
avoid restrictions placed by the regulators in their host nation.

Activity 4

Compare and contrast the strategies of two different groups of

conglomerates. Are they following concentric or conglomerate
diversification?

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 Corporate Level Strategy
9.7 ALTERNATIVE ROUTES TO
DIVERSIFICATION
Once an organization opts for diversification, it must select one of the options
discussed below. There are three broad ways to implement diversification
strategies:
Mergers and Acquisitions
A merger is a legal transaction in which two or more organizations combine
operations through an exchange of stock. In a merger only one organization entity
will eventually remain. An acquisition is a purchase of one organization by another.
In recent years, there were quite a few acquisitions in which the target
organizations resisted the take-over bids. These acquisitions are referred to as
hostile takeovers. It is natural for the target organization’s management to try to
defend against the takeover. Although they are used synonymously, there is a
slight distinction between the terms ‘merger’ and ‘acquisition’. This will be
discussed more in detail in the later sections.
Strategic Partnering
Strategic partnering occurs when two or more organizations establish a
relationship that combines their resources, capabilities, and core competencies
to achieve some business objective. The three major types of strategic partnerships
include: joint ventures, long-term partnerships, and strategic alliances which
are discussed below:
Joint Ventures: In a joint venture, two or more organizations form a separate,
independent organization for strategic purposes. Such partnerships are usually
focused on accomplishing a specific market objective. They may last from a few
months to a few years and often involve a cross-border relationship. One
organization may purchase a percentage of the stock in the other partner, but not
a controlling share.
Long-Term Contracts: In this arrangement, two or more organizations enter a
legal contract for a specific business purpose. Long-term contracts are common
between a buyer and a supplier. Many strategists consider them more flexible
and less inhibiting than vertical integration. It is usually easier to end an
unsatisfactory long-term contract than to end a joint venture.
Strategic Alliances: In a strategic alliance, two or more organizations share
resources, capabilities, or distinctive competencies to pursue some business
purpose. Strategic alliances often transcend the narrower focus and shorter
duration of joint ventures. These alliances may be aimed at world market
dominance within a product category. While the partners cooperate within the
boundaries of the alliance relationship, they often compete fiercely in other parts
of their businesses.

9.8 RETRENCHMENT STRATEGIES

Retrenchment is a short-run renewal strategy designed to overcome organizational
weaknesses that are contributing to deteriorating performance. It is meant to
161
Formulation of Strategy replenish and revitalize the organizational resources and capabilities so that the
organization can regain its competitiveness. Retrenchment may be thought as a
minor surgery to correct a problem. Managers often try a minimal treatment
first—cost cutting or a small layoff—hoping that nothing more painful will be
needed to turn the organization around. When performance measures reveal a
more serious situation, more drastic action must be taken to restore
performance. Retrenchment strategies call for two primary actions: cost
cutting and restructuring. One or both of these tools will be employed more
extensively in turnaround situations, because the problems are deeper
there than in retrenchment situations. Retrenchment strategy alternatives
include shrinking selectively, extracting cash for investment in other
businesses, and divestment. While these strategies result in generating cash,
they differ in terms of their intentions. Divestment of the whole business is
an “end game” strategy and it may be done via selling or liquidation of business.
Under the strategy of extraction of cash for investment in other business, cash
is generated from the troubled business mainly via budget and cost
contraction. In both strategies, the intention of management is to quit the
troubled business.

In the shrinking selectively strategy (SSS), cash is generated via downsizing

(contraction of size or divesting some operations. The strategy of shrinking
selectively involves retrieving the value of investments in some parts of the market
while reinvesting in others because in some niches’ demand will continue to be
grow while in others the demand shrivels. The objective is to capture the desirable
niches. Shrinking selectively as a repositioning strategy (i.e., matching market
niche with distinctive competence) often results in renewed strength.

There are three major variants of retrenchment strategy which are:

 Turnaround strategy
 Survival strategy
 Liquidation strategy.
These are discussed in detail below.
Turnaround strategy
A turnaround situation exists when an organization encounters multiple years of
declining financial performance subsequent to a period of prosperity. Turnaround
situations are caused by combinations of external and internal factors and may
be the result of years of gradual slowdown or months of precipitous financial
decline. The strategic causes of performance downturns include increased
competition, raw material shortages, and decreased profit margins, while operating
problems include strikes and labour problems, excess plant capacity and depressed
price levels. The immediacy of the resulting threat to organization survival posed
by the turnaround situation is known as situation .Low levels of severity are
indicated by declines in sales or income margins, while extremely high severity
would be signaled by imminent bankruptcy. The recognition of a relationship
between cause and response is imperative for a turnaround process and hence,
the importance of properly assessing the cause of the turnaround situation so
that it could be the focus of the recovery response is very important.
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The Turnaround Process Corporate Level Strategy

The Turnaround Process begins with a depiction of external and internal factors
as causes of an organization’s performance downturn. If these factors continue
to detrimentally impact the organization, its financial health is threatened.
Unchecked financial decline places the organization in a turnaround situation. A
turnaround situation represents absolute and relative-to-industry declining
performance of a sufficient magnitude to warrant explicit turnaround actions. A
turnaround is typically accomplished through a two stage process. The initial
stage is focused on the primary objectives of survival and achievement of a
positive cash flow. The means to achieve this objective involves an emergency
plan to halt the organization’s financial hemorrhage and a stabilization plan to
streamline and improve core operations. In other words, it involves the classic
retrenchment activities i.e. liquidation, divestment, product elimination, and
downsizing the workforce.
Retrenchment is an integral component of turnaround strategy. The critical role
of retrenchment in providing a stable base from which to launch a recovery phase
of the turnaround process is well established. Many organizations that have
achieved a reversal of financial or competitive decline inevitably refer to the
presence of retrenchment as a precursor or prelude to the implementation of a
successful recovery strategy. Consequently, retrenchment may be necessary to
stabilize the situation by securing or providing slack regardless of the subsequent
recovery strategy that is chosen.
The second phase involves a return-to-growth or recovery stage and the turnaround
process shifts away from retrenchment and move towards growth and
development and growth in market share. The means employed for achieving
these objectives are acquisitions, new products, new markets, and increased
market penetration. The importance of the second stage in the turnaround situation
is underscored by the fact that primary causes of the turnaround situation have
been associated with this phase of the turnaround process- the recovery response.
Recovery is said to have been achieved when economic measures indicate that
the organization has regained its pre-downturn levels of performance.
Between these two stages, a clear strategy is needed for an organization. As the
financial decline stops, the organization must decide whether it will pursue
recovery in its retrenchment- reduced form through a scaled-back version of its
preexisting strategy, or whether it will shift to a return-to-growth stage. It is at
this point that the ultimate direction of the turnaround strategy becomes
clear. Essentially, the organization must choose either to continue to pursue
retrenchment as its dominant strategy or to couple the retrenchment stage with a
new recovery strategy that emphasizes growth. The degree and duration of the
retrenchment phase should be based on the organization’s financial health.
Activity 5
Scan business dailies in the last few months or browse the Internet for
organizations that implemented turnaround strategy successfully. Discuss the
important issues involved in these cases.
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Formulation of Strategy Survival strategy
When the organization is on the verge of extinction, it can follow several routes
for renewing the fortunes of the organization. These are discussed in the following
sections.
Divestment: An organization divests when it sells a business unit to another
organization that will continue to operate it.
Spin-Off: In a spin-off, an organization sets up a business unit as a separate
business through a distribution of stock or a cash deal. This is one way to allow
a new management team to try to do better with a business unit that is a poor or
mediocre performer.
Restructuring the Business Operations: The organization tries to survive by
restructuring its management team, financial reengineering or overall business
reengineering. Business reengineering involves throwing aside all old business
processes and starting from scratch to design more efficient processes. This may
cut costs and assist a turnaround situation. This is much easier to visualize in a
manufacturing process, where each step of assembly is examined for improvement
or elimination. It would be foolish to find more efficient ways to perform processes
that should be abandoned and hence, reengineering is strongly suggested in such
cases.
Liquidation strategy
Liquidation is the final resort for a declining organization. This is the ultimate
stage in the process of renewing organization. Sometimes a business unit or a
whole organization becomes so weak that the owners cannot find an interested
buyer. A simple shutdown will prevent owners from throwing good money after
bad once it is clear that there is no future for the business. In such a situation,
liquidation is the best option. Bankruptcy is a last resort when the business fails
financially. The court will liquidate its assets. The proceeds will be used to pay
off the organization’s outstanding debts. Some organizations file for bankruptcy
instead of liquidating. Under this option, the organization reorganizes its
operations while being protected from its creditors. If the organization can emerge
from bankruptcy, it pays off its creditors as best as it can.

9.9 SUMMARY
Strategy refers to how a given objective will be achieved. Therefore, strategy is
concerned with the relationships between ends and means, that is, between the
results we seek and the resources at our disposal. There are three levels of strategy,
namely, corporate strategies, competitive strategies and functional strategies.
Corporate strategies sets the overall direction the organization will follow.
On the other hand, competitive strategies determine how the organization
will compete in a specific business or industry. Functional strategies, also
referred to as operational strategies, are the short-term (less than one year),
goal- directed decisions and actions of the organization are various functional
departments.
There are various approaches to developing stability strategy. They are holding
strategy, stable growth, harvesting strategy, profit or endgame strategy. Growth
164 of business organizations implies realignment of its business operations to
different product–market environments. This is achieved through the basic growth Corporate Level Strategy
approaches of intensive expansion, integration (horizontal and vertical
integration), diversification and international operations have been covered in
this unit.
Diversification involves moving into new lines of business. Of the various routes
to expansion, diversification is definitely the most complex and risky route.
Diversification of an organization can take the form of concentric and
conglomerate diversification. An organization is said to pursue concentric
diversification strategy when it enters into new product or service areas belonging
to different industry category but the new product or service is similar to the
existing one in many respects.
Retrenchment strategies normally followed by organizations during their decline
stage. Retrenchment is a short-run renewal strategy designed to overcome
organizational weaknesses that are contributing to deteriorating performance. It
is meant to replenish and revitalize the organizational resources and capabilities
so that the organization can regain its competitiveness. Overall this unit gives an
idea about various corporate strategies which at one point of time the organizations
use.

9.10 KEYWORDS
Corporate Strategies : Corporate strategy is essentially a blueprint for
the growth of the organization.
Competitive Strategies : Strategies that determine how the organization
will compete in a specific business or industry.
Combination Strategy : Combination strategy may include combination
of two alternatives i.e., market penetration and
market development or combination of both
the alternatives.
Diversification : the organization grows by diversifying into new
businesses by developing new products for new
markets.
Expansion Strategies : Growth or expansion strategy is the most
important strategic option, which organizations
pursue to gain significant growth as opposed to
incremental growth envisaged in stable strategy.
Functional Strategies : Also called operational strategies, these are the
short-term, goal-directed decisions and actions
of the organization’s various functional
departments.
Generic Corporate : The four variants of corporate strategy, namely,
Strategies stability strategy, growth/expansion strategy,
retrenchment/divestment strategy and
combination strategy are called generic corporate
strategies or grand strategies.
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Formulation of Strategy Harvesting Strategy : The organization has a dominant market share,
which it wants to leverage to generate cash for
future business expansion.

Integration Strategy : The combination or association with other

organizations to expand externally is termed as
integration strategy.

Intensification Strategy : Intensive expansion strategy involves

safeguarding its present position and expanding
in the organization’s current product-market
space to achieve growth targets.

International Expansion : Global expansion involves establishing

significant market interests and operations
outside an organization’s home nation.

Product Development : The organization develops new products targeted

to its existing market segments.

Stability Strategy : Strategy, which aims to retain present strategy of

the organization at the corporate level by focusing
on its present products and markets.

Strategy : Strategy refers to how an organization plans to

achieve a given objective.

Concentric Diversification : An organization is said to have pursued

concentric diversification strategy when it enters
into new product or service area belonging to
different industry but the new product or service
is similar to the existing one with respect to
technology or production or marketing channels
or customers.

Conglomerate : Conglomerate diversification is a growth strategy

Diversification in which an organization seeks to grow by adding
entirely unrelated products and markets to its
existing business.

Diversification : Diversification involves moving into new lines

of business.
Divestment : An organization divests when it sells a business
unit to another organization that will continue to
operate it.

Liquidation : It is the final resort for a declining organization.

This is the ultimate stage in the process of
renewing organization.

Turnaround Strategy : It is a strategy adopted by organizations to arrest

the decline and revive their growth.
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 Corporate Level Strategy
9.11 SELF-ASSESSMENT QUESTIONS
1) What is corporate level strategy? Why is it important for a diversified
organization?
2) What are the various reasons that organizations choose to move from either
a single- or a dominant-business position to a more diversified position?
3) What do you mean by stability strategy? Does this strategy mean that an
organization stands still? Explain.
4) Under what circumstances do organizations pursue stability strategy? What
are the different approaches to stability strategy?
5) What resources and incentives encourage an organization to pursue expansion
strategies? What are the main problems that affect an organization’s efforts
to use an expansion strategy?
6) Given the advantages of international expansion, why do some organizations
choose not to expand internationally?
7) What is meant by diversification? What are the pros and cons of a
diversification strategy?
8) What are the conditions under which organizations adopt retrenchment
strategies? Briefly describe the variants of these strategies.
9) What is a turnaround strategy? Describe the different steps involved in
turnaround process.

9.12 REFERENCES AND FURTHER READINGS

Bibeault, D. G. (1998). Corporate turnaround: How managers turn losers into
winners. New York: McGraw-Hill.
Collis, D. J. &Montgomery, C. A. (2005). Corporate Strategy: A Resource-based
Approach. United Kingdom: McGraw-Hill/Irwin.
Furrer, O. (2016). Corporate Level Strategy: Theory and Applications. United
Kingdom: Taylor & Francis.
Goold, M., Campbell, A., Whitehead, J. &Alexander, M. (2014). Strategy for the
Corporate Level: Where to Invest, What to Cut Back and How to Grow
Organizations with Multiple Divisions. Germany: Wiley.
Hotchkiss, E. & Altman, E. I. (2010). Corporate Financial Distress and
Bankruptcy: Predict and Avoid Bankruptcy, Analyze and Invest in Distressed
Debt. Germany: Wiley.
Ireland, R. D., Hitt, M. A. &Hoskisson, R. E. (2014). Strategic Management:
Concepts and Cases: Competitiveness and Globalization. United States: Cengage
Learning.
Johnson, G., Whittington, R. &Scholes, K. (2009). Exploring Corporate Strategy:
Text & Cases. United Kingdom: Financial Times Prentice Hall.
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Formulation of Strategy Porter, M.E. (1987). From Competitive Advantage to Corporate Strategy, Harvard
Business Review, 65 (3); 43-59.
Ramaswamy, V. S. &Namakumari, S. (2000). Strategic Planning Formulation of
Corporate Strategy: Text and Cases: Indian Context. India: Macmillan India.
Schmitt, A. (2009). Innovation and Growth in Corporate Restructurings: Solution
Or Contradiction. Germany: GablerVerlag.

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